Sonyar05-E.Pdf

Contents

Financial Highlights 1 Operating Performance Highlights 2 To Our Shareholders 4 Review of Operations 8 Electronics 8 Game 13 Entertainment 16 Financial Services 20 Other 22 R&D Strategies and Selection of Key Technological Fields 23 The Sony Challenge: Seeing is Believing 26 Corporate Governance/New Directors and Corporate Executive Officers 32 Corporate Social Responsibility 34 Financial Section 35 Stock Information 130 Stock Acquisition Rights and Bond Information 131 Investor Information 132

Cautionary Statement Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as “believe”, “expect”, “plans”, “strategy”, “prospects”, “forecast”, “estimate”, “project”, “anticipate”, “aim”, “may” or “might” and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Sony cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore you should not place undue reliance on them. You also should not rely on any obligation of Sony to update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. Sony disclaims any such obligation. Risks and uncertainties that might affect Sony include, but are not limited to (i) the global economic environment in which Sony operates, as well as the economic conditions in Sony’s markets, particularly levels of consumer spending; (ii) exchange rates, particularly between the yen and the U.S. dollar, the euro and other currencies in which Sony makes significant sales or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of its products and services, which are offered in highly competitive markets characterized by continual new product intro- ductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game, Music, Pictures and Other segments); (iv) Sony’s ability to implement successfully personnel reduction and other business reorganization activities in its Electronics, Music, Pictures and Other segments; (v) Sony’s ability to implement successfully its network strategy for its Electronics, Music, Pictures and Other segments and to develop and implement successful sales and distribution strategies in its Music, Pictures and Other segments in light of the Internet and other technological developments; (vi) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (vii) shifts in customer demand for financial services such as life insurance and failure to conduct successful Asset Liability Management and (viii) the success of Sony’s joint ventures and alliances. Risks and uncertainties also include the impact of any future events with material unforeseen impacts.

SONY AR-E0629 Page 36 05.7.6, 2:16 PM Adobe PageMaker 6.0J/PPC Financial Highlights Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Dollars in millions* Yen in millions Percent except per except per share amounts and number of employees change share amounts 2003 2004 2005 2005/2004 2005 FOR THE YEAR Sales and operating revenue ...... ¥7,473,633 ¥7,496,391 ¥7,159,616 –4.5% $66,912 Operating income ...... 185,440 98,902 113,919 +15.2 1,065 Income before income taxes ...... 247,621 144,067 157,207 +9.1 1,469 Income taxes ...... 80,831 52,774 16,044 –69.6 150 Equity in net income (loss) of affiliated companies ...... (44,690) 1,714 29,039 +1,594.2 271 Income before cumulative effect of an accounting change ...... 115,519 90,628 168,551 +86.0 1,575 Net income ...... 115,519 88,511 163,838 +85.1 1,531

Cash flows from operating activities . . . 853,788 632,635 646,997 +2.3 6,047 Cash flows from investing activities . . . (706,425) (761,792) (931,172) — (8,703)

Per share data: (Yen, dollars) Income before cumulative effect of an accounting change —Basic ...... ¥ 125.74. ¥ 98.26. ¥ 180.96. +84.2% $ 1.69. —Diluted ...... 118.21. 89.03. 162.59. +82.6 1.52. Net income —Basic ...... 125.74. 95.97. 175.90. +83.3 1.64. —Diluted ...... 118.21. 87.00. 158.07. +81.7 1.48. Cash dividends ...... 25.00. 25.00. 25.00. — 0.23.

AT YEAR-END Stockholders’ equity...... ¥2,280,895 ¥2,378,002 ¥2,870,338 +20.7% $26,826 Total assets ...... 8,370,545 9,090,662 9,499,100 +4.5 88,777

Number of employees ...... 161,100 162,000 151,400 –6.5% * U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005. Please refer to pages 70 and 71 for detailed footnotes to the table above.

Sales and operating revenue Net income and ROE Cash flows and operating income

(Yen in trillions) (Yen in billions) (Yen in billions) (%) (Yen in billions) 8 800 200 8 1,000

6.2%

6 600 150 6 500 5.0%

4 400 100 4 0 3.8%

2 200 50 2 –500

0 0 0 0 –1,000 2003 2004 2005 2003 2004 2005 2003 2004 2005

■ Sales and operating revenue (left) ■ Net income ■ Cash flows from operating activities ■ Operating income (right) ● Return on equity ■ Cash flows from investing activities

*Years ended March 31 *Years ended March 31 *Years ended March 31

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SONY AR-E0629 Page 1 05.7.6, 2:42 PM Adobe PageMaker 6.0J/PPC Operating Performance Highlights

Sales (Financial Services Revenues) and Financial Highlights by Business Segment Operating Income (Loss) (Years ended March 31)

(Yen in billions) 2005/2004 Electronics 5,096.0 5,042.3 5,021.6 (Percent (Yen in billions, %) 2003 2004 2005 change) Sales ¥5,096.0 ¥5,042.3 ¥5,021.6 –0.4% 65.9 66.5% Operating (loss) income 65.9. (6.8.) (34.3.) —% (6.8) Operating margin 1.3 — — % (34.3) 2003 2004 2005 Assets 2,974.0 2,995.3 (3,434.1) ■ Sales ■ Operating (loss) income

(Yen in billions) 2005/2004 Game (Percent 955.0 (Yen in billions, %) 2003 2004 2005 change) 112.7 780.2 729.8 Sales ¥955.0 ¥780.2 ¥729.8 –6.5% 9.7% 67.6 Operating income 112.7 67.6 43.2 –36.1% 43.2 Operating margin 11.8 8.7 5.9 Assets 673.2 684.2 482.0 2003 2004 2005 ■ Sales ■ Operating income

(Yen in billions) 2005/2004 Music (Percent (Yen in billions, %) 2003 2004 2005 change) 466.3 440.3 Sales ¥466.3 ¥440.3 ¥249.1 –43.4% 3.3% 249.1 Operating income 8.8 (loss) (28.3.)(6.0.) 8.8. —%

(6.0) Operating margin ——3.5 % (28.3) 2003 2004 2005 Assets 500.6 484.0 325.9 ■ Sales ■ Operating income (loss)

(Yen in billions) 2005/2004 Pictures (Percent (Yen in billions, %) 2003 2004 2005 change) 802.8 756.4 733.7 Sales ¥802.8 ¥756.4 ¥733.7 –3.0%

9.7% 59.0 63.9 Operating income 59.0 35.2 63.9 +81.4% 35.2 Operating margin 7.3 4.7 8.7 Assets 868.4 856.5 863.1 2003 2004 2005 ■ Sales ■ Operating income

(Yen in billions) Financial 2005/2004 Financial (Percent Services (Yen in billions, %) 2003 2004 2005 change) Financial services 593.5 537.3 560.6 revenues ¥537.3 ¥593.5 ¥560.6 –5.6% 7.4% 55.2 55.5 Operating income 22.8 55.2 55.5 0.+0.6% 22.8 Operating margin 4.2 9.3 0.9.9

2003 2004 2005 Assets 2,897.1 3,475.0 3,885.5 0.0 ■ Financial Services revenues ■ Operating income

(Yen in billions) 2005/2004 Other (Percent (Yen in billions, %) 2003 2004 2005 change) Sales ¥261.1 ¥268.3 ¥254.4 –5.2% 261.1 268.3 254.4 3.4% Operating loss (28.3.) (12.1.) (4.1.) —% Operating margin ——— % (4.1) (12.1) (28.3) Assets 333.5 371.7 347.9 2003 2004 2005 ■ Sales ■ Operating loss Notes: 1. Sales=Sales and operating revenue 2. Operating margin=Operating income / Sales and operating revenue x 100 2 Sony Corporation 3. Includes intersegment transactions

SONY AR-E0629 Page 2 05.7.6, 2:42 PM Adobe PageMaker 6.0J/PPC Description of Business Fiscal Year in Review

The Electronics segment com- • Segment sales were essentially level. Calculated using the same exchange rates as the previous fiscal year, prises audio, video, televisions, segment sales edged up 1%. information and communications • Sales of flat panel televisions, Cyber-shot digital still cameras and liquid crystal display (LCD) rear-projection equipment, semiconductors, televisions increased, while sales of cathode-ray tube (CRT) televisions and portable audio products declined. components and other products. • Despite a decrease in restructuring expenses, the segment’s operating loss widened as falling sales prices prompted a further increase in the cost of sales ratio. Products contributing to the worsening of the segment’s operating loss included CRT televisions, portable audio products and video cameras.

The Game segment encom- • Sales in this segment fell 6.5%. passes Sony’s game console and • Unit sales of PlayStation 2 (PS2) software reached a record high, but this was more than offset by a decline in software businesses, which are unit sales of PS2 hardware and strategic sales price reductions. conducted by Sony Computer • Operating income decreased 36.1% as falling hardware sales and startup costs for PlayStation Portable (PSP) Entertainment Inc. (SCE). countered higher operating income for software.

The Music segment comprises the • The transfer of SMEI’s business to SONY BMG in August 2004 prompted a 43.4% decline in segment sales. businesses of Sony Music Entertain- • An increase in sales of recordings boosted SMEJ’s sales 6.9%. ment (Japan) Inc. (SMEJ) and, from • SMEJ achieved a significant increase in operating income, reflecting higher sales and a lower cost of sales ratio. April through July 2004, Sony Music Entertainment Inc. (SMEI). In August 2004, SMEI’s business was transferred to SONY BMG MUSIC ENTERTAINMENT (SONY BMG), a joint venture with Bertelsmann AG accounted for by the equity method.

The Pictures segment • Segment sales decreased 3.0%, owing primarily to the appreciation of the yen. On a U.S. dollar basis, sales encompasses motion pictures, rose 1%. television and other businesses • Higher sales on a U.S. dollar basis were largely attributable to increases in home entertainment and theatrical conducted by Sony Pictures revenues worldwide and television syndication sales outside the United States. Entertainment Inc. (SPE). •Worldwide home entertainment revenues rose on the strength of strong performances by DVD and VHS releases and brisk syndication sales of films shown in theaters in the previous fiscal year, notably 50 First Dates, Big Fish and Bad Boys II. • Theatrical revenues were bolstered by such successful releases as Spider-Man 2, Hitch and The Grudge. •Sales gains supported record-high operating income.

The Financial Services segment • Segment revenue declined 5.6%, owing largely to a change in Sony Life’s method of recognizing revenue. comprises the businesses of • Operating income increased 0.6%, reflecting the absence of impairment losses on lease assets recorded by Sony Life Insurance Co., Ltd. Sony Finance International in the preceding fiscal year. (Sony Life), Sony Assurance Inc., Sony Bank Inc. and Sony Finance International, Inc.

This segment comprises a variety of • Sales decreased 5.2%. This was primarily due to a decrease in intersegment sales resulting from contractual businesses, such as a network revisions at a Japan-based subsidiary in the advertising agency business. service business, including Internet- • Operating loss narrowed, reflecting lower fixed costs, a gain on the sale of a commercial building with a related services, carried out by Sony showroom in Japan, and a robust performance by an animation production and marketing business. Communication Network Corpora- tion, a business for the production and marketing of animation products, a retail seller of imported general merchandise in Japan and an integrated circuit (IC) card business.

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SONY AR-E0629 Page 3 05.7.6, 2:38 PM Adobe PageMaker 6.0J/PPC To Our Shareholders

A Message from Nobuyuki Idei The Year in Review In the fiscal year ended March 31, 2005, we recorded key strategic achievements that positioned the Sony Group for further growth as a global enterprise. These include strengthening our entertainment business through important alliances, establishing a firm foundation for our mobile phone business and making significant advances in the development of next-generation microprocessors. With regard to our core electronics business, however, we faced an increasingly harsh operating environment, owing to such factors as intensified price competition. Accordingly, restoring profitability in our mainstay Electronics segment remains management’s top priority. Sales and operating revenue in the period under review edged down from the previous year, owing to the transfer of our non-Japanese recorded music business to our new joint venture SONY BMG MUSIC ENTERTAINMENT (SONY BMG), which is accounted for using the equity method, and to the impact of a strong yen. Operat- ing income rose on the strength of strong performances by the Pictures and Music segments, while the Financial Services segment continued to see steady gains. We also registered a major increase in net income, reflecting contributions from Sony Ericsson Mobile Communications AB, and other equity-method affiliates. In the Electronics segment, we increased sales of flat panel televisions and digital still cameras by enhancing product appeal. Nonetheless, segment sales were largely unchanged, a consequence of flagging markets for cathode-ray tube (CRT) televisions, coupled with a shift in demand from MD Walkman, CD Walkman and other portable audio products toward hard disk and flash memory audio players. The segment’s operating loss widened, as higher variable costs accompanying downward pressure on prices outweighed the positive impact of restructuring-derived reductions in fixed costs. In contrast, Sony Ericsson’s worldwide shipments of mobile phones, particularly camera phones, exceeded 43 million units during the period, significantly boosting its sales and operating profit. In the Game segment, shipments of PlayStation 2 (PS2) software reached a record 252 million units during the period. Sales fell, however, as a result of a decline in PS2 hardware sales volume and strategic price reductions. PlayStation Portable (PSP) hardware and software had a strong start, following PSP’s launch in Japan in December 2004 and North America in March 2005. A decline in the segment’s operating income was largely attributable to a decrease in overall sales of game hardware and startup costs for PSP.

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SONY AR-E0629 Page 4 05.7.6, 2:37 PM Adobe PageMaker 6.0J/PPC Nobuyuki Idei Sir Howard Stringer Chairman and Group Chief Executive Officer Vice Chairman (Appointed Chief Corporate Advisor on June 22, 2005) In Charge of Entertainment Business Group (Appointed Chairman and CEO on June 22, 2005)

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SONY AR-E0629 Page 5 05.7.6, 2:37 PM Adobe PageMaker 6.0J/PPC Operating in a shrinking market, the Music segment generated an increase in operating income, thanks partly to a string of hits by new artists at Sony Music Entertain- ment (Japan) Inc. (SMEJ), which greatly bolstered SMEJ’s recorded music sales. In the Pictures segment, expanded box office revenue as well as sales of titles on DVD and VHS—attributable to such hits as Spider-Man 2—drove both sales and operating income to new heights. During the period, we took several steps that reinforced the already formidable position of our entertainment business in the industry. Of particular note, we formed two key equity and business alliances. In August 2004, we created SONY BMG, a joint venture that brings together our non-Japanese recorded music business Sony Music Enter- tainment Inc. and BMG, the music group of Bertelsmann AG, with the aim of raising profitability through enhanced efficiency and expanded scale. In April 2005, a consortium comprising Sony and four partner companies completed the acquisition of Metro–Goldwyn–Mayer Inc. (MGM). In addition to using our global channels to distribute MGM’s existing library of film and television content, we will be involved in co-financing and producing new titles.

New Management Structure Guided by our “Transformation 60” (TR60) groupwide medium-term corporate strategy— which focuses on structural reforms aimed at enhancing operational profitability and growth strategies—efforts to reduce fixed costs through the restructuring of operations are proceeding according to plan. Although our electronics business has yet to suffi- ciently recover in terms of profitability, we have been implementing strategies that will ensure the steady growth of the Sony Group. The fiscal year ending March 31, 2006, marks the start of the next stage of Sony’s evolution—a stage of accelerated growth. Accordingly, we judged this to be an opportune time to create a new management structure. At the Board of Directors meeting to be held following the Ordinary General Meet- ing of Shareholders on June 22, 2005, we expect three candidates for positions on the Board to be approved: Sir Howard Stringer, nominated as Chairman and Chief Executive Officer (CEO), Dr. Ryoji Chubachi, nominated as President and Electronics CEO, and Mr. Katsumi Ihara, nominated as Executive Deputy President and President of the Home Electronics Network Company. Under the robust guidance of this new management team, the Sony Group will remain on course for further growth.

April 26, 2005

Nobuyuki Idei Chairman and Group Chief Executive Officer (Appointed Chief Corporate Advisor on June 22, 2005)

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SONY AR-E0629 Page 6 05.7.6, 2:34 PM Adobe PageMaker 6.0J/PPC A Message from Sir Howard Stringer Sony has built up important traditions and assets during its 60-year history. I am honored to be given the responsibility of drawing upon these to carve out a new history for Sony. As CEO, my priority will be to recreate the excitement and spirit of innovation that has evolved into the Sony brand over the past six decades. Although we face many challenges, we also recognize a wealth of exciting opportunities. Together with Dr. Chubachi and Mr. Ihara, I will work to deliver the best in electronics and entertainment to customers by fostering the further convergence of Sony’s technological hardware and content development. The new management team will not hold back from implementing reforms in all businesses in its drive to ensure Sony’s position as the world’s leading electronics and entertainment company. We will accelerate the reforms introduced by the current management and exert our best efforts to drive Sony’s growth as a global enterprise with core capabilities in electronics, entertainment and technology.

April 26, 2005

Sir Howard Stringer Vice Chairman In Charge of Entertainment Business Group (Appointed Chairman and CEO on June 22, 2005)

A Message from Ryoji Chubachi The Sony Group continues to operate in a very challenging business environment. Accordingly, I am committed to forming a tightly knit management team with Sir Howard and Mr. Ihara and working with them to enhance the Group’s corporate value. As CEO of the Electronics Business Group, my principal mission is to enhance the competitiveness of our electronics business. I believe the key to this lies in our ability to develop products from the customer’s viewpoint. Our passion for craftsmanship remains as strong as ever. In addition to identifying key business areas and enhancing technological competence, we will strengthen our operations in areas crucial to competitiveness, including engineering, manufacturing, distribution and sales. In recent years, we have undertaken ambitious, growth-oriented technological development and capital investment, thereby sowing promising seeds for the future. Bringing these seeds to bloom is our foremost challenge. On this, the occasion of Sony’s 60th anniversary, I renew my pledge to build a strong, sound company. In the years ahead, we will continue to work to inspire and delight our stakeholders, including our shareholders, customers, business partners, employees and the community at large, while remaining true to our statement of purpose: “to establish an ideal factory that stresses a spirit of freedom and open- mindedness.” This statement is included in Sony’s founding prospectus and continues to define our spirit.

April 26, 2005

Ryoji Chubachi Executive Deputy President and Electronics CEO (Appointed President and Electronics CEO on June 22, 2005)

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SONY AR-E0629 Page 7 05.7.6, 2:34 PM Adobe PageMaker 6.0J/PPC Review of Operations

Electronics http://www.sony.net/electronics/

Home Electronics

Televisions and other home electronics products with enhanced performance and ease of use have become the hub of the modern living room, essential to the enjoyment of television programming, movies, games and other types of entertainment content. With demand continuing to shift from cathode-ray tube (CRT) televisions toward flat panel televisions, Sony is concentrating management resources on LCD and LCD rear-projection televisions. In the fiscal year ended March 31, 2005, we reinforced our lineup of LCD televisions with the introduction of lower-cost models as well as high- end models with outstanding picture quality. Efforts to differentiate models contributed to a significant rise in Sony’s market share during the 2004 year-end holiday sales season. Of particular importance to this achievement were dramatic improvements in three fundamental areas: picture quality, audio fidelity and ease of operation. The new WEGA Engine HD, an integrated digital high-definition system developed to deliver greater depth and a higher degree of realism, renders a highly precise, beautiful picture. The S-Master sound engine is a 100W output, full-digital amplifier that capitalizes on Sony’s capabilities in high-fidelity audio to deliver the crystal clear audio reproduction essential to complement large-screen viewing. The xross (“cross”) media bar (XMB) is a graphical user interface (GUI) that applies technologies developed in the games business to enhance operability, enabling people to access and enjoy content from a variety of devices on their televisions quickly and easily—an important consideration in this era of increasingly multifunctional televisions. In spring 2005, we further expanded our lineup in Japan with the Happy Wega series of digital high-definition (HD) televisions, which have earned a strong reputation. The Happy Wega series uses fewer components and employs the same structure and cir- cuitry as other Wega televisions. This led to a reduction of material and other manufacturing costs and is helping to improve the profitability of our LCD televisions. Sony will begin sourcing LCD panels from S-LCD Corporation, our joint venture with Samsung Electronics Co., Ltd. of Korea, as well as promoting in-house sourcing of other key devices. These efforts should enable us to achieve further cost reductions— already realized with the Happy Wega series—in other LCD televisions. We plan to launch HD televisions featuring Cell, a next-generation, high-performance processor developed in cooperation with IBM Corporation and Toshiba Corporation.

DVD Recorders Going into the 2004 year-end holiday sales season, we introduced new Sugoroku DVD recorders featuring a high-capacity hard disk drive (HDD) and an electronic program guide (EPG). These models also feature an automatic DVD recorder recording function, which uses the EPG to automatically locate and record all programs related to a particular keyword entered by the user. Sugoroku, developed as an attractive post-VHS unit offering high picture quality, easy operation and intelligent recording, has expanded and enhanced our product mix. The PSX, a fun-to-use DVD recorder that enables users to enjoy video, music, photographs and games on a single unit, is carving out a new market for intelligent entertainment devices. These efforts will position us to respond to increasingly diverse customer needs in the rapidly expanding market for DVD recorders.

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SONY AR-E0629 Page 8 05.7.6, 2:31 PM Adobe PageMaker 6.0J/PPC QUALIA 006 70-inch Micro-Display SXRD TV

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SONY AR-E0629 Page 9 05.7.6, 2:31 PM Adobe PageMaker 6.0J/PPC The Grand Wega LCD rear-projection television continued to enjoy popularity in the U.S. market, reflecting consumer appreciation of comparatively inexpensive large televisions. New additions to our LCD rear-projection lineup during the fiscal year included a model featuring Sony’s exclusive Silicon X-tal (“crystal”) Reflective Display (SXRD) technology, which achieves high resolution and high contrast, as well as fast responsiveness. This technology facilitates higher panel pixel density than conventional display devices, thereby realizing full HD (1920 x 1080 pixel) resolution and a smooth-textured, cinematic picture quality. In the fiscal year ending March 31, 2006, we will take further steps to differentiate our LCD rear-projection televisions from those of other companies—including introducing new models with SXRD—and strengthen our lineup in all regions.

SXRD: Sony’s exclusive SXRD achieves outstanding resolution and contrast, as well as fast responsiveness, facilitating a sharper, richer and more smoothly textured picture than ever before possible with consumer-use rear-projection television. A narrow inter- pixel spacing—2,000,000 pixels with a pitch of 9 m—delivers full HD resolution within an image area measuring a mere 0.78 inches across. In addition, a liquid crystal cell gap of less than 2 m and vertically aligned liquid crystal materials facilitate contrast of 3000:1 or higher and a response speed of less than five milliseconds, resulting in a clear, stable picture.

Mobile Electronics

Sony expanded its video camera and digital still camera lineup. In portable audio, the Network Walkman was a hit. In the fiscal year ended March 31, 2005, the global market for digital still cameras exhibited strong growth. Sony continues to command a significant share of this market, thanks to the popular Cyber-shot lineup, which reflects our continuing efforts to combine slim designs with large LCD screens and extended recording times. We are also focusing efforts on the development of innovative products that combine video and digital still camera features in a single unit. Also in the period, we launched full-scale, global sales of DVD Handycam,

Cyber-shot DSC-T7 bolstering our lineup of video cameras, which previously focused on Handycams using conventional tape media. While DVD Handycam accounted for approximately 10% to 20% of sales of Sony video cameras in the past fiscal year, we are aiming to greatly increase shipments in the fiscal year ending March 31, 2006. During the year, we introduced the first consumer-use video camera with full HD resolution based on the 1080 interlaced (1080i) digital HD standard, bringing HD picture quality out of the broadcast arena and into the home. Customers responded to this easy-to-use model very favorably. We will promote the shift to HD video cameras by enhancing our lineup, offering consumers a whole new experience. Key devices are what really set Sony’s video and digital still cameras apart from those of other manufacturers. These include small LCD panels, batteries and charge-coupled devices (CCDs), which are image-capturing devices that work like an electronic version of a human eye. We source these devices internally, facilitating vertically integrated production and ensuring our ability to enhance product appeal while lowering production costs.

Super HAD CCD: Sony’s CCD technology has enabled the development of the Super HAD CCD, a CCD that offers both a high saturation signal level and increased sensitivity. This technology greatly reduces the ineffective areas between the on-chip microlenses formed over each pixel, thereby increasing the efficiency of utilization of incident light.

Real lmaging Processor: Sony designed the Real Imaging Processor using an exclusive algorithm that increases processing precision and speed, improving picture quality and reducing start-up time for a truly enjoyable picture-taking experience. Thanks to a system large-scale integration (LSI) designed for energy efficiency, the Real Imaging Processor consumes 30% less energy than previous processors, thus improving battery life.

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SONY AR-E0629 Page 10 05.7.6, 2:31 PM Adobe PageMaker 6.0J/PPC Network Walkman

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SONY AR-E0629 Page 11 05.7.6, 2:31 PM Adobe PageMaker 6.0J/PPC In the portable audio market, trends and ways of enjoying music are changing rapidly as consumer preferences shift from CD-based and MD-based products to those with flash memory and HDDs. In spring 2005, we released our latest Network Walkman, reinforcing our lineup of Walkman portable audio products in the Japanese market, which until then comprised the CD Walkman and the MD Walkman. The Network Walkman, available in both flash memory and hard disk models, enjoyed strong sales. In November 2004, we established the Connect Company, a global business that uses Sony’s unique strengths to distribute content, client software and hardware. Not limited to music distribution, Connect aims to foster a broad-based network business that also encompasses movie and other entertainment content.

VAIO T-Series The VAIO T-Series, launched in autumn 2004, is a slim (25mm), lightweight (1.38kg) notebook PC. This sleek machine was made possible by reducing the number of components used and arranging them more efficiently. Despite its small size, the VAIO T-Series carries an array of features comparable to those found in a full-sized notebook, including a 10.6-inch-wide LCD display and a DVD±RW drive. The unique finish, with a texture similar to that of a leather-bound book, and four rich color choices, including midnight blue and burgundy, add a touch of quality and class that has earned a positive response from consumers around the world. We will continue to combine our passion for making things with advanced audiovisual technologies and IT capabilities to create high-value- VAIO T-Series added products and build new PC markets.

Sony Ericsson Mobile Communications AB, established in October 2001 as a 50–50 joint venture between Sony Corporation and LM Ericsson, maintained a high average selling price and achieved significant increases in shipments and sales in the fiscal year ended March 31, 2005, owing to the introduction of high-value-added products. During the period, the company also succeeded in bolstering its operating foundation, thanks to steady growth in sales of camera phones and brisk sales of third-generation (3G) phones for the Universal Mobile Telecommunications System (UMTS) network, positioning it to further expand its lineup of 3G-enabled handsets. Groundbreaking new offerings include the W800, the first Walkman-branded mobile phone; the K750, a 2-megapixel camera phone; and the Z800, a new 3G phone for the Global System for Mobile Communications (GSM) and UMTS networks. In Japan, Sony Ericsson launched the W31S for KDDI Corporation and the premini®-II* for NTT DoCoMo, Inc. The company also became a worldwide sponsor of the Women’s Tennis Association (WTA) Tour, which is now the Sony Ericsson WTA Tour. * premini® is a registered trademark of NTT DoCoMo, Inc.

W800 K750 Z800 W31S premini®-II

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SONY AR-E0629 Page 12 05.7.6, 2:30 PM Adobe PageMaker 6.0J/PPC Game http://www.scei.co.jp/global/

The PlayStation 2 platform continues to expand further. Since its launch by Sony Computer Entertainment Inc. (SCE) in 2000, PlayStation 2 (PS2) has continued to expand worldwide as the standard platform for home entertainment, and cumulative shipments surpassed the 90 million unit mark in June 2005. The new slimline PS2 (SCPH-70000 series) has been particularly popular since its release in November 2004. Now in its fifth year, PS2 is still in high demand, with shipments reaching 16.17 million units in the fiscal year ended March 31, 2005. Similarly, demand for PS2 software remains high. By March 31, 2005, there were more than 5,000 game titles released for PS2 worldwide, and cumulative shipments reached 824 million units. With first-party hits such as Gran Turismo 4, which sold over 6 million units, as well as other major hit titles from third-party developers and publishers, software shipments in the fiscal year ended March 31, 2005, recorded New PlayStation 2 (SCPH-70000 CB) an all-time high of 252 million units. SCE released a smaller, slimmer PS2 in November 2004 in the Japanese, North American and European markets. New, attractive titles are expected to be released from first- and third-party While inheriting the basic functions and design architecture developers and publishers, and SCE will continue to expand the PS2 platform with of the original PS2, the volume was reduced by 75%, the weight was halved and the thickness was trimmed down the strong software lineup as well as the popular slimline PS2. to 2.8 centimeters (1.1 inches). With the built-in Ethernet network connector included as a standard feature, users can enjoy easy access to online games. PlayStation Portable creates a new market. SCE released PlayStation Portable (PSP) in Japan in December 2004 and in North America in March 2005. PSP is a new handheld entertainment system that brings together a wide variety of entertainment content, including games, music and movies, and employs full-scale 3-D computer graphics and the newly developed high-capacity optical disc, Universal Media Disc (UMD). Since its debut, PSP has enjoyed favorable hardware and software sales. Cumulative hardware shipments as of March 31, 2005, in Japan and North America reached 2.97 million units, while shipments of software reached 5.7 million units. By May 2005, there were more than 30 titles in the PSP game lineup in Japan and over 20 titles in North America. Moreover, with the release of movie and music video

Gran Turismo 4: The latest title from the Gran Turismo series. titles on UMD in April 2005, the entertainment experience on PSP has been enhanced further. PSP was also released in Asia in May 2005, and will be launched in Europe in Cumulative worldwide shipments of the Gran Turismo series for PS and PS2 reached 43 million units in March September. SCE and other content developers and publishers will continue to release 2005. The series revolutionized the concept of racing attractive software in all regions. As an entirely new handheld entertainment platform games, delivering an entertainment-packed experience as a real-life driving and racing lifestyle simulator. It has enabling users to enjoy entertainment content at any time, anywhere, PSP will create won strong support from a broad range of users all over a new market around the world. the world and received high acclaim from automobile experts and enthusiasts.

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SONY AR-E0629 Page 13 05.7.6, 2:30 PM Adobe PageMaker 6.0J/PPC PLAYSTATION 3, SCE’s next-generation computer entertainment system, is expected to be launched in spring 2006, creating a new world of computer entertainment. SCE announced the features of its next-generation computer entertainment system, PLAYSTATION 3 (PS3), in May 2005. PS3 will incorporate many cutting-edge advances, such as the Cell next-generation, high-performance processor jointly developed by IBM Corporation, Sony Group and Toshiba Corporation, the RSX graphics processor jointly developed by NVIDIA Corporation and SCE, and XDR memory developed by Rambus Inc. PS3 will provide supercomputer-like power which, in combination with Blu-ray Disc ROM (BD-ROM), will deliver entertainment content in full high-definition (HD) quality. In games, not only will movement of characters and objects be far more refined and PLAYSTATION 3 (Prototype) realistic, but landscapes and virtual worlds will also be rendered in real time, thereby elevating the freedom of graphics expression to levels not experienced in the past. PS3 will also have built-in Gigabit Ethernet and wireless local area network (LAN) features, thereby creating a new world of entertainment through its networking capabilities. PS3 will also offer backward compatibility with over 13,000 game titles created for PlayStation (PS) and PS2 worldwide by March 2005, allowing users to continue to enjoy these enormous assets. With PS, PS2, PSP and PS3, expected to be released in spring 2006, SCE will create and develop a new world of computer entertainment through the fusion of games, music, movies and broadcasting.

(Design and specifications are subject to change without notice)

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SONY AR-E0629 Page 14 05.7.6, 2:29 PM Adobe PageMaker 6.0J/PPC PlayStation Portable (PSP)

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The fiscal year ended March 31, 2005 was a pivotal year in Sony’s entertainment businesses, with the successful integration of the SONY BMG MUSIC ENTERTAINMENT (SONY BMG) joint venture and a record performance by Sony Pictures Entertainment Inc. (SPE). In addition, the acquisition of Metro–Goldwyn–Mayer (MGM) by a consortium led by Sony Corporation of America (SCA) was completed in early April 2005. In August 2004, Sony Corporation and Bertelsmann AG merged their recorded music assets to create SONY BMG, a joint venture with an impressive array of current artists and a vast catalog that includes some of the most important recordings in history. SONY BMG is streamlining its operations and investing in talent development to position the company for future growth. In the fiscal year ended March 31, 2005, SPE generated record-breaking operating income, due in part to the worldwide success of Spider-Man 2, strong home entertainment sales and international television syndication. In April 2005, a consortium comprised of SCA, Providence Equity Partners Inc., Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners completed its acquisition of MGM. 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. The members of the consortium entered into a separate agreement to form a joint venture, to be managed by Comcast, establishing new cable/satellite channels that will feature SPE and MGM content. By expanding access to content, Sony’s entertainment companies have improved their strategic position. Licensing of the content to existing and emerging distribution channels such as digital cable, mobile and broadband services, as well as distribution in new media formats, are expected to create a wide array of revenue-generating opportunities.

Through the consortium’s acquisition of MGM, one of the world’s most renowned motion picture studios, Sony has created a strategic partnership with a massive library of entertainment content. MGM owns the world’s largest library of modern films, comprising approximately 4,000 titles. MGM’s film library has received 208 Academy Awards®, making it one of the largest award-winning collections in the world, and it includes several of the most successful film franchises in history, including James Bond, Pink Panther and Rocky. Additionally, the library also includes over 10,400 episodes from television series previously broadcast on prime-time network television, cable or in first- run syndication, where original episodes are initially broadcast on a syndicate of television stations and not on a single network. The programs in the MGM library have won, among others, 108 Emmy Awards and 17 Golden Globe Awards. With our strong financial and strategic partners, Sony looks forward to building on MGM’s exceptional legacy and capitalizing on emerging technologies and markets to provide consumers worldwide more opportunities to enjoy MGM’s vast library.

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Destiny’s Child Maroon 5 Ken Hirai Destiny’s Child’s Destiny Fulfilled was released in Maroon 5 was honored with the Best New Artist Ken Hirai’s soulful voice has cemented his November 2004 and went on to sell 5.5 million units award at the 2005 GRAMMY® Awards. Their de- position as one of Japan’s most popular male during the fiscal year, achieving double platinum but album, Songs about Jane, has spent 104 vocalists. His single “Close Your Eyes”—used as status in the United States, Canada and Japan, weeks on the Billboard 200 Chart and sold more the theme song for the film Crying Out Love in the and platinum and gold status in countries across than 8 million albums worldwide. Center of the World in 2004—was one of a string Europe, Oceania and Asia. of hits from his sixth album, SENTIMENTALovers, which sold 1.8 million units.

Gretchen Wilson Usher ORANGE RANGE Gretchen Wilson’s Here for the Party, which was Usher’s Confessions, the world’s bestselling album Okinawa’s six-man pop-rock unit ORANGE RANGE released in May 2004, was the top-selling debut in 2004, was honored with three awards at the 2005 has emerged in recent years as one of Japan’s most album in any genre for the year. The artist won the GRAMMY® Awards. popular bands. The band has released several hit 2005 GRAMMY® for Best Female Country Vocal singles, including “Hana,” used as the theme song Performance. for the film Ima, Ai ni Yukimasu. Their second album, musiQ, sold 2.8 million units, putting ORANGE RANGE firmly among the top of the J-Pop scene. Pictures

Seinfeld Jeopardy! 50 First Dates The first four seasons of Seinfeld, considered by Jeopardy! is a classic TV quiz show with a twist: Adam Sandler continues to be one of Columbia many to be the best TV sitcom ever, were released the host provides the answers and the contestants Pictures’ most consistent and bankable stars. His on DVD by Sony Pictures Home Entertainment. must give the questions. Now in its 21st season, 2004 romantic comedy 50 First Dates was a hit Seinfeld has become one of the fastest selling TV Jeopardy! remains the highest-rated quiz show on with audiences in movie theaters worldwide and titles on DVD ever. television, attracting 10 million viewers daily. was one of the studio’s most successful home entertainment titles this past year.

Kung Fu Hustle Spider-Man 2 – Motion Picture © 2004 Columbia Pictures Hitch Produced by Columbia Pictures Film Production Industries, Inc. All rights reserved. Spider-Man Character Will Smith’s romantic comedy Hitch was a breakout ® & © 2004 Marvel Characters, Inc. All rights reserved. Asia, Kung Fu Hustle has become one of Asia’s success around the world for Columbia Pictures in most successful local films of all time, grossing close Spider-Man 2 2005, earning more than $359 million in ticket sales. to $70 million. It broke a number of records through- Columbia Pictures’ critically lauded blockbuster out Asia, including all-time biggest opening week- Spider-Man 2 was the No. 1 live action film of 2004, ends in China, Hong Kong, Taiwan and Malaysia. generating nearly $800 million in worldwide box office receipts. Spider-Man 2 opened at No. 1 in more than 70 territories around the globe.

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The creation of the SONY BMG joint venture enables the company to continue to invest aggressively in new talent and develop new musical content throughout its worldwide operations. During the year, successful artist development efforts delivered strong results from such artists as Anastacia, Ciara, Destiny’s Child, John Legend, Jennifer Lopez, Mario, Maroon 5, Britney Spears, Rod Stewart, Usher and Gretchen Wilson. At the 47th Annual GRAMMY® Awards ceremony, the newly combined company led the industry with a total of 28 GRAMMY® Awards in a wide range of genres, including R&B, pop, rock and country, with awards going to such artists as Alicia Keys, Usher, John Mayer, Los Lonely Boys and Gretchen Wilson. Sony Music Network is leading the The merger also provided the company with the resources to continue to build on evolution of network music services its position as a global leader in the growing online and mobile music markets. SONY in Japan. BMG aggressively expanded its efforts in the mobile arena by establishing new Capitalizing on its digital network capa- relationships for the distribution of master ringtones, which are actual recordings that bilities, on April 1, 2005, SMEJ estab- replace the standard mobile phone ringer, and ringback tones, which are recordings lished Sony Music Network Inc. The new that take the place of the ringing sound callers traditionally hear when dialing. The company operates SMEJ’s Internet company also entered into agreements with wireless carriers in Europe and Asia to music distribution site, Sony Music facilitate the growth of 3G mobile services, which provide such features as full-length Online Japan, a pioneering site that audio and video offerings. Master ringtones represented one of the largest areas of offers fee-based downloads of copy- growth in wireless service, with a number of master ringtones achieving total sales of right-protected music, as well as music more than a million units during the fiscal year ended March 31, 2005. video clips and a wide range of other Even as the music company forged a wide range of new relationships for the digital visual content. distribution of its content, it also played an active role in the successful introduction of The online music download service a new product designed to rejuvenate the traditional retail market. In the United market is expanding rapidly, and signs States, SONY BMG led the music industry’s rollout of DualDisc, a new, two-sided, point to further growth as the number single-disc product that combines DVD video content and enhanced audio on one of Internet and advanced mobile phone side, with a full-length audio album on the other. High-profile titles such as Omarion’s users rises. This trend is signaling a debut release O and Jennifer Lopez’s Rebirth were issued simultaneously on CD and crucial change in the way people enjoy DualDisc, with DualDisc accounting for well over 30% of weekly sales for both titles. music. By upgrading and strengthening its Internet music distribution services, Sony Music Entertainment Japan Chaku-Uta® mobile phone master http://www.sonymusic.co.jp/ ringtone download service and other In the fiscal year ended March 31, 2005, a string of hits from leading artists, including offerings, Sony Music Network aims to ORANGE RANGE’s musiQ, Ken Hirai’s SENTIMENTALovers and Porno Graffitti’s bring entertainment even closer to its PORNO GRAFFITTI BEST BLUE’S, contributed to sales of Sony Music Entertainment customers. The company will also focus (Japan) Inc. (SMEJ). During the period, SMEJ continuously enjoyed the top share of on developing new businesses in such the Japanese music market in terms of sales. At the 19th Japan Gold Disc Awards, areas as e-commerce and network- ORANGE RANGE was named Artist of the Year, while releases by SMEJ artists based music and video promotions, with garnered seven of 20 Japanese Rock and Pop Album of the Year awards. the aim of further maximizing its digital SMEJ also took steps to accelerate growth in its network service business. network capabilities. Downloads from SMEJ’s various services, including Chaku-Uta®, launched in 2002, and Chaku-Uta Full™ master ringtone download services, are currently in the order of 5.0 million per month, and SMEJ continues to enjoy the top share of this key market in terms of revenues. Sony will continue to grow its music business in Japan by developing new talent and providing exciting new recordings, while at the same time cultivating new ways of enjoying music that take advantage of technological advances.

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With a consistent and stable approach to its core businesses, SPE achieved record profitability in the fiscal year ended March 31, 2005. The year was filled with critical and commercial successes and further strengthened SPE’s position as a global leader in the entertainment industry. In calendar year 2004, the studio was No. 1 in theatrical market share in the United States for the second time in the past three years, and generated ticket sales in excess of $1 billion in each of the United States and international markets for the third year in a row, which set a company record. Leading the way was Spider-Man 2, which opened at No. 1 in the United States and 70 of the international territories in which it was released. The film has grossed nearly $800 million in worldwide box office revenue to date and won the Academy Award® for Best Achievement in Visual Effects. In addition, the studio experienced tremendous success with films such as Hitch and The Grudge. SPE continues to pursue a local language production and distribution strategy and achieved notewor- thy results this year with the foreign language films The House of Flying Daggers and Kung Fu Hustle, which both enjoyed critical acclaim and box office success around the world. The strength and consistency of the film slate has translated into significant results in the home entertainment market, with Spider-Man 2 being this year’s top performer. In addition, the studio capitalized on content from Sony Pictures Television for DVD distribution, most notably Seinfeld, which has become one of the fastest selling television titles on DVD in history. Having digitized more film and television titles than any other studio, SPE is well positioned for continued success with emerging home entertainment formats, including the Universal Media Disc (UMD) used by Sony’s PlayStation Portable (PSP). As a result, PSP owners have the opportunity to watch some of SPE’s latest films, including Spider-Man 2, on a portable device. Sony Pictures Television International (SPTI) continued to pursue its branded international channel strategy with the launches of Animax India in July 2004 and AXN Germany in November 2004. To date, SPTI has formed or invested in approximately 40 international networks, which are available in more than 100 countries.

Local Language Television Production The past decade has seen significant growth in demand for local language television content. To capitalize on this market trend, SPTI has steadily expanded its local language production capabilities in key markets around the world. With dedicated offices in France, Germany, Hong Kong, Miami (Latin America), the People’s Republic of China, Spain and the United Kingdom, SPTI manages the production of shows based on its popular game show formats, such as The Dating Game and The Newlywed Game, as well as scripted formats. The Nanny, for example, which ended production in the United States in 1999, is now enjoying success with localized versions in Greece, Russia, Turkey and Argentina. Today, SPTI is the global leader in local language production, with more than 9,000 episodes produced in over 30 countries. In fact, SPTI is the No. 1 independent comedy producer in Germany and produces more original programming in Russia than any other major Hollywood studio. In November 2004, SPTI formed the first fully government-approved television production joint venture in the People’s Republic of China.

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Sony Financial Holdings In April 2004, Sony established Sony Financial Holdings Inc. (SFH) to oversee the operations of Sony Life Insurance Co., Ltd. (Sony Life), Sony Assurance Inc. and Sony Bank Inc. With this move, SFH became Japan’s first financial holding company to integrate insurance and banking institutions under one umbrella. In the fiscal year ended March 31, 2005, its first year of operation, SFH strengthened tie-ups among the three companies in the provision and delivery of products and services, complementing the existing tie-ups in such areas as the provision of automobile insurance and group credit life insurance. In June 2004, Sony Bank launched sales of Sony Life’s pension insurance policies through its web site MONEYKit. In October 2004, Sony Assurance began to offer a fire insurance policy limited to customers taking out Sony Bank loans, while in December 2004 Sony Life’s highly trained life insurance professionals, Lifeplanners, began introducing Sony Bank’s housing loans. Recognizing the importance of maintaining financial soundness for the protection of policyholders and depositors, SFH took initiatives in reinforcing risk management and compliance systems for the entire SFH Group. In June 2004, SFH took steps to enhance Sony Bank’s financial condition, injecting into the bank ¥10.0 billion equity with the proceeds of a third-party allotment of SFH shares to Sony. In the fiscal year ending March 31, 2006, SFH will continue to reinforce the SFH Group’s synergies and bolster risk management and compliance systems, as well as prepare for its initial public offering, which is being targeted to occur within the fiscal year ending March 31, 2007.

Sony Life Sony Life, by enforcing needs-based sales solutions through its Lifeplanners (sales employees) and Partners (independent agents), provides optimal protection that best matches the needs of each customer, as well as comprehensive after-sales services for policyholders. In May 2004, Sony Life introduced an optional feature for its existing family income insurance policy, covering death and serious disability, which expands coverage to include other specified disabilities and conditions requiring nursing care. Sony Life also enhanced its lineup of services with the launch of a special agreement exempt- ing policyholders from future premium payments if they fall victim to any of three major illnesses—cancer, acute myocardial infarction and/or stroke—or develop certain disabilities, including conditions that necessitate nursing care. In the fiscal year ended March 31, 2005, Sony Life’s results continued to improve steadily. The amount of individual life insurance and annuity policies in force increased 6%, to ¥27,823.4 billion, and the solvency margin, which reflects a life insurance company’s ability to pay claims and other benefits in unforeseen events, was 1,317.1%, indicating an extremely high level of stability.

Sony Assurance Sony Assurance has sold non-life insurance products using direct marketing via telephone and the Internet since its operations began. Sony Assurance offers risk- segmented automobile insurance and medical insurance, and aims to provide carefully tailored policies with reasonable premiums. In the fiscal year ended March 31, 2005, Sony Assurance offered a new discount option to automobile insurance policyholders based on annually traveled distance, an

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SONY AR-E0629 Page 20 05.7.6, 2:21 PM Adobe PageMaker 6.0J/PPC example of risk segmentation. Policyholders can enjoy this option when their traveled distance does not exceed a specified annual limit, and apply a discount to the following year’s premiums, the size of which is based on the distance remaining under the limit. Sony Assurance also launched a new service that eliminates the requirement for policyholders to report to the insurance company and to pay extra premiums when they exceed the distance limit agreed to in the policy. In medical insurance, to respond to diversifying customer needs, Sony Assurance broadened the choice of coverage options for its whole-life insurance products and commenced sales of SURE Basic and SURE Wide in May 2005. In the fiscal year ended March 31, 2005, net premiums increased 18%, to ¥36.6 billion. The total number of automobile and cancer insurance policies in force surpassed 650,000.

Sony Bank Sony Bank, founded as an Internet bank that provides asset management and other financial services to individual customers, has actively and inventively offered various new services. In June 2004, the New Zealand dollar was added to the foreign currency deposit transaction service line-up. The foreign currency deposit service is one of the bank’s main services. In addition, to support individual customers’ flexible investment activities, in December 2004 Sony Bank introduced limit order services as well as foreign currency time deposits with special agreements. In the fiscal year ended March 31, 2005, Sony Bank newly added 17 investment trusts to its investment trust business, bringing the total number of funds it handles to 40. Meanwhile, the bank successfully enhanced the features of its housing loan business in November 2004 by, among other things, developing a special arrangement that enables borrowers to partially set various fixed rates from time to time on their floating-rate loans. In the fiscal year ended March 31, 2005, deposits from customers in the banking business rose 44%, to ¥546.7 billion, and the balance of loans doubled to ¥126.3 billion. Additionally, the number of accounts at Sony Bank as of March 31, 2005, increased by 98,968, or 37%, to 367,748.

Sony Finance International Sony Finance International, Inc., is involved in credit card, e-commerce payment processing and leasing operations. In 2002, the company began issuing its eLIO- branded cards, which were created specifically for Internet shopping and incorporated FeliCa, Sony’s contactless IC card technology. Efforts to increase the number of member merchants and affiliated partners are supporting steady growth in the total number of eLIO card members and the volume of transactions. As of March 31, 2005, Sony Finance International had issued approximately 750,000 eLIO cards and 900,000 conventional credit cards. Developed by Sony Finance International, eLIO is a simple and secure credit service. Card members place their card on an electronic

eLIO card reading device, instead of inputting personal identification numbers (PINs) or credit card numbers, removing the need to transmit such vital information over the Web. eLIO cards can be used for a variety of transactions, including shopping. They are compatible with the Edy prepaid e-money service operated by bitWallet, Inc., and also function as conventional Visa® cards. During the fiscal year, Sony Finance Inter- national launched eLIO Order, an easy-to-use service allowing card members to place orders and purchase products with their mobile phones*.

* eLIO Order is available for NTT DoCoMo mobile phones that have been embedded with a chip based on FeliCa technology.

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Sony Communication Network Corporation (SCN) is primarily expanding the So-net Internet service in Japan. So-net presently provides Internet access and content services to approximately 2.45 million subscribers. The market for broadband Internet services continues to grow quickly. The domestic market for constant-connection broadband services—including asymmetric digital subscriber lines (ADSLs), fiber-to-the-home (FTTH) and cable television—exceeded 18 million subscribers in December 2004, according to Ministry of Internal Affairs and Communications statistics, and Internet users continue to join. In the fiscal year ended March 31, 2005, SCN sought to attract new subscribers by strengthening its broadband content services and adding personalized services, such as the customizable portal My So-net and the easy-to-use personal web site service, So-net Blog. To allow subscribers to use its network without worry, SCN was an early adopter of personal privacy policies, obtaining Privacy Mark* certification in November 1999. Two of SCN’s affiliates were listed on the Tokyo Stock Exchange Mothers market in the period under review. So-net M3, Inc., a consolidated subsidiary of SCN listed in September 2004, provides pharmaceutical marketing support services centered on m3.com, a portal for physicians in Japan. In May 2005, the subscriber base for m3.com reached 100,000, making it the largest in the country. DeNA Co., Ltd., an SCN equity-method affiliate listed in February 2005, offers e-commerce solutions, including Bidders, an auction and shopping site, and Mobaoku, an auction site for mobile phone users. To provide SCN with greater independence and more flexibility to adopt its own management structures and growth strategies, we are considering the possibility of pursuing an initial public offering of SCN’s common stock and delisting our subsidiary tracking stock. We believe this would allow SCN to achieve its full potential within the Sony Group.

* Privacy Mark: Personal information management accreditation administered by the Japan Information Processing Development Corporation (JIPDEC).

A470001(03)

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SONY AR-E0629 Page 22 05.7.6, 2:21 PM Adobe PageMaker 6.0J/PPC R&D Strategies and Selection of Key Technological Fields

Research and development (R&D) are vital to achieving the continuous innovation crucial to sustained corporate growth. After identifying key technological fields and R&D themes with the potential to deliver growth, Sony manages its R&D activities strategically to differentiate and increase the value-added components of its products and services. While Sony naturally directs efforts toward technologies that sustain and develop its current businesses, it also examines technologies that will create new markets and give consumers fresh lifestyle ideas. As we progress into the era of broadband networks, it is increasingly important to create environments that facilitate the enjoyment of high-definition (HD) images and other high-grade audiovisual content inside and outside the home. The key to realizing such environments is the home server, which is used to control both networked audiovisual equipment and the content recorded or purchased by the consumer. We recognize semiconductors, displays and storage technologies as essential to making home servers and the connected audiovisual equipment better, easier to use, and more feature-packed. Accordingly, we will concentrate our R&D activities on these three key technological fields for the foreseeable future.

R&D Results for the Fiscal Year Ended March 31, 2005 Semiconductors Electronics products derive the majority of their value-added, advanced features from semiconductor devices. Accordingly, Sony has made semiconductor technologies a key focus and is active in semiconductor design and process technology research, as well as the development of high-performance, high-function devices closely linked to products.

• Cell—The Next-Generation Processor At the International Solid-State Circuits Conference (ISSCC) in February 2005, the Sony Group, IBM Corporation and Toshiba Corporation revealed Cell, a high-performance processor under joint development since March 2001. Built on a revolutionary new multicore architecture, Cell features eight floating-point computing cores and a Power- based processor core, achieving clock speeds exceeding 4GHz and supercomputer-level floating-point computing performance. We will incorporate Cell into next-generation audiovisual equipment, including computer entertainment systems, home servers and digital televisions. We also plan to continue developing this processor to achieve break- through advances in performance for real-time processing of rich media applications.

Cell—the next-generation processor • 1080i Standard HD CCD Drawing on our proprietary imaging device technologies, we developed the first consumer-use HD charge-coupled device (CCD) capable of supporting 1080 interlaced (1080i) digital HD photography at a 16:9 aspect ratio.* In addition to paving the way for high-resolution imaging with a total count of 1.12 million pixels, the 1080i standard HD CCD attains excellent sensitivity and smear performances.** The new device is being incorporated into the HDR-FX1, the first consumer-use digital HD video camera recorder based on the 1080i standard.

** The aspect ratio is a display’s width-to-height ratio. ** Smear is the effect created when strong incident light, such as sunlight, strikes the CCD sensor, causing perpendicular white stripes to appear on the screen.

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SONY AR-E0629 Page 23 05.7.6, 2:20 PM Adobe PageMaker 6.0J/PPC Displays With the advent of HD broadcasting and Blu-ray Disc recorders for recording and playing back HD content, and of high-resolution digital still cameras and video cameras, Sony is developing the architecture that will allow people to enjoy and be enter- tained by the growing diversity of high-resolution content. To this end, we are using our proprietary know-how to advance display technologies and devices in the pursuit of “realism,” our concept of the ideal picture quality.

•Triluminous Wide-Spectrum Backlit LED System We developed Triluminous, a wide-spectrum backlit light-emitting diode (LED) system, and used it in the QUALIA 005 LCD television, making the QUALIA 005 the first consumer-use LCD television with LED backlighting. By using independent panels for red, green and blue (RGB) signals, this backlit LED system achieves more realistic, wide-spectrum color reproduction than previous LCD television backlit systems.

• GxL System Our new projection format, called the GxL (“G-by-L”) system, utilizes diffraction grat- ing elements on the surface of a micro-electromechanical systems (MEMS) chip and primary color lasers to reproduce colors more faithfully than LEDs. The GxL system debuted in March 2005 at the Laser Dream Theater at the 2005 World Exposition in Aichi, Japan, projecting at high resolution onto an ultra-wide 2005-inch screen (approximately 10 meters high and 50 meters wide).

Storage We are developing a range of backbone devices compliant with the Blu-ray Disc standard to complement our fast-track commercialization of Blu-ray Disc systems for HD image recording and playback.

• Three-Wavelength Optical Recording/Playback Heads for Blu-ray Discs, DVDs and CDs Combining our extensive experience in semiconductor laser, surface mount and optical technologies, we developed a three-wavelength optical recording and playback head that supports Blu-ray Disc, DVD and CD playback with a single optical head.

• Joint Development of Dual Wavelength Coupler for Red and Blue-Violet Lasers In collaboration with Nichia Corporation, we developed a dual wavelength coupler for the playback of DVD-format and blue-violet laser optical discs. It integrates two laser diodes for the different laser wavelengths, the respective pickup elements and the components for transmitting and receiving optical signals. Because prior systems relied on separate elements to support the different wavelengths, this coupler will help to simplify, miniaturize and lighten optical heads while making them more reliable.

Dual wavelength coupler

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SONY AR-E0629 Page 24 05.7.6, 2:20 PM Adobe PageMaker 6.0J/PPC R&D Expenses for the Fiscal Year under Review R&D expenses for the fiscal year ended March 31, 2005, decreased 2.4%, to ¥502.0 billion, equivalent to 7.6% of net sales, excluding the Financial Services segment, compared with 7.5% of net sales the prior year. R&D expenses in the Electronics segment rose 0.8%, to ¥432.8 billion, while those in the Game segment declined 17.9%, to ¥68.5 billion. Approximately 62% of R&D expenses in the Electronics seg- The Sony ment were allocated to prototype development and 38% to new, mid- to long-term technologies focusing primarily on semiconductors, communications, displays and next-generation optical disc technologies.

Long-Term Research Fields In step with Moore’s Law,* semiconductor device development is evolving from the “micro” to the “nano”** level as techniques for fabricating and measuring are increas- Challenge: ingly miniaturized. Miniaturization is expanding computing capacity, accelerating the transition to broadband networks, and stimulating the electrification and digitization of staggering volumes of information and content in the form of text, voice, still-image and video data. Accordingly, information technologies are transitioning from “giga” to “tera” and “peta.”** Advances in processors, storage, networks and software will drive massive changes in the computing environment, making it possible to run large-scale simula- Seeing is tions and process rich media applications in real time on a daily basis, impossible until now because of a lack of computing power. In addition, Sony’s integration of recognition technologies with IT will render communication between humans and QRIO bipedal robot products/services more natural. In particular, it will enable the development of robots that are more human-friendly. We believe these technological trends will continue. Accordingly, in addition to R&D for traditional devices that are viewed and interacted with as collections of many Believing molecules, atoms and electrons, we are starting to pursue research at a “nano-device” and “nano-electronics” level into the qualitative characteristics of small numbers At Sony, our commitment to creating new visual of particles. Rather than relying solely on the top-down process represented by traditional semiconductor processes, the fabrication of nano devices will combine experiences doesn’t stop at consumer electronics. R&D expenses bottom-up processes in which the molecules align themselves. We are also venturing (Yen in billions) into biotechnology and other areas, learning how to apply in our devices the qualities In this special feature, we take a look at three 600 of DNA—the legacy of evolution—and mimic the elegantly elaborate formation of 514.5 502.0 applications of Sony technologies that underscore 1.7 0.7 protein molecules. 443.1 83.4 450 1.3 68.5 61.5 We will continue R&D into these new technologies to facilitate their use in daily life this statement: the Laser Dream Theater, which uses and enable us to offer products, services and entertainment that improve the quality 300 of life for people everywhere. innovative technologies to offer images of unsurpassed 432.8 429.4 380.3 beauty; Sony Pictures Imageworks, a visual effects 150 **Moore’s Law is the principle that the data density of integrated circuits doubles every 18–24 months. ** Micro=one millionth, nano=one billionth, giga=1 billion, tera=1 trillion, peta=1 quadrillion (1,000 trillion) and character animation leader; and CineAlta, a 0 2003 2004 revolutionary digital movie production system. 2005 ■ Electronics Our challenge is to continue developing technologies ■ Game ■ Other like these, enabling us to offer innovative content and hardware that mean seeing really is believing.

Sony Corporation 25 26 Sony Corporation R&D Expenses for the Fiscal Year under Review R&D expenses for the fiscal year ended March 31, 2005, decreased 2.4%, to ¥502.0 billion, equivalent to 7.6% of net sales, excluding the Financial Services segment, compared with 7.5% of net sales the prior year. R&D expenses in the Electronics segment rose 0.8%, to ¥432.8 billion, while those in the Game segment declined 17.9%, to ¥68.5 billion. Approximately 62% of R&D expenses in the Electronics seg- The Sony ment were allocated to prototype development and 38% to new, mid- to long-term technologies focusing primarily on semiconductors, communications, displays and next-generation optical disc technologies.

Sony Corporation 25 26 Sony Corporation

Laser Dream Theater

Sony’s GxL display technology offers images like none ever seen before. At the 2005 World Exposition in Aichi, Japan, Sony is presenting the Laser Dream

Size: 34 x 6 x 2mm Theater, where high-quality images are projected with lasers onto one of the world’s largest screens. The ultra-wide, 2005-inch screen is big enough to show even a whale in life-size proportions, or display the skyline at dusk over the savanna with

GxL device such realism that you believe the real thing is right before your eyes. Magnified image of surface Size: 25 microns Behind this amazing performance is the GxL (“G-by-L”) system under development at Sony. GxL is a projection system that combines our proprietary high-output laser GxL System technologies and cutting-edge micro-electromechanical systems (MEMS). By using red, green and blue (RGB) lasers, it is able to more than double the vividness of color produced in cathode-ray tube (CRT) televisions.

GxL color For example, only the GxL system can faithfully reproduce the brilliant HDTV color reproduction deep blue of the earth as shown at the end of Laser Dream Theater’s reproduction spectrum Morpho menelaus specifications © Clive S. Pratt– presentation—the same hue as found on the wings of the Morpho The Insect Company butterfly (morpho menelaus) dwelling in the Amazon. The Laser Dream Theater brings together multiple Sony Group technologies, from Spectrum those used in content planning around the Expo’s theme, “Nature’s Wisdom,” to locus CIE 1931 chromaticity diagram those used in filming, music scores and image projection. A specially developed (xy chromaticity diagram) camera system was used to film the images, which entered a single lens and were

GxL Color Reproduction simultaneously recorded onto three Hi-Vision video system HDCAM-SRs. Sony Music Entertainment Japan also produced the high-fidelity music flowing from the 86 speakers installed in the theater. Gathering the best in technology, Sony overcame numerous difficulties to realize its dream of delivering high-quality, beautiful imagery never before seen on so gigantic a screen. In pursuit of achievements like this, we will continue to follow our dreams and curiosity to bring wonder and delight to people worldwide.

Naoya Eguchi General Manager, Laser & Optics Development Department, Photonics Development Division, Core Technology Development Group, Micro Systems Network Company, Sony Corporation

It was the summer of 2002 when I first heard about Sony’s plans to participate in the World Exposition. About the only thing decided then was that we would try to create a 2005-inch screen to honor the year of the Expo. At the time, the GxL prototype could only project up to 200 inches, so there was a more than tenfold discrepancy between that and the 2005-inch goal. Nevertheless, a passion burned within us to create a laser display, a so-called “dream display,” with our own hands. We managed to overcome many obstacles in an amazingly short period to develop brand-new blue and green lasers. The human optic nerve is constituted so it can respond to the three additive primary colors—red, green and blue. The GxL system uses single wavelength RGB lasers with outstanding color purity, enabling it to reproduce the same colors as in real objects. The beauty it produces far exceeded even my own expectations. When you look at the real world through a 2005-inch screen like some huge window, you can’t help but feel a sense of wonder and excitement.

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SONY AR-E0629 Page 27 05.7.6, 2:19 PM Adobe PageMaker 6.0J/PPC Spider-Man 2 – Motion Picture © 2004 Columbia Pictures Industries, Inc. All rights reserved. Spider-Man Character ® & © 2004 Marvel Characters, Inc. All rights reserved.

Sony Pictures Imageworks (Imageworks) is driven by challenge. Imageworks is an Academy Award®-winning global leader in visual effects and character animation because it meets the creative and technical demands presented by some of the world’s preeminent, most cutting-edge filmmakers, who themselves are challenged by an increasingly sophisticated worldwide audience. Its success stems from a commitment to combining world-class artists and leading-edge technology.

Jay Redd Visual Effects Supervisor, Sony Pictures Imageworks

My job is to work with the director and From left: Senior Visual Effects Supervisor John Dykstra, Visual production designers at the beginning of Effects Supervisor Scott Stokdyk, Special Effects Coordinator John Frazier and Animation Supervisor Anthony LaMolinara celebrate the a film and determine how to best “realize” Academy Award® for Best Achievement in Visual Effects backstage the conceptual ideas and bring the fan- at the Awards. Carlo Allegri/GettyImages. Oscar statuette © tasy world to life. The director just has to A.M.P.A.S.® say, “I want to do this.” Then, it’s our job Sony Pictures Entertainment Inc. (SPE) established Imageworks in 1992, initially to to figure out how to do it. We have to assist filmmakers in planning complex stunt sequences using computer-generated decide how to shoot it, what kind of (CG) imagery. SPE management recognized the importance of digital production as technologies to use, what kinds of com- filmmaking became more dependent on visual effects. Imageworks’ services are puters, software and talent we need and available to other studios in the motion picture industry and are the choice for leading what kind of casting of visual effects art- filmmakers. Some of Hollywood’s most notable films featuring the company’s visual ists is necessary. I think the challenge is effects and animation include Bewitched, The Aviator (Miramax), The Polar Express to continue making effects that are truly (Warner Bros.), Bad Boys II, Spider-Man and Spider-Man 2, Big Fish, The Matrix magical and draw the audience into the Revolutions (Warner Bros.), The Haunted Mansion (Disney), Seabiscuit (Universal), experience so they forget they are in a The Lord of the Rings: The Two Towers (New Line), Stuart Little and Stuart Little 2, movie theater or watching TV. The Matrix Reloaded (Warner Bros.), Harry Potter and the Sorcerer’s Stone (Warner Bros.), Cast Away (Fox/DreamWorks) and Charlie’s Angels.

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SONY AR-E0629 Page 28 05.7.6, 2:19 PM Adobe PageMaker 6.0J/PPC Spider-Man 2, winner of the 2005 Academy Award® for Best Achievement in Visual Effects, demonstrated Imageworks’ drive to surpass its previous accomplishments— a challenge of the highest order. In Spider-Man 2, the hero gets up close and personal with the tentacled villain, Doctor Otto Octavius—“Doc Ock.” Spider-Man engages in extensive hand-to-hand combat with both real and virtual versions of Doc Ock, which required complex and detailed CG versions of both characters. The reality of Spider- Man’s moves and reactions to attacks and blows from Doc Ock’s tentacles required Jerome Chen a complete rethinking of the Spider-Man character, with even higher expectations for Senior Visual Effects Supervisor, the animators. Both digital characters showcased the state of the art in digital humans, Sony Pictures Imageworks with lifelike movement and appearance, especially in the rendering of skin, hair and I help filmmakers tell their stories. Often fabric. In the original Spider-Man, both the title character and the villain were masked. the success of their story requires some- In Spider-Man 2, we see their individual faces close up, which required the development thing that hasn’t been done before. My of a new CG skin technology pipeline. job is to figure out how to do it, ignoring that at first glance it might seem impossible. This was the case last year with The Polar Express. Film director Robert Zemeckis was determined to faithfully bring the visual style of the popular children’s book to the big screen. He didn’t see it as a live-action film, but he also didn’t want to create the movie with conventional animation. What he wanted was something in between, a technique that would transform an actor’s performance into a digital character. When faced with a daunting challenge, I usually think of what would be the most simple and intuitive approach. With The Polar Spider-Man 2 – Motion Picture © 2004 Columbia Pictures Industries, Inc. All rights reserved. Spider-Man Character ® & © 2004 Marvel Characters, Inc. All rights reserved. Express, I thought the simplest way to get the best result was to capture the details of the actor’s face and body at the same time. We developed a new performance-capture technique called Imagemotion, in which the complete performance is captured together and later integrated by our digital artists into

the CG characters and environments. A detailed digital city in Spider-Man 2, far more extensive than anything seen in Spider-Man, enabled the film- The process also enabled Zemeckis to makers to stage scenes across an urban landscape. This was most spectacularly revealed in the scenes in which Spider-Man flies through the city and throughout a sequence where fully digital characters Spider-Man stage his scenes with multiple actors, and Doc Ock fight onboard a speeding train. all of whom could be performance- captured simultaneously. Scenes could be played just as they would in live action, with all of the spontaneity and energy that comes with a live performance. What was simple to conceive was incredibly difficult to accomplish, but the results opened the door to a new way of making movies.

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SONY AR-E0629 Page 29 05.7.6, 2:19 PM Adobe PageMaker 6.0J/PPC For more than a decade, Imageworks has challenged itself to build on its own capabilities and expand the creative palette. Imagemotion™, a new proprietary technology developed by Imageworks, enables live-action filmmakers to work in an all-CG environment while using all of their familiar moviemaking tools. Imagemotion allows for the simultaneous recording of face and body performance data by multiple live actors and the application of that data to create CG images and camera movements. Imageworks pioneered the Imagemotion process in its groundbreaking work Jill Culton on Robert Zemeckis’s The Polar Express, and is currently using Imagemotion on Director, Sony Pictures Animation Columbia Pictures’ Monster House and Beowulf. I’m very proud to be directing Sony The promise of all-CG animation inspired Imageworks to test itself by indepen- Pictures Animation’s first feature film, dently producing The ChubbChubbs!, which ultimately won the Academy Award® for Open Season. Directing an animated film Best Animated Short in 2003. The establishment of Sony Pictures Animation to presents many challenges, but ultimately produce all-CG animated motion pictures presents Imageworks with its next chal- I feel it’s my job to tell a great story. We lenge. Sony Pictures Animation’s first two feature films, Open Season and Surf’s Up, strive to develop a story with humor, are now in production. emotion and a cast of endearing characters. At the same time, we have to think about the look and style of the picture. On Open Season, we’re going for a graphic, stylized look. I really want the audience to have the feeling you get when you’re in the woods for the first

time and your senses are overwhelmed The ChubbChubbs! won the Academy Award® for Best Animated Short in 2003. by the magnificence around you. One of © 2002 Sony Pictures Imageworks. All rights reserved. the things we did to achieve this look was to develop new technology to create water that has the correct reflective characteristics and volume. In creating characters, expression is essential. Today, we’re able to create expression with infinite detail, closely mir- roring the range of motion and expression that we’re accustomed to seeing in life. The wink of an eye, the curve of a smile, the furrow of a brow all contribute to the performance. For directors, this is Open Season will be the first feature length animated film an exciting advancement because the from Sony Pictures Animation. It is the story of a 900 pound expression we imagine can be seen on domesticated grizzly bear and a scrawny, one-horned mule deer, stranded together in the woods during hunting season. the screen. They must work together to rally the animals of the forest and turn the tables on the hunters. Open Season is scheduled to be released in fall 2006. © 2005 Sony Pictures Animation. All rights reserved.

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SONY AR-E0629 Page 30 05.7.6, 2:18 PM Adobe PageMaker 6.0J/PPC Cinema’s Digital Revolution

The CineAlta professional movie production system, a high-definition video format (HDCAM 24P), has introduced a revolutionary new movie production process that employs digital technologies while recording on tape to achieve the realism of film imaging. CineAlta, which takes its name from “cinema” and “alta,” the Spanish word for high, uses the same frame rate, 24 frames per second, as conventional movie films and achieves the same color and texture quality. The CineAlta project team, formed in 1998, succeeded in commercializing CineAlta in merely one and a half years. The CineAlta system was used to shoot the entire 2002 blockbuster Star Wars Director George Lucas on the set of Episode II: Attack of the Clones, as well as 2005’s sequel Star Wars Episode III: Star Wars Episode II: Attack of the Clones Revenge of the Sith. The more recent film used the upgraded CineAlta RGB444 Rick McCallum system, which has RGB color reproduction capabilities that deliver even greater Producer, Lucasfilm Ltd. realism. Let me be blunt. We simply could not Sony Electronics Inc. and Panavision Inc. jointly have made Star Wars Episode III without received a 2004 Primetime Emmy Engineering the help of Sony and their development Award from the Academy of Television Arts & of the HDCAM-SR 4:4:4 camera and Sciences for the Panavised F900 HD 1080/24P recording system. CineAlta camcorder. The Panavised F900 has Since we have gone to a completely become the new standard for documentary and digital pipeline, another world has independent moviemakers as the world’s first digital opened up to us. 24P imaging system. It incorporates high-quality George Lucas and I are very passion- optics and cutting-edge digital processing and From left: Noritaka Miyaji and Kiyoshi Yamauchi (Professional Solutions Network ate about digital filmmaking, and all of us recording technologies in a single package. Company, Sony Corporation) and Yasuhiko at Lucasfilm appreciate the contribution Mikami (Sony Electronics Inc.) celebrate as CineAlta has made to our work. The two co-recipients of the 2004 Primetime Emmy Sony’s 4K SXRD projector heralds new Engineering Award. main ways it has impacted our work has advances in digital cinema. been in allowing us to be more creative At Sony, we were not content to stop at modern- and increasing our workflow efficiency. izing film production. We pressed on with the development of digital cinema, in which For example, we can instantly access movies are both recorded and projected digitally. In 2005, we successfully commer- footage we have just shot, which helps cialized and launched the industry’s first “4K” digital projector. The 4K projector is a not only the director, but the cast as well. digital cinema projector incorporating a 4K Silicon X-tal (“crystal”) Reflective Display This, coupled with longer recording (SXRD) device, which produces high-resolution 8.85-megapixel images, four times times, helps us keep the production sharper than those of current high-definition televisions. moving at a fast pace without losing With the advent of our digital projector, movies can be presented in theaters with momentum for camera reloads. Addi- virtually no degradation in quality from when they are recorded. Quality does not tionally, digital shooting allows us to go diminish with repeated use, leading to significant time and cost savings. into post production, not only off-line but even online without any chemical processes like telecine, film scanning and color timing, which increases our production efficiency dramatically.

I believe that digital acquisition gives James Cameron, renowned director of us a significant advantage. It really is a Titanic, shot the 3-D feature Ghosts of the Abyss using a CineAlta system in a special shame that very few people can enjoy housing. Diving 3,650 meters in a deep-sea our movies in theaters at the same submersible to explore the Titanic, Cameron’s quality level in which we shoot them. crew penetrated the interior of the sunken liner to capture scenes never before Someday when the entire process witnessed by the living. is digital, including the elusive final link of A still from the film Ghosts of the Abyss directed by James Cameron and used with the permission of Walden Media, LLC. theatrical distribution, moviegoers will get to see films the way they were meant to be seen. That will be a great day, and one that Sony will have made a major contribution to. Sony Corporation 31

SONY AR-E0629 Page 31 05.7.6, 2:17 PM Adobe PageMaker 6.0J/PPC Corporate Governance/New Directors and Corporate Executive Officers

Sony follows the “Company with Committees” corporate governance system under the Japanese Commercial Code, under which the Board of Directors maintains an important oversight role separate from the executive function and delegates broad authority to the Corporate Executive Officers to run the company’s affairs. This separation of functions allows for sound and transparent management as well as swift and dynamic decision making in a rapidly changing environment.

Governance Structure As statutory decision-making bodies, Sony has established the Board of Directors, three Board committees (the Nominating Committee, Audit Committee and Compen- sation Committee) and the Corporate Executive Officers. In addition to those statutory bodies, Sony has Corporate Executives who carry out business operations within specific areas. The primary roles of each body are set out below.

Board of Directors 1. Determines the fundamental management policies of the Sony Group 2. Oversees the management of Sony Group’s business operations 3. Determines Directors who comprise the statutory committees 4. Appoints and dismisses Corporate Executive Officers Statutory Committees Nominating Committee: Proposes the appointment and dismissal of Directors Audit Committee: Audits the execution of duties by Directors and Corporate Executive Officers with regard to financial statements, disclosure controls and procedures, internal controls, compliance structure, risk management structure, internal audit structure, whistleblower protections and other matters; proposes appointment/ dismissal of, approves the compensation of, oversees and evaluates Sony’s independent auditors. Compensation Committee: Determines remuneration for individual Directors, Corporate Executive Officers, Corporate Executives and Group Executives. Corporate Executive Officers Make decisions regarding the execution of Sony Group business activities within the scope of the authority delegated to them by the Board of Directors. Corporate Executives Carry out business operations within specific areas, including business units, research and development and/or head office functions, in accordance with the fundamental policies determined by the Board of Directors and the Corporate Executive Officers.

Sony Initiatives To strengthen governance beyond Commercial Code requirements, Sony has added several provisions to its Regulations of the Board of Directors to ensure the separation of the Board of Directors from the execution of business activities, and to advance the proper functioning of the statutory committees. The main provisions are as follows: • Separating the roles of the Board chairman/vice chairman and Representative Corporate Executive Officers • Limiting the number of terms outside Directors may serve and rotating committee membership • Appointing chairmen of statutory committees from the ranks of outside Directors • Instituting qualifications for director candidates aimed at eliminating conflicts of interest and ensuring independence • Raising the minimum number of Nominating Committee members (five or more), prohibiting the appointment of the CEO or COO of Sony Group (or person at any equivalent position) to the Compensation Committee, and discouraging the concurrent appointment of Audit Committee members to other committees

Meeting Record During the year ended March 31, 2005, the Board of Directors convened seven times. The Nominating Committee met seven times, the Audit Committee 15 times, and the Compensation Committee seven times.

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SONY AR-E0629 Page 32 05.7.6, 2:17 PM Adobe PageMaker 6.0J/PPC Structure of Sony Corporate Governance System Supervision

Board of Directors Determination of fundamental management policies for the Sony Group Oversight of management of Sony Group’s business operations Determination of Directors organizing each committee Appointment and dismissal of Corporate Executive Officers Chairman of the Board: Yotaro Kobayashi* Vice Chairman of the Board: Hirobumi Kawano*

Sir Howard Stringer Sony Corporation Chairman and Chief Executive Officer Ryoji Chubachi Sony Corporation President and Electronics CEO Katsumi Ihara Sony Corporation Executive Deputy President and NC President, Home Electronics Network Company Akishige Okada* Chairman of the Board (Representative Director), Sumitomo Mitsui Financial Group, Inc. Chairman of the Board (Representative Director), Sumitomo Mitsui Banking Corporation Hirobumi Kawano* Senior Vice President, JFE Steel Corporation Yotaro Kobayashi* Chairman of the Board, Fuji Xerox Co., Ltd. Sakie T. Fukushima* Representative Director & Regional Managing Director—Japan, Korn/Ferry International Member of the Board, Korn/Ferry International, U.S.A. Yoshihiko Miyauchi* Director, Representative Executive Officer, Chairman and Chief Executive Officer, ORIX Corporation Yoshiaki Yamauchi* Director, Sumitomo Mitsui Financial Group, Inc. Sir Peter Bonfield* Member of the Board, Telefonaktiebolaget LM Ericsson Fueo Sumita* Chief of Sumita Accounting Office Göran Lindahl Sony Corporation

Nominating Committee Audit Committee Compensation Committee

Proposes the appointment and Audits the execution of duties by Directors Determines remuneration for individual dismissal of Directors and Corporate Executive Officers with regard Directors, Corporate Executive Officers, to financial statements, disclosure controls Corporate Executives and Group Yotaro Kobayashi* (Chairman) and procedures, internal controls, compli- Executives. Hirobumi Kawano* ance structure, risk management structure, Akishige Okada* (Chairman) Akishige Okada* internal audit structure, whistleblower Yoshihiko Miyauchi* Sir Howard Stringer protections and other matters; proposes appointment/dismissal of, approves the Göran Lindahl Ryoji Chubachi compensation of, oversees and evaluates Sony’s independent auditors. Yoshiaki Yamauchi* (Chairman) Sakie T. Fukushima* Fueo Sumita*

* An outside director appointed in accordance with Paragraph 2, Subsection 7, Section 2, Article 188 of the Commercial Code.

Execution

Corporate Executive Officers Execution of Sony Group Business activities within the scope of authority delegated by the Board of Directors

Representative Corporate Executive Officers: Sir Howard Stringer** Chairman and Chief Executive Officer Ryoji Chubachi** President and Electronics CEO Katsumi Ihara** Executive Deputy President and NC President, Home Electronics Network Company Corporate Executive Officers: Nobuyuki Oneda Executive Vice President and Chief Financial Officer Keiji Kimura Executive Vice President and Officer in Charge of Technology Strategies NC President, Information Technology & Communications Network Company Nicole Seligman Executive Vice President and General Counsel Yutaka Nakagawa Executive Vice President and NC President, Personal Audio Visual Network Company

** Concurrently serving as Director. New Directors and Corporate Executive Officers as of June 22, 2005

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SONY AR-E0629 Page 33 05.7.6, 2:16 PM Adobe PageMaker 6.0J/PPC Corporate Social Responsibility

The Sony CSR Policy and Activities The core responsibility of the Sony Group to society is to pursue enhancement of corporate value through innovation and sound business practices. The Sony Group recognizes that its businesses have direct and indirect impact on the societies in which it operates. Sound business practice requires that business decisions give due consideration to the interests of Sony’s stakeholders, including shareholders, customers, employees, suppliers, business partners, local communities and other organizations. To ensure our ability to continue fulfilling our fundamental social responsibility, we are acting on a number of fronts. These include strengthening our corporate governance, compliance and quality management systems, as well as maintaining sound labor and employment practices and a healthy working environment, conserving the environment (mainly through reducing greenhouse gases emissions, raising resource productivity and improving chemical substance management), and contributing to Sony CSR Report 2005 our communities through social contribution programs. Please refer to the Sony CSR Report for full details of our CSR activities. Compliance System Improvements http://www.sony.net/csr/ We have established the Sony Group Code of Conduct and have introduced it at all Group companies with the objective of reinforcing Sony’s commitment to integrity, corporate governance, legal and regulatory compliance and ethical business practices. In addition, we have set up the Sony Group Compliance Hotline, an internal tool designed to provide each employee with a means of reporting any perceived violation of law, regulation or internal company rule or policy, or to raise concerns about any such matters. Through our global network of Regional Compliance Offices, we are continually working to strengthen our compliance system throughout the Sony Group.

Sony Group Compliance Network

Corporate Executive Officer in Charge of Compliance

Compliance Office

*1 *2 *3 Regional Americas Europe Japan East Asia Pan-Asia Compliance Compliance Compliance Compliance Compliance Compliance Offices Officer Officer Officer Officer Officer

Regional Subsidiaries in Subsidiaries in Subsidiaries in Subsidiaries in Subsidiaries in Subsidiaries the Americas Europe Japan East Asia Pan-Asia

*1. Responsible for Japan, South Korea and Taiwan *2. Responsible for Mainland China and Hong Kong *3. Responsible for Southeast Asia, the Middle East, Africa and Oceania

Socially Responsible Investing Sony’s efforts to be socially responsible are recognized worldwide with its inclusion in such leading indices as the Dow Jones Sustainability Indexes (as of April 1, 2005).

Dow Jones Sustainability Indexes FTSE4Good Global 100 Index Jointly developed by Dow Jones Indexes (United Developed by the FTSE Group, a Financial Times Ltd. States), STOXX Limited (Switzerland) and the (United Kingdom) and London Stock Exchange plc joint SAM Group (Switzerland) venture

34 Sony Corporation Financial Section

Contents Operating and Financial Review and Prospects ...... 36 Five-Year Summary of Selected Financial Data ...... 69 Quarterly Financial and Stock Information...... 71 Segment Information ...... 72 Consolidated Balance Sheets ...... 74 Consolidated Statements of Income...... 76 Consolidated Statements of Cash Flows ...... 78 Consolidated Statements of Changes in Stockholders’ Equity ...... 80 Notes to Consolidated Financial Statements ...... 83 Report of Independent Auditors ...... 129

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BH6/30 Page 35 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC Operating and Financial Review and Prospects Sony Corporation and Consolidated Subsidiaries

OPERATING RESULTS left the company primarily through early retirement programs. Operating Results for the Fiscal Year Ended March 31, 2005 For more detailed information about restructuring, please refer compared with the Fiscal Year Ended March 31, 2004 to Note 25 of Notes to the Consolidated Financial Statements.

OVERVIEW ■ ELECTRONICS After translation of Sony’s financial results into yen (the currency in Restructuring charges in the Electronics segment for the fiscal which Sony’s financial statements are prepared), in accordance year ended March 31, 2005 were 81.8 billion yen, compared to with Generally Accepted Accounting Principles in the U.S. (“U.S. 143.3 billion yen in the previous fiscal year. Of these restructuring GAAP”). Sony’s sales and operating revenue (“sales”) for the fiscal charges, restructuring charges of 2.1 billion yen and 1.1 billion year ended March 31, 2005 decreased 4.5 percent compared yen, for the years ended March 31, 2004 and 2005, respectively, with the previous fiscal year. On a local currency basis (regarding were recorded in the non-Japan based disc manufacturing and references to results of operations expressed on a local currency physical distribution businesses, formerly included within the basis, refer to “Foreign Exchange Fluctuations and Risk Hedging” Music segment but reclassified to the Electronics segment. See below), sales for the fiscal year decreased approximately 3 per- Note 25 of Notes to the Consolidated Financial Statements for cent. This decrease is mainly due to the fact that, as of August more information on this reclassification. 1, 2004, the sales of Sony’s overseas recorded music business In the fiscal year ended March 31, 2004, Sony made a are no longer recorded within Sony’s consolidated sales as a result decision to shut down certain TV display CRT manufacturing of the establishment of SONY BMG MUSIC ENTERTAINMENT operations in Japan to rationalize production facilities and (“SONY BMG”), which is accounted for by the equity method, downsize its business, due to a contraction in the market as a through the merger of Sony’s overseas recorded music business result of a shift in demand from CRT televisions to plasma and with Bertelsmann AG’s recorded music business, and a change liquid crystal display (“LCD”) panel televisions. In the year ended in the method of recognizing insurance premiums received on March 31, 2005, as part of this restructuring program, Sony certain products at Sony Life Insurance Co., Ltd. (“Sony Life”), recorded a non-cash impairment charge of 7.5 billion yen for the as of the third quarter beginning October 1, 2003, from being CRT TV display manufacturing facilities located in Europe. The recorded as revenues to being offset against the related impairment charge was calculated as the difference between provision for future insurance policy benefits. the carrying value of the asset group and the present value of Operating income increased 15.2 percent compared with the estimated future cash flows. The charge was recorded in loss on previous fiscal year. On a local currency basis, operating income sale, disposal or impairment of assets, net in the consolidated increased approximately 26 percent compared with the previous statements of income. fiscal year. In addition to a decrease in restructuring charges In addition to the above restructuring efforts, Sony undertook compared to the previous fiscal year, several segments experi- several headcount reduction programs to further reduce operat- enced an improvement in profitability such as the Pictures ing costs in the Electronics segment. As a result of these pro- segment, where Spider-Man 2 was a significant contributor, grams, Sony recorded restructuring charges of 50.3 billion yen and the Music segment, where several best-selling albums and for the fiscal year ended March 31, 2005, and these charges singles in Japan contributed to improved profitability. On the were included in selling, general and administrative expenses in other hand, the Electronics segment, where the cost of sales the consolidated statements of income. These staff reductions ratio deteriorated due to pricing pressures, and the Game were achieved worldwide mostly through the implementation of segment, where there was a decrease in hardware sales, early retirement programs. The remaining liability balance as of both experienced deteriorated profitability. March 31, 2005 was 14.0 billion yen and will be paid through the fiscal year ending March 31, 2006. Sony will continue seek- RESTRUCTURING ing the appropriate headcount level to optimize the workforce in In the fiscal year ended March 31, 2005, Sony recorded restruc- the Electronics segment. turing charges of 90.0 billion yen, a decrease from the 168.1 billion yen recorded in the previous fiscal year. The primary restruc- ■ MUSIC turing activities were in the Electronics and Music segments. Restructuring charges in the Music segment, including at Sony Of the total 90.0 billion yen, Sony recorded 53.6 billion yen in Music Entertainment (Japan) Inc. (“SMEJ”), for the fiscal year personnel related costs. This expense was incurred because ended March 31, 2005 were 3.8 billion yen, compared to 9.9 12,000 people, mainly in Japan, the U.S. and Western Europe, billion yen in the previous fiscal year.

36 Sony Corporation

BH6/30 Page 36 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC Due to the continued contraction of the worldwide music and “other operating revenue” portions of consolidated sales market caused by slow worldwide economic growth, the and operating revenue, and excludes Financial service revenue. saturation of the CD market, the effects of piracy and other This is because Financial Service expenses are recorded illegal duplication, parallel imports, pricing pressures and the separately from cost of sales and selling, general and adminis- diversification of customer preferences, Sony has been actively trative expenses. Furthermore, in the analysis of cost of sales, repositioning the Music segment for the future by looking to including research and development costs, to sales, only “net create a more effective and profitable business model. As a sales” are used. This is because cost of sales is an expense result, the Music segment has undertaken a worldwide restruc- associated only with net sales. The calculations of all ratios turing program since the fiscal year ended March 31, 2001 to below that pertain to business segments include intersegment reduce staffing and other costs through the consolidation and transactions.) rationalization of facilities worldwide. Sales and operating revenue During the fiscal year ended March 31, 2005, in continuation of and operating income the worldwide restructuring program and in connection with the merger of its recorded music business into a joint venture with (Yen in billions) (Yen in billions) 8,000 800 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 6,000 600 non-Japan based disc manufacturing and physical distribution businesses that were formerly included in the Music segment but 4,000 400

have now been reclassified to the Electronics segment. Restruc- 2.5%

turing activities included the shutdown of certain distribution 2,000 200 1.3% 1.5% operations after the establishment of the recorded music joint venture with Bertelsmann AG as well as the further rationalization 0 0 of overhead functions through staff reductions. The restructuring 2003 2004 2005 ■ Sales and operating revenue (left) charges consisted of personnel related costs of 0.9 billion yen ■ Operating income (right) ● and other related costs of 2.1 billion yen. These charges are Operating margin included in selling, general and administrative expenses in the *Years ended March 31 consolidated statements of income. Positions were eliminated across various employee levels, business functions, operating COST OF SALES AND SELLING, GENERAL AND units, and geographic regions during this phase of the worldwide ADMINISTRATIVE EXPENSES restructuring program. 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 com- OPERATING PERFORMANCE pared with the previous fiscal year, but increased from 73.5 percent to 76.2 percent as a percentage of sales. Year on year, Yen in billions Percent change the cost of sales ratio rose from 78.9 percent to 81.8 percent in Years ended March 31 2004 2005 2005/2004 the Electronics segment and increased from 70.1 percent to Sales and operating revenue . . 7,496.4 7,159.6 –4.5% 73.0 percent in the Game segment. On the other hand, the cost Operating income ...... 98.9 113.9 +15.2 of sales ratio decreased from 58.5 percent to 57.2 percent in Income before income taxes . . 144.1 157.2 +9.1 the Music segment and improved in the Pictures segment from Equity in net income of 60.0 percent to 58.7 percent. affiliated companies ...... 1.7 29.0 +1,594.2 In the Electronics segment, there was a deterioration in the Net income ...... 88.5 163.8 +85.1 cost of sales ratio particularly within the CRT television, portable audio, DVD recorder (including PSX) and video camera busi- SALES nesses. In the Game segment, there was an increase in the cost Sales for the fiscal year ended March 31, 2005 decreased by of sales ratio as a result of costs associated with both the 336.8 billion yen, or 4.5 percent, to 7,159.6 billion yen com- launch of the PlayStation Portable (“PSP”) and the changeover pared with the previous fiscal year. A further breakdown of sales to the new PlayStation 2 (“PS2”) model. The cost of sales ratio figures is presented under “Operating Performance by Business in the Music segment improved due to the establishment of Segment” below. SONY BMG which is accounted for under the equity method (“Sales” in this analysis of the ratio of selling, general and resulting in a higher percentage of sales being derived from administrative expenses to sales refers only to the “net sales” SMEJ which benefited from the contribution of greatest hits

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BH6/30 Page 37 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC album sales. In the Pictures segment, the cost of sales ratio also advertising and publicity expenses for the fiscal year decreased improved primarily due to the substantial contribution from by 51.6 billion yen compared to the previous fiscal year. This Spider-Man 2. was primarily due to the fact that advertising and publicity Personnel related costs included in cost of sales decreased expenses that were recorded in the Music segment decreased by 52.5 billion yen compared with the previous fiscal year, due to the establishment of SONY BMG and a reduction in primarily within the Electronics segment. advertising and publicity expenses in the Pictures segment. Research and development costs (all research and develop- Loss on sale, disposal or impairment of assets, net was ment costs are included within cost of sales) for the fiscal year 28.0 billion yen, compared with 35.5 billion in the previous fiscal ended March 31, 2005 decreased by 12.5 billion yen to 502.0 year. Although losses were recorded on the sale, disposal and billion yen compared with the previous fiscal year. The ratio of impairment of CRT and CRT television production equipment research and development costs to sales was 7.6 percent in the Electronics segment, gains were recorded mainly from compared to 7.5 percent in the previous fiscal year. the sale of land and buildings in both the Electronics and Selling, general and administrative expenses for the fiscal year Other segments. 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 OPERATING INCOME year. The ratio of selling, general and administrative expenses to Operating income for the fiscal year ended March 31, 2005 sales improved from 25.9 percent in the previous fiscal year to increased by 15.0 billion yen, or 15.2 percent, to 113.9 billion yen 23.2 percent. Year on year, the ratio of selling, general and compared with the previous fiscal year. The operating income administrative expenses to sales improved from 21.2 percent to margin increased from 1.3 percent to 1.6 percent. The business 19.0 percent in the Electronics segment, from 21.1 percent to segments that contributed the most to operating income, in 21.0 percent in the Game segment, and improved from 41.8 descending order by amount of financial impact, were the percent to 38.9 percent in the Music segment, and from 35.0 Pictures, Financial Services and Game segments. On the other percent to 32.5 percent in the Pictures segment. hand, the Electronics segment recorded an operating loss mainly Personnel related costs in selling, general and administrative due to the appreciation of the yen against the U.S. dollar as well expenses decreased by 169.3 billion yen compared with the as an increase in cost of sales that exceeded the reduction in sell- previous fiscal year mainly due to a decrease in severance ing, general and administrative expenses. For a further break- related expenses in the Electronics segment resulting from the down of operating income for each segment, please refer to implementation of restructuring initiatives, and the fact that “Operating Performance by Business Segment” below. personnel related costs in Sony’s recorded music business outside Japan are no longer recorded within Sony’s consoli- OTHER INCOME AND EXPENSES dated selling, general and administrative expenses due to the In the consolidated results for the fiscal year ended March 31, establishment of SONY BMG mentioned above. In addition, 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 Research and development Cost of sales and selling, general with the previous fiscal year. The net amount of other income expenses and as a percentage and administrative (SGA) expenses of sales as a percentage of sales and other expenses was net other income of 43.3 billion yen, a (Yen in billions) (%) (%) decrease of 1.9 billion yen, or 4.2 percent, compared with the 600 7.5% 7.6% 8 80 76.2% previous fiscal year. 72.0% 73.5% 6.4% A net foreign exchange loss of 0.5 billion yen was recorded in

450 6 60 the fiscal year ended March 31, 2005, compared to a net foreign exchange gain of 18.1 billion yen recorded in the previous fiscal

300 4 40 year. The net foreign exchange loss was recorded because the value of the yen, especially during the first quarter of the fiscal 25.6% 25.9% 23.2% year ended March 31, 2005, was lower than the value of the yen 150 2 20 at the time that Sony entered into foreign exchange forward contracts and foreign currency option contracts. These con- 0 0 0 2003 2004 2005 2003 2004 2005 tracts are entered into by Sony to mitigate the foreign exchange ■ Research and development ● Cost of sales/sales rate risk to cash flows that arises from settlements of foreign expenses ● SGA/sales ● Percentage of sales currency denominated accounts receivable and accounts *Years ended March 31 *Years ended March 31 *Excluding the Financial payable, as well as foreign currency denominated transactions *Excluding the Financial Services segment Services segment between consolidated subsidiaries.

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BH6/30 Page 38 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC For the fiscal year ended March 31, 2005, a loss on devalua- RESULTS OF AFFILIATED COMPANIES ACCOUNTED FOR tion of securities investments of 3.7 billion yen was recorded, an UNDER THE EQUITY METHOD improvement of 12.8 billion yen, or 77.5 percent, compared with Equity in net income of affiliated companies during the fiscal year the previous year. This improvement was primarily due to the ended March 31, 2005 was 29.0 billion yen, an increase of 27.3 recording of valuation losses of 10.3 billion yen in the previous billion yen, or 1,594.2 percent, compared to 1.7 billion yen fiscal year related to securities issued by a privately held Japa- recorded in the previous fiscal year. Equity in net income of Sony nese company engaged in cable broadcasting and other Ericsson Mobile Communications AB (“Sony Ericsson”), a joint businesses which Sony accounted for under the cost method. venture focused on mobile phone handsets, was 17.4 billion The gain on change in interest in subsidiaries and equity yen, an increase of 11.0 billion yen, or 171.9 percent, compared investees increased by 11.5 billion yen, or 235.2 percent to the 6.4 billion yen recorded in the previous fiscal year. Equity compared to the previous fiscal year to 16.3 billion yen. This in net income of affiliated companies for the current fiscal year was mainly the result of gains of 9.0 billion yen from a change in includes the recording of 12.6 billion yen as equity in net income interest from Monex Inc., an equity affiliate of Sony, following its from InterTrust Technologies Corporation (“InterTrust”). This business integration by way of share transfer with Nikko Beans, amount reflects InterTrust’s proceeds from a license agreement Inc and total gains of 4.7 billion yen from the sale of stock and a with Microsoft Corporation arising from the settlement of a change in interest in a subsidiary resulting from the initial public patent-related lawsuit. In addition, due to significant restructur- offering of So-net M3 Inc., a consolidated subsidiary of Sony ing costs, an equity loss of 3.4 billion yen was recorded at Communication Network Corporation (“SCN”). SONY BMG. Furthermore, equity in net loss was recorded at In addition, the net gain recorded on sales of securities affiliates such as STAR CHANNEL INC., a Japan-based sub- investments decreased 6.3 billion yen, or 53.8 percent, to 5.4 scription television company specializing in the broadcast of billion yen. This was primarily a result of the recording of a movies, and S-LCD Corporation (“S-LCD”), a joint-venture with deferred gain of 6.0 billion yen in the fiscal year ended March 31, Samsung Electronics Co., Ltd. (“Samsung”), for the manufacture 2004, from Sony’s sale, during the fiscal year ended March 31, of amorphous TFT LCD panels. 2003, of its equity interest in Telemundo Communications Group, Inc. and its subsidiaries (“Telemundo”), a U.S.-based MINORITY INTEREST IN INCOME OF CONSOLIDATED Spanish language television network and station group that was SUBSIDIARIES accounted for under the equity method. In the fiscal year ended March 31, 2005, minority interest in income of consolidated subsidiaries decreased by 0.7 billion INCOME BEFORE INCOME TAXES yen, or 30.6 percent, to 1.7 billion yen. This decrease was Income before income taxes for the fiscal year ended March 31, primarily due to the recording of minority interest at certain 2005 increased 13.1 billion yen, or 9.1 percent, to 157.2 billion television and home entertainment subsidiaries in the Pictures yen compared with the previous fiscal year, as a result of the segment in the previous fiscal year. increase in operating income and the decrease in net amount of other income and other expenses mentioned above. NET INCOME Net income for the fiscal year ended March 31, 2005 increased INCOME TAXES by 75.3 billion yen, or 85.1 percent, to 163.8 billion yen com- Income taxes for the fiscal year ended March 31, 2005 de- pared with the previous fiscal year. This increase was the result creased by 36.7 billion yen, or 69.6 percent, to 16.0 billion yen. primarily of the abovementioned increase in income before Compared to an effective tax rate of 36.6 percent in the previous income taxes, a decrease in the effective tax rate, as well as an fiscal year, the effective tax rate was 10.2 percent in the current increase in equity in net income of affiliated companies. As a fiscal year. As a result of the recording of operating losses in the percentage of sales, net income increased from 1.2 percent to past, the U.S. subsidiaries of Sony have had valuation allow- 2.3 percent. Return on stockholders’ equity increased from 3.8 ances against deferred tax assets for U.S. federal taxes and percent to 6.2 percent. (This ratio is calculated by dividing net certain state taxes. However, in the fiscal year ended March 31, income by the simple average of stockholders’ equity at the end 2005, based on both improved operating results in recent years of the previous fiscal year and at the end of the fiscal year ended and a sound outlook for the future operating performance at March 31, 2005.) Sony’s U.S. subsidiaries, Sony reversed 67.9 billion yen of such Basic net income per share was 175.90 yen compared with valuation allowances, resulting in a reduction to income tax 95.97 yen in the previous fiscal year, and diluted net income per expense. On the other hand, certain of Sony’s subsidiaries share was 158.07 yen compared with 87.00 yen in the previous recorded new valuation allowances against deferred tax assets fiscal year. Refer to Notes 2 and 22 of Notes to Consolidated during the fiscal year ended March 31, 2005. Financial Statements.

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BH6/30 Page 39 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC Net income and ROE Net income per share of Shares of sales and operating revenue by business segment common stock

(Yen in billions) (%) (Yen) ■ Electronics 200 8 200 3.4% 7.4% ■ Game ■ Music 9.7% 6.2% ■ Pictures ■ 150 6 150 3.3% Financial Services ■ Other 5.0% 9.7% 66.5% *Years ended March 31 100 4 100 *Including intersegment transactions 3.8%

50 2 50

0 0 0 2003 2004 2005 2003 2004 2005 company, SONY BMG, is 50 percent owned by each parent ■ Net income ■ Basic company. Under U.S. GAAP, SONY BMG is accounted for by ● ROE ■ Diluted Sony using the equity method and, since August 1, 2004, 50 *Years ended March 31 *Years ended March 31 percent of net profits or losses of this business have been included under equity in net income (loss) of affiliated companies. OPERATING PERFORMANCE BY BUSINESS SEGMENT In connection with the establishment of this joint venture, The following discussion is based on segment information. Sony’s non-Japan based disc manufacturing and physical Sales and operating revenue in each business segment include distribution businesses, formerly included within the Music intersegment transactions. Refer to Note 25 of Notes to segment, have been reclassified to the Electronics segment to Consolidated Financial Statements. reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these BUSINESS SEGMENT INFORMATION businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this Yen in billions Percent change Years ended March 31 2004 2005 2005/2004 reclassification. In the Music segment, results for the fiscal year ended March Sales and operating revenue 31, 2005 only include the results of Sony Music Entertainment Electronics ...... 5,042.3 5,021.6 –0.4% Inc.’s (“SMEI”) recorded music business for the months of April Game ...... 780.2 729.8 –6.5% through July 2004, and the twelve months results of SMEI’s Music ...... 440.3 249.1 –43.4% music publishing business and SMEJ. However, results for the Pictures ...... 756.4 733.7 –3.0% previous fiscal year in the Music segment include the consoli- Financial Services ...... 593.5 560.6 –5.6% dated results for SMEI’s recorded music business for all twelve Other ...... 268.3 254.4 –5.2% months of the fiscal year, as well as the full year’s results for Elimination ...... (384.7) (389.6) —% SMEI’s music publishing business and SMEJ. Consolidated ...... 7,496.4 7,159.6 –4.5% In July 2004, in order to establish a more efficient and coordi- Operating income (loss) nated semiconductor supply structure, Sony completed the Electronics ...... (6.8) (34.3) —% integration of its semiconductor manufacturing business by Game ...... 67.6 43.2 –36.1% transferring Sony Computer Entertainment Inc.’s semiconductor Music ...... (6.0) 8.8 —% manufacturing operation from the Game segment to the Pictures ...... 35.2 63.9 +81.4% Electronics segment. As a result of this transfer, sales revenue Financial Services ...... 55.2 55.5 +0.6% and expenditures associated with this operation are now Other ...... (12.1) (4.1) —% recorded within the “Semiconductor” category in the Electronics Total ...... 133.1 133.0 –0.1% segment. The results for the same period of the previous fiscal Elimination and unallocated year have not been restated as such comparable figures cannot corporate expenses . . . . (34.2) (19.0) —% be practically obtained given that it was not operated as a Consolidated ...... 98.9 113.9 +15.2% separate business within the Game segment. This integration of the semiconductor manufacturing businesses is a part of Sony’s As of August 1, 2004, Sony and Bertelsmann AG combined semiconductor strategy of utilizing semiconductor technologies their recorded music businesses, excluding Sony’s Japanese and manufacturing equipment originally developed or designed recorded music business, in a joint venture. The newly formed for the Game business within Sony as a whole.

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BH6/30 Page 40 05.7.7, 3:35 AM Adobe PageMaker 6.0J/PPC ■ ELECTRONICS to 571.9 billion yen. Sales of headphone stereos declined as a Sales for the fiscal year ended March 31, 2005 decreased 20.7 result of a significant decrease in the unit shipments of both CD billion yen, or 0.4 percent, to 5,021.6 billion yen compared with format and MD format devices due to a shift in demand towards the previous fiscal year. An operating loss of 34.3 billion in the hard disc- and flash-based memory players. Worldwide ship- Electronics segment was recorded compared to the operating ments of CD format devices decreased by approximately 3.68 loss of 6.8 billion yen in the previous fiscal year. Sales to outside million units to approximately 7.28 million units and worldwide customers on a yen basis decreased 1.1 percent compared to shipments of MD format devices decreased by approximately the previous fiscal year. Regarding sales to outside customers 1.44 million units to 1.92 million units. Sales of home audio by geographical area, although sales decreased in Japan by 10 declined primarily due to a contraction of the market. On the percent and in the U.S. by 4 percent, they remained almost other hand, overall sales of car audio increased slightly due to unchanged in Europe and increased by 9 percent in non-Japan strong sales in the European market and Other Areas. Asia and other geographic areas (“Other Areas”). “Video” sales increased by 85.5 billion yen, or 9.0 percent, to In Japan, although there was a significant increase in the sales 1,034.7 billion yen. There was a growth in the sales of digital of LCD televisions, and an increase in the sales of DVD record- still cameras outside of Japan and DVD recorders (including ers (including PSX), there was a decrease in the sales of PCs, PSX) recorded a significant increase in sales worldwide. World- cellular phones, primarily to Sony Ericsson, broadcast- and wide shipments of digital still cameras increased by approxi- professional-use equipment and CRT televisions. In the U.S., mately 4.0 million units to approximately 14.0 million units. there was an increase in sales of LCD rear projection televisions Worldwide shipments of DVD recorders were approximately and digital still cameras, although sales mainly of CRT televi- 650,000 units in the previous fiscal year but increased to sions, PCs, computer displays and portable audio declined. approximately 1.7 million units in the fiscal year ended March In Europe, sales increased, primarily of digital still cameras, 31, 2005. Worldwide shipments of home-use video cameras LCD televisions and plasma televisions. However, there was increased by approximately 750,000 units to approximately a decrease in the sales mainly of CRT televisions and portable 7.35 million units, but overall sales remained almost unchanged, audio. In Other Areas, sales mainly of digital still cameras, due to increased price competition. DVD-Video player sales CD-R/RW and DVD+/-R/RW drives and PCs increased while decreased due to pricing pressure, although unit shipments sales of primarily portable audio, optical pickups and home increased by approximately 1.0 million units to approximately audio decreased. 9.5 million units. “Televisions” sales increased by 31.6 billion yen, or 3.4 Sales and operating income (loss) in the Electronics segment percent, to 957.1 billion yen. In addition to a significant increase in worldwide sales of LCD televisions, there was a significant (Yen in billions) (Yen in billions) increase in the sales of plasma televisions outside of Japan, 6,000 600 particularly in Europe, and of projection televisions in the U.S. Worldwide shipments of LCD televisions increased by approxi- 4,000 400 mately 570,000 units, compared to the previous fiscal year, to approximately 1.0 million units; plasma television shipments 2,000 200 1.3% increased by approximately 90,000 units to approximately 300,000 units; and projection televisions shipments increased 0 0 by approximately 280,000 units to approximately 1.2 million –0.1% –0.7% units. On the other hand, although there was an increase in

–2,000 –200 worldwide shipments of CRT televisions by approximately 2003 2004 2005 100,000 units to approximately 9.5 million units, sales decreased ■ Sales (left) ■ Operating income (loss) (right) significantly as a result of a fall in unit prices due to the contin- ● Operating margin ued shift in demand towards flat panel televisions. In addition, *Years ended March 31 sales of computer displays also decreased worldwide. “Information and Communications” sales decreased by 56.4 ● Performance by Product Category billion yen, or 6.8 percent, to 778.4 billion yen. Despite an Sales and operating revenue by product category discussed increase in notebook PC sales due to strong sales outside below represent sales to outside customers, which do not Japan, overall sales decreased due to a decrease in sales of include intersegment transactions. Refer to Note 25 of Notes to desktop PCs. Worldwide unit shipments of PCs increased Consolidated Financial Statements. approximately 100,000 units to approximately 3.3 million units. “Audio” sales decreased by 103.6 billion yen, or 15.3 percent, Sales of personal digital assistants decreased significantly due

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BH6/30 Page 41 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC to a downsizing of the business. Sales of broadcast- and charges recorded in the Electronics segment, the amount professional-use products decreased slightly compared to the recorded in selling, general and administrative expenses previous fiscal year, despite recording increased sales outside decreased by 71.4 billion yen from 124.7 billion yen in the Japan, as sales in Japan decreased as a result of the recording previous fiscal year to 53.3 billion yen. Of the restructuring of higher sales, in the previous fiscal year, from the sale of charges recorded in selling, general and administrative equipment to two television stations which opened new expenses, the amount recorded for headcount reductions, broadcasting facilities. including reductions through the early retirement program, was “Semiconductors” sales decreased by 6.9 billion yen, or 50.3 billion yen, a decrease of 67.7 billion yen compared with 2.7 percent, to 246.3 billion yen. The decrease was due to a the previous fiscal year. On the other hand, royalty expenses decrease in sales of CCDs as the result of pricing pressures. increased 17.3 billion yen. The ratio of selling, general and Regarding LCDs, sales of low temperature polysilicon LCDs administrative expenses to sales decreased 2.2 percentage for cellular phones increased significantly. points from the 21.2 percent recorded in the previous fiscal “Components” sales decreased by 4.3 billion yen, or 0.7 year to 19.0 percent. percent, to 619.5 billion yen. The decrease was primarily due Loss on sale, disposal or impairment of assets, net decreased to a decrease in sales of CD-R/RW drives and optical pickups 6.0 billion yen to 23.4 billion yen compared with the previous associated mainly with significant declines in unit prices. Sales fiscal year. This amount includes 18.8 billion yen in restructuring of DVD+/-R/RW drives increased due to a production and sales charges, which includes 7.5 billion yen related to CRT and CRT alliance with a third party. Regarding lithium-ion batteries, sales televisions manufacturing facilities in Europe. The amount of for use in digital still cameras and cellular phones increased. restructuring charges included in loss on sale, disposal or “Other” sales increased by 2.1 billion yen, or 0.4 percent, to impairment, net in the previous fiscal year was 10.6 billion yen. 578.3 billion yen. The increase resulted from increased sales at An increased operating loss was recorded in the Electronics Sony’s non-Japan based disc manufacturing business. How- segment for the fiscal year ended March 31, 2005 due to a ever, there was a slight decrease in sales of mobile phone significant deterioration in the cost of sales ratio, as mentioned handsets mainly to Sony Ericsson. above. Regarding profit performance by product, excluding In the Electronics segment, cost of sales for the fiscal year restructuring charges, semiconductors recorded an operating ended March 31, 2005 increased by 129.1 billion yen, or 3.3 loss for the fiscal year, compared to the operating profit of the percent to 4,079.1 billion yen compared with the previous fiscal previous fiscal year. This loss was due to the recording, within year. The cost of sales to sales ratio deteriorated by 2.9 percent the Electronics segment, of research and development costs to 81.8 percent compared to 78.9 percent in the previous fiscal related to system large scale integration (“LSI”) manufacturing, year. Products that contributed to the deterioration in the cost of in particular the next generation processor chip, as a result of sales to sales ratio were CRT televisions and portable audio the integration of Sony’s semiconductor manufacturing business products, which both experienced a decrease in sales, and DVD operations within the Electronics segment mentioned above. recorders (including PSX) and video cameras, which were both These costs were previously recorded within the Game seg- impacted by falling unit prices. Restructuring charges recorded ment. CRT televisions and portable audio products recorded a in cost of sales amounted to 9.6 billion yen, a decrease of 0.5 loss for the fiscal year compared to the operating income billion yen compared with the 10.1 billion yen recorded in the recorded in the previous fiscal year. DVD recorders (including previous fiscal year. Research and development costs increased PSX) also experienced an increased operating loss. The operat- 2.4 billion yen, or 0.5 percent, from 430.5 billion yen in the ing income for video cameras also decreased. previous fiscal year to 432.8 billion yen. Although there was an On the other hand, results were positively affected by a increase in research and development costs within the segment decreased operating loss from personal digital assistants as a result of the transfer of semiconductor manufacturing through the implementation of significant business downsizing, operations from the Game segment to the Electronics segment and a significant increase in operating income recorded for PCs in association with the business integration of Sony’s semicon- and broadcast- and professional-use products. ductor manufacturing operations, overall research and development costs within the segment only increased slightly as a result ● Manufacturing by Geographic Area of the carrying out of a stringent process for the selection of Approximately 50 percent of the Electronics segment’s total research and development activities. annual production during the fiscal year ended March 31, 2005 Selling, general and administrative expenses decreased by took place in Japan, including the production of digital still 116.3 billion yen, or 10.9 percent to 953.4 billion yen compared cameras, video cameras, flat panel televisions, PCs, semicon- with the previous fiscal year. The primary reason for this decrease ductors and components such as batteries and Memory Sticks. was a decrease in restructuring charges. Of the restructuring Approximately 60 percent of the annual production in Japan

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BH6/30 Page 42 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC was destined for other regions. China accounted for approxi- Total worldwide production shipments of hardware and mately 10 percent of total annual production, approximately 70 software were as follows: percent of which was destined for other regions. Asia, excluding Million units Japan and China, accounted for slightly more than 10 percent of Years ended March 31 Cumulative as of March 31, 2005 total annual production, with approximately 60 percent destined 2004 2005 for Japan, the U.S. and Europe. The Americas and Europe Total Production Shipments together accounted for the remaining slightly less than 30 percent of Hardware* of total annual production, most of which was destined for local PlayStation + PS one . . . . 3.31 2.77 102.49 distribution and sale. PS2 ...... 20.10 16.17 87.47 PSP ...... 2.97 2.97 ● Comparison of Results on a Local Currency Basis and Total Production Shipments Results on a Yen Basis of Software*/** In the Electronics segment, the negative effect of the apprecia- PlayStation ...... 32.00 10.00 959.00 tion of the yen against the U.S. dollar exceeded the positive PS2 ...... 222.00 252.00 824.00 effect of the appreciation of the euro against the yen. Sales for PSP ...... 5.70 5.70 the fiscal year ended March 31, 2005 decreased, on a yen **Production shipments of hardware and software are counted upon shipment of basis, by 0.4 percent, but increased on a local currency basis the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers. by approximately 1 percent. In terms of operating performance, ** Including those both from Sony and third parties under Sony licenses. there was a deterioration in the operating loss compared to the previous fiscal year, but if calculated on a local currency basis, Operating income decreased compared with the previous this operating loss was smaller compared to the actual results fiscal year. Although there was an increase in software sales, on a yen basis. the decrease in operating income was the result of a decrease Sales to outside customers by geographic area on a yen basis in hardware sales coupled primarily with start up costs for the decreased in Japan by 10 percent, and in the U.S. by 4 percent: PSP. The cost of sales to sales ratio deteriorated as a result of however, sales in Europe remained relatively unchanged and costs associated with both the launch of the PSP and with the sales increased in Other Areas by 9 percent. Sales on a local changeover to the new PS2 model. The ratio of selling, general currency basis for regions outside Japan increased in the U.S. and administrative expenses to sales compared to the previous by 1 percent and in Other Areas by 13 percent, but decreased fiscal year was relatively unchanged. in Europe by 2 percent. Sales and operating income ■ GAME in the Game segment

Sales for the fiscal year ended March 31, 2005 decreased by (Yen in billions) (Yen in billions) 11.8% 50.5 billion yen, or 6.5 percent, to 729.8 billion yen compared 1,200 240 with the previous fiscal year. Operating income decreased by

8.7% 24.4 billion yen, or 36.1 percent, to 43.2 billion yen compared 900 180 with the previous fiscal year, and the operating income margin

decreased from 8.7 percent to 5.9 percent. 5.9% 600 120 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 com- 300 60 pared to the previous fiscal year. By region, although sales 0 0 increased in Japan, there was a decrease in sales in the U.S. 2003 2004 2005 and Europe. ■ Sales (left) ■ Operating income (right) Hardware sales declined. Although there was an increase ● Operating margin

in sales in Japan primarily associated with the launch of PSP in *Years ended March 31 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.

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BH6/30 Page 43 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC ■ MUSIC operating income margin increased from 4.7 percent to Sales for the fiscal year ended March 31, 2005 decreased by 8.7 percent. The results in the Pictures segment consist of the 191.2 billion yen, or 43.4 percent, to 249.1 billion yen compared results of Sony Pictures Entertainment Inc. (“SPE”), a U.S. with the previous fiscal year. Of the Music segment’s sales, based subsidiary. 62 percent were generated by SMEJ, a Japan-based subsidiary, On a U.S. dollar basis, sales for the fiscal year in the Pictures and 38 percent were generated by SMEI, a U.S.-based segment increased approximately 1 percent and operating subsidiary. Compared to an operating loss of 6.0 billion yen income increased by approximately 76 percent. Sales increased in the previous fiscal year, operating income of 8.8 billion yen primarily due to higher worldwide home entertainment, interna- was recorded. tional television syndication and worldwide theatrical revenues On a local currency basis, sales in the Music segment on films. Worldwide home entertainment and international decreased by approximately 42 percent, although the Music television syndication revenues were higher as a result of the segment recorded operating income as compared to an performance of films from the prior year release slate including operating loss in the previous fiscal year. 50 First Dates, Big Fish and Bad Boys 2. For theatrical rev- As previously noted, the recorded music business of SMEI enues, the success of the current year film slate, particularly merged with the recorded music business of Bertelsmann AG Spider-Man 2, Hitch and The Grudge, more than offset the to form SONY BMG. As a result, there were no recorded music impact of releasing fewer films this fiscal year. Sales for the fiscal sales at SMEI after July 31, 2004. Therefore, SMEI’s results are year release slate decreased 70 million U.S. dollars as com- not comparable with the results of the previous fiscal year. pared to the previous fiscal year. However, sales in the fiscal Sales at SMEJ increased by 6.9 percent compared with the year ended March 31, 2005 from the prior year release slate previous fiscal year mainly due to an increase in album and increased 304 million U.S. dollars as compared to sales in the single sales. Best-selling albums and singles during the fiscal previous fiscal year from the release slate for the fiscal year year included musiQ by ORANGE RANGE, SENTIMENTALovers ended March 31, 2003. While benefiting from higher theatrical by Ken Hirai and two greatest hits albums by Porno Graffitti. revenues, total fiscal year release slate revenues were lower due Operating income increased by approximately 250 percent to the timing of the fiscal year’s film slate’s release in the home compared to the previous fiscal year due mainly to the higher entertainment market. The higher sales from films were partially sales noted above and an improvement in the cost of sales ratio offset by a 248 million U.S. dollar decrease in sales resulting associated with strong sales of greatest hits albums. from the absence in the fiscal year ended March 31, 2005 of several transactions in the television business that occurred in Sales and operating income the prior fiscal year. These included syndication sales of King of (loss) in the Music segment Queens and Seinfeld as well as the extension of a licensing

(Yen in billions) (Yen in billions) agreement for Wheel of Fortune. Television sales in the fiscal 600 90 year ended March 31, 2005 benefited from the highly successful DVD release of Seinfeld.

400 60 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 200 30 home entertainment and international television syndication 3.5% carryover performance of the prior year film slate noted above. 0 0 Operating loss from the fiscal year release slate decreased 415 –1.4% million U.S. dollars and operating income for the prior year’s –6.1% –200 –30 2003 2004 2005 release slate increased 173 million U.S. dollars as compared to ■ Sales (left) the prior year. Spider-Man 2’s worldwide success contributed ■ Operating income (loss) (right) ● Operating margin substantially to this fiscal year’s earnings, offset somewhat by

*Years ended March 31 the disappointing theatrical performance of Spanglish. Further improving operating income was a 38 million U.S. dollar decrease in restructuring charges. Partially offsetting these increases in ■ PICTURES operating income was the impact of the absence of the televi- Sales for the fiscal year ended March 31, 2005 decreased by sion transactions noted above, which reduced operating income 22.7 billion yen, or 3.0 percent, to 733.7 billion yen compared by approximately 150 million U.S. dollars due primarily to the with the previous fiscal year. Operating income increased by factors noted above for revenue. 28.7 billion yen, or 81.4 percent, to 63.9 billion yen and the As of March 31, 2005, unrecognized license fee revenue at

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BH6/30 Page 44 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC SPE was approximately 1.3 billion U.S. dollars. SPE expects to in insurance-in-force at the end of the fiscal year compared to record this amount in the future having entered into contracts the end of the previous fiscal year. Operating income at Sony with television broadcasters to provide those broadcasters with Life decreased by 2.2 billion yen or 3.4 percent to 61.0 billion completed motion picture and television product. The license yen, mainly due to a decrease in valuation gains against stock fee revenue will be recognized in the fiscal year that the product conversion rights from convertible bonds, although this was is available for broadcast. partially offset by an increase in revenue from insurance premiums excluding the effect of the change in revenue recognition Sales and operating income in method noted above. In addition, the impact on operating the Pictures segment income from the change in revenue recognition method noted (Yen in billions) (Yen in billions) above was slight. 800 80 At Sony Assurance, revenue increased due to higher insurance 8.7% revenue brought about by an expansion in automobile insurance- 600 7.3% 60 in-force. Operating income increased due to an increase in insurance revenue, although there was a deterioration in the loss

400 40 ratio (the ratio of insurance payouts to premiums). 4.7% At Sony Bank, which started operations in June 2001, revenue rose as there was an increase in interest revenue 200 20 associated with an increase in the balance of funds from investing activities. Although revenue increased, an increase in 0 0 2003 2004 2005 operating expenses resulted in a relatively unchanged operating ■ Sales (left) loss compared with the previous fiscal year. ■ Operating income (right) ● Operating margin At Sony Finance International, Inc. (“Sony Finance”), a leasing *Years ended March 31 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, ■ FINANCIAL SERVICES in the previous fiscal year ended March 31, 2004, from the lease Please note that the revenue and operating income at Sony Life, of certain fixed assets to Crosswave Communications Inc. Sony Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“CWC”), which commenced reorganization proceedings under (“Sony Bank”) discussed below differ from the results that Sony the Corporate Reorganization Law of Japan during the same Life, Sony Assurance and Sony Bank disclose on a Japanese fiscal year. statutory basis. Financial Services revenue for the fiscal year ended March 31, Revenue and operating income in 2005 decreased by 33.0 billion yen, or 5.6 percent, to 560.6 the Financial Services Segment billion yen compared with the previous fiscal year. Operating income increased by 0.3 billion yen, or 0.6 percent, to 55.5 (Billions of yen) (Billions of yen) 800 80 billion yen and the operating income margin increased to 9.9% 9.9 percent compared with the 9.3 percent of the previous 9.3% fiscal year. 600 60 At Sony Life, revenue decreased by 38.7 billion yen, or 7.5 percent, to 474.3 billion yen compared with the previous 400 40

fiscal year. The main reasons for the decrease in revenue were 4.2%

a change in the method of recognizing insurance premiums 200 20 received on certain products, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being 0 0 offset against the related provision for future insurance policy 2003 2004 2005 ■ Financial Services revenue (left) benefits, coupled with a small decrease in valuation gains in the ■ Operating income (right) ● current fiscal year compared to the previous fiscal year in which Operating margin significant valuation gains were recorded against stock conver- *Years ended March 31 sion 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

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BH6/30 Page 45 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC ● Condensed Statements of Income Separating Out the segment is different in nature from Sony’s other segments, Sony Financial Services Segment (Unaudited) believes that a comparative presentation may be useful in The following schedule shows unaudited condensed statements understanding and analyzing Sony’s consolidated financial of income for the Financial Services segment and all other statements. segments excluding Financial Services as well as condensed Transactions between the Financial Services segment and all consolidated statements of income. This presentation is not other segments excluding Financial Services are eliminated in required under U.S. GAAP, which is used in Sony’s consolidated the consolidated figures shown below. financial statements. However, because the Financial Services

CONDENSED STATEMENTS OF INCOME SEPARATING OUT THE FINANCIAL SERVICES SEGMENT Yen in millions Sony without Financial Services Financial Services Consolidated Years ended March 31 2004 2005 2004 2005 2004 2005 Financial Services revenue ...... 593,544 560,557 — — 565,752 537,715 Net sales and operating revenue ...... — — 6,939,964 6,632,728 6,930,639 6,621,901 ...... 593,544 560,557 6,939,964 6,632,728 7,496,391 7,159,616 Costs and expenses ...... 538,383 505,067 6,896,377 6,575,354 7,397,489 7,045,697 Operating income ...... 55,161 55,490 43,587 57,374 98,902 113,919 Other income (expenses), net ...... 1,958 10,204 52,746 40,639 45,165 43,288 Income before income taxes ...... 57,119 65,694 96,333 98,013 144,067 157,207 Income taxes and other ...... 22,975 25,698 30,916 (37,043) 53,439 (11,344) Income before cumulative effect of an accounting change ...... 34,144 39,996 65,417 135,056 90,628 168,551 Cumulative effect of an accounting change ...... — (4,713) (2,117) — (2,117) (4,713) Net income ...... 34,144 35,283 63,300 135,056 88,511 163,838

■ OTHER During the fiscal year ended March 31, 2005, sales within the losses decreased despite the absence in the fiscal year ended Other segment were comprised mainly of sales from an adver- March 31, 2005 of a 7.7 billion yen one-time gain recorded at a tising agency business in Japan; SCN, an Internet-related business operated by a U.S. subsidiary on the sale of rights service business subsidiary operating mainly in Japan; an related to a portion of the Sony Credit Card portfolio in the imported general merchandise retail business; an in-house previous fiscal year. oriented facility management business; and from an IC-card business. Sales for the fiscal year ended March 31, 2005 decreased by Sales and operating loss in the Other segment 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 (Yen in billions) (Yen in billions) were sales to outside customers. In terms of profit performance, 400 40 operating losses for the segment improved for the fiscal year

from 12.1 billion yen to 4.1 billion yen. 200 20 During the fiscal year, sales decreased primarily as the result of a decrease in intersegment sales due to contract changes at 0 0 a Japanese subsidiary involved in the advertising agency –1.6%

business. Regarding profit performance, an operating loss of 4.1 –4.5% –200 –20 billion yen was recorded, an 8.0 billion yen improvement on the

12.1 billion yen loss recorded in the previous fiscal year. This –10.8% –400 –40 improvement was mainly due to a reduction of fixed costs, a 2003 2004 2005 gain from the sale of a retail and showroom building in Japan ■ Sales (left) ■ Operating loss (right) and the strong performance of a business engaged in the ● Operating margin

production and marketing of animation products. Segment *Years ended March 31

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BH6/30 Page 46 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC CHANGES IN THE CLASSIFICATION OF BUSINESS Therefore, analysis and discussion of certain portions of the SEGMENTS FOR THE FISCAL YEAR ENDING MARCH 31, 2006 operating results of SMEI and SPE are specified as being on “a In association with a significant contraction in the size of the U.S. dollar basis.” Results on a local currency basis and results Music segment as a result of the establishment of SONY BMG on a U.S. dollar basis are not on the same basis as Sony’s in August, 2004, Sony will discontinue the separate reporting of consolidated financial statements and do not conform with U.S. the Music segment as of the first quarter of the fiscal year GAAP. In addition, Sony does not believe that these measures ending March 31, 2006, and will instead consolidate its results are a substitute for U.S. GAAP measures. However, Sony within the Other segment. After the establishment of SONY believes that local currency basis results provide additional BMG, for the second half of the fiscal year ended March 31, useful information to investors regarding operating performance. 2005, sales revenue for the Music segment (including Sony’s consolidated results are subject to foreign currency intersegment sales) was 2.3 percent of total consolidated sales rate fluctuations mainly derived from the fact that the countries and operating income was 7.9 percent of the total operating where manufacturing takes place may be different from those income for all segments recording an operating profit. In where such products are sold. In order to reduce the risk addition, total assets for the Music segment, as of March 31, caused by such fluctuations, Sony employs derivatives, includ- 2005, were 3.5 percent of the total assets for all segments. ing foreign exchange forward contracts and foreign currency Furthermore, as of the first quarter of the fiscal year ending option contracts, in accordance with a consistent risk manage- March 31, 2006, Sony’s Japan-based disc manufacturing and ment strategy. Such derivatives are used primarily to mitigate the distribution business, previously classified within the Music effect of foreign currency exchange rate fluctuations on cash segment, is scheduled to be reclassified to the Electronics flows generated by anticipated intercompany transactions and segment. intercompany accounts receivable and payable denominated in foreign currencies. FOREIGN EXCHANGE FLUCTUATIONS AND RISK Sony Global Treasury Services Plc (“SGTS”) in London HEDGING provides integrated treasury services for Sony Corporation and During the fiscal year ended March 31, 2005, the average value its subsidiaries. Sony’s policy is that Sony Corporation and all of the yen was 106.5 yen against the U.S. dollar, and 133.7 yen subsidiaries with foreign exchange exposures should enter into against the euro, which was 5.2 percent higher against the U.S. commitments with SGTS for hedging their exposures. Sony dollar and 1.9 percent lower against the euro, respectively, com- Corporation and most of its subsidiaries utilize SGTS for this pared with the average of the previous fiscal year. Operating purpose. The concentration of foreign exchange exposures at results on a local currency basis described in “Overview” and SGTS means that, in effect, SGTS hedges the net foreign “Operating Performance” show results of sales and operating exchange exposure of Sony Corporation and its subsidiaries. revenue and operating income obtained by applying the yen’s SGTS in turn enters into foreign exchange transactions with monthly average exchange rate in the previous fiscal year to creditworthy third-party financial institutions. Most of the monthly local currency-denominated sales, cost of sales, and sell- transactions are entered into against projected exposures before ing, general and administrative expenses for the fiscal year ended the actual export and import transactions take place. In general, March 31, 2005, as if the value of the yen had remained constant. SGTS hedges the projected exposures on average three months In the Music segment, Sony consolidates the yen-translated before the actual transactions take place. However, in certain results of SMEI (a U.S.-based operation that aggregates the cases, SGTS partially hedges the projected exposures one results of its worldwide subsidiaries on a U.S. dollar basis) and month before the actual transactions take place when business the results of SMEJ (a Japan based operation that aggregates requirements such as shorter production-sales cycle for certain the results of its operations in yen). In addition, in the Music products arise. Sony enters into foreign exchange transactions segment, results for this fiscal year only include the results of with financial institutions primarily for hedging purposes. Sony SMEI’s recorded music business for the months of April through does not use these derivative financial instruments for trading July 2004, and the twelve month results for SMEI’s music or speculative purposes except for certain derivatives in the publishing business and SMEJ. However, results for the previ- Financial Services segment utilized for portfolio investments. ous fiscal year in the Music segment include the consolidated To minimize the adverse effects of foreign exchange fluctua- results for SMEI’s recorded music business for all twelve tions on its financial results, particularly in the Electronics months, as well as the full year’s results for SMEI’s publishing segment, Sony seeks, when appropriate, to localize material business and SMEJ. and parts procurement, design, and manufacturing operations In the Pictures segment, Sony translates into yen the U.S. in areas outside of Japan. dollar consolidated results of SPE (a U.S. based operation that Changes in the fair value of derivatives designated as cash has worldwide subsidiaries). flow hedges, including foreign exchange forward contracts and

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BH6/30 Page 47 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC foreign currency option contracts, are initially recorded in other (based on the average of inventories at the end of each fiscal comprehensive income and reclassified into earnings when the year and previous fiscal year) was 1.56 months compared to hedged transaction affects earnings. Foreign exchange forward 1.53 months at the end of the previous fiscal year. Sony consid- contracts, foreign currency option contracts and other deriva- ers this level of inventory to be appropriate in the aggregate. tives that do not qualify as hedges are marked-to-market with Current assets on March 31, 2005 in the Financial Services changes in value recognized in Other Income and Expenses. segment increased by 290.5 billion yen, or 41.5 percent, to The notional amounts of foreign exchange forward contracts, 990.2 billion yen, compared with the previous fiscal year-end. currency option contracts purchased and currency option The increase was primarily attributable to an increase in contracts written as of March 31, 2005 were 1,545.8 billion marketable securities. (Refer to Note 8 of Notes to Consolidated yen, 428.3 billion yen and 146.5 billion yen, respectively. Financial Statements.)

■ INVESTMENTS AND ADVANCES ASSETS, LIABILITIES AND STOCKHOLDERS’ Investments and advances on March 31, 2005 increased by EQUITY 232.7 billion yen, or 9.3 percent, to 2,745.7 billion yen, compared with the previous fiscal year-end. ASSETS Investments and advances on March 31, 2005 in all segments Total assets on March 31, 2005 increased by 408.4 billion yen, excluding the Financial Services segment increased by 86.8 or 4.5 percent, to 9,499.1 billion yen, compared with the billion yen, or 24.2 percent, to 445.4 billion yen. This increase previous fiscal year-end. Total assets on March 31, 2005 in all was mainly the result of investments associated with the segments excluding the Financial Services segment decreased establishment of S-LCD, a joint venture with Samsung for the by 32.9 billion yen, or 0.5 percent, to 6,027.9 billion yen and manufacture of amorphous TFT LCD panels. total assets on March 31, 2005 in the Financial Services Investments and advances on March 31, 2005 in the Financial segment increased by 410.5 billion yen, or 11.8 percent, to Services segment increased by 104.5 billion yen, or 4.6 percent, 3,885.5 billion yen, compared with the previous fiscal year-end. to 2,379.0 billion yen, compared with the previous fiscal year- Total assets on March 31, 2005 in all segments excluding the end. This increase was primarily due to investments mainly in Financial Services segment would have decreased by approxi- Japanese fixed income securities resulting from an increase in mately 2 percent compared with the previous fiscal year-end if insurance premiums at Sony Life, and an increase in housing the value of the yen had remained the same on March 31, 2005 loans due to a campaign carried out at Sony Bank. as it was on March 31, 2004. Also see “Investments” below.

■ CURRENT ASSETS ■ PROPERTY, PLANT AND EQUIPMENT (AFTER DEDUCTION Current assets on March 31, 2005 increased by 192.8 billion OF ACCUMULATED DEPRECIATION) yen, or 5.7 percent, to 3,556.2 billion yen compared with the Property, plant and equipment on March 31, 2005 increased by previous fiscal year-end. Current assets on March 31, 2005 in all 7.4 billion yen, or 0.5 percent, to 1,372.4 billion yen, compared segments excluding the Financial Services segment decreased with the previous fiscal year-end. by 99.6 billion yen, or 3.7 percent, to 2,592.8 billion yen. Property, plant and equipment on March 31, 2005 in all Cash and cash equivalents on March 31, 2005 in all segments segments excluding the Financial Services segment increased excluding Financial Services segment decreased 73.2 billion by 9.6 billion yen, or 0.7 percent, to 1,333.8 billion yen, com- yen, or 12.3 percent, to 519.7 billion yen compared with the pared with the previous fiscal year-end. previous fiscal year-end. This is primarily a result of a 57.3 billion Capital expenditures (part of the increase in property, plant and yen repayment of long-term debt relating to a variable interest equipment) for the fiscal year ended March 31, 2005 decreased entity responsible for the operation and development of a real by 21.4 billion yen, or 5.7 percent, to 356.8 billion yen compared estate complex in Berlin, Germany. with the previous fiscal year. Capital expenditures in the Electron- Notes and accounts receivable, trade (net allowance for ics segment increased by 59.1 billion yen, or 23.5 percent, to doubtful accounts and sales returns) on March 31, 2005, in all 311.1 billion yen but decreased in the Game segment by 81.5 segments excluding Financial Services segment increased 9.1 billion yen, or 81.2 percent, to 18.8 billion yen. Capital expendi- billion yen, or 1.0 percent, compared with the previous fiscal tures in the semiconductor businesses mainly in the Electronics year-end to 952.7 billion yen. segment amounted to 150.0 billion yen, of which investments in Inventories on March 31, 2005 decreased by 35.2 billion yen, production equipment for system large-scale integration (“LSI”) or 5.3 percent, to 631.3 billion yen compared with the previous including the Cell next-generation, high-performance processor fiscal year-end. The inventory to cost of sales turnover ratio amounted to 90.0 billion yen. Capital expenditures in the Music

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BH6/30 Page 48 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC segment decreased by 0.8 billion yen, or 20.7 percent, to 2.9 previous fiscal year-end if the value of the yen had remained the billion yen, and decreased in the Pictures segment by 0.2 billion same on March 31, 2005 as it was on March 31, 2004. 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. ■ CURRENT LIABILITIES Property, plant and equipment on March 31, 2005 in the Current liabilities on March 31, 2005 decreased by 172.8 billion Financial Services segment decreased by 2.3 billion yen, or 5.6 yen, or 5.8 percent, to 2,809.4 billion yen compared with the percent, to 38.6 billion yen compared with the previous fiscal previous fiscal year-end. Current liabilities on March 31, 2005 in year-end. Capital expenditures in the Financial Services segment all segments excluding the Financial Services segment decreased decreased by 0.8 billion yen, or 16.7 percent, to 3.8 billion yen. by 236.1 billion yen, or 9.9 percent, to 2,137.5 billion yen. Short-term borrowings and the current portion of long-term ■ OTHER ASSETS debt on March 31, 2005 in all segments excluding the Financial Other assets on March 31, 2005 decreased by 46.7 billion yen, Services segment decreased 205.7 billion yen, or 50.2 percent, or 2.9 percent, to 1,545.9 billion yen, compared with the to 204.0 billion yen compared with the previous fiscal year-end. previous fiscal year-end. This decrease was mainly a result of the fact that of 300.0 billion Other assets on March 31, 2005 in all segments excluding yen of convertible bonds due on March 31, 2005, 5.0 billion yen the Financial Services segment decreased by 62.5 billion yen to were redeemed on the maturity date with 282.8 billion yen of the 1,189.4 billion yen. This decrease was primarily the result of the 287.8 billion yen balance outstanding at the start of the fiscal fact that, due to the establishment of SONY BMG, artist’s year being converted into common stock, which was partially contracts belonging to the joint venture are no longer recorded offset by the reclassification of long-term debt to current liabilities as intangible assets within Sony’s consolidated balance sheets. mainly consisting of 119.0 billion yen of straight bonds and Deferred tax assets on March 31, 2005 increased by 37.2 bil- bonds with warrants redeemable during the fiscal year ending lion yen, or 18.3 percent, to 240.4 billion yen compared with the March 31, 2006. (Refer to Note 12 of Notes to Consolidated previous fiscal year-end. As a result of the recording of operating Financial Statements.) losses in the past, certain U.S. subsidiaries of Sony have had Notes and accounts payable, trade on March 31, 2005 in all valuation allowances against deferred tax assets for U.S. federal segments excluding the Financial Services segment increased taxes and certain state taxes. However, in the fiscal year ended by 28.0 billion yen, or 3.6 percent, to 801.3 billion yen compared March 31, 2005, based on both improved operating results in with the previous fiscal year-end, mainly due to an increase recent years and a sound outlook for the future operating perfor- within the Game segment. mance at Sony’s U.S. subsidiaries, Sony reversed 67.9 billion Current liabilities on March 31, 2005 in the Financial Services yen of such valuation allowances. On the other hand, certain of segment increased by 59.8 billion yen, or 9.2 percent, to 708.6 Sony’s subsidiaries recorded new valuation allowances against billion yen, mainly due to the increase in deposits from customers deferred tax assets during the fiscal year ended March 31, 2005. in the banking business. Deposits from customers in the banking Other assets in the Financial Services segment on March 31, business increased by 167.9 billion yen, or 44.3 percent, to 546.7 2005 increased by 17.8 billion yen, or 3.9 percent, to 477.8 billion yen, due to the expansion of the banking business. billion yen compared with the previous fiscal year-end. This was mainly due to an increase in deferred insurance acquisition costs ■ LONG-TERM LIABILITIES at Sony Life. 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 LIABILITIES previous fiscal year-end. Total current and long-term liabilities on March 31, 2005 Long-term liabilities on March 31, 2005 in all segments decreased by 84.9 billion yen, or 1.3 percent, to 6,604.9 billion excluding the Financial Services segment decreased by 253.5 yen compared with the previous fiscal year-end. Total current billion yen, or 17.1 percent, to 1,228.9 billion yen. Long-term and long-term liabilities on March 31, 2005 in all segments debt on March 31, 2005 in all segments excluding the Financial excluding the Financial Services segment decreased by 489.5 Services segment decreased 147.9 billion yen, or 19.1 percent, billion yen, or 12.7 percent, to 3,366.4 billion yen. Total current to 627.4 billion yen. This was primarily the result of the reclassifi- and long-term liabilities in the Financial Services segment on cation of long-term debt to current liabilities, including 119.0 March 31, 2005 increased by 365.5 billion yen, or 11.8 percent, billion yen of bonds redeemable during the fiscal year ending to 3,465.3 billion yen, compared with the previous fiscal year- March 31, 2006 and a decrease in accrued pension and end. Total current and long-term liabilities on March 31, 2005 in severance costs of 20.2 billion yen, or 5.6 percent, to 338.0 all segments excluding the Financial Services segment would billion yen, primarily due to the reform of Sony’s employee have decreased by approximately 14 percent compared with the retirement pension plan in Japan.

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BH6/30 Page 49 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC Long-term liabilities on March 31, 2005 in the Financial fiscal year-end, and other comprehensive income (net of tax) Services segment increased by 305.7 billion yen, or 12.5 was 64.3 billion. This was primarily due to 74.2 billion yen percent, to 2,756.7 billion yen. This was due to an increase in arising from foreign currency translation adjustments due to insurance-in-force in the life insurance business which resulted the devaluation of the yen, partially offset by the recording of a in an increase in future insurance policy benefits and other of change in accumulated other comprehensive income of 7.3 285.7 billion yen, or 13.1 percent, to 2,464.3 billion yen. billion yen arising from unrealized gains on securities in the current fiscal year. The ratio of stockholders’ equity to total assets ■ TOTAL INTEREST-BEARING DEBT increased 4.0 percent from 26.2 percent to 30.2 percent. Total interest-bearing debt on March 31, 2005 decreased by

343.4 billion yen, or 27.4 percent, to 909.3 billion yen, com- Stockholders’ equity and Stockholders’ equity per share pared with the previous fiscal year-end. Total interest-bearing stockholders’ equity ratio of common stock debt on March 31, 2005 in all segments excluding the Financial (Yen in billions) (%) (Yen)

Services segment decreased by 353.6 billion yen, or 29.8 3,200 40 3,200 percent, to 831.4 billion yen. 30.2% 2,400 27.2% 26.2% 30 2,400 Interest-bearing liabilities (Yen in billions) 1,600 20 1,600 1,600

800 10 800 1,200

0 0 0 800 2003 2004 2005 2003 2004 2005 ■ Stockholders’ equity *As of March 31 ● Stockholders’ equity ratio 400 Stockholders’ equity ratio= Stockholders’ equity/Total assets

*As of March 31 0 2003 2004 2005 ■ Short-term (including the current portion of long-term debt) ■ Long-term CONDENSED BALANCE SHEETS SEPARATING OUT THE *As of March 31 FINANCIAL SERVICES SEGMENT (UNAUDITED) The following schedule shows an unaudited condensed balance sheet for the Financial Services segment and all other segments STOCKHOLDERS’ EQUITY excluding Financial Services as well as the condensed consoli- Stockholders’ equity on March 31, 2005 increased by 492.3 dated balance sheet. This presentation is not required under billion yen, or 20.7 percent, to 2,870.3 billion yen compared with U.S. GAAP, which is used in Sony’s consolidated financial state- the previous fiscal year-end. As noted above, of 300.0 billion yen ments. However, because the Financial Services segment is dif- of convertible bonds due on March 31, 2005, 5.0 billion yen were ferent in nature from Sony’s other segments, Sony believes that redeemed on the maturity date with 282.8 billion yen of the 287.8 a comparative presentation may be useful in understanding and billion yen balance outstanding at the start of the fiscal year being analyzing Sony’s consolidated financial statements. Transactions converted into common stock, and, therefore, incorporated into between the Financial Services segment and all other segments stockholders’ equity and additional paid-in capital. Retained excluding Financial Services are eliminated in the consolidated earnings increased 139.0 billion yen compared with the previous figures shown below.

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BH6/30 Page 50 05.7.7, 9:28 AM Adobe PageMaker 6.0J/PPC CONDENSED BALANCE SHEETS SEPARATING OUT THE FINANCIAL SERVICES SEGMENT (UNAUDITED) Yen in millions Sony without Financial Services Financial Services Consolidated Years ended March 31 2004 2005 2004 2005 2004 2005 Assets Current assets ...... 699,698 990,191 2,692,436 2,592,849 3,363,355 3,556,171 Cash and cash equivalents ...... 256,316 259,371 592,895 519,732 849,211 779,103 Marketable securities ...... 270,676 456,130 4,072 4,072 274,748 460,202 Notes and accounts receivable, trade ...... 72,273 77,023 943,590 952,692 1,011,189 1,025,362 Other ...... 100,433 197,667 1,151,879 1,116,353 1,228,207 1,291,504 Film costs ...... — — 256,740 278,961 256,740 278,961 Investments and advances ...... 2,274,510 2,378,966 358,629 445,446 2,512,950 2,745,689 Investments in Financial Services, at cost ...... — — 176,905 187,400 — — Property, plant and equipment ...... 40,833 38,551 1,324,211 1,333,848 1,365,044 1,372,399 Other assets ...... 459,998 477,809 1,251,901 1,189,398 1,592,573 1,545,880 Deferred insurance acquisition costs ...... 349,194 374,805 — — 349,194 374,805 Other ...... 110,804 103,004 1,251,901 1,189,398 1,243,379 1,171,075 ...... 3,475,039 3,885,517 6,060,822 6,027,902 9,090,662 9,499,100 Liabilities and stockholders’ equity Current liabilities ...... 648,803 708,613 2,373,550 2,137,480 2,982,215 2,809,368 Short-term borrowings ...... 86,748 45,358 409,766 204,027 475,017 230,266 Notes and accounts payable, trade ...... 7,847 7,099 773,221 801,252 778,773 806,044 Deposits from customers in the banking business ...... 378,851 546,718 — — 378,851 546,718 Other ...... 175,357 109,438 1,190,563 1,132,201 1,349,574 1,226,340 Long-term liabilities ...... 2,450,969 2,756,679 1,482,378 1,228,927 3,707,587 3,795,547 Long-term debt ...... 135,811 135,750 775,233 627,367 777,649 678,992 Accrued pension and severance costs ...... 10,183 14,362 358,199 338,040 368,382 352,402 Future insurance policy benefits and other ...... 2,178,626 2,464,295 — — 2,178,626 2,464,295 Other ...... 126,349 142,272 348,946 263,520 382,930 299,858 Minority interest in consolidated subsidiaries ...... — 5,476 17,554 18,471 22,858 23,847 Stockholders’ equity ...... 375,267 414,749 2,187,340 2,643,024 2,378,002 2,870,338 ...... 3,475,039 3,885,517 6,060,822 6,027,902 9,090,662 9,499,100

INVESTMENTS and whether or not Sony is able to retain the investment for a Sony regularly evaluates its investment portfolio to identify other- period of time sufficient to allow for the anticipated recovery in than-temporary impairments of individual securities. Factors that market value. are considered by Sony in determining whether an other-than- In evaluating the factors for available-for-sale securities with temporary decline in value has occurred include: the length of readily determinable fair values, management presumes a time and extent to which the market value of the security has decline in value to be other-than-temporary if the fair value of been less than its original cost, the financial condition, operating the security is 20 percent or more below its original cost for an results, business plans and estimated future cash flows of the extended period of time (generally a period of up to six to twelve issuer of the security, other specific factors affecting the market months). The presumption of an other-than-temporary impair- value, deterioration of issuer’s credit condition, sovereign risk, ment in such cases may be overcome if there is evidence to

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BH6/30 Page 51 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC support that the decline is temporary in nature due to the exist- expected operating results, business plans and future cash ence of other factors which overcome the duration or magnitude flows of the issuer of the security. Accordingly, it is possible that of the decline. On the other hand, there may be cases where investments in Sony’s portfolio that have had a decline in value impairment losses are recognized when the decline in the fair that Sony currently believes to be temporary may be determined value of the security is not more than 20 percent or such decline to be other-than-temporary in the future based on Sony’s evalu- has not existed for an extended period of time, as a result of ation of additional information such as continued poor operating considering specific factors which may indicate the decline in results, future broad declines in value of worldwide equity mar- the fair value is other-than-temporary. kets and the effect of world wide interest rate fluctuations. As a The assessment of whether a decline in the value of an invest- result, unrealized losses recorded for investments may be ment is other-than-temporary is often judgmental in nature and recognized into income in future periods. involves certain assumptions and estimates concerning the

The following table contains available for sale and held to maturity securities, breaking out the unrealized gains and losses by investment category. Yen in millions Unrealized Unrealized Fair market March 31, 2005 Cost gain loss value 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 These unrealized losses related to numerous investments, with to investments held by Sony Life. Sony Life principally invests in no single investment being in a material unrealized loss position. debt securities in various industries. Almost all of these securi- In addition, there was no individual security with unrealized ties were rated “BBB” or better by Standard & Poor’s, Moody’s losses that met the test discussed above for impairment as the or others. As of March 31, 2005, Sony Life had debt and equity declines in value were observed to be small both in amounts securities which had gross unrealized losses of 2.1 billion yen and percentage, and therefore, the decline in value for those and 0.3 billion yen, respectively. Of the unrealized loss amounts investments was still determined to be temporary in nature. The recorded by Sony Life, less than 1 percent relate to securities percentage of noninvestment grade securities held by Sony Life being in an unrealized loss position of greater than 12 months. represents approximately 3 percent of Sony Life’s total invest-

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BH6/30 Page 52 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC ment portfolio, while the percentage of unrealized losses that value. For publicly traded investments, fair value is determined relate to those noninvestment grade securities was approxi- by the closing stock price as of the date on which the impair- mately 4 percent of Sony Life’s total unrealized losses as of ment determination is made. For non-public investments, fair March 31, 2005. value is determined through the use of such methodologies as For fixed maturity securities with unrecognized losses held by discounted cash flows, valuation of recent financings and Sony Life as of March 31, 2005 (2.1 billion yen), maturity dates comparable valuations of similar companies. The impairment vary as follows: losses that were recorded in each of the three fiscal years related to the unique facts and circumstances of each individual ■ Within 1 year ...... 18 percent investment and did not significantly impact other investments. ■ 1 to 5 years ...... 55 percent Sony Life and Sony Bank’s investments constitute the majority ■ 5 to 10 years ...... 21 percent of the investments in the Financial Services segment. Sony Life and Sony Bank account for approximately 84 percent and 14 Sony also maintains long-term investment securities issued by percent of the investments of the Financial Services segment, a number of non-public companies. The aggregate carrying respectively. amount of these investments in non-public companies at March 31, 2005 was 48.9 billion yen. A non-public equity investment is Sony Life’s basic investment policy is to take both expected valued at cost as fair value is not readily determinable. If the returns and investment risks into account in order to maintain value is estimated to have declined and such decline is judged sound asset quality, structuring its asset management portfolio to be other than temporary, impairment of the investment is to ensure steady medium- and long-term returns by investing recognized and the carrying value is reduced to its fair value. assets in an efficient manner and responding flexibly to changes For the fiscal years ended March 31, 2003, 2004 and 2005, in financial conditions and the investment environment. More- total impairment losses were 25.5 billion yen, 16.7 billion yen over, Sony Life analyzes the character of future insurance policy and 4.2 billion yen of which 2.3 billion yen, 0.2 billion yen and benefits by utilizing Asset Liability Management (“ALM”), a 0.5 billion yen, respectively, were recorded by Sony Life in method of managing interest rate fluctuation risk through the Financial Services revenue (Refer to “Financial Services” under comprehensive identification of the mismatches of duration and “Operating Performance by Business Segment” for the fiscal cash flows between assets and liabilities. Government bonds, years ended March 31, 2005 and March 31, 2004). Impairment convertible bonds, and straight corporate bonds constitute a losses other than at Sony Life in each of the three fiscal years majority of Sony Life’s current portfolio. Sony Life invests in were reflected in non-operating expenses and primarily relate to various types of bonds in many countries, companies and the certain strategic investments in non-financial services industries, to diversify associated risks. Stocks accounted for businesses. These investments primarily relate to the certain approximately 3 percent of the current portfolio. strategic investments in Japan, the U.S. and Europe with which Sony Bank operates using a similar basic investment policy as Sony has strategic relationships for the purposes of developing Sony Life, taking expected returns and investment risks into and marketing new technologies. The impairment losses were account in order to disperse associated risks, and structuring its recorded for each of the three fiscal years as these companies asset portfolio to ensure steady returns from investments. In failed to successfully develop and market such technology, the addition, Sony Bank is careful to match the duration of its asset operating performance of the companies was more unfavorable portfolio with the duration of liabilities resulting from customer than previously expected and the decline in fair value of these deposits, in order to ensure that significant discrepancies do not companies was judged as other-than-temporary. None of these occur. Government bonds and corporate bonds in yen or other impairment losses was individually material to Sony, except for currencies constitute a majority of Sony Bank’s current portfolio. the devaluation of securities explained in “Other Income and To safeguard its assets Sony Bank does not invest in equity Expenses” for the fiscal years ended March 31, 2005, March 31, securities but invests in various types of government and 2004 and March 31, 2003. corporate bonds in many countries, companies and industries, Upon determination that the value of an investment is im- to diversify associated risks. With respect to loans, Sony Bank paired, the value of the investment is written down to its fair mainly offers housing loans to individuals and does not have any corporate loan exposure.

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BH6/30 Page 53 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENT LIABILITIES The following table summarizes Sony’s contractual obligations and major commitments as of March 31, 2005. Please note that references to Notes below are references to particular notes within the Notes to Consolidated Financial Statements. Yen in millions Payments due by period Less than Total 1 year 1 to 3 years 3 to 5 years After 5 years Contractual Obligations and Major Commitments*: Long-term debt (Note 12) Capital lease obligations (Notes 9 and 12) ...... 40,301 11,173 17,435 6,655 4,498 Other long-term debt (Note 12)...... 805,561 155,157 192,741 278,684 178,979 Minimum rental payments required under operating leases (Note 9) ...... 169,951 38,182 53,561 24,556 53,652 Purchase commitments for property, plant and equipment and other assets (Note 24) ...... 83,683 67,698 15,973 12 — Expected cost for the production or purchase of films and television programming or certain rights (Note 24) ...... 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 15). * The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in the above table or the amount of commitments outstanding at March 31, 2005 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 199.9 billion yen as of March 31, 2005 (Note 24). * The 5 year Revolving Credit Agreement with Sony BMG, which matures on August 5, 2009 and provides for a base commitment of 32.1 billion yen and additional incremental borrowings of up to 16.1 billion yen, is not included in the above table or the amount of commitments outstanding at March 31, 2005 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2005 was 24.1 billion yen (Note 24).

The total amount of commitments outstanding at March 31, The following table summarizes Sony’s contingent liabilities as 2005 was 240.7 billion yen (Refer to Note 24 of Notes to of March 31, 2005. Consolidated Financial Statements). The commitments include Yen in millions major purchase obligations as shown above. Total amounts of contingent liabilities In the ordinary course of business, Sony makes commitments for the purchase of property, plant and equipment. As of March Contingent Liabilities (Notes 24): 31, 2005, such commitments outstanding were 83.7 billion yen. Loan guarantees to related parties ...... 7,642 A subsidiary in the Pictures segment has committed to fund a Other ...... 18,407 portion of the production cost of completed films and is respon- Total contingent liabilities ...... 26,049 sible for all distribution and marketing expenses relating to these films under a distribution agreement with a third party. Further, OFF-BALANCE SHEET ARRANGEMENTS certain subsidiaries in the Pictures segment have entered into Sony has several accounts receivable securitization programs to agreements with creative talent for the development and provide liquidity, capital resources and credit risk support. production of films and television programming as well as In the United States, Sony has set up an accounts receivable agreements with third parties to acquire completed films, or securitization program that provides for the accelerated receipt certain rights therein. As of March 31, 2005, the total amount of of up to 53.5 billion yen of cash on eligible trade accounts the expected cost for the production or purchase of films and receivable of Sony’s U.S. electronics subsidiary. Through this television programming or certain rights under the above program, Sony can securitize and sell a percentage of an commitments was 82.1 billion yen. undivided interest in that pool of receivables to several multi- In order to fulfill its commitments, Sony will use cash gener- seller commercial paper conduits owned and operated by a ated by its operating activities, intra-group loans and borrowings bank. These securitization transactions are accounted for as a from subsidiaries with excess funds to subsidiaries that are short sale in accordance with FAS No. 140, “Accounting for Transfers of funds through its finance subsidiaries such as SGTS, and and Servicing of Financial Assets and Extinguishments of raise funds from the global capital markets and from banks Liabilities”, because Sony has relinquished control of the when necessary. receivables. Accordingly, accounts receivable sold under these transactions are excluded from receivables in the accompanying consolidated balance sheet. During the period from April 2004

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BH6/30 Page 54 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC to January 2005, Sony sold a total of 80.3 billion yen of accounts recently entered into several joint ventures and made certain receivable under this program. There were no outstanding strategic investments which include SONY BMG, S-LCD and amounts due at March 31, 2005 relating to the existing undi- Metro–Goldwyn–Mayer Inc. (“MGM”). Sony has reviewed these vided interests in the pool of receivables that had been sold. investments and determined that both SONY BMG and S-LCD Losses from these transactions were insignificant. This program are not VIEs while MGM is a VIE. However, MGM will not be was terminated in May 2005. consolidated as Sony is not the primary beneficiary of this VIE. During the fiscal year ended March 31, 2005, Sony entered Accordingly, Sony has accounted for these investments under into new accounts receivable sales programs that provide for the equity method. 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 CASH FLOWS entities owned and operated by banks. These transactions are accounted for as a sale in accordance with FAS No. 140, (The fiscal year ended March 31, 2005 compared with the fiscal because Sony has relinquished control of the receivables. year ended March 31, 2004) Accordingly, accounts receivable sold under these transactions Operating Activities: During the fiscal year ended March 31, are excluded from receivables in the accompanying consolidated 2005, Sony generated 647.0 billion yen of net cash from balance sheet. The initial sale of these receivables was in March operating activities, a increase of 14.4 billion yen, or 2.3 percent 2005, and Sony sold a total of 10.0 billion yen for the fiscal year compared with the previous fiscal year. Of this total, all segments ended March 31, 2005. Losses from these transactions were excluding the Financial Services segment generated 485.4 billion insignificant. Although Sony continues servicing the sold receiv- yen of net cash from operating activities, a increase of 84.3 billion ables, no servicing liabilities are recorded because costs regarding yen, or 21.0 percent, compared with the previous fiscal year, and collection of the sold receivables are insignificant. the Financial Services segment generated 168.1 billion yen of net Refer to Note 7 of Notes to Consolidated Financial Statements cash from operating activities, a decrease of 73.5 billion yen, or for more information. 30.4 percent, compared with the previous fiscal year. Sony has, from time to time, entered into various financing During the fiscal year, in addition to profit contributions from arrangements with Variable Interest Entities (“VIEs”). These the Pictures, Financial Services, Game and Music segments and arrangements include facilities which provide for the leasing of depreciation expenses, operating cash flow benefited from an certain property, the financing of film production and the increase in notes and accounts payable, trade, primarily associ- development and operation of a multi-use real estate complex. ated with an increase in sales and procurement related primarily Although not a significant part of its financing activities, Sony to the PSP within the Game segment during the fourth quarter employs these arrangements because they provide a diversifica- of the fiscal year, a decrease in notes and accounts receivable, tion of funding sources. The assets and liabilities associated with trade, associated with a sales decrease in the Pictures segment these arrangements previously qualified for off-balance sheet during the fourth quarter and within the Music segment associ- treatment. On July 1, 2003, Sony adopted FIN 46 and accord- ated with the decrease in sales after August 2004, and a ingly, the assets and liabilities associated with these arrange- decrease in inventory mainly within the Game and Electronics ments were consolidated. Refer to Note 23 of Notes to Consoli- segments. Partially offsetting these contributions were factors dated Financial Statements for more information. As a result, including an increase in notes and accounts receivable, trade Sony recognized a one time charge with no tax effect of 2.1 primarily within the Game segment. In addition, in the Financial billion yen for cumulative effect of an accounting change for the Services segment, an increase in future insurance policy benefits year ended March 31, 2004. Additionally, Sony’s assets and and other, due to an increase in insurance-in-force, contributed liabilities increased as non-cash transactions, which resulted in to operating cash flow in the Financial Services segment. no cash flows, by 95.3 billion yen and 98.0 billion yen, respec- Compared with the previous fiscal year, net cash provided by tively. Cash and cash equivalents as of March 31, 2005, also operating activities increased, due to a decrease in inventory increased by 1.5 billion yen compared with previous fiscal year- during the fiscal year compared to an increase in inventory in the end. As of March 31, 2005, Sony is a primary beneficiary for all previous fiscal year, and there was a smaller increase in notes the VIEs in which Sony holds a significant variable interest, and and accounts receivable, trade, compared with the previous all these VIEs are consolidated by Sony. fiscal year associated with the decrease in sales. These factors Also, in connection with Sony’s utilization of joint venture and were partially offset by factors such as a smaller increase in alliances to achieve certain strategic objectives, Sony has notes and accounts payable, trade.

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BH6/30 Page 55 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC Investing Activities: During the fiscal year, Sony used 931.2 In the Financial Services segment, as a result of a 294.4 billion billion yen of net cash in investing activities, an increase of 169.4 yen increase in customer deposits due to factors such as an billion yen, or 22.2 percent, compared with the previous fiscal increase in insurance-in-force at Sony Life and an increase in year. Of this total, all segments excluding the Financial Services deposits from customers in the banking business, 256.4 billion segment used 472.1 billion yen of net cash in investing activities, yen was procured by financing activities. an increase of 119.6 billion yen, or 33.9 percent, compared with Accounting for all these factors and the effect of exchange the previous fiscal year, and the Financial Services segment rate changes, the total outstanding balance of cash and cash used 421.4 billion yen in net cash, an increase of 19.8 billion equivalents at the end of the fiscal year decreased by 70.1 billion yen, or 4.9 percent. yen, or 8.3 percent, to 779.1 billion yen, compared with the end During the fiscal year, purchases of fixed assets (capital of the previous fiscal year. The total outstanding balance of cash expenditures) were made, primarily due to proactive capital and cash equivalents of all segments excluding the Financial expenditures in semiconductors mainly within the Electronics Services segment decreased by 73.2 billion yen, or 12.3 segment, mostly associated with system LSI including the Cell percent, to 519.7 billion yen, and for the Financial Services next-generation, high-performance processor, as well as segment, increased by 3.1 billion, or 1.2 percent, to 259.4 billion investments associated with the establishment of the amorphous yen, compared with the end of the previous fiscal year. TFT LCD panel manufacturing joint venture S-LCD. Within the Financial Services segment, payments for investments and Cash flows advances exceeded proceeds from maturities of marketable

securities, sales of securities investments and collections of (Yen in billions)

advances primarily as a result of both investments in mainly 1,000 Japanese fixed income securities resulting from an increase in insurance premiums at Sony Life, and a housing loan campaign 500 carried out at Sony Bank. Compared with the previous fiscal year, net cash used in 0 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 –500 advances increased by 124.8 billion yen from 33.3 billion yen to –1,000 158.2 billion yen due to the abovementioned investments at S- 2003 2004 2005 LCD. On the other hand, in the Financial Services segment, net ■ Cash flows from operating activities ■ Cash flows from investing activities cash used in investing activities increased due to an increase in ■ Cash flows from financing activities

proceeds from investments and advances year on year. *Years ended March 31 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 CONDENSED STATEMENTS OF CASH FLOWS year, a decrease of 35.3 billion yen, or 72.6 percent, compared SEPARATING OUT THE FINANCIAL SERVICES SEGMENT with the previous fiscal year. (UNAUDITED) Financing Activities: During the fiscal year ended March 31, The following schedule shows unaudited condensed statements 2005, 205.2 billion yen of net cash was provided by financing of cash flow for the Financial Services segment and all other activities. Of the total, 95.4 billion yen of net cash was used for segments excluding the Financial Services segment as well as financing activities in all segments excluding the Financial condensed consolidated statements of cash flow. These Services segment as a result of 89.7 billion yen being used for presentations are not required under U.S. GAAP, which is used the repayment of long term debt and 23.0 billion yen in cash in Sony’s consolidated financial statements. However, because being used for the payment of dividends. the Financial Services segment is different in nature from Sony’s In the fiscal year ended March 31, 2005, net cash was used other segments, Sony believes that a comparative presentation for financing activities compared to 153.8 billion yen of net cash may be useful in understanding and analyzing Sony’s consoli- procured in the previous fiscal year. This change was due mainly dated financial statements. Transactions between the Financial to the issuance of 250.0 billion yen in euro yen convertible Services segment and all other segments excluding the Financial bonds (bonds with stock acquisition rights) within the previous Services segment are eliminated in the consolidated figures fiscal year. shown below.

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BH6/30 Page 56 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC CONDENSED STATEMENTS OF CASH FLOWS SEPARATING OUT THE FINANCIAL SERVICES SEGMENT Yen in millions Sony without Financial Services Financial Services Consolidated Years ended March 31 2004 2005 2004 2005 2004 2005 Net cash provided by operating activities ...... 241,627 168,078 401,090 485,439 632,635 646,997 Net cash used in investing activities ...... (401,550) (421,384) (352,496) (472,119) (761,792) (931,172) Net cash provided by (used in) financing activities ...... 141,696 256,361 153,759 (95,373) 313,283 205,177 Effect of exchange rate changes on cash and cash equivalents . . — — (47,973) 8,890 (47,973) 8,890 Net increase (decrease) in cash and cash equivalents ...... (18,227) 3,055 154,380 (73,163) 136,153 (70,108) Cash and cash equivalents at beginning of the fiscal year ...... 274,543 256,316 438,515 592,895 713,058 849,211 Cash and cash equivalents at end of the fiscal year ...... 256,316 259,371 592,895 519,732 849,211 779,103

LIQUIDITY AND CAPITAL RESOURCES MARKET ACCESS Sony Corporation and SGTS, a finance subsidiary in the U.K., Sony’s financial policy is to secure adequate liquidity and procure funds from the financial and capital markets. financing for its operations and to maintain the strength of its In order to meet long-term funding requirements, Sony balance sheet. Corporation utilizes its access to global equity and bond Sony intends to continue both structural reform and invest- markets and did not issue any stock or bonds during the fiscal ment for future growth in several segments. Sony believes that it year. Sony has a shelf registration of 300 billion yen in the can maintain sufficient liquidity and financial flexibility to satisfy its Japanese domestic bond market, of which no bonds were various capital needs, including the funding requirements that issued as of March 31, 2005. arise from this business strategy, working capital needs, repay- In order to meet the working capital requirements of Sony, ment of existing debt, payment of dividend and all its other SGTS maintains commercial paper (“CP”) programs and a capital needs, through operating cash flows and cash and cash medium-term note (“MTN”) program. SGTS maintains CP equivalents, its ability to procure necessary funds from the programs for the U.S., Euro and Japanese CP markets. As of financial and capital markets, its commitment lines with banks, March 31, 2005, the total amount of these CP programs was and other means. 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 Depreciation and amortization Capital expenditures (additions to property, plant no outstanding balance as of March 31, 2005. Sony Capital and equipment) Corporation (“SCC”), a Sony finance subsidiary in the U.S., had (Yen in billions) (Yen in billions) an outstanding MTN balance of approximately 58.8 billion yen 400 400 as of March 31, 2005. However, Sony does not intend to utilize SCC’s program for future financing requirements as SCC’s 300 300 financing function was integrated into that of SGTS.

200 200 LIQUIDITY MANAGEMENT Sony defines its liquidity sources as the amount of cash, cash

100 100 equivalents (“cash balance”), and committed lines of credit contracted with financial institutions. Working capital needs of

0 0 Sony shows general seasonality to grow significantly in the third 2003 2004 2005 2003 2004 2005 quarter (from October to December). In Sony’s liquidity manage- *Years ended March 31 *Years ended March 31 *Including amortization ment, it is basic policy to secure sufficient liquidity throughout expenses for intangible assets and for deferred insurance the relevant fiscal year, covering such factors as short-term cash acquisition costs flow volatility mentioned above, repayments for debts whose

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BH6/30 Page 57 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC due date come within the fiscal year, and possible downward On November 22, 2004, S&P downgraded Sony’s long-term earnings risk due to business environment change. debt rating from A+ to A (outlook: negative). This action reflected Sony has a policy to keep more than a certain level of cash the concerns of S&P that it is uncertain if Sony will strengthen and balance to absorb any working capital needs daily and monthly. stabilize its profitability particularly in the electronics business, The cash balance on March 31, 2005, was 523.8 billion yen. A under the severe competition and deflationary pressures. Sony’s short-term shortage in the cash balance is financed by the short-term debt rating from S&P has been unaffected. Despite the issuance of CP. However, Sony controls the outstanding CP downgrading of Sony’s long-term debt rating by S&P, Sony amount through internal limits as part of its short-term debt risk believes its access to the global capital markets and ability to management strategy. In the fiscal year ended March 31, 2005, issue CP for its working capital needs has not been limited. there was no outstanding CP amount. As part of its additional liquidity sources, Sony has a total of CASH MANAGEMENT 868.7 billion yen in committed lines of credit, of which the Sony is centralizing and working to make more efficient its global unused amount was approximately 863.9 billion yen as of March cash management activities through SGTS. The excess or 31, 2005. Major committed lines of credit include 574.3 billion shortage of cash at most of Sony’s subsidiaries is invested or yen of the Global Commitment Facilities contracted with a funded by SGTS after having been netted out, although Sony syndicate of global banks, and 250 billion yen of committed lines recognizes that fund transfers are limited in certain countries and of credit contracted with a syndicate of Japanese banks. There geographical areas due to restrictions on capital transactions. In has been no major change since the last fiscal year in terms of order to pursue more efficient cash management, Sony man- the total amount and composition of the committed lines of ages uneven cash distribution among its subsidiaries directly or credit. Sony uses these lines for general corporate purposes, indirectly through SGTS so that Sony can reduce unnecessary including the support of commercial paper programs and for cash and cash equivalents as well as borrowings as much as emergency purposes. There are no financial covenants in any possible. of Sony’s material financial agreements that would cause an The above description covers liquidity and capital resources acceleration of the obligation in the event of a downgrade in for consolidated Sony excluding the Financial Services segment Sony’s credit ratings. However, a downgrade in Sony’s credit which secure liquidity on their own. ratings could increase the cost of borrowings. There are no restrictions on how Sony’s borrowings can be used except that FINANCIAL SERVICES SEGMENT some borrowings may not be used to acquire securities listed In the Financial Services segment, the management of Sony on a U.S. exchange or traded over-the-counter in U.S., and use Financial Holdings Inc., Sony Life, Sony Assurance and Sony of such borrowings must comply with the rules and regulations Bank recognize the importance of securing sufficient liquidity to issued by authorities such as the Board of Governors of the cover the payment obligations that they take on as a result of Federal Reserve Board. their ordinary course of business, and these companies abide by the regulations imposed by regulatory authorities and RATINGS establish and operate under company guidelines that comply Sony considers it to be one of management’s top priorities to with these regulations. Their purpose in doing so is to maintain maintain a stable and appropriate credit rating in order to ensure sufficient cash and cash equivalents and secure sufficient means financial flexibility for liquidity and capital management, and to to pay their obligations. For instance, Sony Life’s cash inflows continue to maintain adequate access to sufficient funding come mainly from policyholders’ insurance premiums and Sony resources in the financial and capital markets. Life keeps sufficient liquidity in the form of investments primarily In order to facilitate access to global capital markets, Sony in various securities. Sony Bank, on the other hand, uses its obtains credit ratings from two rating agencies, Moody’s cash inflows, which come mainly from customers’ deposits Investors Service (“Moody’s”) and Standard and Poor’s Rating in local or foreign currencies, in order to offer housing loans Services (“S&P”). In addition, Sony maintains a rating from to individuals or to make bond investments, and establish Rating and Investment Information, Inc. (“R&I”), a rating agency a necessary level of liquidity for the smooth settlement of in Japan, for access to the Japanese capital market. transactions. Sony’s current debt ratings from each agency are noted below: Sony Life currently obtains ratings from four rating agencies: A+ by S&P both for long-term local currency issuer ratings and Moody’s S&P R&I insurance and finance capability ratings, A+ by AM Best Long-term debt A1 (Outlook: A (Outlook: AA Corporation for insurance and finance capability ratings, and AA Negative) Negative) by R&I and the Japan Credit Rating Agency Ltd for insurance Short-term debt P-1 A-1 a-1+ claim payment capabilities ratings. Sony Bank obtained an A-/A-2

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BH6/30 Page 58 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC rating from S&P for its long-term/short-term local/foreign conductors, communications, displays and next generation currency issuer ratings. 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 RESEARCH AND DEVELOPMENT semiconductor manufacturing operations from the Game segment to the Electronics segment. However, the stringent Recognizing that research and development are indispensable selection of research and development activities resulted in a for business growth, Sony has established semiconductors, small increase in research and development costs within the displays, and optical technologies and related devices as focus Electronics segment. Research and development costs in areas for research and development and is devoting its energies the Game segment remained high due to the research and to the development of a variety of strategic devices and innova- development associated with PSP and PLAYSTATION 3 (“PS3”). tive new products as part of research and development activities within the Network companies and business groups. Moreover, a Technology Round Table has been set up to facilitate the REWARDING SHAREHOLDERS selection, consolidation and convergence of themes for research and development, for the sharing and validation of research and Sony believes that continuously increasing corporate value and development roadmaps and to frame research and development providing dividends are essential to rewarding shareholders. It is strategy. In addition, while continually endeavoring to improve Sony’s policy to utilize retained earnings, after ensuring the product quality, Sony is also striving to develop products that perpetuation of stable dividends, to carry out various investments are even more environmentally-friendly. During the fiscal year that contribute to an increase in corporate value such as those ended March 31, 2005, Sony received a special commendation that ensure future growth and strengthen competitiveness. and award from the Ministry of Agriculture, Forestry and Fisher- A fiscal year-end cash dividend of 12.5 yen per share of Sony ies of Japan for excellence in the utilization of biomass as a Corporation Common Stock was approved at the Board of result of Sony’s “technological development and proactive Directors meeting held on May 16, 2005 and was paid on June implementation of vegetable-based plastics in home electronic 1, 2005. Sony Corporation has already paid an interim dividend appliances.” Sony continues to strengthen the basic research for Common Stock of 12.5 yen per share to each shareholder; and development structure at two of its corporate laboratories, accordingly, the total annual cash dividend per share of the Material Laboratories and the Information Technology Common Stock is 25.0 yen. Laboratories. These laboratories closely collaborate with the Regarding shares of subsidiary tracking stock issued in Japan research and development activities carried out by the network by Sony Corporation, SCN has been working to manage its companies, with the aim of forging new future markets. In operations so as to expand cash flow, fully solidify its financial addition, Sony operates three independent research laborato- base and increase its retained earnings to aggressively expand ries; Sony Computer Science Laboratories, Inc. (focusing on its business to strengthen its foundation and respond to the fundamental research and user interface research); Sony-Kihara quickly expanding Internet market. For these reasons, SCN Research Center, Inc. (focusing on three-dimensional computer does not plan to distribute earnings to SCN shareholders for graphics and image processing technologies); and Sony the time being. As such, Sony Corporation will continue its Intelligence Dynamics Laboratories, Inc. policy of not paying dividends to shareholders of the subsidiary Research and development costs for the fiscal year ended tracking stock. 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 NUMBER OF EMPLOYEES Financial Services segment) increased from 7.5 percent to 7.6 percent. The bulk of research and development costs were The number of employees at the end of March 2005 was incurred in the Electronics and Game segments. Expenses in approximately 151,400, a decrease of approximately 10,600 the Electronics segment increased 2.4 billion yen, or 0.5 employees from the end of March 2004. Although employees percent, to 432.8 billion yen, and expenses in the Game increased at manufacturing facilities in Asia, particularly in China, segment decreased 14.9 billion yen, or 17.9 percent, to 68.5 the total number of employees declined due to the reductions billion yen. In the Electronics segment, approximately 62 percent associated with the implementation of restructuring activities in of expenses were for the development of new product proto- Japan, the U.S., Europe and South-East Asia, and a decrease in types while the remaining 38 percent were for the development the number of employees due to the establishment of Sony BMG. of mid- to long-term new technologies in such areas as semi-

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BH6/30 Page 59 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC TREND INFORMATION intense price erosion in the end-user consumer audio visual products market. To respond to these challenges, Sony is This section, including the Forecast of Consolidated Results, striving to keep pace with price erosion by reducing its manufac- contains forward-looking statements about the possible future turing and other costs. It is seeking to maintain the premium performance of Sony and should be read in light of the caution- pricing it enjoys on many of its end-user products by adding ary statement on that subject, which appears on the inside front functionality to those products and developing new applications cover page and which applies to this entire document. and ways of use that are then communicated to the consumer. In addition, it is taking steps to increase its competitive edge by ISSUES FACING SONY AND MANAGEMENT’S RESPONSE developing high value-added semiconductors and other digital TO THOSE ISSUES key devices in-house. By increasing the ratio of key devices Competition in many of Sony’s business segments continues to produced in-house, Sony aims to capture the value that has intensify and price erosion, especially in the Electronics seg- become increasingly concentrated in those devices. ment, remains persistent. Competition has intensified due to the In the area of semiconductors, in the fiscal years ended March penetration of broadband, which has led to an augmentation of 31, 2004 and 2005, Sony carried out 175 billion yen and 150 network infrastructure, making it easier for companies in other billion yen, respectively, of capital expenditure mainly on system sectors to enter the markets in which Sony competes. LSIs and CCDs. Of this, Sony invested 69 billion yen in the fiscal In response to these challenges, over the three fiscal years year ended March 31, 2004 and invested 90 billion yen in the ending March 31, 2006, Sony is implementing Transformation fiscal year ended March 31, 2005 on semiconductor fabrication 60, a series of fundamental reforms aimed at improving opera- equipment built at the 65 nanometer level of process technol- tional profitability and competitiveness in anticipation of future ogy. Chips that will be manufactured using this equipment will growth. Through greater focus of management resources on be some of the most highly advanced on the market, and will strategic businesses, accelerated reform of its manufacturing include the Cell next-generation, high-performance processor, platform, headcount reductions in administrative (including as well as other system LSI for use in the next generation corporate) and sales functions and reductions in the cost of computer entertainment system PS3 and a variety of future non-production materials, Sony intends to reduce fixed costs. consumer electronics products. Sony began developing Cell Sony also aims to lay the seeds for future growth through together with IBM Corporation and Toshiba Corporation in the strategic investments in research and development, as well as spring of 2001. In July 2004, in order to establish a more efficient aggressive capital expenditures in the area of semiconductors. and coordinated semiconductor supply structure, Sony has In addition to this cost-cutting and investment for growth, integrated its semiconductor manufacturing business by transfer- each of Sony’s business segments grappled with issues specific ring Sony Computer Entertainment’s semiconductor manufac- to that segment. Below is a description of the issues manage- turing operation from the Game segment to the semiconductor ment believes each segment continues to face and an explana- category within the Electronics segment. tion as to how each segment is approaching those issues. In the area of other key devices, Sony invested in 7th generation amorphous TFT LCD panel production equipment, through ■ ELECTRONICS a one billion U.S. dollar investment in S-LCD, a joint venture with Although the Electronics segment continues to hold a very Samsung, based in South Korea. This investment reflects Sony’s strong position in the worldwide consumer audio visual products belief that demand for LCD televisions will continue to increase market, that position has become increasingly threatened as a rapidly. Samsung holds 50 percent plus one share of the equity result of the entrance of new manufacturers and distributors. of the joint venture while Sony holds 50 percent minus one These new entrants are threatening Sony’s position due to the share of the equity of the joint venture. The President and CEO industry shift from analog to digital technology. In the analog era, comes from Samsung while the CFO comes from Sony. Produc- complicated functionality of electronics products was made tion of LCD panels began in April 2005. Expected production possible through the combination of several complex parts, and capacity is 60,000 sheets per month at the 7th generation Sony held a competitive advantage in the design and manufac- (1,870 mm x 2,200 mm) level of technology. ture of those parts as a result of its accumulated expertise. In the digital era, however, complicated functionality has become ■ GAME concentrated on semiconductors and other key digital devices. In the Game segment, PS2 has a high share of the global game Since these semiconductors and key devices are able to be console market, and the PS2 business, particularly the PS2 mass produced, they have become readily available to new software business, remains in its harvest stage. However, market entrants, and the functionality that once commanded a production shipment units of PS2 hardware are expected to high premium has become more affordable. This has led to decrease in the fiscal year ending March 31, 2006. In order to

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BH6/30 Page 60 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC ensure future growth in the Game segment, Sony is investing, individual needs, in April 2004 Sony established Sony Financial as described above, in the research and development of Holdings, a holding company comprised of Sony Life, Sony cutting-edge microprocessors and other LSIs that will be Assurance and Sony Bank, with the aim of both increasing the used in the next generation computer entertainment system, synergies between these businesses and targeting an initial PS3. Furthermore, Sony is working to develop a new market public offering during the fiscal year ending March 31, 2007. through its introduction of PSP, a new handheld video game system on which a variety of content can be enjoyed. PSP FORECAST OF CONSOLIDATED RESULTS was introduced in Japan and U.S. in December 2004 and Factors which may affect Sony’s financial performance include March 2005, respectively and will be introduced in Europe in the following: market conditions, including general economic September 2005. conditions, in major areas where Sony conducts its businesses, levels of consumer spending, foreign exchange fluctuations, ■ MUSIC Sony’s ability to continue to design, develop, manufacture, sell, Within the music industry, album sales over the past several and win acceptance of its products and services, Sony’s ability years have decreased due to piracy and competition from other to continue to implement personnel reductions and other entertainment sectors. One way Sony is working to combat business reorganization initiatives, Sony’s ability to implement its digital piracy and generate profits is through the digital distribu- network strategy, and implement successful sales and distribution of content, is through its launch of the Connect music store, tion strategies in the light of the Internet and other technological a digital downloading service, which is now classified as part of developments, Sony’s ability to devote sufficient resources to the Other segment. As part of an effort to achieve significant research and development, and capital expenditures, and the operational efficiencies, Sony merged its recorded music success of Sony’s joint ventures and alliances. Risks and business, excluding its recorded music business in Japan, with uncertainties also include the impact of any future events with the recorded music business of Bertelsmann AG in August material unforeseen impacts. Refer also to the “Cautionary 2004, forming the joint venture SONY BMG. The newly formed Statement”. company is 50 percent owned by each parent company and is accounted for by Sony under the equity method. Regarding the forecast of consolidated results for the fiscal year ending March 31, 2006, sales and operating revenue, ■ PICTURES operating income, and income before income taxes are expected In the Pictures segment, Sony faces intense competition, rising to increase compared with the fiscal year ended March 31, advertising and promotion expenses and a growing trend 2005. Net income is expected to decrease. This forecast toward digital piracy. To meet these challenges, Sony is working assumes that the yen for the fiscal year ending March 31, 2006 to distribute a diversified portfolio of motion pictures and will strengthen against the U.S. dollar and the euro compared capitalize on the expanding DVD home entertainment market, with the fiscal year ended March 31, 2005. which is becoming a more significant source of revenues and During the fiscal year ending March 31, 2006, restructuring profits. One of the ways that Sony is working to distribute a charges, primarily in the Electronics segment, of approximately diversified portfolio of motion pictures and capitalize on the 72 billion yen are expected to be incurred across Sony as a expanding DVD home entertainment market is through its whole. 90 billion yen of restructuring charges were recorded in participation in the acquisition of MGM. In conjunction with the the fiscal year ended March 31, 2005. transaction, SPE entered into agreements to co-finance and The forecast for operating income and income before income produce new motion pictures with MGM and to distribute taxes reflects an estimated gain of approximately 60 billion yen MGM’s existing film and television content in, among other related to the transfer to the Japanese Government of the markets, the DVD home entertainment market. substitutional portion, the benefit obligation related to past employee service, of Sony’s Employee Pension Fund. Further- ■ FINANCIAL SERVICES more, 35 billion yen of this estimated gain is reflected in the In the Financial Services segment, the value of assets accumu- forecast for net income after deductions for the effect of lated by the businesses in the segment has grown continuously income taxes. over the past several fiscal years, resulting in a large portion In June 6, 2005, SCN sold 17,935 shares of So-Net M3 Inc., (approximately 40 percent) of Sony’s total assets being ac- at 694,600 yen per share with a total value of 12.5 billion yen. counted for by the Financial Services segment. To strengthen As a result of this sale, Sony records approximately 11.9 billion asset management and risk management in parallel with this yen gain on the sale of its stock for the year ending March 31, growing asset value, enhance disclosure of business details, 2006, and Sony’s ownership interest has been reduced from and offer customers integrated financial services tailored to their 74.8 percent to 60.8 percent.

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BH6/30 Page 61 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC As of March 31, 2005, Sony had deferred tax assets on tax increase of 15 percent compared with the fiscal year ended loss carry forwards in relation to Japanese local income taxes March 31, 2005. Approximately 90 percent of the amount is totaling 77.5 billion yen. However, there is a possibility that, expected to be spent in the Electronics segment. Of this depending on future operating performance, Sony may establish amount, capital expenditures on semiconductors during the a valuation allowance against part or all of its deferred tax assets fiscal year are expected to amount to 160 billion yen (actual that would be charged to income as an increase in tax expense. amount in the fiscal year ended March 31, 2005 was 150 billion However, the forecast above does not include this possibility. yen). For an explanation regarding fund procurement, refer to The forecast for each business segment (excluding the “Liquidity and Capital Resources” above. anticipated gain from the transfer of the substitutional portion of Sony’s Employee Pension Fund) is as follows: ■ DEPRECIATION AND AMORTIZATION In the fiscal year ending March 31, 2006, expenses for deprecia- ■ ELECTRONICS tion and amortization, which includes the amortization of Sales are expected to increase primarily due to an increase in intangible assets and the amortization of deferred insurance the sales of products such as flat panel televisions and LCD rear acquisition costs, are expected to be 390 billion yen, an in- projection televisions. With regard to operating performance, crease of 5 percent compared with the fiscal year ended March although an improvement is expected due to the increase in 31, 2005. Both expenses for the amortization of deferred sales and a reduction in fixed costs relating to restructuring insurance acquisition costs in the Financial Services segment implemented during the previous fiscal year, a decline in unit and expenses for depreciation and amortization in the prices, appreciation of the yen against the U.S. dollar and euro Electronics segment are expected to increase. and increase in both depreciation and amortization and research and development costs are also anticipated. An improvement in ■ RESEARCH AND DEVELOPMENT operating performance is expected, reflecting the above- Sony expects research and development costs (total of expenses mentioned factors, as well as an anticipated reduction in for the development of new product prototypes and expenses for restructuring charges. the development of mid- to long-term new technologies) for the fiscal year ending March 31, 2006 to be 520 billion yen, a 4 ■ GAME percent increase compared with the fiscal year ended March 31, Sales are expected to increase due to the contribution from 2005. Research and development costs for both the Electronics both PSP hardware and software. Although PS2 and PSP are and Game segments are expected to increase. expected to contribute to operating income, increased research and development costs primarily for PS3 are expected to leave operating income relatively unchanged. CRITICAL ACCOUNTING POLICIES

■ MUSIC The preparation of the consolidated financial statements in Due to the establishment of SONY BMG, sales are expected to conformity with U.S. GAAP requires management to make decrease. A small increase in operating income is anticipated. estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and ■ PICTURES liabilities at the date of the financial statements and the reported Although sales are expected to increase due to the impact of amounts of revenues and expenses during the reporting period. SPE’s agreements with MGM, operating income is expected to On an ongoing basis, Sony evaluates its estimates which are decrease compared to the fiscal year ended March 31, 2005, in based on historical experience and on various other assump- which Spider-Man 2 was a substantial contributor. tions that are believed to be reasonable under the circumstances. The results of these evaluations form the basis for ■ FINANCIAL SERVICES making judgments about the carrying values of assets and Although revenue is expected to continue to grow mainly due to liabilities and the reported amounts of expenses that are not an increase in revenue from insurance premiums at Sony Life, a readily apparent from other sources. Actual results may differ small decrease is expected in operating income due to the from these estimates under different assumptions. Sony conservative estimation of insurance claim payments. considers an accounting policy to be critical if it is important to its financial condition and results, and requires significant ■ CAPITAL EXPENDITURES judgments and estimates on the part of management in its In the fiscal year ending March 31, 2006, capital expenditures application. Sony believes that the following represent the critical (additions to fixed assets) are expected to be 410 billion yen, an accounting policies of the company.

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BH6/30 Page 62 05.7.7, 3:34 AM Adobe PageMaker 6.0J/PPC ■ INVESTMENTS ■ IMPAIRMENT OF LONG-LIVED ASSETS Sony’s investments are comprised of debt and equity securities Sony reviews the carrying value of its long-lived assets held and accounted for under both the cost and equity method of used and long-lived assets to be disposed of whenever events accounting. If it has been determined that an investment has or changes in circumstances indicate that the carrying value of sustained an other-than-temporary decline in its value, the the assets may not be recoverable. This review is performed investment is written down to its fair value by a charge to using estimates of future cash flows by product category (e.g. earnings. Sony regularly evaluates its investment portfolio to TV display CRTs) or entity (e.g. semiconductor manufacturing identify other-than-temporary impairments of individual securi- division in the U.S.). If the carrying value of the asset is consid- ties. Factors that are considered by Sony in determining whether ered impaired, an impairment charge is recorded for the amount an other-than-temporary decline in value has occurred include: by which the carrying value of the asset exceeds its fair value. the length of time and extent to which the market value of the Fair value is determined using the present value of estimated net security has been less than its original cost, the financial cash flows or comparable market values. condition, operating results, business plans and estimated future Management believes that the estimates of future cash flows cash flows of the issuer of the security, other specific factors and fair value are reasonable; however, changes in estimates affecting the market value, deterioration of credit condition of the resulting in lower future cash flows and fair value due to unfore- issuers, sovereign risk, and ability to retain the investment for a seen changes in business assumptions could negatively affect period of time sufficient to allow for the anticipated recovery in the valuations of those long-lived assets. These unforeseen market value. changes include a possible further decline in demand for TV In evaluating the factors for available-for-sale securities whose display CRTs due to a shift in demand from CRT displays to fair values are readily determinable, management presumes a LCD and plasma panel displays. decline in value to be other-than-temporary if the fair value of the In the fiscal year ended March 31, 2003, Sony recorded security is 20 percent or more below its original cost for an impairment charges for long-lived assets totaling 12.4 billion extended period of time (generally a period of up to six to twelve yen. This included 8.1 billion yen for the impairment of semicon- months). This criteria is employed as a threshold to identify ductor and computer display CRT manufacturing equipment to securities which may have a decline in value that is other-than- be abandoned or to be sold in connection with certain restruc- temporary. The presumption of an other-than-temporary turing activities in the Electronics segment. It also included 2.7 impairment in such cases may be overcome if there is evidence billion yen for the impairment of a CD manufacturing facility in to support that the decline is temporary in nature due to the the U.S., the fair value of which was estimated by using meth- existence of other factors which overcome the duration or ods such as a survey of the local real estate market. magnitude of the decline. On the other hand, there may be In the fiscal year ended March 31, 2004, Sony recorded cases where impairment losses are recognized when the decline impairment charges for long-lived assets totaling 16.1 billion in the fair value of the security is not more than 20% or such yen. This included 5.3 billion yen for the impairment of long-lived decline has not existed for an extended period of time, as a assets such as semiconductor and TV display CRT manufactur- result of considering specific factors which may indicate the ing equipment to be abandoned or sold in connection with decline in the fair value is other-than-temporary. certain restructuring activities in the Electronics segment. It also The assessment of whether a decline in the value of an included 3.0 billion yen for the impairment of long-lived assets in investment is other-than-temporary often requires management the Music segment such as a certain CD manufacturing facility judgment based on evaluation of relevant factors. Those factors to be abandoned or sold and a recording studio and equipment include business plans and future cash flows of the issuer of the to be held and used in Japan. Fair value of these assets was security, the regulatory, economic or technological environment determined using estimated future discounted cash flows based of the investee, and the general market condition of either the on the best information available. geographic area or the industry in which the investee operates. In the fiscal year ended March 31, 2005, Sony recorded Accordingly, it is possible that investments in Sony’s portfolio impairment charges for long-lived assets totaling 19.2 billion that have had a decline in value that are currently believed to yen. This included 7.5 billion yen for the impairment of long-lived be temporary may determine to be other-than-temporary in the assets of CRT TV display manufacturing facilities to be held and future based on Sony’s evaluation of additional information such used in Europe in connection with certain restructuring activities as continued poor operating results, future broad declines in in the Electronics segment. Fair value of these assets was value of worldwide equity markets or circumstances in market determined using estimated future discounted cash flows based interest rate fluctuations. As a result, unrealized losses on the best information available. recorded for investments may be recognized into income in future periods.

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BH6/30 Page 63 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC ■ GOODWILL AND OTHER INTANGIBLE ASSETS market information that is publicly available. Estimates of fair Goodwill and other intangible assets that are determined to have value are primarily determined using discounted cash flow an indefinite life are not amortized, but are tested for impairment analysis. This approach uses significant estimates and assump- in accordance with FAS No. 142 on an annual basis and tions including projected future cash flows, the timing of such between annual tests if an event occurs or circumstances cash flows, discount rates reflecting the risk inherent in future change that would more likely than not reduce the fair value of cash flows, perpetual growth rates, determination of appropriate these assets below their carrying value. Such an event would market comparables and the determination of whether a include unfavorable variances from established business plans, premium or discount should be applied to comparables. During significant changes in forecasted results or volatility inherent to the fourth quarter of the fiscal year ended March 31, 2005, Sony external markets and industries, which are periodically reviewed performed the annual impairment analysis and no impairment by management. Specifically, goodwill impairment is determined loss has been recognized. using a two-step process. The first step of the goodwill impair- Management believes that the estimates of future cash flows ment test is used to identify potential impairment by comparing and fair value are reasonable; however, changes in estimates the fair value of a reporting unit (generally, Sony’s operating resulting in lower future cash flows and fair value due to unfore- segments) with its carrying amount, including goodwill. If the fair seen changes in business assumptions could negatively affect value of a reporting unit exceeds its carrying amount, goodwill of the valuations, which may result in Sony recognizing impairment the reporting unit is considered not impaired and the second charges for goodwill and other intangible assets in the future. step of the impairment test is unnecessary. If the carrying In order to evaluate the sensitivity of the fair value calculations amount of a reporting unit exceeds its fair value, the second on the impairment analysis, Sony applied a hypothetical 10% step of the goodwill impairment test is performed to measure decrease to the fair value of each reporting unit. As of March the amount of impairment loss, if any. The second step of the 31, 2005, a 10% hypothetical decrease to the fair value of goodwill impairment test compares the implied fair value of the each reporting units would not have resulted in a material reporting unit’s goodwill with the carrying amount of that impairment loss. goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment ■ PENSION BENEFITS COSTS loss is recognized in an amount equal to that excess. The Employee pension benefit costs and obligations are dependent implied fair value of goodwill is determined in the same manner on certain assumptions including discount rates, retirement as the amount of goodwill recognized in a business combina- rates and mortality rates, which are based upon current statisti- tion. That is, the fair value of the reporting unit is allocated to all cal data, as well as expected long-term rates of return on plan of the assets and liabilities of that unit (including any unrecog- assets and other factors. Specifically, the discount rate and nized intangible assets) as if the reporting unit had been ac- expected long-term rate of return on assets are two critical quired in a business combination and the fair value of the assumptions in the determination of periodic pension costs and reporting unit was the purchase price paid to acquire the pension liabilities. Assumptions are evaluated at least annually, reporting unit. Other intangible assets are tested for impairment or at the time when events occur or circumstances change and by comparing the fair value of the intangible asset with its these events or changes could have a significant effect on these carrying value. If the carrying value of the intangible asset critical assumptions. In accordance with U.S. GAAP, actual exceeds its fair value, an impairment loss is recognized in an results that differ from the assumptions are accumulated and amount equal to that excess. amortized over future periods. Therefore, actual results generally Determining the fair value of a reporting unit under the first affect recognized expenses and the recorded obligations for step of the goodwill impairment test and determining the fair pensions in future periods. While management believes that the value of individual assets and liabilities of a reporting unit assumptions used are appropriate, differences in actual experi- (including unrecognized intangible assets) under the second ence or changes in assumptions may affect Sony’s pension step of the goodwill impairment test is judgmental in nature and obligations and future expenses. often involves the use of significant estimates and assumptions. Sony’s principal pension plans are its Japanese pension plans. Similarly, estimates and assumptions are used in determining the Foreign pension plans are not significant individually with total fair value of other intangible assets. These estimates and assets and pension obligations amounting to less than 10% of assumptions could significantly impact whether or not an those of the aggregate of the Japanese pension plans. impairment charge is recognized as well as the magnitude of To determine the benefit obligation of the Japanese pension any such charge. In its impairment review, Sony performs plans, Sony used a discount rate of 2.3% for its Japanese internal valuation analyses or utilizes third-party valuations when pension plans as of March 31, 2005. The discount rate was management believes it to be appropriate, and considers other determined by using available information about rates of return

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BH6/30 Page 64 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC on high-quality fixed-income investments currently available and ■ DEFERRED TAX ASSET VALUATION expected to be available during the period to maturity of the Sony records a valuation allowance to reduce the deferred tax pension benefit obligation. The 2.3% discount rate represents a assets to an amount that management believes is more likely than 10 basis point decrease from the 2.4% discount rate used for not to be realized. In establishing the appropriate valuation allow- fiscal year ended March 31, 2004 and reflects current market ance for deferred tax assets (including deferred tax assets on tax interest rate conditions. For Japanese pension plans, a 10 basis loss carry-forwards), all available evidence, both positive and point decrease in the discount rate would increase pension negative, is considered. Information on historical results is supple- costs by approximately 1.2 billion yen for the fiscal year ending mented by all currently available information on future years, March 31, 2006. because realization of deferred tax assets is dependent on To determine the expected long-term rate of return on whether each tax-filing unit generates sufficient taxable income. pension plan assets, Sony considers the current and expected The estimates and assumptions used in determining future asset allocations, as well as historical and expected long-term taxable income are consistent with those used in Sony’s approved rates of return on various categories of plan assets. For Japa- forecasts of future operations. Although realization is not assured, nese pension plans, the expected long-term rate of return on management believes it is more likely than not that all of the pension plan assets was 4.0% and 3.2% as of March 31, 2004 deferred tax assets, less valuation allowance, will be realized. and 2005 respectively. The actual loss on pension plan assets Sony applied to file its corporate income tax return under the for the fiscal year ended March 31, 2005 was 0.1%. Actual consolidated tax filing system in Japan beginning with the fiscal results that differ from the expected return on plan assets are year ended March 31, 2004. Under the consolidated tax filing accumulated and amortized as a component of pension costs system, the tax-filing unit consists of Sony Corporation, the over the average future service period, thereby reducing the ultimate parent company of the Sony Group, and its wholly year-to-year volatility in pension costs. As of March 31, 2004 owned Japanese subsidiaries. The eventual ability to realize the and 2005, Sony had unrecognized actuarial losses of 328.5 tax benefit of its deferred tax assets is dependent on whether billion yen and 322.2 billion yen, respectively, including losses the tax-filing unit as a whole will be able to generate sufficient related to plan assets. The unrecognized actuarial losses reflect taxable income in the future. In addition, Sony is subject to local the overall unfavorable performance of equity markets over the income taxes in Japan. For purposes of local income taxes, past several years and will result in an increase in pension costs each entity is taxed as a stand alone tax filing unit. The eventual as they are recognized. ability to realize the tax benefit of deferred tax assets for local Sony recorded a liability for the unfunded accumulated benefit income taxes is dependent on whether Sony Corporation and obligation for Japanese pension plans of 149.4 billion yen and each subsidiary will be able to generate sufficient taxable 128.6 billion yen as of March 31, 2004 and 2005, respectively. income in the future. As of March 31, 2005, Sony Corporation This liability represents the excess of the accumulated benefit had deferred tax assets for local income taxes totaling 77.5 obligation under Sony’s qualified defined benefit pension plans billion yen. The eventual ability to realize the tax benefit of its over the fair value of the plans’ assets. This liability was estab- deferred tax assets is dependent on whether Sony Corporation lished by a charge to stockholders’ equity, resulting in no impact will be able to generate sufficient taxable income in the future. to the accompanying consolidated statements of income. Management believes that Sony Corporation’s historical results, The following table illustrates the sensitivity to a change in the when evaluated in connection with relevant qualitative factors discount rate and the expected return on pension plan assets, and available information concerning its business and industry, while holding all other assumptions constant, for Japanese provided substantial positive evidence, which outweighs the pension plans as of March 31, 2005: negative evidence available. However, under recent conditions, management considers that it is possible that Sony CHANGE IN ASSUMPTION Corporation’s future results may yield sufficient negative evi- Yen in billions dence to support the future determination that it is more likely Pre-tax Pension Equity PBO expense (net of tax) 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 25 basis point increase / of relevant qualitative factors and uncertainties, Sony may decrease in discount rate . . . –/+45.0 –/+3.0 +/–1.8 establish a valuation allowance against part or all of the deferred 25 basis point increase / tax assets of Sony Corporation. Such valuation allowances decrease in expected would be charged to income as an increase in tax expense. return on assets ...... — –/+1.3 +/–0.8

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BH6/30 Page 65 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC ■ FILM ACCOUNTING RECENTLY ADOPTED ACCOUNTING An aspect of film accounting that requires the exercise of STANDARDS judgment relates to the process of estimating the total revenues to be received throughout a film’s life cycle. Such estimate of a ■ ACCOUNTING AND REPORTING BY INSURANCE film’s ultimate revenue is important for two reasons. First, while a ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG- film is being produced and the related costs are being capital- DURATION CONTRACTS AND FOR SEPARATE ized, it is necessary for management to estimate the ultimate ACCOUNTS revenue, less additional costs to be incurred, including exploita- In July 2003, the Accounting Standards Executive Committee of tion costs which are expensed as incurred, in order to determine the American Institute of Certified Public Accountants (“AcSEC”) whether the value of a film has been impaired and thus requires issued the Statement of Position (“SOP”) 03-1, “Accounting and an immediate write off of unrecoverable film costs. Second, the Reporting by Insurance Enterprises for Certain Nontraditional amount of film costs recognized as cost of sales for a given film Long-Duration Contracts and for Separate Accounts”. SOP 03- as it is exhibited in various markets throughout its life cycle is 1 requires insurance enterprises to record additional reserves for based upon the proportion that current period actual revenues long-duration life insurance contracts with minimum guarantee bear to the estimated ultimate total revenues. or annuity receivable options. Additionally, SOP 03-1 provides Management bases its estimates of ultimate revenue for guidance for the presentation of separate accounts. This each film on several factors including the historical performance statement is effective for fiscal years beginning after December of similar genre films, the star power of the lead actors and 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result actresses, the expected number of theaters at which the film of the adoption of SOP 03-1, Sony’s operating income will be released, anticipated performance in the home entertain- decreased by 5.2 billion yen for the fiscal year ended March 31, ment, television and other ancillary markets, and agreements for 2005. Additionally, on April 1, 2004, Sony recorded a 4.7 billion future sales. Management updates such estimates based on the yen charge (net of income taxes of 2.7 billion yen) as a cumula- actual results to date of each film. For example, a film that has tive effect of an accounting change. In addition, the separate resulted in lower than expected theatrical revenues in its initial account assets, which are defined by insurance business law in weeks of release would generally have its theatrical, home enter- Japan and were previously included in “Securities investments tainment and television distribution ultimate revenues adjusted and other” in the consolidated balance sheet, were excluded downward; a failure to do so would result in the understatement from the category of separate accounts under the provision of amortized film costs for the period. Since the total film cost to of SOP 03-1. Accordingly, the assets previously treated as be amortized for a given film is fixed, the estimate of ultimate separate account assets are now treated within general revenues impacts only the timing of film cost amortization. account assets.

■ FUTURE INSURANCE POLICY BENEFITS ■ THE EFFECT OF CONTINGENTLY CONVERTIBLE Liabilities for future insurance policy benefits are established in INSTRUMENTS ON DILUTED EARNINGS PER SHARE amounts adequate to meet the estimated future obligations of In July 2004, the Emerging Issues Task Force (“EITF”) issued policies in force. These liabilities are computed by the net level EITF Issue No. 04-8, “The Effect of Contingently Convertible premium method based upon estimates as to future investment Instruments on Diluted Earnings per Share.” In accordance with yield, morbidity, mortality, withdrawals and other factors. Future Statement of Financial Accounting Standards (“FAS’’) No.128, policy benefits are computed using interest rates ranging from “Earnings per Share’’, Sony had not previously included in the approximately 1.30% to 5.20%. Mortality, morbidity and with- computation of diluted earnings per share (“EPS’’) the number drawal assumptions for all policies are based on either the life of potential common stock issuable upon the conversion of insurance subsidiary’s own experience or various actuarial contingently convertible debt instruments (“Co-Cos’’) that had tables. Generally these assumptions are “locked-in” upon the not met the conditions to exercise the stock acquisition rights. issuance of new insurance. While management believes that the EITF Issue No. 04-8 requires that the maximum number of assumptions used are appropriate, differences in actual experi- common stock that could be issued upon the conversion of ence or changes in assumptions may affect Sony’s future Co-Cos be included in diluted EPS computations from the date insurance policy benefits. of issuance regardless of whether the conditions to exercise the

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BH6/30 Page 66 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC stock acquisition rights have been met. EITF Issue No. 04-8 is cumulative effect of accounting change in the consolidated effective for reporting periods ending after December 15, 2004. statement of income, and Sony’s assets and liabilities increased Sony adopted EITF Issue No. 04-8 during the quarter ended by 95.3 billion yen and 98.0 billion yen, respectively. These December 31, 2004. As a result of the adoption of EITF Issue increases were treated as non-cash transactions in the consoli- No. 04-8, Sony’s diluted EPS of income before cumulative effect dated statement of cash flows. In addition, cash and cash of an accounting change and net income for the fiscal year equivalents increased by 1.5 billion yen. See Note 23 of Notes ended March 31, 2004 were restated respectively. Sony’s to Consolidated Financial Statements for further discussion on diluted EPS of income before cumulative effect of an accounting the VIEs that are used by Sony. change and net income for the fiscal year ended March 31, In December 2003, the FASB issued revised FIN No. 46 2005 were decreased by 7.26 yen and 7.06 yen, respectively, (“FIN No. 46R”), which replaced FIN No. 46. Sony early adopted compared to those before adopting EITF Issue No. 04-8. the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of ■ EMPLOYERS’ DISCLOSURES ABOUT PENSIONS AND operations and financial position or impact the way Sony had OTHER POSTRETIREMENT BENEFITS previously accounted for VIEs. In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” RECENT PRONOUNCEMENTS (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, ■ ACCOUNTING FOR STOCK-BASED COMPENSATION an amendment of FAS No. 87, “Employers’ Accounting for In December 2004, the FASB issued FAS No. 123 (revised Pensions”, FAS No. 88, “Employers’ Accounting for Settlements 2004), “Share-Based Payment” (“FAS No. 123(R)”). This and Curtailments of Defined Benefit Pension Plans and for statement requires the use of the fair value based method Termination Benefits”, and FAS No. 106, “Employers’ Account- of accounting for employee stock-based compensation and ing for Postretirement Benefits Other Than Pensions”. FAS No. eliminates the alternative use of the intrinsic value method pre- 132(R) revised employers’ disclosures about pension plans and scribed by Accounting Principle Board Opinion (“APB”) No. 25, other postretirement benefit plans. It did not change the mea- “Accounting for Stock Issued to Employees.” With limited surement or recognition of those plans required by FAS No. 87, exceptions, FAS No. 123(R) requires that the grant-date fair 88 and 106. While retaining the disclosure requirements of FAS value of share-based payments to employees be expensed over No. 132, FAS No. 132(R) requires additional disclosures about the period the service is received. Sony has accounted for its assets, obligations and cash flows. The provisions of FAS No. employee stock-based compensation in accordance with the 132(R) were generally effective for financial statements with fiscal provisions prescribed by APB No. 25 and its related interpreta- years ending after December 15, 2003, excluding the disclosure tions and has disclosed the net effect on net income and net of certain information about foreign plans. The information about ncome per share allocated to the common stock if Sony had foreign plans is effective for fiscal years ending after June 15, applied the fair value recognition provisions of FAS No. 123 to 2004. In accordance with FAS No. 132(R), Note 15 of Notes to stock-based compensation as described in Consolidated the Consolidated Financial Statements, Pension and severance Financial Statements Note 2(2) Significant accounting policies— plans, has been expanded to include the new disclosures. Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption ■ CONSOLIDATION OF VARIABLE INTEREST ENTITIES encouraged during the fiscal years beginning after the date this In January 2003, the FASB issued FASB Interpretation (“FIN”) statement is issued. The options for transition methods No. 46, “Consolidation of Variable Interest Entities - an Interpre- prescribed in FAS No. 123(R) include either the modified pro- tation of ARB No. 51”. FIN No. 46 addresses consolidation by a spective or the modified retrospective methods. Sony intends primary beneficiary of a variable interest entity (“VIE”). Sony early to adopt the modified prospective method of transition, which adopted the provisions of FIN No. 46 on July 1, 2003. As a requires that compensation expense be recorded for all result of adopting the original FIN No. 46, Sony recognized a unvested stock acquisition rights as the requisite service is one-time charge with no tax effect of 2.1 billion yen as a rendered beginning with the first period of adoption. Sony is

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BH6/30 Page 67 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC currently evaluating the impact of adopting this new pronouncement. However, Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information in Note 2(2) of Notes to the Consolidated Financial Statements—Stock-based compensation.

■ INVENTORY COSTS In November 2004, the FASB issued FAS No. 151, “Inventory Costs, an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4”. This statement requires certain abnormal expenditures to be recognized as expenses in the current period. It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption encouraged during the fiscal years beginning after the date this statement is issued. The adoption of FAS No. 151 is not expected to have a material impact on Sony’s results of operations and financial position.

■ EXCHANGES OF NONMONETARY ASSETS In December 2004, the FASB issued FAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” This statement requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. This statement shall be effective for nonmonetary asset exchanges occurring in the fiscal periods beginning after June 15, 2005, with early adoption during the fiscal periods beginning after the date this statement is issued encouraged. Sony is currently evaluating the impact of adopting this new pronouncement.

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BH6/30 Page 68 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Five-Year Summary of Selected Financial Data Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Dollars in millions except Yen in millions per share except per share amounts amounts 2001 2002 2003 2004 2005 2005 FOR THE YEAR Sales and operating revenue ...... ¥7,314,824 ¥7,578,258 ¥7,473,633 ¥7,496,391 ¥7,159,616 $66,912 Operating income ...... 225,346 134,631 185,440 98,902 113,919 1,065 Income before income taxes ...... 265,868 92,775 247,621 144,067 157,207 1,469 Income taxes ...... 115,534 65,211 80,831 52,774 16,044 150 Equity in net income (loss) of affiliated companies . . (44,455) (34,472) (44,690) 1,714 29,039 271 Income before cumulative effect of accounting changes ...... 121,227 9,332 115,519 90,628 168,551 1,575 Net income ...... 16,754 15,310 115,519 88,511 163,838 1,531

Per share data: Common stock Income before cumulative effect of accounting changes —Basic ...... ¥ 132.64. ¥ 10.21. ¥ 125.74. ¥ 98.26. ¥ 180.96. $ 1.69. —Diluted ...... 124.36. 10.18. 118.21. 89.03. 162.59. 1.52. Net income —Basic ...... 18.33. 16.72. 125.74. 95.97. 175.90. 1.64. —Diluted ...... 19.28. 16.67. 118.21. 87.00. 158.07. 1.48. Cash dividends ...... 25.00. 25.00. 25.00. 25.00. 25.00. 0.23. Number of weighted-average shares for basic per share data (thousands of shares) ...... 913,932 918,462 919,706 923,650 931,125 Subsidiary tracking stock Net income (loss) —Basic ...... — (15.87.) (41.98.) (41.80.) 17.21. 0.16. Number of weighted-average shares for basic per share data (thousands of shares) ...... — 3,072 3,072 3,072 3,072

Depreciation and amortization* ...... ¥ 348,268 ¥ 354,135 ¥ 351,925 ¥ 366,269 ¥ 372,865 $ 3,485 Capital expenditures (additions to property, plant and equipment) ...... 465,209 326,734 261,241 378,264 356,818 3,335 Research and development expenses ...... 416,708 433,214 443,128 514,483 502,008 4,692

AT YEAR-END Net working capital ...... ¥ 830,734 ¥ 778,716 ¥ 719,166 ¥ 381,140 ¥ 746,803 $ 6,979 Stockholders’ equity ...... 2,315,453 2,370,410 2,280,895 2,378,002 2,870,338 26,826 Stockholders’ equity per share attributable to common stock ...... ¥ 2,521.19. ¥ 2,570.31. ¥ 2,466.81. ¥ 2,563.67. ¥ 2,872.21. $ 26.84. Total assets ...... ¥7,827,966. ¥8,185,795. ¥8,370,545. ¥9,090,662. ¥9,499,100. $88,777

Number of shares issued at year-end (thousands of shares): Common stock...... 919,617 919,744 922,385 926,418 997,211 Subsidiary tracking stock ...... — 3,072 3,072 3,072 3,072 * Including amortization expenses for intangible assets and for deferred insurance acquisition costs

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BH6/30 Page 69 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S. $1, the approximate Tokyo foreign exchange market rate as of March 31, 2005. 2. In July 2003, the Accounting Standards Executive Committee of American Institute of Certified Public Accountants (“AcSEC”) issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by ¥5,156 million ($48 million) for the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized ¥4,713 million ($44 million) of loss (net of income taxes of ¥2,675 million) 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 the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. 3. In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with Statement of Financial Accounting Standards (“FAS”) No. 128, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended 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 its net income for the year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and its net income for the year ended March 31, 2005 were decreased by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to those before the adoption of EITF Issue No. 04-8. 4. In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of ¥2,117 million as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by ¥95,255 million and ¥97,950 million, 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. See Note 23 for further discussion on the VIEs that are used by Sony. In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs. 5. On April 1, 2001, Sony adopted FAS No.133, “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133”. As a result, Sony’s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by ¥3,007 million, ¥3,441 million and ¥2,167 million, respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of ¥1,089 million in accumulated other comprehensive income in the consolidated balance sheet, as well as an after- tax gain of ¥5,978 million in the cumulative effect of accounting changes in the consolidated statement of income. 6. In July 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible Assets”. Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony’s operating income and income before income taxes for the year ended March 31, 2002 increased by ¥20,114 million and income before cumulative effect of accounting changes as well as net income for the year ended March 31, 2002 increased by ¥18,932 million. 7. In June 2000, AcSEC issued SOP 00-2, “Accounting by Producers or Distributors of Films”. Sony adopted SOP 00-2 retroactive to April 1, 2000. As a result, Sony’s net income for the year ended March 31, 2001 included a one-time, non-cash charge with no tax effect of ¥101.7 billion, primarily to reduce the carrying value of its film inventory. 8. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements”. Sony adopted SAB No. 101 in the fourth quarter ended March 31, 2001 retroactive to April 1, 2000. As a result, a one-time no-cash cumulative effect adjustment of ¥2.8 billion was recorded in the income statement directly above the caption of “net income” for a change in accounting principle. In December 2003, SAB No. 101 was amended by SAB No. 104, “Revenue Recognition”. The amendment did not have an impact on Sony’s results of operations and financial position.

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BH6/30 Page 70 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Quarterly Financial and Stock Information Sony Corporation and Consolidated Subsidiaries—Years ended March 31 (Unaudited)

Yen in billions except per share amounts 1st quarter 2nd quarter 3rd quarter 4th quarter 2004 2005 2004 2005 2004 2005 2004 2005 Sales and operating revenue ...... ¥1,603.8. ¥1,612.1. ¥1,797.0. ¥1,702.3. ¥2,323.4. ¥2,148.2. ¥1,772.2. ¥1,697.0. Operating income (loss) ...... 16.7. 9.8. 33.2. 43.4. 158.8. 138.2. (109.8.) (77.4.) Income (loss) before income taxes . . . 35.8. 6.6. 44.1. 63.3. 157.8. 149.2. (93.6.) (61.9.) Income taxes ...... 25.4. (1.8.) 10.3. 16.2. 67.6. 7.0. (50.5.) (5.3.) Equity in net income (loss) of affiliated companies ...... (9.7.) 20.1. 2.9. 6.1. 3.1. 2.3. 5.5. 0.5. Income (loss) before cumulative effect of accounting changes ...... 1.1. 28.0. 35.0. 53.2. 92.6. 143.8. (38.2.) (56.5.) Net income (loss) ...... 1.1. 23.3. 32.9. 53.2. 92.6. 143.8. (38.2.) (56.5.) Per share data of common stock Income (loss) before cumulative effect of accounting changes —Basic ...... ¥ 1.24. ¥ 30.20. ¥ 37.99. ¥ 57.50. ¥ 100.16. ¥ 155.32. ¥ (41.23.) ¥ (59.40.) —Diluted ...... 1.24. 28.52. 35.60. 53.76. 92.51. 138.08. (41.23.) (59.40.) Net income (loss) —Basic ...... 1.24. 25.10. 35.69. 57.50. 100.16. 155.32. (41.23.) (59.40.) —Diluted ...... 1.24. 23.81. 33.48. 53.76. 92.51. 138.08. (41.23.) (59.40.) Depreciation and amortization* . . . . . ¥ 84.3. ¥ 85.5. ¥ 87.4. ¥ 91.2. ¥ 95.2. ¥ 92.0. ¥ 99.3. ¥ 104.1. Capital expenditures (additions to fixed assets) ...... 81.0. 88.1. 90.0. 90.1. 97.6. 78.7. 109.6. 100.0. R&D expenses ...... 114.2. 123.6. 136.2. 127.0. 123.8. 119.4. 140.4. 132.0. . Tokyo Stock Exchange price per share of common stock**: High ...... ¥ 4,190 ¥ 4,670 ¥ 4,410 ¥ 4,160 ¥ 4,200 ¥ 3,970 ¥ 4,660 ¥ 4,400 Low ...... 2,720 3,890 3,430 3,590 3,520 3,650 3,780 3,760 New York Stock Exchange price per American Depositary Share**: High ...... $ 35.51. $ 43.66. $ 38.30. $ 38.44. $ 37.96. $ 38.96. $ 42.36. $ 41.47. Low ...... 23.92. 34.08. 29.23. 32.50. 32.59. 34.02. 34.98. 36.34. * Including amortization expenses for intangible assets and for deferred insurance acquisition costs. ** Stock price data are based on daily closing prices.

Notes: 1. In July 2003, AcSEC issued SOP 03-1. 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 ¥1,595 million ($15 million) and ¥5,156 million ($48 million) for the three months and the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized ¥4,713 million ($44 million) of loss (net of income taxes of ¥2,675 million) 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 the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. 2. In July 2004, EITF issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with FAS No. 128, Sony had not previously included in the computation of diluted EPS the number of potential shares of common stock issuable upon the conversion of Co-Cos that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended 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 its net income for the year ended March 31, 2004 were restated. Sony’s diluted EPS of its income before cumulative effect of an accounting change and net income for the year ended March 31, 2005 were decreased by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to those before the adoption of EITF Issue No. 04-8. 3. In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable Interest Entities—an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary beneficiary of a 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 as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by ¥95,255 million and ¥97,950 million, 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. See Note 23 for further discussion on the VIEs that are used by Sony. In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.

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BH6/30 Page 71 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Segment Information Sony Corporation and Consolidated Subsidiaries—Years ended March 31

SALES AND OPERATING REVENUE BY BUSINESS SEGMENT*

Yen in millions Dollars in millions** Years ended March 31 2003 2004 2005 2005 Electronics ...... ¥4,624,181 ¥4,838,268 ¥4,786,236 $44,731 ...... 61.9.% 64.5.% 66.9.% Game ...... 936,274 753,732 702,524 6,566 ...... 12.5. 10.1. 9.8. Music ...... 433,147 409,487 216,779 2,026 ...... 5.8. 5.5. 3.0. Pictures ...... 802,770 756,370 733,677 6,857 ...... 10.7. 10.1. 10.2. Financial Services ...... 509,398 565,752 537,715 5,025 ...... 6.8. 7.5. 7.5. Other ...... 167,863 172,782 182,685 1,707 ...... 2.3. 2.3. 2.6. Consolidated total ...... ¥7,473,633 ¥7,496,391 ¥7,159,616 $66,912 **Sales and operating revenue to customers. **U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.

Yen in millions Dollars in millions* Years ended March 31 2003 2004 2005 2005 Audio ...... ¥ 784,114 ¥ 675,496 ¥ 571,864 $ 5,345 ...... 17.0.% 14.0.% 12.0.% Video ...... 828,308 949,261 1,034,736 9,670 ...... 17.9. 19.6. 21.6. Televisions ...... 981,655 925,501 957,122 8,945 ...... 21.2. 19.1. 20.0. Information and Communications ...... 836,724 834,757 778,374 7,275 ...... 18.1. 17.3. 16.3. Semiconductors ...... 204,710 253,237 246,314 2,302 ...... 4.4. 5.2. 5.1. Components ...... 527,782 623,799 619,477 5,789 ...... 11.4. 12.9. 12.9. Other ...... 460,888 576,217 578,349 5,405 ...... 10.0. 11.9. 12.1. Total ...... ¥4,624,181 ¥4,838,268 ¥4,786,236 $44,731 *U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.

Note: The above table is a breakdown of Electronics sales and operating revenue in Sony’s business segment information. The Electronics segment is managed as a single operating segment by Sony’s management. Effective for the year ended March 31, 2005, Sony has partly changed its product category configuration. The main changes are that AIWA product group has been moved from “Other” to “Audio” or “Video” or “Televisions”, and the set-top box product group has been moved from “Video” to “Televisions”. Accordingly, sales and operating revenue for the years ended March 31, 2003 and 2004 have been restated to conform to the presentation for the year ended March 31, 2005.

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BH6/30 Page 72 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC SALES AND OPERATING REVENUE BY GEOGRAPHIC INFORMATION

Yen in millions Dollars in millions* Years ended March 31 2003 2004 2005 2005 Japan ...... ¥2,093,880 ¥2,220,747 ¥2,100,793 $19,634 ...... 28.0.% 29.6.% 29.3.% U.S.A...... 2,403,946 2,121,110 1,977,310 18,479 ...... 32.2. 28.3. 27.6. Europe ...... 1,665,976 1,765,053 1,612,536 15,070 ...... 22.3. 23.6. 22.6. Other ...... 1,309,831 1,389,481 1,468,977 13,729 ...... 17.5. 18.5. 20.5. Total ...... ¥7,473,633 ¥7,496,391 ¥7,159,616 $66,912 *U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.

Note: Classification of geographic segment information shows sales and operating revenue recognized by location of customers.

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BH6/30 Page 73 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Consolidated Balance Sheets Sony Corporation and Consolidated Subsidiaries—March 31

Dollars in millions Yen in millions (Note 3) 2004 2005 2005 ASSETS Current assets: Cash and cash equivalents ...... ¥0,849,211 ¥0,779,103 $07,281 Time deposits ...... 4,662 1,492 14 Marketable securities (Notes 8 and 12) ...... 274,748 460,202 4,301 Notes and accounts receivable, trade (Notes 6 and 7) ...... 1,123,863 1,113,071 10,403 Allowance for doubtful accounts and sales returns...... (112,674) (87,709) (820) Inventories (Note 4) ...... 666,507 631,349 5,900 Deferred income taxes (Note 21) ...... 125,532 141,154 1,319 Prepaid expenses and other current assets ...... 431,506 517,509 4,837 Total current assets ...... 3,363,355 3,556,171 33,235

Film costs (Note 5) ...... 256,740 278,961 2,607

Investments and advances: Affiliated companies (Note 6) ...... 86,253 252,905 2,364 Securities investments and other (Notes 8, 11 and 12) ...... 2,426,697 2,492,784 23,297 ...... 2,512,950 2,745,689 25,661

Property, plant and equipment (Notes 9 and 12): Land ...... 189,785 182,900 1,709 Buildings ...... 930,983 925,796 8,652 Machinery and equipment ...... 2,053,085 2,192,038 20,486 Construction in progress ...... 98,480 92,611 866 ...... 3,272,333 3,393,345 31,713 Less—Accumulated depreciation ...... 1,907,289 2,020,946 18,887 ...... 1,365,044 1,372,399 12,826

Other assets: Intangibles, net (Notes 10 and 15) ...... 248,010 187,024 1,748 Goodwill (Note 10) ...... 277,870 283,923 2,653 Deferred insurance acquisition costs (Note 11) ...... 349,194 374,805 3,503 Deferred income taxes (Note 21) ...... 203,203 240,396 2,247 Other ...... 514,296 459,732 4,297 ...... 1,592,573 1,545,880 14,448

...... ¥9,090,662 ¥9,499,100 $88,777 (Continued on following page.)

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BH6/30 Page 74 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Dollars in millions Yen in millions (Note 3) 2004 2005 2005 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term borrowings (Note 12) ...... ¥0,091,260 ¥0,063,396 $00,592 Current portion of long-term debt (Notes 9, 12 and 14) ...... 383,757 166,870 1,560 Notes and accounts payable, trade (Note 6) ...... 778,773 806,044 7,533 Accounts payable, other and accrued expenses (Notes 5 and 15) ...... 812,175 746,466 6,976 Accrued income and other taxes ...... 57,913 55,651 520 Deposits from customers in the banking business (Note 13) ...... 378,851 546,718 5,110 Other (Notes 21 and 24) ...... 479,486 424,223 3,965 Total current liabilities ...... 2,982,215 2,809,368 26,256

Long-term liabilities: Long-term debt (Notes 9, 12 and 14) ...... 777,649 678,992 6,346 Accrued pension and severance costs (Note 15) ...... 368,382 352,402 3,293 Deferred income taxes (Note 21) ...... 96,193 72,227 675 Future insurance policy benefits and other (Note 11) ...... 2,178,626 2,464,295 23,031 Other ...... 286,737 227,631 2,127 ...... 3,707,587 3,795,547 35,472

Minority interest in consolidated subsidiaries ...... 22,858 23,847 223

Stockholders’ equity (Note 16): Subsidiary tracking stock, no par value— Authorized 100,000,000 shares, outstanding 3,072,000 shares ...... 3,917 3,917 36 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 5,774 Additional paid-in capital ...... 992,817 1,134,222 10,600 Retained earnings ...... 1,367,060 1,506,082 14,076 Accumulated other comprehensive income— Unrealized gains on securities (Note 8) ...... 69,950 62,669 586 Unrealized losses on derivative instruments (Note 14) ...... (600) (2,490) (23) Minimum pension liability adjustment (Note 15) ...... (89,261) (90,030) (841) Foreign currency translation adjustments ...... (430,048) (355,824) (3,326) ...... (449,959) (385,675) (3,604)

Treasury stock, at cost Subsidiary tracking stock (2004—0 shares, 2005—32 shares) ...... — (0) (0) Common stock (2004—2,468,258 shares, 2005—1,118,984 shares) ...... (12,183) (6,000) (56) ...... 2,378,002 2,870,338 26,826 Commitments and contingent liabilities (Notes 9 and 24) ...... ¥9,090,662 ¥9,499,100 $88,777 The accompanying notes are an integral part of these statements.

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BH6/30 Page 75 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Consolidated Statements of Income Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Dollars in millions Yen in millions (Note 3) 2003 2004 2005 2005 Sales and operating revenue: Net sales (Note 6) ...... ¥6,916,042 ¥6,883,478 ¥6,565,010 $61,355 Financial service revenue ...... 509,398 565,752 537,715 5,025 Other operating revenue ...... 48,193 47,161 56,891 532 ...... 7,473,633 7,496,391 7,159,616 66,912 Costs and expenses: Cost of sales (Notes 6, 18 and 19) ...... 4,979,421 5,058,205 5,000,112 46,730 Selling, general and administrative (Notes 17, 18 and 19)...... 1,782,367 1,798,239 1,535,015 14,346 Financial service expenses ...... 486,464 505,550 482,576 4,510 Loss on sale, disposal or impairment of assets, net (Notes 10 and 18) ...... 39,941 35,495 27,994 261 ...... 7,288,193 7,397,489 7,045,697 65,847 Operating income ...... 185,440 98,902 113,919 1,065 Other income: Interest and dividends (Note 6) ...... 14,441 18,756 14,708 137 Royalty income ...... 32,375 34,244 31,709 296 Foreign exchange gain, net ...... 1,928 18,059 —— Gain on sale of securities investments, net (Notes 6 and 8) ...... 72,552 11,774 5,437 51 Gain on change in interest in subsidiaries and equity investees (Note 20) ...... — 4,870 16,322 153 Other ...... 36,232 34,587 29,447 275 ...... 157,528 122,290 97,623 912 Other expenses: Interest ...... 27,314 27,849 24,578 230 Loss on devaluation of securities investments ...... 23,198 16,481 3,715 35 Foreign exchange loss, net ...... ——524 5 Other ...... 44,835 32,795 25,518 238 ...... 95,347 77,125 54,335 508 Income before income taxes ...... 247,621 144,067 157,207 1,469 Income taxes (Note 21): Current ...... 178,847 87,219 85,510 799 Deferred ...... (98,016) (34,445) (69,466) (649) ...... 80,831 52,774 16,044 150 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 1,319 Minority interest in income of consolidated subsidiaries ...... 6,581 2,379 1,651 15 Equity in net income (loss) of affiliated companies (Note 6) ...... (44,690) 1,714 29,039 271 Income before cumulative effect of an accounting change . . . . 115,519 90,628 168,551 1,575 Cumulative effect of an accounting change (2004: Net of income taxes of ¥0 million (2005: Net of income taxes of ¥2,675 million) (Note 2) ...... — (2,117) (4,713) (44) Net income...... ¥0,115,519 ¥0,088,511 ¥0,163,838 $01,531 (Continued on following page.)

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BH6/30 Page 76 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Dollars Yen(Note 3) 2003 2004 2005 2005 Per share data (Note 22): Common stock Income before cumulative effect of an accounting change —Basic ...... ¥125.74. ¥98.26. ¥180.96. $1.69. —Diluted ...... 118.21. 89.03. 162.59. 1.52. Cumulative effect of an accounting change —Basic ...... — (2.29.) (5.06.) (0.05.) —Diluted ...... — (2.03.) (4.52.) (0.04.) Net income —Basic ...... 125.74. 95.97. 175.90. 1.64. —Diluted ...... 118.21. 87.00. 158.07. 1.48. Cash dividends ...... 25.00. 25.00. 25.00. 0.23.

Subsidiary tracking stock (Note 16) Net income (loss) —Basic ...... (41.98.) (41.80.) 17.21. 0.16. The accompanying notes are an integral part of these statements.

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BH6/30 Page 77 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Consolidated Statements of Cash Flows Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Dollars in millions Yen in millions (Note 3) 2003 2004 2005 2005 Cash flows from operating activities: Net income ...... ¥115,519 ¥088,511 ¥163,838 $1,531 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 3,485 Amortization of film costs ...... 312,054 305,786 276,320 2,582 Accrual for pension and severance costs, less payments . . . . 37,858 35,562 22,837 214 Loss on sale, disposal or impairment of assets, net (Notes 10 and 18) ...... 39,941 35,495 27,994 261 Gain on sale or loss on devaluation of securities investments, net (Notes 6 and 8) ...... (49,354) 4,707 (1,722) (16) Gain on change in interest in subsidiaries and equity investees (Note 20) ...... — (4,870) (16,322) (153) Deferred income taxes (Note 21) ...... (98,016) (34,445) (69,466) (649) Equity in net (income) losses of affiliated companies, net of dividends...... 46,692 1,732 (15,648) (146) Cumulative effect of an accounting change (Note 2) ...... — 2,117 4,713 44 Changes in assets and liabilities: (Increase) decrease in notes and accounts receivable, trade ...... 174,679 (63,010) (22,056) (206) (Increase) decrease in inventories ...... 36,039 (78,656) 34,128 319 Increase in film costs ...... (317,953) (299,843) (294,272) (2,750) Increase (decrease) in notes and accounts payable, trade ...... (58,384) 93,950 31,473 294 Increase (decrease) in accrued income and other taxes . . . . 14,637 (46,067) 30 Increase in future insurance policy benefits and other . . . . . 233,992 264,216 144,143 1,347 Increase in deferred insurance acquisition costs ...... (66,091) (71,219) (65,051) (608) (Increase) decrease in marketable securities held in the financial service business for trading purpose ...... — 369 (28,524) (266) (Increase) decrease in other current assets ...... 29,095 (34,991) (29,699) (278) Increase in other current liabilities ...... 26,205 44,772 46,545 435 Other ...... 24,950 22,250 64,898 607 Net cash provided by operating activities ...... ¥853,788 ¥632,635 ¥646,997 $6,047 (Continued on following page.)

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BH6/30 Page 78 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Dollars in millions Yen in millions (Note 3) 2003 2004 2005 2005 Cash flows from investing activities: Payments for purchases of fixed assets ...... ¥ (275,285) ¥ (427,344) ¥ (453,445) $ (4,238) Proceeds from sales of fixed assets ...... 25,711 33,987 34,184 319 Payments for investments and advances by financial service business ...... (1,012,508) (1,167,945) (1,309,092) (12,235) Payments for investments and advances (other than financial service business) ...... (123,839) (33,329) (158,151) (1,478) Proceeds from maturities of marketable securities, sales of securities investments and collections of advances by financial service business ...... 529,395 791,188 923,593 8,632 Proceeds from maturities of marketable securities, sales of securities investments and collections of advances (other than financial service business) ...... 148,977 35,521 25,849 242 Other ...... 1,124 6,130 5,890 55 Net cash used in investing activities ...... (706,425) (761,792) (931,172) (8,703) Cash flows from financing activities: Proceeds from issuance of long-term debt ...... 12,323 267,864 57,232 535 Payments of long-term debt ...... (238,144) (32,042) (94,862) (887) Increase (decrease) in short-term borrowings ...... (7,970) (57,708) 11,397 107 Increase in deposits from customers in the financial service business (Note 13) ...... 142,023 129,874 294,352 2,751 Increase (decrease) in call money and bills sold in the banking business (Note 12) ...... 24,700 30,300 (40,400) (377) Dividends paid ...... (22,871) (23,106) (22,978) (215) Other ...... (3,195) (1,899) 436 4 Net cash provided by (used in) financing activities . . . . . (93,134) 313,283 205,177 1,918 Effect of exchange rate changes on cash and cash equivalents . . . (24,971) (47,973) 8,890 83 Net increase (decrease) in cash and cash equivalents ...... 29,258 136,153 (70,108) (655) Cash and cash equivalents at beginning of the fiscal year ...... 683,800 713,058 849,211 7,936 Cash and cash equivalents at end of the fiscal year ...... ¥ 713,058 ¥ 849,211 ¥ 779,103 $ 7,281

Supplemental data: Cash paid during the year for— Income taxes ...... ¥ 171,531 ¥ 114,781 ¥ 65,477 $ 612 Interest ...... 22,216 22,571 18,187 170 Non-cash investing and financing activities— Conversion of convertible bonds ...... ¥ 344 ¥ 7,977 ¥ 282,744 $ 2,641 Obtaining assets by entering into capital lease ...... 9,034 18,298 19,049 178 Contribution of Net assets into the Joint Venture with Bertelsmann AG (Note 6) ...... ——9,402 88 The accompanying notes are an integral part of these statements.

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BH6/30 Page 79 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Consolidated Statements of Changes in Stockholders’ Equity Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Yen in millions Accumulated Subsidiary Additional other Treasury tracking Common paid-in Retained comprehensive stock, at stock stock capital earnings income cost Total Balance at March 31, 2002 ...... ¥3,917 ¥472,189 ¥968,223 ¥1,209,262 ¥(275,593) ¥(7,588) ¥2,370,410 Conversion of convertible bonds ...... 172 172 344 Stock issued under exchange offering (Note 16) . . 15,791 15,791 Comprehensive income: Net income ...... 115,519 115,519 Other comprehensive income, net of tax (Note 16)— Unrealized gains on securities: Unrealized holding gains or losses arising during the period ...... (9,627) (9,627) Less: Reclassification adjustment for gains Less: or losses included in net income . . . . 4,288 4,288 Unrealized losses on derivative instruments: Unrealized holding gains or losses arising during the period ...... (4,477) (4,477) Less: Reclassification adjustment for gains Less: or losses included in net income . . . . 395 395 Minimum pension liability adjustment ...... (110,636) (110,636) Foreign currency translation adjustments: Translation adjustments arising during the period ...... (83,993) (83,993) Less: Reclassification adjustment for Less: losses included in net income ...... 7,665 7,665 Total comprehensive income ...... (80,866) Stock issue costs, net of tax ...... (19) (19) Dividends declared ...... (23,022) (23,022) Purchase of treasury stock...... (1,817) (1,817) Reissuance of treasury stock ...... 10 64 74 Balance at March 31, 2003 ...... ¥3,917 ¥472,361 ¥984,196 ¥1,301,740 ¥(471,978) ¥(9,341) ¥2,280,895 Conversion of convertible bonds ...... 3,989 3,988 7,977 Stock issued under exchange offering (Note 16) . . 5,409 5,409 Comprehensive income: Net income ...... 88,511 88,511 Other comprehensive income, net of tax (Note 16)— Unrealized gains on securities: Unrealized holding gains or losses arising during the period ...... 57,971 57,971 Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (5,679) (5,679) Unrealized losses on derivative instruments: Unrealized holding gains or losses arising during the period ...... 7,537 7,537 Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (3,344) (3,344) Minimum pension liability adjustment ...... 93,415 93,415 Foreign currency translation adjustments: Translation adjustments arising during the period ...... (129,113) (129,113) Less: Reclassification adjustment for losses Less: included in net income ...... 1,232 1,232 Total comprehensive income ...... 110,530 Stock issue costs, net of tax ...... (53) (53) Dividends declared ...... (23,138) (23,138) Purchase of treasury stock...... (8,523) (8,523) Reissuance of treasury stock ...... (776) 5,681 4,905 Balance at March 31, 2004 ...... ¥3,917 ¥476,350 ¥992,817 ¥1,367,060 ¥(449,959) ¥(12,183) ¥2,378,002 (Continued on following page)

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BH6/30 Page 80 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Yen in millions Accumulated Subsidiary Additional other Treasury tracking Common paid-in Retained comprehensive stock, at stock stock capital earnings income cost Total Balance at March 31, 2004 ...... ¥3,917 ¥476,350 ¥992,817 ¥1,367,060 ¥(449,959) ¥(12,183) ¥2,378,002 Exercise of stock acquisition rights...... 52 53 105 Conversion of convertible bonds ...... 141,390 141,354 282,744 Stock based compensation (Note 17) ...... 340 340 Comprehensive income: Net income ...... 163,838 163,838 Other comprehensive income, net of tax (Note 16)— Unrealized gains on securities: Unrealized holding gains or losses arising during the period ...... 5,643 5,643 Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (12,924) (12,924) Unrealized losses on derivative instruments: Unrealized holding gains or losses arising during the period ...... (209) (209) Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (1,681) (1,681) Minimum pension liability adjustment ...... (769) (769) Foreign currency translation adjustments: Translation adjustments arising during the period ...... 74,224 74,224 Total comprehensive income ...... 228,122 Stock issue costs, net of tax ...... (541) (541) Dividends declared ...... (24,030) (24,030) Purchase of treasury stock ...... (416) (416) Reissuance of treasury stock ...... (342) (245) 6,599 6,012 Balance at March 31, 2005 ...... ¥3,917 ¥617,792 ¥1,134,222 ¥1,506,082 ¥(385,675) ¥(6,000) ¥2,870,338 (Continued on following page)

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BH6/30 Page 81 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Dollars in millions (Note 3) Accumulated Subsidiary Additional other Treasury tracking Common paid-in Retained comprehensive stock, at stock stock capital earnings income cost Total Balance at March 31, 2004 ...... $36 $4,452 $ 9,279 $12,776 $(4,205) $(114) $22,224 Exercise of stock acquisition rights...... 11 2 Conversion of convertible bonds ...... 1,321 1,320 2,641 Stock based compensation (Note 17) ...... 33 Comprehensive income: Net income ...... 1,531 1,531 Other comprehensive income, net of tax (Note 16)— Unrealized gains on securities: Unrealized holding gains or losses arising during the period ...... 53 53 Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (121) (121) Unrealized losses on derivative instruments: Unrealized holding gains or losses arising during the period ...... (2) (2) Less: Reclassification adjustment for gains Less: or losses included in net income . . . . (16) (16) Minimum pension liability adjustment ...... (7) (7) Foreign currency translation adjustments: Translation adjustments arising during the period ...... 694 694 Total comprehensive income ...... 2,132 Stock issue costs, net of tax ...... (5) (5) Dividends declared ...... (224) (224) Purchase of treasury stock...... (4) (4) Reissuance of treasury stock ...... (3) (2) 62 57 Balance at March 31, 2005 ...... $36 $5,774 $10,600 $14,076 $(3,604) $ (56) $26,826 The accompanying notes are an integral part of these statements

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BH6/30 Page 82 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Notes to Consolidated Financial Statements Sony Corporation and Consolidated Subsidiaries

Index to Notes to Consolidated Financial Statements 1. Nature of operations ...... 84 2. Summary of significant accounting policies ...... 84 3. U.S. dollar amounts ...... 91 4. Inventories ...... 91 5. Film costs ...... 91 6. Related party transactions ...... 92 7. Accounts receivable securitization programs ...... 93 8. Marketable securities and securities investments and other ...... 94 9. Leased assets ...... 95 10. Goodwill and intangible assets ...... 96 11. Insurance-related accounts ...... 97 12. Short-term borrowings and long-term debt ...... 98 13. Deposits from customers in the banking business ...... 100 14. Financial instruments ...... 100 15. Pension and severance plans ...... 103 16. Stockholders’ equity ...... 107 17. Stock-based compensation plans ...... 110 18. Restructuring charges and asset impairments ...... 113 19. Research and development costs, advertising costs and shipping and handling costs . . . . . 116 20. Gain on change in interest in subsidiaries and equity investees ...... 116 21. Income taxes ...... 117 22. Reconciliation of the differences between basic and diluted net income per share (“EPS”) . . . 120 23. Variable interest entities ...... 121 24. Commitments and contingent liabilities ...... 122 25. Business segment information ...... 123

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BH6/30 Page 83 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Notes to Consolidated Financial Statements Sony Corporation and Consolidated Subsidiaries

1. Nature of operations issued the Statement of Position (“SOP”) 03-1, “Accounting and Sony Corporation and consolidated subsidiaries (hereinafter Reporting by Insurance Enterprises for Certain Nontraditional collectively referred to as “Sony”) are engaged in the develop- Long-Duration Contracts and for Separate Accounts”. SOP 03- ment, design, manufacture, and sale of various kinds of elec- 1 requires insurance enterprises to record additional reserves for tronic equipment, instruments, and devices for consumer and long-duration life insurance contracts with minimum guarantee industrial markets. Sony also develops, produces, manufac- or annuity receivable options. Additionally, SOP 03-1 provides tures, and markets home-use game consoles and software. guidance for the presentation of separate accounts. This state- Sony’s principal manufacturing facilities are located in Japan, the ment is effective for fiscal years beginning after December 15, United States of America, Europe, and Asia. Its electronic 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of products are marketed throughout the world and game prod- the adoption of SOP 03-1, Sony’s operating income decreased ucts are marketed mainly in Japan, the United States of America by ¥5,156 million ($48 million) for the year ended March 31, and Europe by sales subsidiaries and unaffiliated local distribu- 2005. Additionally, on April 1, 2004, Sony recorded a ¥4,713 tors as well as direct sales via the Internet. Sony is engaged in million ($44 million) charge (net of income taxes of ¥2,675 the development, production, manufacture, marketing, distribu- million) as a cumulative effect of an accounting change. In tion and broadcasting of image-based software, including film, addition, the separate account assets, which are defined by video and television product. Sony is also engaged in the devel- insurance business law in Japan and were previously included in opment, production, manufacture, and distribution of recorded “Securities investments and other” in the consolidated balance music, in all commercial formats and music genres. Further, sheet, were excluded from the category of separate accounts Sony is engaged in various financial service businesses including under the provision of SOP 03-1. Accordingly, the assets previ- insurance operations through a Japanese life insurance subsid- ously treated as separate account assets are now treated within iary and non-life insurance subsidiaries, banking operations general account assets (Note 8). through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to ■ The effect of contingently convertible instruments on the above, Sony is engaged in Internet-related businesses, an diluted earnings per share animation production and marketing business, an imported In July 2004, the Emerging Issues Task Force (“EITF”) issued general merchandise retail business, an IC card business and an EITF Issue No. 04-8, “The Effect of Contingently Convertible advertising agency business in Japan. 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 2. Summary of significant accounting policies computation of diluted earnings per share (“EPS’’) the number of Sony Corporation and its subsidiaries in Japan maintain their potential common stock issuable upon the conversion of contin- records and prepare their financial statements in accordance gently convertible debt instruments (“Co-Cos’’) that had not met with accounting principles generally accepted in Japan while its the conditions to exercise the stock acquisition rights. EITF Issue foreign subsidiaries maintain their records and prepare their No. 04-8 requires that the maximum number of common stock financial statements in conformity with accounting principles that could be issued upon the conversion of Co-Cos be in- generally accepted in the countries of their domiciles. Certain cluded in diluted EPS computations from the date of issuance adjustments and reclassifications have been incorporated in the regardless of whether the conditions to exercise the stock accompanying consolidated financial statements to conform acquisition rights have been met. EITF Issue No. 04-8 is effec- with accounting principles generally accepted in the United tive for reporting periods ending after December 15, 2004. Sony States of America (“U.S. GAAP”). These adjustments were not adopted EITF Issue No. 04-8 during the quarter ended Decem- recorded in the statutory books of account. ber 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 (1) Newly adopted accounting pronouncements: accounting change and net income for the year ended March ■ Accounting and reporting by insurance enterprises for 31, 2004 were restated respectively. Sony’s diluted EPS of certain nontraditional long-duration contracts and for income before cumulative effect of an accounting change and separate accounts net income for the year ended March 31, 2005 were decreased In July 2003, the Accounting Standards Executive Committee of by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to the American Institute of Certified Public Accountants (“AcSEC”) those before adopting EITF Issue No. 04-8.

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BH6/30 Page 84 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC ■ Employers’ disclosures about pensions and other Sony Corporation and its majority-owned subsidiary companies, postretirement benefits general partnerships in which Sony has a controlling interest, In December 2003, the Financial Accounting Standards Board and variable interest entities for which Sony is the primary (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclo- beneficiary. All intercompany transactions and accounts are sures about Pensions and Other Postretirement Benefits” (“FAS eliminated. Investments in business entities in which Sony does No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures not have control, but has the ability to exercise significant influ- about Pensions and Other Postretirement Benefits”, an amend- ence over operating and financial policies generally through 20- ment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS 50% ownership, are accounted for under the equity method. In No. 88, “Employers’ Accounting for Settlements and Curtailments addition, investments in general partnerships in which Sony of Defined Benefit Pension Plans and for Termination Benefits”, does not have a controlling interest and limited partnerships are and FAS No. 106, “Employers’ Accounting for Postretirement also accounted for under the equity method. Under the equity Benefits Other Than Pensions”. FAS No. 132(R) revised employ- method, investments are stated at cost plus/minus Sony’s ers’ disclosures about pension plans and other postretirement equity in undistributed earnings or losses. Consolidated net benefit plans. It did not change the measurement or recognition of income includes Sony’s equity in current earnings or losses of those plans required by FAS No. 87, 88 and 106. While retaining such companies, after elimination of unrealized intercompany the disclosure requirements of FAS No. 132, FAS No. 132(R) profits. If the value of an investment has declined and is judged requires additional disclosures about assets, obligations and cash to be other than temporary, the investment is written down to its flows. The provisions of FAS No. 132(R) were generally effective fair value. for financial statements with fiscal years ending after December On occasion, a consolidated subsidiary or an affiliated com- 15, 2003, excluding the disclosure of certain information about pany accounted for by the equity method may issue its shares foreign plans. The information about foreign plans is effective for to third parties in either a public or private offering or upon fiscal years ending after June 15, 2004. In accordance with FAS conversion of convertible debt to common stock at amounts per No. 132(R), (Note 15), Pension and severance plans, has been share in excess of or less than Sony’s average per share carry- expanded to include the new disclosures. ing value. With respect to such transactions, where the sale of such shares is not part of a broader corporate reorganization ■ Consolidation of variable interest entities and the reacquisition of such shares is not contemplated at the In January 2003, the FASB issued FASB Interpretation (“FIN”) time of issuance, the resulting gains or losses arising from the No. 46, “Consolidation of Variable Interest Entities—an Interpre- change in interest are recorded in income for the year the tation of ARB No. 51”. FIN No. 46 addresses consolidation by a change in interest transaction occurs. If the sale of such shares primary beneficiary of a variable interest entity (“VIE”). Sony early is part of a broader corporate reorganization, the reacquisition of adopted the provisions of FIN No. 46 on July 1, 2003. As a such shares is contemplated at the time of issuance or realiza- result of adopting the original FIN No. 46, Sony recognized a tion of such gain is not reasonably assured (i.e., the entity is one-time charge with no tax effect of ¥2,117 million as a cumu- newly formed, non-operating, a research and development or lative effect of accounting change in the consolidated statement start-up/development stage entity, or where the entity’s ability to of income, and Sony’s assets and liabilities increased by continue in existence is in question), the transaction is ac- ¥95,255 million and ¥97,950 million, respectively. These in- counted for as a capital transaction. creases were treated as non-cash transactions in the consoli- The excess of the cost over the underlying net equity of dated statement of cash flows. In addition, cash and cash investments in consolidated subsidiaries and affiliated compa- equivalents increased by ¥1,521 million. See Note 23 for further nies accounted for on an equity basis is allocated to identifiable discussion on the VIEs that are used by Sony. assets and liabilities based on fair values at the date of acquisi- In December 2003, the FASB issued revised FIN No. 46 (“FIN tion. The unassigned residual value of the excess of the cost No. 46R”), which replaced FIN No. 46. Sony early adopted the over the underlying net equity is recognized as goodwill. provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of opera- ■ Use of estimates tions and financial position or impact the way Sony had previ- The preparation of the consolidated financial statements in ously accounted for VIEs. conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of (2) Significant accounting policies: assets and liabilities and disclosure of contingent assets and ■ Basis of consolidation and accounting for investments in liabilities at the date of the financial statements and the reported affiliated companies amounts of revenues and expenses during the reporting period. The consolidated financial statements include the accounts of Actual results could differ from those estimates.

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BH6/30 Page 85 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC ■ Translation of foreign currencies subsidiary companies in electronics which is determined on the All asset and liability accounts of foreign subsidiaries and affili- “first-in, first-out” basis. ates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are trans- ■ Film costs lated at rates that approximate those rates prevailing at the time Film costs related to theatrical and television product (which of the transactions. The resulting translation adjustments are includes direct production costs, production overhead and accumulated as a component of accumulated other compre- acquisition costs) are stated at the lower of unamortized cost or hensive income. estimated fair value and classified as non-current assets. Film Foreign currency receivables and payables are translated at costs are amortized, and the estimated liabilities for residuals appropriate year-end current rates and the resulting translation and participations are accrued, for an individual product based gains or losses are taken into income. on the proportion that current period actual revenues bear to the estimated remaining total lifetime revenues. These estimates are ■ Cash and cash equivalents reviewed on a periodic basis. Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are ■ Property, plant and equipment and depreciation readily convertible to known amounts of cash and are so near Property, plant and equipment are stated at cost. Depreciation maturity that they present insignificant risk of changes in value of property, plant and equipment is primarily computed on the because of changes in interest rates. declining-balance method for Sony Corporation and its Japa- nese subsidiaries, except for certain semiconductor manufactur- ■ Marketable debt and equity securities ing facilities whose depreciation is computed on the straight-line Debt and equity securities designated as available-for-sale, whose method, and on the straight-line method for its foreign subsidiar- fair values are readily determinable, are carried at fair value with ies at rates based on estimated useful lives of the assets, princi- unrealized gains or losses included as a component of accumu- pally, ranging from 15 years up to 50 years for buildings and lated other comprehensive income, net of applicable taxes. Debt from 2 years up to 10 years for machinery and equipment. and equity securities classified as trading securities are carried at Significant renewals and additions are capitalized at cost. Main- fair value with unrealized gains or losses included in income. Debt tenance and repairs, and minor renewals and betterments are securities that are expected to be held-to-maturity are carried at charged to income as incurred. amortized cost. Individual securities classified as either available- for-sale or held-to-maturity are reduced to net realizable value by ■ Goodwill and other intangible assets a charge to income for other than temporary declines in fair value. Goodwill and certain other intangible assets that are determined Realized gains and losses are determined on the average cost to have an indefinite life are not amortized and are tested for method and are reflected in income. impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely ■ Equity securities in non-public companies than not reduce the fair value below its carrying amount. Fair Equity securities in non-public companies are carried at cost as value for those assets is generally determined using a discounted fair value is not readily determinable. If the value of a non-public cash flow analysis. equity investment is estimated to have declined and such decline Intangible assets that are determined not to have an indefinite is judged to be other than temporary, Sony recognizes the life mainly consist of artist contracts, music catalogs, acquired impairment of the investment and the carrying value is reduced patent rights and software to be sold, leased or otherwise to its fair value. Determination of impairment is based on the marketed. Artist contracts and music catalogs are amortized on consideration of such factors as operating results, business a straight-line basis over a period of up to 40 years. Acquired plans and estimated future cash flows. Fair value is determined patent rights and software to be sold, leased or otherwise mar- through the use of such methodologies as discounted cash keted are amortized on a straight-line basis over 3 to 10 years. flows, valuation of recent financings and comparable valuations of similar companies. ■ Accounting for computer software to be sold Sony accounts for software development costs in accordance ■ Inventories with FAS No. 86, “Accounting for the Costs of Computer Soft- Inventories in electronics, game and music as well as non-film ware to Be Sold, Leased, or Otherwise Marketed”. inventories for pictures are valued at cost, not in excess of In the Electronics segment, costs related to establishing the market, cost being determined on the “average cost” basis technological feasibility of a software product are expensed as except for the cost of finished products carried by certain incurred as a part of research and development in cost of sales.

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BH6/30 Page 86 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Costs that are incurred to produce the finished product after assets held and used, other than goodwill and intangible assets technological feasibility is established are capitalized and with indefinite lives, and assets to be disposed of, whenever amortized over the estimated economic life of the product, events or changes in circumstances indicated that the carrying which is generally three years. Sony performs periodic reviews amount may not be recoverable. Long-lived assets to be held to ensure that unamortized program costs remain recoverable and used are reviewed for impairment by comparing the carrying from future revenue. value of the assets with their estimated undiscounted future In the Game segment, technological feasibility of the underly- cash flows. If it is determined that an impairment loss has ing software is reached shortly before the products are released occurred, the loss would be recognized during the period. The to manufacturing. Costs incurred after technological feasibility is impairment loss would be calculated as the difference between established are not material, and accordingly, Sony expenses asset carrying value and the present value of estimated net cash software development costs for the Game segment as incurred flows or comparable market values, giving consideration to as a part of research and development in cost of sales. recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used ■ Deferred insurance acquisition costs until they are disposed of. Long-lived assets that are to be Costs that vary with and are primarily related to acquiring new disposed of by sale are reported at the lower of their carrying insurance policies are deferred as long as they are recoverable. value or fair value less cost to sell. Reductions in carrying value The deferred insurance acquisition costs include such items as are recognized in the period in which the long-lived assets are commission, medical examination and inspection report fees. classified as held for sale. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying ■ Derivative financial instruments period of the related insurance policies using assumptions All derivatives, including certain derivative financial instruments consistent with those used in computing policy reserves. The embedded in other contracts, are recognized as either assets or deferred insurance acquisition costs for non-traditional life liabilities in the balance sheet at fair value. Changes in the fair insurance contracts are amortized over the expected life in value of derivative financial instruments are either recognized proportion to the estimated gross profits. periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on ■ Product warranty whether the derivative financial instrument qualifies as a hedge Sony provides for the estimated cost of product warranties at and the derivative is being used to hedge changes in fair value the time revenue is recognized by either product category group or cash flows. or individual product. The product warranty is calculated based In accordance with FAS No. 133, the derivative financial instru- upon product sales, estimated probability of failure and esti- ments held by Sony are classified and accounted as below. mated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis. Fair value hedges Certain subsidiaries in the Electronics segment offer extended Changes in the fair value of derivatives designated and effective warranty programs. The consideration received through extended as fair value hedges for recognized assets or liabilities or unrecog- warranty service is deferred and amortized on a straight-line nized firm commitments are recognized in earnings as offsets to basis over the term of the extended warranty. changes in the fair value of the related hedged assets or liabilities.

■ Future insurance policy benefits Cash flow hedges Liabilities for future insurance policy benefits are primarily com- Changes in the fair value of derivatives designated and effective prised of the present value of estimated future payments to as cash flow hedges for forecasted transactions or exposures policyholders. These liabilities are computed by the net level associated with recognized assets or liabilities are initially recorded premium method based upon the assumptions such as future in other comprehensive income and reclassified into earnings investment yield, morbidity, mortality and withdrawals. These when the hedged transaction affects earnings. Changes in the assumptions are reviewed on a periodic basis. Liabilities for fair value of the ineffective portion are recognized in current future insurance policy benefits also include liabilities for guaran- period earnings. teed benefits related to certain non-traditional long-duration life and annuity contracts. Derivatives not designated as hedges Changes in the fair value of derivatives that are not designated ■ Accounting for the impairment of long-lived assets as hedges under FAS No. 133 are recognized in current period Sony periodically reviews the carrying value of its long-lived earnings.

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BH6/30 Page 87 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Sony formally documents all hedging relationships between Disclosure—an Amendment of FASB Statement No. 123”. In the derivatives designated as hedges and hedged items, as well accordance with APB No. 25, stock-based compensation cost as its risk management objectives and strategies for undertaking is recognized in income based on the excess, if any, of the various hedging activities. Sony links all hedges that are desig- quoted market price of the common stock or subsidiary tracking nated as fair value or cash flow hedges to specific assets or stock of Sony Corporation at the grant date of the award or liabilities on the balance sheet or to the specific forecasted other measurement date over the stated exercise price of the transaction. Sony also assesses, both at the inception of the award. As the exercise prices for Sony’s stock-based compen- hedge and on an on-going basis, whether the derivatives that sation plans are generally determined based on the prevailing are designated as hedges are highly effective in offsetting market price shortly before the date of grant, the compensation changes in fair value or cash flows of hedged items. When it is expense for these plans is not significant. For awards that determined that a derivative is not highly effective as a hedge, generate compensation expense as defined under APB No. 25, Sony discontinues hedge accounting. Sony calculates the amount of compensation expense and recognizes the expense over the vesting period of the award. ■ Stock-based compensation The following table reflects the net effect on net income and Sony applies Accounting Principle Board Opinion (“APB”) No. net income per share allocated to the common stock if Sony 25, “Accounting for Stock Issued to Employees”, and its related had applied the fair value recognition provisions of FAS No. 123, interpretations in accounting for its stock-based compensation “Accounting for Stock-Based Compensation”, to its stock- plans and follows the disclosure-only provisions of FAS No. 148, based compensation. See Note 17 for detailed assumptions. “Accounting for Stock-Based Compensation—Transition and

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Income before cumulative effect of an accounting change allocated to common stock: As reported ...... ¥115,648 ¥90,756 ¥168,498 $1,575 Deduct: Total stock-based compensation expense determined Deduct: under the fair value based method, net of related tax effects ...... (7,008) (6,334) (4,690) (44) Pro forma ...... ¥108,640 ¥84,422 ¥163,808 $1,531 Net income allocated to common stock: As reported ...... ¥115,648 ¥88,639 ¥163,785 $1,531 Deduct: Total stock-based compensation expense determined Deduct: under the fair value based method, net of related tax effects ...... (7,008) (6,334) (4,690) (44) Pro forma ...... ¥108,640 ¥82,305 ¥159,095 $1,487

YenDollars Years ended March 31 2003 2004 2005 2005 Income before cumulative effect of an accounting change allocated to common stock: Basic EPS: As reported ...... ¥125.74. ¥98.26. ¥180.96. $1.69. Pro forma ...... 118.12. 91.40. 175.92. 1.64. Diluted EPS: As reported ...... ¥118.21. ¥89.03. ¥162.59. $1.52. Pro forma ...... 111.20. 82.96. 158.10. 1.48.

Net income allocated to common stock: Basic EPS: As reported ...... ¥125.74. ¥95.97. ¥175.90. $1.64. Pro forma ...... 118.12. 89.11. 170.86. 1.60. Diluted EPS: As reported ...... ¥118.21. ¥87.00. ¥158.07. $1.48. Pro forma ...... 111.20. 80.94. 153.58. 1.44.

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BH6/30 Page 88 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Net income and net income per share allocated to the subsid- such as interest sensitive whole life contracts, single payment iary tracking stock would not be impacted if Sony had applied endowment contracts, single payment juvenile contracts and the fair value recognition provisions of FAS No. 123. other contracts without life contingencies are recognized as As a result of the adoption of EITF Issue No. 04-8, Sony’s deposits to policyholder account balances and included in future diluted EPS of income before cumulative effect of an accounting insurance policy benefits and other. Revenues from these con- change and net income for the year ended March 31, 2004 tracts are comprised of fees earned for administrative and were restated in the above table. contract-holder services, which are recognized over the period of the contracts, and included in financial service revenue. ■ Free distribution of common stock Property and casualty insurance policies that the non-life On occasion, Sony Corporation may make a free distribution of insurance subsidiary writes are primarily automotive insurance common stock which is accounted for either by a transfer from contracts which are categorized as short-duration contracts. additional paid-in capital to the common stock account or with Premiums from these policies are reported as revenue over the no entry if free shares are distributed from the portion of previously period of the contract in proportion to the amount of insurance issued shares in the common stock account. protection provided. Under the Japanese Commercial Code, a stock dividend can be effected by an appropriation of retained earnings to the ■ Accounting for consideration given to a customer or a reseller common stock account, followed by a free share distribution In accordance with EITF Issue No. 01-09, “Accounting for Con- with respect to the amount appropriated by resolution of the sideration Given by a Vendor to a Customer or Reseller of the Board of Directors’ meeting. Vendor’s Products”, cash consideration given to a customer or a Free distribution of common stock is recorded in the consoli- reseller including payments for buydowns, slotting fees and coop- dated financial statements only when it becomes effective, except erative advertising programs, is accounted for as a reduction of for the calculation and presentation of per share amounts. revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate ■ Stock issue costs the fair value of this benefit and receives documentation from the Stock issue costs are directly charged to retained earnings, net reseller to support the amounts spent. Any payments meeting of tax, in the accompanying consolidated financial statements as these criteria are treated as selling, general and administrative the Japanese Commercial Code prohibits charging such stock expenses. For the years ended March 31, 2003, 2004 and 2005, issue costs to capital accounts which is the prevailing practice in consideration given to a reseller, primarily for free promotional the United States of America. shipping and cooperative advertising programs included in selling, general and administrative expense totaled ¥29,135 million, ■ Revenue recognition ¥30,338 million and ¥27,946 million ($261 million), respectively. Revenues from electronics, game and music sales are recognized upon delivery which is considered to have occurred when ■ Cost of sales the customer has taken title to the product and the risk and Costs classified as cost of sales relate to the producing and rewards of ownership have been substantively transferred. If the manufacturing of products and include such items as material sales contract contains a customer acceptance provision, then cost, subcontractor cost, depreciation of fixed assets, personnel sales are recognized after customer acceptance occurs or the expenses, research and development costs, and amortization of acceptance provisions lapse. film cost related to theatrical and television products. Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the ■ Research and development costs licensing of feature films and television programming are recorded Research and development costs are expensed as incurred. when the material is available for telecast by the licensee and when any restrictions regarding the exhibition or exploitation of the ■ Selling, general and administrative product lapse. Revenues from the sale of home videocassettes Costs classified as selling expense relate to the promoting and and DVDs are recognized upon availability of sale to the public. selling of products and include such items as advertising, Traditional life insurance policies that the life insurance subsid- promotion, shipping, and warranty expenses. iary writes, most of which are categorized as long-duration con- General and administrative expenses include operating items tracts, mainly consist of whole life, term life and accident and such as officer’s salaries, personnel expenses, depreciation of health insurance contracts. Premiums from these policies are fixed assets, office rental for sales, marketing and administrative reported as revenue when due from policyholders. divisions, a provision for doubtful accounts and amortization of Amounts received as payment for non-traditional contracts intangible assets.

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BH6/30 Page 89 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Selling, general and administrative expenses are expensed this method, basic net income per share (“EPS”) for each class as incurred. of stock is calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted- ■ Financial service expenses average number of outstanding shares in each class during the Financial service expenses include a provision for policy reserves applicable period. and amortization of deferred insurance acquisition cost, and all The earnings allocated to the subsidiary tracking stock are other operating costs such as personnel expenses, depreciation determined based on the subsidiary tracking stock holders’ of fixed assets, and office rental of subsidiaries in the Financial economic interest in the targeted subsidiary’s earnings available Services segment. for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking ■ Advertising costs stock holders is based on the declared dividends of the targeted Advertising costs are expensed when the advertisement or subsidiary, which may only be declared from the amounts commercial appears in the selected media, except for advertising available for dividends of the targeted subsidiary. The targeted costs for acquiring new insurance policies which are deferred and subsidiary’s earnings available for dividends are, as stipulated by amortized as part of insurance acquisition costs. the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary has ■ Shipping and handling costs accumulated losses, a change in accumulated losses is also The majority of shipping and handling, warehousing and internal allocated to the subsidiary tracking stock. The subsidiary track- transfer costs for finished goods are included in selling, general ing stock holders’ economic interest is calculated as the number and administrative expenses. An exception to this is in the of the subsidiary tracking stock outstanding (3,072,000 shares Pictures segment where such costs are charged to cost of sales as of March 31, 2005) divided by the number of the targeted as they are integral part of producing and distributing the film subsidiary’s common stock outstanding (235,520 shares as of under SOP 00-2, “Accounting by Producers or Distributors of March 31, 2005), subject to multiplying by the Standard Ratio Films”. All other costs related to Sony’s distribution network are (tracking stock : subsidiary’s common stock=1 : 100, as defined included in cost of sales, including inbound freight charges, in the articles of incorporation). The earnings allocated to the purchasing and receiving costs, inspection costs and warehous- common stock are calculated by subtracting the earnings allo- ing costs for raw materials and in-process inventory. In addition, cated to the subsidiary tracking stock from Sony’s net income amounts paid by customers for shipping and handling costs are for the period. included in net sales. The computation of diluted net income per common stock reflects the maximum possible dilution from conversion, exer- ■ Income taxes cise, or contingent issuance of securities including the conver- The provision for income taxes is computed based on the pretax sion of Co-Cos regardless of whether the conditions to exercise income included in the consolidated statements of income. The the conversion rights have been met. asset and liability approach is used to recognize deferred tax There are no potentially dilutive securities for net income per assets and liabilities for the expected future tax consequences subsidiary tracking stock, as tracking stock shares outstanding of temporary differences between the carrying amounts and the are increased upon potential subsidiary tracking stocks’ being tax bases of assets and liabilities. Sony records a valuation exercised, which results in a proportionate increase in earnings allowances to reduce deferred tax assets to the amount that allocated to the subsidiary tracking stock. However, they could management believes is more likely than not to be realized. have a dilutive effect on net income per common stock, as In assessing the likelihood of realization, Sony considers all earnings allocated to the common stock would be decreased. currently available evidence for future years, both positive and negative, supplemented by information of historical results for (3) Recent pronouncements: each tax filling unit. ■ Accounting for stock-based compensation In December 2004, the FASB issued FAS No. 123 (revised ■ Net income per share 2004), “Share-Based Payment” (“FAS No. 123(R)”). This state- Sony calculates and presents per share data separately for ment requires the use of the fair value based method of account- Sony’s common stock and for the subsidiary tracking stock, ing for employee stock-based compensation and eliminates the based on FAS No. 128. The holders of the subsidiary tracking alternative use of the intrinsic value method prescribed by APB stock have the right to participate in earnings, together with No. 25. With limited exceptions, FAS No. 123(R) requires that common stockholders. Accordingly, Sony calculates per share the grant-date fair value of share-based payments to employees data by the “two-class” method based on FAS No. 128. Under be expensed over the period the service is received. Sony has

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BH6/30 Page 90 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC accounted for its employee stock-based compensation in ended March 31, 2003 and 2004 have been made to conform accordance with the provisions prescribed by APB No. 25 and to the presentation for the year ended March 31, 2005. 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 3. U.S. dollar amounts FAS No. 123 to stock-based compensation as described above U.S. dollar amounts presented in the financial statements are in (2) Significant accounting policies—Stock-based compensa- included solely for the convenience of the reader. These translation. This statement shall be effective for fiscal years beginning tions should not be construed as representations that the yen after June 15, 2005, with early adoption during the fiscal years amounts actually represent, or have been or could be converted beginning after the date this statement is issued encouraged. into U.S. dollars. As the amounts shown in U.S. dollars are for The options for transition methods prescribed in FAS No. 123(R) convenience only, the rate of ¥107=U.S.$1, the approximate include either the modified prospective or the modified retro- current rate at March 31, 2005, has been used for the purpose spective methods. Sony intends to adopt the modified prospec- of presentation of the U.S. dollar amounts in the accompanying tive method of transition, which requires that compensation consolidated financial statements. expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. Sony is currently evaluating the impact of adopting 4. Inventories this new pronouncement. However, Sony expects that the total Inventories comprise the following: expenses to be recorded in the future periods will be consistent Dollars in with the pro forma information above in (2) Significant accounting Yen in millions millions policies—Stock-based compensation. March 31 2004 2005 2005 Finished products ...... ¥427,877 ¥405,616 $3,791 ■ Inventory costs Work in process ...... 98,607 93,181 871 In November 2004, the FASB issued FAS No. 151, “Inventory Raw materials, purchased Costs, an amendment of Accounting Research Bulletin (“ARB”) components and No. 43, Chapter 4.” This statement requires certain abnormal supplies ...... 140,023 132,552 1,238 expenditures to be recognized as expenses in the current period...... ¥666,507 ¥631,349 $5,900 It also requires that the amount of fixed production overhead allocated to inventory be based on the normal capacity of the production facilities. This statement shall be effective for fiscal 5. Film costs years beginning after June 15, 2005, with early adoption during Film costs comprise the following: the fiscal years beginning after the date this statement is issued

encouraged. The adoption of FAS No. 151 is not expected to Dollars in have a material impact on Sony’s results of operations and Yen in millions millions financial position. March 31 2004 2005 2005 Theatrical: ■ Exchanges of nonmonetary assets Released (including In December 2004, the FASB issued FAS No. 153, “Exchanges acquired film libraries) . . . ¥136,057 ¥119,438 $1,116 of Nonmonetary Assets, an amendment of APB Opinion No. Completed not released . . 7,946 11,358 106 29.” This statement requires that exchanges of productive In production and assets be accounted for at fair value unless fair value cannot be development ...... 79,198 118,271 1,106 reasonably determined or the transaction lacks commercial Television licensing: substance. This statement shall be effective for nonmonetary Released (including asset exchanges occurring in the fiscal periods beginning after acquired film libraries) . . . 33,378 29,894 279 June 15, 2005, with early adoption during the fiscal periods In production and beginning after the date this statement is issued encouraged. development ...... 161 00 Sony is currently evaluating the impact of adopting this new ...... ¥256,740 ¥278,961 $2,607 pronouncement. Sony estimates that approximately 88% of unamortized costs (4) Reclassifications: of released films (excluding amounts allocated to acquired film Certain reclassifications of the financial statements for the years libraries) at March 31, 2005 will be amortized within the next

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BH6/30 Page 91 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC three years. Approximately ¥94,790 million ($886 million) of In April 2002, Sony completed the sale of its equity interest released film costs are expected to be amortized during the next in the Telemundo Group which resulted in cash proceeds of twelve months. As of March 31, 2005, unamortized acquired ¥88,373 million and a gain of ¥66,502 million. In the year ended film libraries of approximately ¥12,371 million ($116 million) March, 31 2003, Sony had deferred ¥5,939 million of the gain remained to be amortized on a straight-line basis over an aver- related to the sale of Telemundo as a result of certain indemnifi- age of the remaining life of 5 years. Approximately ¥108,833 cations provided by Sony to the acquirer, which was subse- million ($1,017 million) of accrued participation liabilities included quently recognized in April 2003, as these indemnifications in accounts payable, other and accrued expenses are expected expired with no amounts being refunded by Sony. to be paid during the next twelve months. 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 6. Related party transactions Blackstone Capital Partners III LP (“Blackstone”), an affiliate of Sony accounts for its investments in affiliated companies over The Blackstone Group, a private investment bank. The chairman which Sony has significant influence or ownership of 20% or of The Blackstone Group was also a director of Sony until June more but less than or equal to 50% under the equity method. 2002. Under the terms of the sale agreement, Sony received In addition, investments in general partnerships in which Sony cash proceeds of ¥17,839 million and a subordinated note does not have a controlling interest and limited partnerships are receivable from Columbia House Holdings, Inc., a majority also accounted for under the equity method. Such investments owned subsidiary of Blackstone, with a face amount of ¥7,827 include but are not limited to Sony’s interest in Sony Ericsson million. The sale resulted in a gain of ¥1,324 million. As of March Mobile Communications AB (50%), SONY BMG MUSIC 31, 2005, Sony still had a 7.5% ownership interest in CHC, ENTERTAINMENT (“SONY BMG”) (50%), S-LCD Corporation which was accounted for as a cost method investment as a (“S-LCD”) (50% minus 1 share), ST Liquid Crystal Display Corpora- result of the partial sale of this investment. In May 2005, an tion (50%), bit Wallet, Inc (34.6%), STAR CHANNEL, INC. (17.8%), agreement was reached between Blackstone and a third party and InterTrust Technologies Corporation (“InterTrust”) (49.5%). for the sale of CHC to the third party. As part of this transaction, Summarized combined financial information that is based on Sony has also agreed to sell its remaining ownership interest in information provided by equity investees is shown below: CHC and settle the outstanding subordinated note receivable. In September 2002, Sony completed the sale of its equity inter- Dollars in Yen in millions millions est in Sony Tektronix Inc., which resulted in a gain of ¥3,090 million. March 31 2004 2005 2005 In January 2003, Sony acquired a 49.5% interest in InterTrust for ¥23,076 million. Current assets ...... ¥433,154 ¥0,942,328 $08,807 In May 2003, Sony acquired the remaining 50% interest in Property, plant and American Video Glass Company (“AVGC”) that it did not own equipment ...... 94,130 361,406 3,377 from Corning Asahi Corporation. As a result, AVGC is no longer Other assets ...... 57,756 250,245 2,339 accounted for under the equity method and is now a consoli- Total assets ...... ¥585,040 ¥1,553,979 $14,523 dated subsidiary. The financial position and operating results of Current liabilities ...... ¥397,242 ¥0,876,430 $08,191 AVGC as of and for the years ended March 31, 2004 and 2005 Long-term liabilities ...... 27,639 115,999 1,084 are not included in the above summarized combined financial Stockholders’ equity ...... 160,159 561,550 5,248 information. Total liabilities and Effective July 1, 2003, in accordance with FIN No. 46, Sony stockholders’ equity . . . . ¥585,040 ¥1,553,979 $14,523 consolidated BE-ST Bellevuestrasse Development GmbH & Co. Number of companies First Real Estate KG, Berlin (“BE-ST”). As a result, BE-ST is no at end of the fiscal year . . . 66 56 longer accounted for under the equity method (Note 23). The financial position and operating results of BE-ST as of and for Dollars in Yen in millions millions the years ended March 31, 2004 and 2005 are not included in Years ended March 31 2003 2004 2005 2005 the above summarized combined financial information. Sales and In August 2003, Crosswave Communications Inc. (“CWC”), of revenue . . . . . ¥785,697 ¥1,009,005 ¥1,473,273 $13,769 which Sony owned approximately a 23.9% interest, commenced Gross profit . . . 140,078 231,083 477,796 4,465 reorganization proceedings under the Corporate Reorganization Net income Law of Japan. As a result, Sony no longer has a significant influ- (loss) ...... (81,422) 11,323 63,404 593 ence on the decision making of CWC. Therefore, CWC is no longer accounted for under the equity method. The financial

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BH6/30 Page 92 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC position and operating results of CWC as of and for the years Dollars in Yen in millions millions ended March 31, 2004 and 2005 are not included in the above Years ended March 31 2003 2004 2005 2005 summarized combined financial information. Sales ...... ¥161,983 ¥258,454 ¥256,799 $2,400 S-LCD, a joint venture with Samsung Electronics Co., Ltd., Purchases . . . . ¥102,735 ¥106,100 ¥101,976 $ 953 focused on manufacturing amorphous TFT panel, was established in April 2004 as a joint venture in which Sony has As of April 1, 2004, Sony Corporation made Sony Computer an ownership interest of 50% minus 1 share. Sony invested Entertainment Inc. (“SCE”) a wholly-owned subsidiary through ¥100,073 million ($935 million) in S-LCD during the year ended a stock for stock exchange pursuant to the provision of Article March 31, 2005. 358 of the Japanese Commercial Code which does not require As of August 1, 2004, Sony combined its recorded music the approval of the General Meeting of Shareholders. The stock business, except for the operations of its recorded music busi- for stock exchange ratio was determined based on the estimated ness in Japan, with the recorded music business of Bertelsmann equity values of SCE and Sony on a consolidated basis. Through AG in a joint venture. The newly formed company, known as the stock for stock exchange, Sony Corporation provided SONY BMG, is 50% owned by each parent company. As a 1,000,000 shares of its common stock to an Executive Deputy result, the results of the recorded music business, except for the President, Corporate Executive Officer of Sony Corporation who recorded music business in Japan, are no longer consolidated had owned 100 shares of SCE’s common stock. This transaction but are accounted for under the equity method. did not have a material impact on Sony’s results of operations On April 8, 2005, a consortium led by Sony Corporation of and financial position for the year ended March 31, 2005. America (“SCA”) and its equity partners, Providence Equity Dividends from affiliated companies accounted for under the Partners, Texas Pacific Group, Comcast Corporation and DLJ equity method for the years ended March 31, 2003, 2004 and Merchant Banking Partners, completed the acquisition of Metro– 2005 were ¥2,002 million, ¥3,446 million and ¥13,391 million Goldwyn–Mayer Inc. (“MGM”). Under the terms of the acquisi- ($125 million), respectively. tion agreement, the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. As part of this transaction, 7. Accounts receivable securitization programs Sony Pictures Entertainment (“SPE”) will co-finance and produce In the United States of America, Sony has set up an accounts new motion pictures with MGM as well as distribute MGM’s receivable securitization program whereby Sony can sell inter- existing film and television contents through SPE’s global distri- ests in up to ¥53,500 million ($500 million) of eligible trade bution channels. MGM will continue to operate under the Metro– accounts receivable, as defined. Through this program, Sony Goldwyn–Mayer name as a private company headquartered in can securitize and sell a percentage of an undivided interest in Los Angeles. As part of the acquisition, SCA invested $257 that pool of receivables to several multi-seller commercial paper million for 20% of the total equity capital. However, based on the conduits owned and operated by a bank. Sony can sell receiv- percentage of common stock owned, Sony will record 45% of ables in which the agreed upon original due dates are no more MGM’s net income (loss) as equity in net income of affiliated than 90 days after the invoice dates. The value assigned to companies. undivided interests retained in securitized trade receivables is Affiliated companies accounted for under the equity method based on the relative fair values of the interest retained and sold with an aggregate carrying amount of ¥6,081 million and in the securitization. Sony has assumed that the fair value of the ¥17,676 million ($165 million) at March 31, 2004 and 2005, retained interest is equivalent to its carrying value as the receiv- were quoted on established markets at an aggregate value of ables are short-term in nature, high quality and have appropriate ¥37,603 million and ¥95,246 million ($890 million), respectively. reserves for bad debt incidence. These securitization transac- Account balances and transactions with affiliated companies tions are accounted for as a sale in accordance with FAS No. accounted for under the equity method are presented below: 140, “Accounting for Transfers and Servicing of Financial Assets

Dollars in and Extinguishments of Liabilities”, because Sony has relin- Yen in millions millions quished control of the receivables. During the period from April March 31 2004 2005 2005 2004 to January 2005, Sony sold a total of ¥80,250 million Accounts receivable, trade. . ¥62,359 ¥50,062 $468 ($750 million) of accounts receivable under this program. There Advances ...... ¥561 ¥16,756 $157 were no outstanding amounts due at March 31, 2005 relating to Accounts payable, trade . . . ¥13,547 ¥15,225 $142 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.

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BH6/30 Page 93 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC In Japan, Sony set up several accounts receivable sales accounted for as sales in accordance with FAS No. 140, because programs whereby Sony can sell up to ¥47,500 million ($444 Sony has relinquished control of the receivables. The initial sale of million) of eligible trade accounts receivable. Through these these receivables was in March 2005 in which Sony sold a total of programs, Sony can sell receivables to special purpose entities ¥10,041 million ($94 million). Losses from these transactions were owned and operated by banks. Sony can sell receivables in insignificant. Although Sony continues servicing the sold receiv- which the agreed upon original due dates are no more than 190 ables, no servicing liabilities are recorded because costs for days after the sales of receivables. These transactions are collection of the sold receivables are insignificant.

8. Marketable securities and securities investments and other Marketable securities and securities investments and other include debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows: Yen in millions March 31, 2004 March 31, 2005 Gross Gross Gross Gross unrealized unrealized unrealized unrealized Cost gains losses Fair value Cost gains losses Fair value Available-for-sale: Debt securities ...... ¥1,938,673 ¥55,922 ¥(2,072) ¥1,992,523 ¥2,090,605 ¥ 58,161 ¥(2,464) ¥2,146,302 Equity securities ...... 86,517 63,225 (1,886) 147,856 107,126 49,350 (814) 155,662 Held-to-maturity securities ...... 26,439 381 (28) 26,792 27,431 530 (13) 27,948 Total ...... ¥2,051,629 ¥119,528 ¥(3,986) ¥2,167,171 ¥2,225,162 ¥108,041 ¥(3,291) ¥2,329,912

Dollars in millions March 31, 2005 Gross Gross unrealized unrealized Cost gains losses Fair value Available-for-sale: Debt securities ...... $19,538 $ 544 $(23) $20,059 Equity securities ...... 1,002 461 (8) 1,455 Held-to-maturity securities ...... 256 5 (0) 261 Total ...... $20,796 $1,010 $(31) $21,775

At March 31, 2005, debt securities classified as available-for- gate carrying amounts of the investments in non-public compa- sale securities and held-to-maturity securities mainly consist of nies at March 31, 2004 and 2005, were ¥51,367 million and Japanese government and municipal bonds and corporate debt ¥48,877 million ($457 million), respectively. A non-public equity securities with maturities of one to ten years. investment is valued at cost as fair value is not readily determin- Proceeds from sales of available-for-sale securities were able. If the value is estimated to have declined and such decline ¥215,554 million, ¥397,817 million and ¥613,035 million ($5,729 is judged to be other than temporary, the impairment of the million) for the years ended March 31, 2003, 2004 and 2005, investment is recognized and the carrying value is reduced to its respectively. On those sales, gross realized gains computed on fair value. the average cost basis were ¥3,570 million, ¥9,525 million and Securities investments and other as of March 31, 2004 also ¥24,080 million ($225 million) and gross realized losses were included separate account assets (Note 11) in the life insurance ¥3,125 million, ¥1,906 million and ¥5,940 million ($56 million), business, which were carried at fair value and excluded from the respectively. above table as gains or losses accrue directly to policyholders. Marketable securities classified as trading securities at March 31, As a result of the adoption of SOP 03-1, the separate account 2004 and 2005 were ¥131,044 million and ¥315,946 million assets, which are defined by insurance business law in Japan and ($2,953 million), respectively, which consist of debt and equity were previously included in “Securities investments and other” on securities including short-term investments in money market funds. the consolidated balance sheet, were excluded from the category In the ordinary course of business, Sony maintains long-term of separate accounts under the provision of SOP 03-1. Accord- investment securities, included in securities investments and ingly, the assets previously treated as separate account assets are other, issued by a number of non-public companies. The aggre- now treated within general account assets. On April 1, 2004,

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BH6/30 Page 94 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC assets of ¥164,461 million ($1,537 million) were reclassified from ended March 31, 2003 and 2004 was insignificant. For the “Securities investments and other” to each respective account by year ended March 31, 2005, Sony booked ¥12,631 million nature including “Marketable securities” and “Cash and cash ($118 million) of net unrealized gain on trading securities equivalents”. Of the total, ¥154,528 million ($1,444 million) was which is mainly derived from the general accounts in the life reclassified to “Marketable securities”. insurance business reclassified from the separate accounts as The net change in the unrealized gains or losses on trading explained above. securities that has been included in earnings during the years

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. Yen in millions Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized Fair value losses Fair value losses Fair value losses Available-for-sale: Debt securities ...... ¥242,388 ¥(2,044) ¥41,523 ¥(420) ¥283,911 ¥(2,464) Equity securities ...... 11,010 (457) 1,225 (357) 12,235 (814) Held-to-maturity securities ...... 239 (0) 660 (13) 899 (13) Total ...... ¥253,637 ¥(2,501) ¥43,408 ¥(790) ¥297,045 ¥(3,291)

Dollars in millions Less than 12 months 12 months or more Total Unrealized Unrealized Unrealized Fair value losses Fair value losses Fair value losses Available-for-sale: Debt securities ...... $2,265 $(19) $388 $(4) $2,653 $(23) Equity securities ...... 103 (5) 12 (3) 115 (8) Held-to-maturity securities ...... 2 (0) 6 (0) 8 (0) Total ...... $2,370 $(24) $406 $(7) $2,776 $(31)

In evaluating the factors for available-for-sale securities whose 9. Leased assets fair values are readily determinable, Sony presumes a decline in Sony leases certain communication and commercial equipment, value to be other-than-temporary if the fair value of the security plant, office space, warehouses, employees’ residential facilities is 20 percent or more below its original cost for an extended and other assets. period of time (generally a period of up to six to twelve months). An analysis of leased assets under capital leases is as follows: This criteria is employed as a threshold to identify securities Dollars in which may have a decline in value that is other-than-temporary. Yen in millions millions The presumption of an other-than-temporary impairment in such March 31 2004 2005 2005 cases may be overcome if there is evidence to support that the Class of property: decline is temporary in nature due to the existence of other Land ...... ¥(00,174 ¥(00,181 $(002 factors which overcome the duration or magnitude of the de- Buildings ...... 12,421 11,089 104 cline. On the other hand, there may be cases where impairment Machinery, equipment losses are recognized when the decline in the fair value of the and others ...... 36,907 33,747 315 security is not more than 20 percent or such decline has not Accumulated depreciation . . (19,385) (18,509) (173) existed for an extended period of time, as a result of considering ...... ¥(30,117 ¥(26,508 $(248 specific factors which may indicate the decline in the fair value is other-than-temporary. At March 31, 2005, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

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BH6/30 Page 95 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC The following is a schedule by year of the future minimum ¥2,923 million and ¥1,933 million ($18 million), respectively. The lease payments under capital leases together with the present total minimum rentals to be received in the future under noncan- value of the net minimum lease payments as of March 31, 2005: celable subleases as of March 31, 2005 were ¥14,954 million ($140 million). The minimum rental payments required under Yen in Dollars in millions millions operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2005 are as follows: Year ending March 31:

2006 ...... ¥15,211 $142 Yen in Dollars in 2007 ...... 11,062 103 millions millions 2008 ...... 8,895 83 Year ending March 31: 2009 ...... 10,873 102 2006 ...... ¥038,182 $0,357 2010 ...... 3,001 28 2007 ...... 30,568 286 Later years ...... 5,428 51 2008 ...... 22,993 215 Total minimum lease payments ...... 54,470 509 2009 ...... 14,060 131 Less—Amount representing interest . . . 14,169 132 2010 ...... 10,496 98 Present value of net minimum lease Later years ...... 53,652 501 payments ...... 40,301 377 Total minimum future rentals ...... ¥169,951 $1,588 Less—Current obligations ...... 11,713 110 Long-term capital lease obligations . . . . ¥28,588 $267 10. Goodwill and intangible assets Minimum lease payments have not been reduced by minimum Intangible assets acquired during the year ended March 31, sublease income of ¥11,480 million ($107 million) due in the 2005 totaled ¥22,844 million ($213 million), which are subject future under noncancelable subleases. to amortization and primarily consist of acquired patent rights Minimum rental expenses under operating leases for the years of ¥6,673 million ($62 million) and software to be sold, leased ended March 31, 2003, 2004 and 2005 were ¥94,364 million, or otherwise marketed of ¥11,546 million ($108 million). The ¥92,649 million and ¥81,391 million ($761 million), respectively. weighted average amortization period for acquired patent rights Sublease rentals received under operating leases for the years and software to be sold, leased or otherwise marketed is 8 years ended March 31, 2003, 2004 and 2005 were ¥6,240 million, and 3 years, respectively.

Intangible assets subject to amortization comprise the following:

Yen in millions Dollars in millions 2004 2005 2005 Gross Gross Gross carrying Accumulated carrying Accumulated carrying Accumulated March 31 amount amortization amount amortization amount amortization Artist contracts ...... ¥080,675 ¥0(68,300) ¥015,218 ¥(11,094) $0,142 $(104) Music catalog ...... 109,795 (47,610) 65,674 (19,641) 614 (184) Acquired patent rights ...... 52,996 (23,172) 55,173 (26,139) 516 (244) Software to be sold, leased or otherwise marketed ...... 31,983 (13,577) 31,907 (16,181) 298 (151) Other ...... 55,048 (27,422) 27,648 (11,625) 258 (108) Total ...... ¥330,497 ¥(180,081) ¥195,620 ¥(84,680) $1,828 $(791)

The aggregate amortization expenses for intangible assets for Yen in Dollars in the years ended March 31, 2003, 2004 and 2005 was ¥27,871 millions millions million, ¥28,866 million and ¥24,993 million ($234 million), Year ending March 31: respectively. The estimated aggregate amortization expense for 2006 ...... ¥22,650 $212 intangible assets for the next five years is as follows: 2007 ...... 18,287 171 2008 ...... 12,202 114 2009 ...... 10,623 99 2010 ...... 8,874 83

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BH6/30 Page 96 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Total carrying amount of intangible assets having an indefinite In addition to the amortizable and indefinite-lived intangible life comprise the following: assets shown in the above tables, intangible assets at March 31, 2004 and 2005 also include unrecognized prior service costs Dollars in Yen in millions millions totaling ¥21,376 million and ¥41 million ($0 million), respectively, March 31 2004 2005 2005 which were recorded under FAS No. 87 as discussed in Note 15. Trademarks ...... ¥57,384 ¥57,195 $535 Distribution agreement . . . . 18,834 18,848 176 ...... ¥76,218 ¥76,043 $711

The changes in the carrying amount of goodwill by operating segment for the years ended March 31, 2004 and 2005 are as follows: Yen in millions Financial Electronics Game Music Pictures Services Other Total Balance at March 31, 2003 ...... ¥53,179 ¥110,606 ¥(46,021 ¥78,697 — ¥1,624 ¥290,127 Goodwill acquired during year ...... 5,634 — 76 1,666 — 534 7,910 Impairment losses ...... (6,049) —————(6,049) Other * ...... (528) (244) (3,771) (9,574) — (1) (14,118) Balance at March 31, 2004 ...... 52,236 110,362 42,326 70,789 — 2,157 277,870 Reallocated from Music segment to Electronics segment ...... 12,329 — (12,329) ———— Goodwill acquired during year ...... 5,872 4,349 52 5,868 ¥441 2,069 18,651 Goodwill contributed to the Joint Venture with Bertelsmann AG ...... ——(15,626) — — — (15,626) Other * ...... 378 29 1,281 1,277 — 63 3,028 Balance at March 31, 2005 ...... ¥70,815 ¥114,740 ¥(15,704 ¥77,934 ¥441 ¥4,289 ¥283,923

Dollars in millions Financial Electronics Game Music Pictures Services Other Total Balance at March 31, 2004 ...... $488 $1,031 $396 $662 — $20 $2,597 Reallocated from Music segment to Electronics segment ...... 116 — (116) ———— Goodwill acquired during year ...... 55 41 1 54 $4 19 174 Goodwill contributed to the Joint Venture with Bertelsmann AG ...... ——(146) — — — (146) Other *...... 301212 — 1 28 Balance at March 31, 2005 ...... $662 $1,072 $147 $728 $4 $40 $2,653 *Other consists of translation adjustments and reclassification to/from other accounts.

During the year ended March 31, 2004, Sony performed the Electronics segment and accordingly, Sony reallocated ¥12,329 annual impairment test for goodwill and recorded an impairment million ($116 million) of goodwill relating to the non-Japan based loss of ¥6,049 million in the Electronics segment. This impair- disc manufacturing and physical distribution business from the ment charge reflected the overall decline in the fair value of a Music segment to the Electronics segment. subsidiary within the Electronics segment. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows. 11. Insurance-related accounts As discussed in Notes 6 and 25, as of August 1, 2004, Sony Sony’s life and non-life insurance subsidiaries in Japan maintain and Bertelsmann AG combined their recorded music business in their accounting records as described in Note 2 in accordance a joint venture. In connection with the establishment of the joint with the accounting principles and practices generally accepted venture, assets contributed by Sony included ¥15,626 million in Japan, which vary in some respects from U.S. GAAP. ($146 million) of goodwill. In addition, the non-Japan based disc Those differences are mainly that insurance acquisition costs manufacturing and physical distribution businesses, formerly for life and non-life insurance are charged to income when included within the Music segment, have been reclassified to the incurred in Japan whereas in the United States of America those

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BH6/30 Page 97 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC costs are deferred and amortized generally over the premium- tions for all policies are based on either the subsidiary’s own paying period of the related insurance policies, and that future experience or various actuarial tables. At March 31, 2004 and policy benefits for life insurance calculated locally under the 2005, future insurance policy benefits amounted to ¥1,605,178 authorization of the supervisory administrative agencies are million and ¥1,782,850 million ($16,662 million), respectively. comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP (4) Separate account assets: purposes. For purposes of preparing the consolidated financial Separate account assets are funds on which investment income statements, appropriate adjustments have been made to reflect and gains or losses accrue directly to policyholders. Separate such items in accordance with U.S. GAAP. account assets are legally segregated. They are not subject to The amounts of statutory net equity of the subsidiaries as of the claims that may arise out of any other business of a life March 31, 2004 and 2005 were ¥146,540 million and ¥153,228 insurance subsidiary. As described in Note 2, the AcSEC issued million ($1,432 million), respectively. SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for (1) Insurance policies: Separate Accounts”. As a result of the adoption of SOP 03-1 on Life insurance policies that the life insurance subsidiary writes, April 1, 2004, the separate account assets, which are defined by most of which are categorized as long-duration contracts, insurance business law in Japan and were previously included in mainly consist of whole life, term life and accident and health “Securities investments and other” (Note 8) in the consolidated insurance contracts. The life insurance revenues for the years balance sheet, were excluded from the category of separate ended March 31, 2003, 2004 and 2005 were ¥450,363 million, accounts under the provision of SOP 03-1. Accordingly, the ¥437,835 million and ¥426,774 million ($3,989 million), respec- assets previously treated as separate account assets are now tively. Property and casualty insurance policies that the non-life treated within general account assets. The related liabilities are insurance subsidiary writes are primarily automotive insurance treated as policyholders’ account and included in future insur- contracts which are categorized as short-duration contracts. ance policy benefits and other in the consolidated balance The non-life insurance revenues for the years ended March 31, sheet. Fees earned for administrative and contract-holder 2003, 2004 and 2005 were ¥21,269 million, ¥28,371 million and services performed for the separate accounts are recognized as ¥35,454 million ($331 million), respectively. financial service revenue.

(2) Deferred insurance acquisition costs: Insurance acquisition costs, including such items as commis- 12. Short-term borrowings and long-term debt sion, medical examination and inspection report fees, that vary Short-term borrowings comprise the following: with and are primarily related to acquiring new insurance policies Dollars in are deferred as long as they are recoverable. The deferred Yen in millions millions insurance acquisition costs for traditional life insurance contracts March 31 2004 2005 2005 are amortized over the premium-paying period of the related Unsecured loans, insurance policies using assumptions consistent with those principally from banks: used in computing policy reserves. The deferred insurance with weighted-average acquisition costs for non-traditional life insurance contracts are interest rate of 1.80% . . . ¥26,260 amortized over the expected life in proportion to the estimated with weighted-average gross profits. Amortization charged to income for the years interest rate of 2.79% . . . ¥38,796 $362 ended March 31, 2003, 2004 and 2005 amounted to ¥44,578 Secured call money: million, ¥50,492 million and ¥47,120 million ($440 million), with weighted-average respectively. interest rate of 0.01% . . . 65,000 —— Secured bills sold: (3) Future insurance policy benefits: with weighted-average Liabilities for future policy benefits are established in amounts interest rate of 0.00% . . . — 24,600 230 adequate to meet the estimated future obligations of policies in ...... ¥91,260 ¥63,396 $592 force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, At March 31, 2005, marketable securities and securities morbidity, mortality and withdrawals. Future policy benefits are investments with a book value of ¥27,433 million ($256 million) computed using interest rates ranging from approximately were pledged as collateral for bills sold by a Japanese bank 1.30% to 5.20%. Mortality, morbidity and withdrawal assump- subsidiary.

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BH6/30 Page 98 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Long-term debt comprises the following:

Dollars in Yen in millions millions March 31 2004 2005 2005 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 $ 11 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 1,060 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 ...... 58,755 550 Unsecured 1.4% convertible bonds, due 2005, convertible at ¥3,995.5 for one common share, redeemable before due date ...... 287,753 —— Unsecured zero coupon convertible bonds, due 2008, convertible currently at ¥5,605 ($52) for one common share, redeemable before due date ...... 250,000 250,000 2,336 Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount ...... 3,981 —— Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount ...... 3,924 3,981 37 Unsecured 1.55% bonds, due 2006 with detachable warrants ...... 12,000 12,000 112 Unsecured 0.9% bonds, due 2007 with detachable warrants ...... 7,300 7,300 68 Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock ...... 150 150 1 Unsecured 1.42% bonds, due 2005, net of unamortized discount ...... 99,994 99,998 935 Unsecured 0.64% bonds, due 2006, net of unamortized discount ...... 99,994 99,996 935 Unsecured 2.04% bonds, due 2010, net of unamortized discount ...... 49,981 49,984 467 Unsecured 1.52% bonds, due 2011, net of unamortized discount ...... 49,996 49,997 467 Unsecured 2.0% bonds, due 2005 ...... 15,000 15,000 140 Unsecured 1.99% bonds, due 2007 ...... 15,000 15,000 140 Unsecured 2.35% bonds, due 2010 ...... 4,900 4,900 46 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 ...... 40,301 377 Guarantee deposits received ...... 21,775 23,942 224 ...... 1,161,406 845,862 7,906 Less—Portion due within one year ...... 383,757 166,870 1,560 ...... ¥0,777,649 ¥678,992 $6,346

At March 31, 2005, machinery and equipment with a book There are no adverse debt covenants or cross-default value of ¥4,502 million ($42 million) were pledged as collateral provisions relating to Sony’s borrowings. for secured loans, representing obligations to banks.

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BH6/30 Page 99 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC A summary of the exercise rights of the detachable warrants as of March 31, 2005 is as follows:

Exercise price Issued on Exercisable during YenDollars Number of shares per warrant Status of exercise August 23, 1999 September 1, 2000 ¥07,167 $067 279 shares of common 2,000 warrants outstanding through August 22, 2005 stock of Sony Corporation October 19, 2000 November 1, 2001 12,457 116 100 shares of common 9,600 warrants outstanding through October 18, 2006 stock of Sony Corporation December 21, 2001 January 6, 2003 6,039 56 100 shares of common 11,534 warrants outstanding through December 20, 2007 stock of Sony Corporation December 21, 2001 June 20, 2002 3,300 31 75 shares of subsidiary 600 warrants outstanding through June 20, 2007 tracking stock

Aggregate amounts of annual maturities of long-term debt 14. Financial instruments during the next five years are as follows: (1) Derivative instruments and hedging activities: Sony has certain financial instruments including financial assets Yen in Dollars in millions millions and liabilities incurred in the normal course of business. Such financial instruments are exposed to market risk arising from the Year ending March 31: 2006 ...... ¥166,870 $1,560 changes of foreign currency exchange rates and interest rates. 2007 ...... 178,117 1,665 In applying a consistent risk management strategy for the 2008 ...... 32,059 300 purpose of reducing such risk, Sony uses derivative financial 2009 ...... 282,430 2,640 instruments, which include foreign exchange forward contracts, 2010 ...... 2,909 27 foreign currency option contracts, and interest rate and currency swap agreements. Foreign exchange forward contracts and At March 31, 2005, Sony had unused committed lines of foreign currency option contracts are utilized primarily to limit the credit amounting to ¥863,956 million ($8,074 million) and can exposure affected by changes in foreign currency exchange rates generally borrow up to 90 days from the banks with whom Sony on cash flows generated by anticipated intercompany transac- has committed line contracts. Furthermore, Sony has Commer- tions and intercompany accounts receivable and payable denomi- cial Paper Programs, the size of which was ¥1,251,450 million nated in foreign currencies. Interest rate and currency swap ($11,696 million). There was no commercial paper outstanding at agreements are utilized primarily to lower funding costs, to diver- March 31, 2005. Under those programs, Sony can issue com- sify sources of funding and to limit Sony’s exposure associated mercial paper for the period generally not in excess of 270 days with underlying debt instruments and available-for-sale debt up to the size of the programs. In addition, Sony has Medium securities resulting from adverse fluctuations in interest rates, Term Notes programs, the size of which was ¥536,750 million foreign currency exchange rates and changes in the fair value. ($5,016 million). At March 31, 2005, the total outstanding bal- These instruments are executed with creditworthy financial ance of Medium Term Notes was ¥58,755 million ($550 million). 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 13. Deposits from customers in the banking the event of nonperformance by counterparties or unfavorable business interest and currency rate movements, it does not anticipate All deposits from customers in the banking business are interest significant losses due to the nature of Sony’s counterparties or bearing deposits and are owned by a Japanese bank subsidiary the hedging arrangements. These derivatives generally mature which was established as an Online Internet bank for individuals. or expire within 5 months after the balance sheet date. Sony At March 31, 2004 and 2005, the balance of time deposits does not use these derivative financial instruments for trading or issued in amounts of ¥10 million ($93 thousand) or more were speculative purposes except for certain derivatives utilized for ¥55,164 million and ¥67,387 million ($630 million), respectively. portfolio investments such as interest rate swap agreements and At March 31, 2005, aggregate amounts of annual maturities interest rate future contracts in the Financial Services segment. of time deposits with a remaining term of more than one year These derivative transactions utilized for portfolio investments in include ¥25,697 million ($240 million) and ¥23,910 million ($223 the Financial Services segment are executed within a certain million) for the years ending March 31, 2007 and 2008, respec- limit in accordance with an internal risk management policy. tively. There are no deposits having a maturity date after March Derivative financial instruments held by Sony are classified and 31, 2008. accounted for as described below pursuant to FAS No. 133.

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BH6/30 Page 100 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Fair value hedges payable and forecasted transactions denominated in functional The derivatives designated as fair value hedges include interest currencies (Japanese yen, U.S. dollars and euros) of Sony’s rate and currency swap agreements. major operating units. The majority of written foreign currency Both the derivatives designated as fair value hedges and option contracts are a part of range forward contract arrange- hedged items are reflected at fair value in the consolidated ments and expire in the same month with the corresponding balance sheet. Changes in the fair value of the derivatives purchased foreign currency option contracts. designated as fair value hedges as well as offsetting changes in Sony also enters into foreign exchange forward contracts, the carrying value of the underlying hedged items are recognized which effectively fix the cash flows from foreign currency in income. denominated debt. Accordingly, these derivatives have been The amount of ineffectiveness of these fair value hedges, that designated as cash flow hedges in accordance with FAS was reflected in earnings, was not material for the years ended No. 133. March 31, 2003, 2004 and 2005. In addition, there were no Foreign exchange forward contracts and foreign currency amounts excluded from the assessment of hedge effectiveness option contracts that do not qualify as hedges are marked- of fair value hedges. to-market with changes in value recognized in other income and expenses. Cash flow hedges The derivatives designated as cash flow hedges include foreign Interest rate and currency swap agreements exchange forward contracts, foreign currency option contracts Sony enters into interest rate and currency swap agreements, and interest rate and currency swap agreements. which are used for reducing the risk arising from the changes in Changes in the fair value of derivatives designated as cash the fair value of fixed rate debt and available-for-sale debt flow hedges are initially recorded in other comprehensive income securities. For example, Sony enters into interest rate and and reclassified into earnings when the hedged transaction currency swap agreements, which effectively swap foreign affects earnings. For the years ended March 31, 2003 and currency denominated fixed rate debt for functional currency 2004, these cash flow hedges were fully effective. For the year denominated variable rate debt. These derivatives are consid- ended March 31, 2005, the amount of ineffectiveness of these ered to be a hedge against changes in the fair value of Sony’s cash flow hedges that was reflected in earnings was not mate- foreign denominated fixed-rate obligations. Accordingly, these rial. In addition, there were no amounts excluded from the derivatives have been designated as fair value hedges in accor- assessment of hedge effectiveness of cash flow hedges. At dance with FAS No. 133. March 31, 2005, amounts related to derivatives qualifying as Sony also enters into interest rate and currency swap agree- cash flow hedges amounted to a net reduction of equity of ments that are used for reducing the risk arising from the ¥2,490 million ($23 million). Within the next twelve months, changes in anticipated cash flow of variable rate debt and ¥1,615 million ($15 million) is expected to be reclassified from foreign currency denominated debt. For example, Sony enters equity into earnings as loss. For the year ended March 31, into interest rate and currency swap agreements, which effec- 2005, there were no forecasted transactions that failed to occur tively swap foreign currency denominated variable rate debt for which resulted in the discontinuance of cash flow hedges. functional currency denominated fixed rate debt. These derivatives are considered to be a hedge against changes in the Derivatives not designated as hedges anticipated cash flow of Sony’s foreign denominated variable The derivatives not designated as hedges under FAS No. 133 rate obligations. Accordingly, these derivatives have been desig- include foreign exchange forward contracts, foreign currency nated as cash flow hedges in accordance with FAS No. 133. option contracts, interest rate and currency swap agreements, Certain subsidiaries in the Financial Services segment have convertible rights included in convertible bonds and other. interest rate swap agreements as part of portfolio investments, Changes in the fair value of derivatives not designated as which are marked-to-market with changes in value recognized hedges are recognized in income. in financial service revenue. A description of the purpose and classification of the deriva- Any other interest rate and currency swap agreements that do tive financial instruments held by Sony is as follows: not qualify as hedges, which are used for reducing the risk arising from changes of variable rate and foreign currency Foreign exchange forward contracts and foreign currency option dominated intercompany debt, are marked-to-market with contracts changes in value recognized in other income and expenses. Sony enters into foreign exchange forward contracts and purchased and written foreign currency option contracts primarily to Interest rate future contracts fix the cash flows from intercompany accounts receivable and Certain subsidiaries in the Financial Services segment have

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BH6/30 Page 101 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC interest rate future contracts as part of portfolio investments, derivatives and are marked-to-market with changes in value which are marked-to-market with changes in value recognized recognized in financial service revenue. in financial service revenue. (2) Fair value of financial instruments: Embedded derivatives The estimated fair values of Sony’s financial instruments are Changes in the fair value of embedded derivatives that must be summarized as follows. The following summary excludes cash separated from the host contracts and accounted for as deriva- and cash equivalents, time deposits, notes and accounts receiv- tive instruments under FAS No. 133 are recognized in income. able, trade, short-term borrowings, notes and accounts payable, For example, the convertible rights included in convertible bonds trade and deposits from customers in the banking business that held by Sony’s life insurance subsidiary, which are classified as are carried at amounts which approximate fair value. The sum- available-for-sale debt securities, are considered embedded mary also excludes debt and equity securities which are disclosed in Note 8. Yen in millions 2004 2005 Notional Carrying Estimated Notional Carrying Estimated March 31 amount amount fair value amount amount fair value Long-term debt including the current portion ...... — ¥(1,161,406) ¥(1,235,669) — ¥(845,862) ¥(856,321) Foreign exchange forward contracts ...... ¥1,348,157 (994) (994) ¥1,545,814 (55) (55) Currency option contracts purchased ...... 375,582 10,781 10,781 428,261 1,646 1,646 Currency option contracts written ...... 124,925 (1,000) (1,000) 146,506 (3,390) (3,390) Interest rate swap agreements ...... 218,101 (4,229) (4,229) 171,133 (4,417) (4,417) Interest rate and currency swap agreements ...... 8,574 384 384 5,734 131 131 Interest rate future contracts ...... 17,007 (9) (9) 136,470 (92) (92) Embedded derivatives ...... 421,416 12,885 12,885 405,756 11,894 11,894 Dollars in millions 2005 Notional Carrying Estimated March 31 amount amount fair value Long-term debt including the current portion ...... — $(7,906) $(8,003) Foreign exchange forward contracts ...... $14,447 (1) (1) Currency option contracts purchased ...... 4,002 15 15 Currency option contracts written ...... 1,369 (32) (32) Interest rate swap agreements ...... 1,599 (41) (41) Interest rate and currency swap agreements ...... 54 1 1 Interest rate future contracts ...... 1,275 (1) (1) Embedded derivatives ...... 3,792 111 111

The following are explanatory notes regarding the estimation Derivative financial instruments method of fair values in the above table. The fair values of foreign exchange forward contracts and foreign currency option contracts were estimated based on Long-term debt including the current portion market quotations. The fair values of interest rate and currency The fair values of long-term debt, including the current portion, swap agreements were estimated based on the discounted were estimated based on either the market value or the dis- amounts of future net cash flows. The fair values of convertible counted amounts of future cash flows using Sony’s current rights, which were a majority of embedded derivatives, were incremental debt rates for similar liabilities. estimated based on the market price of stock which will be acquired by the exercise of these rights.

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BH6/30 Page 102 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC 15. Pension and severance plans employer and employees’ pension fund plan to separate the Upon terminating employment, employees of Sony Corporation substitutional portion from its employees’ pension fund and and its subsidiaries in Japan are entitled, under most circum- transfer the obligation and related assets to the government. In stances, to lump-sum indemnities or pension payments as July, 2004, in accordance with the law, the Japanese Govern- described below. For employees voluntarily retiring, payments ment approved applications submitted by Sony Corporation and are determined based on current rates of pay and lengths of most of its subsidiaries in Japan for an exemption from the service. In calculating the payments for employees involuntarily obligation to pay benefits for future employee services related retiring, including employees retiring due to meeting mandatory to the substitutional portion of the governmental welfare pension retirement age requirements, Sony may grant additional benefits. program. In January 2005, the government also approved In July, 2004, Sony Corporation and certain of its subsidiaries applications for an exemption from the obligation to pay benefits amended their pension plans and introduced a point-based plan for past employee services related to the substitutional portion. under which a point is added every year reflecting the individual As of March 31, 2005 the benefit obligation for past employee employee’s performance over that year. Under the point-based services related to the substitutional portion and the related plan the amount of payment is determined based on sum of government-specified portion of the plan assets have not been cumulative points from past services and interest points earned transferred to the government. on the cumulative points regardless of whether or not the em- EITF Issue No. 03-2, “Accounting for the Transfer to the ployee is voluntarily retiring. As a result of the plan amendment, Japanese Government of the Substitutional Portion of Employee the projected benefit obligation was decreased by ¥120,873 Pension Fund Liabilities”, requires employers to account for the million ($1,130 million). entire separation process of a substitutional portion from an Sony Corporation and most of its subsidiaries in Japan have entire plan upon completion of the transfer of the substitutional contributory funded defined benefit pension plans, which are portion of the benefit obligation and related plan assets to the pursuant to the Japanese Welfare Pension Insurance Law. The government as the culmination of a series of steps in a single contributory pension plans cover a substitutional portion of the settlement transaction. In accordance with EITF Issue No. 03-2, governmental welfare pension program, under which the contri- no accounting for the transfer was recorded for the year ended butions are made by the companies and their employees, and March 31, 2005. an additional portion representing the substituted noncontribu- Many of foreign subsidiaries have defined benefit pension tory pension plans. Under the contributory pension plans, the plans or severance indemnity plans, which substantially cover all defined benefits representing the noncontributory portion of the of their employees. Under such plans, the related cost of ben- plans, in general, cover 65% of the indemnities under existing efits is currently funded or accrued. Benefits awarded under regulations to employees. The remaining indemnities are cov- these plans are based primarily on the current rate of pay and ered by severance payments by the companies. The pension length of service. benefits are payable at the option of the retiring employee either Sony uses a measurement date of March 31 for substantially in a lump-sum amount or monthly pension payments. Contribu- all of its pension and severance plans. tions to the plans are funded through several financial institutions The components of net pension and severance costs, which in accordance with the applicable laws and regulations. exclude employee termination benefits paid in restructuring In June 2001, the Japanese Government issued the Defined activities, for the years ended March 31, 2003, 2004 and 2005 Benefit Corporate Pension Plan Act which permits each were as follows:

Japanese plans:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Service cost ...... ¥(47,884 ¥(54,501 ¥(31,971 $(299 Interest cost ...... 20,857 19,489 21,364 200 Expected return on plan assets ...... (25,726) (22,812) (16,120) (151) Amortization of net transition asset ...... (375) (375) (375) (4) Recognized actuarial loss ...... 20,655 31,019 20,236 189 Amortization of prior service cost ...... (939) (939) (7,216) (67) Gains on curtailments and settlements ...... (1,380) — (876) (8) Net periodic benefit cost ...... ¥(60,976 ¥(80,883 ¥(48,984 $(458

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Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Service cost ...... ¥13,954 ¥11,252 ¥(6,419 $060 Interest cost ...... 8,478 8,566 8,091 76 Expected return on plan assets ...... (7,319) (6,812) (6,712) (63) Amortization of net transition asset ...... (47) (27) (18) (0) Recognized actuarial loss ...... 1,452 1,569 1,637 15 Amortization of prior service cost ...... (208) (117) (114) (1) (Gains) losses on curtailments and settlements ...... (460) 5,574 1,713 16 Net periodic benefit cost ...... ¥15,850 ¥20,005 ¥11,016 $103

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 Dollars in Dollars in Yen in millions millions Yen in millions millions March 31 2004 2005 2005 2004 2005 2005 Change in benefit obligation: Benefit obligation at beginning of the fiscal year ...... ¥1,031,760 ¥(993,542 $(9,285 ¥157,580 ¥155,838 $1,456 Service cost ...... 54,501 31,971 299 11,252 6,419 60 Interest cost ...... 19,489 21,364 200 8,566 8,091 76 Plan participants’ contributions ...... 5,802 2,111 20 644 873 8 Amendments ...... — (120,873) (1,130) 3,900 286 3 Actuarial (gain) loss ...... (81,873) 1,641 15 431 12,210 114 Foreign currency exchange rate changes ...... — ——(17,082) 14,288 134 Curtailments and settlements ...... — (2,988) (28) (66) (628) (6) Benefits paid ...... (36,137) (25,042) (234) (9,387) (11,639) (109) Divestiture ...... — ——— (32,140) (301) Benefit obligation at end of the fiscal year...... 993,542 901,726 8,427 155,838 153,598 1,435

Change in plan assets: Fair value of plan assets at beginning of the fiscal year ...... 405,248 513,095 4,795 67,937 85,662 800 Actual return (loss) on plan assets ...... 93,154 (354) (3) 13,065 7,513 70 Foreign currency exchange rate changes ...... — ——(3,420) 3,517 33 Employer contribution ...... 23,243 34,581 323 16,475 18,406 172 Plan participants’ contributions ...... 5,802 2,111 20 644 873 8 Curtailments and settlements ...... — ——— (112) (1) Benefits paid ...... (14,352) (14,982) (140) (9,039) (11,168) (104) Divestiture ...... — ——— (12,666) (118) Fair value of plan assets at end of the fiscal year ...... ¥ 513,095 ¥(534,451 $(4,995 ¥ 85,662 ¥ (92,025 $0,860

In connection with the establishment of the SONY BMG joint and ¥12,666 million ($118 million) of its plan assets which were venture with Bertelsmann AG as discussed in Note 6, Sony included in Sony’s foreign plans to the joint venture. transferred ¥32,140 million ($301 million) of its benefit obligation

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BH6/30 Page 104 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Japanese plans Foreign plans Dollars in Dollars in Yen in millions millions Yen in millions millions March 31 2004 2005 2005 2004 2005 2005 Funded status ...... ¥(480,447) ¥(367,275) $(3,432) ¥(70,176) ¥(61,573) $(575) Unrecognized actuarial loss ...... 328,467 322,237 3,011 27,550 37,383 349 Unrecognized net transition asset ...... (479) (104) (1) 211 70 Unrecognized prior service cost ...... (20,784) (134,440) (1,256) (748) (501) (5) Net amount recognized ...... ¥(173,243) ¥(179,582) $(1,678) ¥(43,163) ¥(24,684) $(231)

Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost ...... — ¥(001,795 $(0,017 ¥(02,609 ¥(01,351 $(013 Accrued pension and severance costs, including current portion ...... ¥(322,677) (309,957) (2,897) (61,452) (42,934) (401) Intangibles ...... 21,263 ——113 41 0 Accumulated other comprehensive income ...... 128,171 128,580 1,202 15,567 16,858 157 Net amount recognized ...... ¥(173,243) ¥(179,582) $(1,678) ¥(43,163) ¥(24,684) $(231)

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

Japanese plans Foreign plans Dollars in Dollars in Yen in millions millions Yen in millions millions March 31 2004 2005 2005 2004 2005 2005 Accumulated benefit obligation ...... ¥830,898 ¥835,420 $7,808 ¥129,879 ¥121,176 $1,132

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 Dollars in Dollars in Yen in millions millions Yen in millions millions

March 31 2004 2005 2005 2004 2005 2005 Projected benefit obligations ...... ¥991,030 ¥898,985 $8,402 ¥135,459 ¥132,556 $1,239 Accumulated benefit obligations ...... 830,362 835,420 7,808 113,020 115,147 1,076 Fair value of plan assets ...... 512,720 533,926 4,990 74,167 86,070 804

Weighted-average assumptions used to determine benefit obligations as of March 31, 2003, 2004 and 2005 were as follows:

Japanese plans: Foreign plans:

March 31 2003 2004 2005 March 31 2003 2004 2005 Discount rate ...... 1.9% 2.4% 2.3% Discount rate ...... 6.3% 5.8% 5.5% Rate of compensation Rate of compensation increase ...... 3.0 3.0 3.3 increase ...... 4.1 4.0 3.3

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BH6/30 Page 105 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Weighted-average assumptions used to determine net pension and severance costs for the years ended March 31, 2003, 2004 and 2005 were as follows:

Japanese plans: Foreign plans:

Years ended March 31 2003 2004 2005 Years ended March 31 2003 2004 2005 Discount rate ...... 2.4% 1.9% 2.4% Discount rate ...... 6.6% 6.3% 5.8% Expected return on plan Expected return on plan assets ...... 4.0 4.0 3.2 assets ...... 8.1 8.3 7.8 Rate of compensation Rate of compensation increase ...... 3.0 3.0 3.3 increase ...... 4.5 4.1 4.0

As required under FAS No. 87, the assumptions are reviewed Following FAS132(R), the weighted-average rate of in accordance with changes in circumstances. compensation increase is calculated based on the pay-related To determine the expected long-term rate of return on pen- plans only. The point-based plan discussed above is excluded sion plan assets, Sony considers the current and expected from the calculation because payments made under the plan asset allocations, as well as historical and expected long-term are not based on employee compensation. rate of returns on various categories of plan assets.

Weighted-average pension plan asset allocations based on the fair value of such assets as of March 31, 2004 and 2005 were as follows:

Japanese plans: Foreign plans:

March 31 2004 2005 March 31 2004 2005 Equity securities ...... 39.0% 28.0% Equity securities ...... 63.2% 68.3% Debt securities ...... 14.7 34.7 Debt securities ...... 26.6 23.4 Cash ...... 42.7 33.7 Real estate ...... 3.2 4.0 Other ...... 3.6 3.6 Other ...... 7.0 4.3 Total ...... 100.0% 100.0% Total ...... 100.0% 100.0%

For the pension plans of Sony Corporation and most of its as deemed appropriate by management after considering the subsidiaries, Sony’s asset investment policy is set so as to fair value of plan assets, expected return on plan assets and the compensate the appropriate level for employee’s benefit over present value of benefit obligations. Sony expects to contribute the long term. approximately ¥35 billion ($327 million) to the Japanese plans For the pension plans of Sony Corporation and most of its and approximately ¥6 billion ($56 million) to the foreign plans for subsidiaries in Japan, the target allocation as of March 31, the year ending March 31, 2006. 2005, is, as a result of our Asset Liability management, 34% of The future benefit payments are expected as follows: public equity, 56% of fixed income securities and 10% of other. When determining an appropriate asset allocation, diversification Japanese plans Foreign plans Yen in Dollars in Yen in Dollars in among assets is duly considered. The actual asset allocation as millions millions millions millions of March 31, 2005 for Sony’s principal pension plans did not Year ending March 31: meet the aforementioned target allocation as the Sony Employ- 2006 ...... ¥018,281 $ 171 ¥ 5,625 $ 53 ees’ Pension Fund tentatively held cash to be paid to the Japa- 2007 ...... 19,734 184 5,977 56 nese government in relation to the transfer of the substitutional 2008 ...... 22,075 206 6,308 59 portion of the benefit obligation and the related government- 2009 ...... 24,600 230 6,860 64 specified portion of the plan assets discussed above. Such 2010 ...... 29,475 275 7,912 74 transfer is expected to occur in the year ending March 31, 2006. 2011–2015 ...... 181,527 1,697 51,919 485 Sony makes contributions to its contributory funded defined benefit pension plans as required by government regulation or

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BH6/30 Page 106 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC 16. Stockholders’ equity shares of common stock of SCN, the number of shares of SCN (1) Subsidiary tracking stock: common stock obtained by multiplying the number of shares of On June 20, 2001, Sony Corporation issued shares of subsid- the subsidiary tracking stock held by each holder by the Stan- iary tracking stock in Japan, the economic value of which is dard Ratio or the net proceeds from the sale of the shares of intended to be linked to the economic value of Sony Communi- SCN common stock so to be distributed will be distributed to cation Network Corporation (“SCN”), a directly and indirectly the holders of the subsidiary tracking stock. wholly owned subsidiary of Sony Corporation which is engaged The shares of subsidiary tracking stock may be subject to in Internet-related services. The subsidiary tracking stock hold- repurchase and retirement in the same manner and under the ers have no direct rights in the equity or assets of SCN or the same restriction as the shares of common stock. In addition, at assets of Sony Corporation. Except as summarized below, the any time after the passage of three years from the date of the shares of subsidiary tracking stock have the same rights and initial issuance of shares of a series of subsidiary tracking stock, characteristics as those of shares of common stock. it may retire the entire amount of all outstanding shares of that The dividend on the shares of this series of subsidiary tracking series of subsidiary tracking stock upon paying to the sharehold- stock is payable only when the Board of Directors of SCN has ers thereof an amount equal to the current market price of the resolved to pay to its common stock holders a dividend in an subsidiary tracking stock out of Sony Corporation’s retained amount per share of the subsidiary tracking stock equal to the earnings available for dividend payments. Sony Corporation may amount of SCN’s dividend per share of its common stock also retire the shares of a series of subsidiary tracking stock in multiplied by the Standard Ratio (as defined in the articles of their entirety pursuant to the procedures prescribed by the incorporation), subject to statutory restriction on Sony Japanese Commercial Code for the reduction of capital upon Corporation’s ability to pay dividends on its shares of capital payment to the subsidiary tracking stock holders an amount stock and the maximum dividend amount (as defined in the equal to the market value thereof as set forth above. articles of incorporation). If the amount of dividends paid to the At any time after the passage of three years from the date of subsidiary tracking stock holders is less than the amount, which the initial issuance of shares of a series of subsidiary tracking should have been paid pursuant to the formula set forth above stock, it may convert the entire amount of all outstanding shares due to the statutory restriction referred to above or for any other of the subsidiary tracking stock into the shares of Sony reason, such shortfall will be accumulated and such cumulative Corporation’s common stock at the rate of the multiple of 1.1 of amount will be paid to the subsidiary tracking stock holders for the market value (as defined in the articles of incorporation) of subsequent fiscal years. Any such dividend on the subsidiary shares of the subsidiary tracking stock divided by the market tracking stock is payable in priority to the payment of dividends value (as similarly defined) of the shares of Sony Corporation’s to the common stock holders. However, the subsidiary tracking common stock. stockholders have no right to participate in the dividends to If any events (as defined in the articles of incorporation) occur, common stock holders. Furthermore, even if the Board of the entire amount of all outstanding shares of the subsidiary Directors of SCN does not take a resolution for the payment of tracking stock will be either retired or converted into shares of dividends to SCN’s common stock holders, Sony Corporation Sony Corporation’s common stock at the price or rate set forth may decide to pay dividends to its common stock holders. above. On April 26, 2005, Sony Corporation decided at the Board The subsidiary tracking stockholders have the same voting of Directors to go through procedures for the initial public offering rights as those of the common stock holders and, thus, are of SCN. If the listing of SCN common stock is approved by the entitled to participate and vote at any General Meeting of Share- stock exchange, subject to required procedures, all of the subsid- holders in the same way as the common stock holders. In iary tracking stock will be compulsorily terminated pursuant to the addition, as each series of subsidiary tracking stock is a sepa- articles of incorporation. The method of such termination will be rate class of stock different from common stock, if any resolu- one of the following: 1) compulsory retirement in cash, 2) compul- tion of the General Meeting of Shareholders would adversely sory conversion to common stock of Sony Corporation, or 3) affect the rights of the shareholders of a particular class of compulsory exchange with common stock of SCN. subsidiary tracking stock, the shareholders of each class of The number of shares of the subsidiary tracking stock issued subsidiary tracking stock will have the right to approve or disap- and outstanding at March 31, 2005 was 3,072,000. At March prove such resolution by a special resolution of the meeting of 31, 2005, 136,454 shares of the subsidiary tracking stock would shareholders of that class of subsidiary tracking stock. be issued upon exercise of warrants and stock acquisition rights In the event of distribution of residual assets to the sharehold- outstanding. ers of Sony Corporation where, as long as such assets include

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BH6/30 Page 107 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC (2) Common stock: enacted on April 1, 2002, purchase by Sony Corporation of its Changes in the number of shares of common stock issued and own shares was subject to the prior approval of shareholders at outstanding during the years ended March 31, 2003, 2004 and the Ordinary General Meeting of Shareholders, which included the 2005 have resulted from the following: maximum number of shares and the maximum total amount to be Number of shares purchased for each class of stock. Once such approval of share- Balance at March 31, 2002 ...... 919,744,355 holders was obtained, Sony Corporation could purchase its own Conversion of convertible bonds ...... 138,330 shares at any time during the period up to the conclusion of the Stock issued under exchange offering ...... 2,502,491 next Ordinary General Meeting of Shareholders. Balance at March 31, 2003 ...... 922,385,176 The Ordinary General Meeting of Shareholders held on June Conversion of convertible bonds ...... 2,944,800 20, 2002 approved that Sony Corporation acquire up to a total Stock issued under exchange offering ...... 1,088,304 not exceeding 90 million outstanding shares of its common Balance at March 31, 2004 ...... 926,418,280 stock at an amount in total not exceeding ¥650 billion and a Conversion of convertible bonds ...... 70,765,533 total not exceeding 300 thousand outstanding shares of the Exercise of stock acquisition rights ...... 27,400 subsidiary tracking stock at an amount in total not exceeding ¥1 Balance at March 31, 2005 ...... 997,211,213 billion until the conclusion of the General Meeting of Sharehold- ers held for the year ended March 31, 2003. As a result, no At March 31, 2005, 55,609,085 shares of common stock common stock and subsidiary tracking stock had been acquired would be issued upon conversion or exercise of all convertible under this approval. bonds, warrants and stock acquisition rights outstanding. The Ordinary General Meeting of Shareholders held on June On October 1, 2002, Sony Corporation implemented a share 20, 2003 approved that Sony Corporation acquire up to a total exchange as a result of which Aiwa Co., Ltd. became a wholly- not exceeding 90 million outstanding shares of its common stock owned subsidiary. As a result of this share exchange, Sony at an amount in total not exceeding ¥400 billion and a total not Corporation issued 2,502,491 new shares, the minority interest exceeding 300 thousand outstanding shares of the subsidiary in Aiwa Co., Ltd. was eliminated from the balance sheet, and tracking stock at an amount in total not exceeding ¥1 billion. As a additional paid-in capital increased ¥15,791 million. result, Sony Corporation had acquired 2 million outstanding On May 1, 2003, Sony Corporation implemented a share shares of its common stock at an amount in ¥8,200 million. No exchange as a result of which CIS Corporation became a subsidiary tracking stock had been acquired under this approval. wholly-owned subsidiary. As a result of this share exchange, The Ordinary General Meeting of Shareholders held on June Sony Corporation issued 1,088,304 new shares, and additional 22, 2004 approved to amend the articles of incorporation that paid-in capital increased ¥5,409 million. Sony Corporation may purchase its own shares by a resolution On November 20, 1991, Sony Corporation made a free share of the Board of Directors, in accordance with the amendments distribution of 33,908,621 shares in ratios of one share for each to the Japanese Commercial Code enacted on September 25, ten shares held for which no accounting entry was required in 2003. With the amendment of the articles of incorporation, Sony Japan. Had the distribution been accounted for in the manner Corporation may purchase its own shares at any time by a adopted by companies in the United States of America, resolution of the Board of Directors up to the retained earnings ¥201,078 million would have been transferred from retained available for dividends to shareholders. No common stock and earnings to the appropriate capital accounts. This has been the subsidiary tracking stock had been acquired by the resolution of only free distribution of common stock where no accounting the Board of Directors during the year ended March 31, 2005. entry was required in Japan. Conversions of convertible bonds into common stock are (3) Retained earnings: accounted for in accordance with the provisions of the Japa- The amount of statutory retained earnings of Sony Corporation nese Commercial Code by crediting approximately one-half of available for dividends to shareholders as of March 31, 2005 the conversion proceeds to the common stock account and the was ¥557,856 million ($5,214million). The appropriation of remainder to the additional paid-in capital account. retained earnings for the year ended March 31, 2005 including Prior to the amendments to the Japanese Commercial Code cash dividends for the six-month period ended March 31, 2005 enacted on April 1, 2002, purchase and retirement by Sony has been incorporated in the accompanying consolidated Corporation of its own shares could be made at any time by financial statements. This appropriation of retained earnings was resolution of the Board of Directors. No common stock and approved at the meeting of the Board of Directors of Sony subsidiary tracking stock had been acquired under the approval Corporation held on May 16, 2005 and was then recorded in the during the year ended March 31, 2002. statutory books of account, in accordance with the Japanese Following the amendments to the Japanese Commercial Code Commercial Code.

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BH6/30 Page 108 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Retained earnings include Sony’s equity in undistributed method in the amount of ¥2,261 million and ¥2,724 million ($25 earnings of affiliated companies accounted for by the equity million) at March 31, 2004 and 2005, respectively.

(4) Other comprehensive income: Other comprehensive income for the years ended March 31, 2003, 2004 and 2005 were as follows: Yen in millions Pre-tax Tax Net-of-tax amount expense amount For the year ended March 31, 2003: Unrealized gains on securities— Unrealized holding gains (losses) arising during the period ...... ¥0(18,575) ¥ 08,948 ¥00(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 ...... ¥(089,861 ¥(31,890) ¥(057,971 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) ¥(022,019

For the year ended March 31, 2005: Unrealized gains on securities— Unrealized holding gains (losses) arising during the period ...... ¥ (07,184 ¥ (1,541) ¥( 05,643 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

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BH6/30 Page 109 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Dollars in millions Pre-tax Tax Net-of-tax amount expense amount For the year ended March 31, 2005: Unrealized gains on securities— Unrealized holding gains (losses) arising during the period ...... $(068 $(15) $(053 Less: Reclassification adjustment for gains (losses) included in net income ...... (170) 49 (121) Unrealized losses on derivative instruments— Unrealized holding gains (losses) arising during the period ...... (19) 17 (2) Less: Reclassification adjustment for gains (losses) included in net income ...... (27) 11 (16) Minimum pension liability adjustment ...... (16) 9 (7) Foreign currency translation adjustments— Translation adjustments arising during the period ...... 716 (22) 694 Other comprehensive income ...... $(552 $(49 $(601

During the years ended March 31, 2003 and 2004, ¥7,665 (2) Convertible bond plan: million and ¥1,232 million of foreign currency translation adjust- Sony has an equity-based compensation plan for selected ments were transferred respectively from other comprehensive executives of Sony’s United States of America subsidiaries using income and charged to income as a result of the liquidation of U.S. dollar-denominated non-interest bearing convertible bonds certain foreign subsidiaries. which have characteristics similar to that of an option plan. Each As discussed in Note 6, as of August 1, 2004, Sony and convertible bond can be converted into 100 shares of the Bertelsmann AG combined their recorded music businesses in a common stock of Sony Corporation at an exercise price based joint venture. In connection with the establishment of the joint on the prevailing market rate shortly before the date of grant. venture, the minimum pension liability attributable to employees The convertible bonds vest ratably over a three-year period and who were transferred to SONY BMG totaling ¥6,053 million ($57 are exercisable up to ten years from the date of grant. As the million) was transferred from other comprehensive income to the convertible bonds were issued in exchange for a non-interest carrying value of Sony’s investment in SONY BMG. bearing employee loan and a right of offset exists between the convertible bonds and the employee loans, no accounting recognition was given to either the convertible bonds or the 17. Stock-based compensation plans employee loans in Sony’s consolidated balance sheet. Sony has four types of stock-based compensation plans as incentive plans for directors, corporate executive officers and (3) Stock acquisition rights: selected employees. During the year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock (1) Warrant plan: acquisition rights for the purpose of granting stock options to Upon issuance of unsecured bonds with detachable warrants the directors, corporate executive officers and selected employ- which are described in Note 12, Sony Corporation has pur- ees of Sony, and subsidiary tracking stock acquisition rights for chased all of the detachable warrants and distributed them to the purpose of granting stock options to the directors and the directors, corporate executive officers and selected employ- selected employees of SCN, pursuant to the Commercial Code ees of Sony. By exercising a warrant, directors, corporate ex- of Japan. The stock acquisition rights generally vest ratably over ecutive officers and selected employees can purchase the a period of three years and are exercisable up to ten years from common stock or subsidiary tracking stock of Sony Corpora- the date of grant. tion, 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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BH6/30 Page 110 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Presented below is a summary of the activities regarding common stock warrant, convertible bond and stock acquisition rights plans for the years shown:

2003 2004 2005 Weighted- Weighted- Weighted- Weighted- Number of average Number of average Number of average average shares exercise price shares exercise price shares exercise price exercise price Years ended March 31 Yen Yen Yen Dollars Outstanding at beginning of the fiscal year ...... 5,853,892 ¥8,648 9,640,892 ¥7,832 11,705,592 ¥6,082 $56.84 Granted ...... 3,874,100 5,313 2,621,400 5,017 2,433,600 3,996 37.35 Exercised ...... ————(27,400) 3,896 36.41 Forfeited ...... (87,100) 8,306 (556,700) 6,760 (998,592) 5,923 55.36 Outstanding at end of the fiscal year ...... 9,640,892 ¥7,832 11,705,592 ¥6,082 13,113,200 ¥5,754 $53.78 Exercisable at end of the fiscal year ...... 4,314,292 ¥9,773 5,853,892 ¥7,522 7,223,600 ¥6,994 $65.36

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- Weighted- Weighted- Number of average average average Number of average average Exercise price range shares exercise price exercise price remaining life shares exercise price exercise price Yen YenDollars Years Yen Dollars ¥3,782–07,000 ...... 10,497,600 ¥04,680 $43.74. 8.24. 4,608,000 ¥05,250 $49.07. ¥7,001–13,202 ...... 2,615,600 10,065 94.07. 3.14. 2,615,600 10,065 94.07. ¥3,782–13,202 ...... 13,113,200 ¥05,754 $53.78. 7.22. 7,223,600 ¥06,994 $65.36.

A summary of subsidiary tracking stock warrants and stock acquisition rights outstanding and exercisable at March 31, 2005 is as follows:

As the exercise prices for the warrant, convertible bond and of the joint venture are no longer considered employees of Sony stock acquisition rights plans were determined based on the under FAS No. 123 as these individual are now employees of prevailing market price shortly before the date of grant, the SONY BMG which is accounted for under the equity method. As compensation expense for these plans was not significant for a result, a compensation charge of ¥340 million ($3 million) was the years ended March 31, 2003, 2004 and 2005. recorded based on the fair value method of accounting for As a result of the establishment of the joint venture between stock-based compensation using the Black-Scholes model. The Sony’s recorded music business with the recorded music busi- fair value of the options as of August 1, 2004, the date on which ness of Bertelsmann AG (Note 6), employees of Sony’s recorded the joint venture was established, was ¥538 million ($5 million) music business who were granted options under the convertible and is being recognized into income over the remaining vesting bond and stock acquisition rights plans prior to the establishment period of the options.

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BH6/30 Page 111 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC The weighted-average fair value per share at the date of grant using the Black-Scholes option-pricing model with the following of common stock warrants, convertible bond options and stock weighted-average assumptions: acquisition rights granted during the years ended March 31, 2003, 2004 and 2005 were ¥2,063, ¥1,413 and ¥1,085 Years ended March 31 2003 2004 2005 ($10.14), respectively. The fair value of common stock warrants, Weighted-average convertible bond options and stock acquisition rights granted on assumptions: the date of grant, which is amortized to expense over the vest- Risk-free interest rate . . . 2.76% 2.18% 2.04% ing period in determining the pro forma impact, is estimated Expected lives ...... 4.23 years 3.67 years 3.54 years Expected volatility . . . . . 47.33% 42.83% 35.56% Expected dividend . . . . . 0.47% 0.57% 0.62%

(4) SAR plan: Sony granted stock appreciation rights (“SARs”) in Japan, the date of grant. Sony holds treasury stock for the SAR plan in Europe and the United States of America for selected employ- Japan to minimize cash flow exposure associated with the ees. Under the terms of these plans, employees on exercise SARs. In addition, Sony uses various strategies to minimize the receive cash equal to the amount that the market price of Sony compensation expense associated with the SAR plans in the Corporation’s common stock exceeds the strike price of the United States of America and Europe. SARs. The SARs generally vest ratably over a period of three The status of the SAR plans is summarized as follows: years, and are generally exercisable up to six to ten years from

2003 2004 2005 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 Years ended March 31 Yen Yen Yen Dollars Outstanding at beginning of the fiscal year ...... 2,410,394 ¥6,644 2,343,028 ¥6,341 1,526,568 ¥6,424 $60.04. Granted ...... 28,750 6,323 — — ——— Exercised ...... (11,800) 5,727 — — (241,134) 3,955 36.96. Expired or forfeited ...... (84,316) 7,274 (816,460) 5,494 (420,350) 5,855 54.72. Outstanding at end of the fiscal year ...... 2,343,028 ¥6,341 1,526,568 ¥6,424 865,084 ¥7,436 $69.50. Exercisable at end of the fiscal year ...... 2,176,319 ¥6,211 1,462,391 ¥6,421 856,156 ¥7,455 $69.67.

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

Outstanding Exercisable Weighted- Weighted- Weighted- Weighted- Weighted- Number of average average average Number of average average Exercise price range SARs exercise price exercise price remaining life SARs exercise price exercise price Yen YenDollars Years Yen Dollars ¥03,234–05,000 ...... 61,850 ¥04,767 $044.55. 6.77. 61,850 ¥04,767 $044.55. ¥05,001–10,000 ...... 749,109 7,365 68.83. 1.08. 740,181 7,386 69.03. ¥10,001–13,419 ...... 54,125 11,471 107.21. 4.56. 54,125 11,471 107.21. ¥03,234–13,419 ...... 865,084 ¥07,436 $069.50. 1.70. 856,156 ¥07,455 $069.67.

In accordance with APB No. 25 and its related interpretations, SARs compensation expense of ¥670 million due to the decline the SARs compensation expense is measured as the excess of in Sony’s stock price during the year. For the year ended March the quoted market price of Sony Corporation’s common stock 31, 2004, Sony recognized ¥105 million of SARs compensation over the SARs strike price, which is consistent with the account- expense. For the year ended March 31, 2005, Sony recognized ing treatment prescribed for SAR plans in FAS No. 123. For the a reduction in SARs compensation expense of ¥74 million ($1 year ended March 31, 2003, Sony recognized a reduction in million).

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BH6/30 Page 112 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC 18. Restructuring charges and asset impairments next several years. The overall restructuring plan is still being As part of its effort to improve the performance of the various formulated as Sony is carefully monitoring the market situation in businesses, Sony has undertaken a number of restructuring each area. As a result, the expected completion date and total initiatives within the Electronics, Music and Pictures segments. estimated cost of this program cannot be determined at this time. For the years ended March 31, 2003, 2004 and 2005, Sony As part of its worldwide plan, Sony made a decision in the recorded total restructuring charges of ¥106,251 million, year ended March 31, 2004 to discontinue certain CRT TV ¥168,091 million and ¥89,963 million ($841 million), respectively. display manufacturing operations in Japan. Restructuring Significant restructuring charges and asset impairments include charges totaling ¥8,478 million consisted of personnel related the following: costs of ¥3,139 million and non-cash equipment impairment, disposal and other costs of ¥5,339 million. Of the total restruc- Electronics Segment turing charges, ¥158 million was recorded in cost of sales, In an effort to improve the performance of the Electronics seg- ¥3,139 million was included in selling, general and administrative ment, Sony has undergone a number of restructuring efforts to expenses, and ¥5,181 million was included in loss on sale, reduce its operating costs. For the years ended March 31, disposal or impairment of assets, net in the consolidated state- 2003, 2004 and 2005, Sony recorded total restructuring ments of income. This phase of the restructuring program was charges of ¥72,473 million, ¥143,310 million and ¥81,768 completed in the year ended March 31, 2004 and no liability million ($764 million), respectively, within the Electronics seg- existed as of March 31, 2005. ment. In addition to the above charges, the Electronics segment In the year ended March 31, 2005, as part of this restructuring also reflects restructuring of ¥7,950 million and ¥2,122 million program, Sony recorded a non-cash impairment charge of for the years ended March 31, 2003 and 2004, respectively, that ¥7,479 million ($70 million) for the CRT TV display manufactur- relate to the non-Japan based disc manufacturing and physical ing facilities located in Europe. The impairment charge was distribution businesses that were part of the restructuring calculated as the difference between the carrying value of the charges of the Music segment which is discussed below. These asset group and the present value of estimated future cash restructuring charges were formerly included within the Music flows. The charge was recorded in loss on sale, disposal or segment but were reclassified to the Electronics segment. See impairment of assets, net in the consolidated statements of Notes 6 and 25 for more information on this reclassification. income. This phase of the restructuring program was completed Significant restructuring activities are the following: in the year ended March 31, 2005 and no liability existed as of March 31, 2005. Downsizing of computer display CRT operations In the year ended March 31, 2003, due to the market shrinkage Aiwa Co., Ltd. restructuring and demand shift from CRT displays to LCDs, Sony made a Due to the continued decline in the operating results of Aiwa, decision to discontinue certain computer display CRT manufac- the restructuring program that was initiated in the year ended turing operations in Japan and Southeast Asia to rationalize March 31, 2002 was accelerated and additional restructuring production facilities and downsize its business. Restructuring charges of ¥23,007 million were recorded in the year ended charges totaling ¥6,902 million consisted of personnel related March 31, 2003. Additional restructuring included further cuts in costs of ¥1,208 million, non-cash equipment impairment and staffing levels and the shutdown of remaining production facili- disposal costs of ¥4,010 million and contract termination and ties. These charges consisted of non-cash equipment impair- other costs of ¥1,684 million. Of the total restructuring charges, ment and disposal costs of ¥3,504 million, personnel related ¥1,264 million was recorded in cost of sales; ¥1,684 million was costs of ¥7,647 million, devaluation of inventory of ¥6,144 included in selling, general and administrative expenses, and million, operating lease termination costs of ¥3,823 million and ¥3,954 million was recorded in loss on sale, disposal or impair- other costs of ¥1,889 million. Among these charges ¥13,791 ment of assets, net in the consolidated statements of income. million was recorded in cost of sales, ¥5,712 million was in- The restructuring activity was completed in the year ended cluded in selling, general and administrative expenses, and March 31, 2003 and no liability existed as of March 31, 2004. ¥3,504 million was included in loss on sale, disposal or impairment of assets, net in the consolidated statements of income. Downsizing of CRT TV display operations The restructuring program was completed in the year ended Due to the worldwide market shrinkage and demand shift from March 31, 2003 and no liability existed as of March 31, 2003. CRT displays to plasma and LCD panel displays, Sony has Aiwa Co., Ltd. was merged into Sony Corporation as of Decem- begun to implement a worldwide plan to rationalize production ber 1, 2002. facilities of CRT TV display and downsize its business over the

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BH6/30 Page 113 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC Closing of a semiconductor plant in the U.S. CD market, the effects of piracy and other illegal duplication, Due to a significant decline in the business conditions of the parallel imports, pricing pressures and the diversification of U.S. semiconductor industry, Sony made a decision in the fourth customer preferences, Sony has been actively repositioning the quarter of the year ended March 31, 2003, to close a semicon- Music segment for the future by looking to create a more effec- ductor plant in the U.S. This restructuring activity was substan- tive and profitable business model. As a result, the Music seg- tially completed in the year ended March 31, 2005 and total ment has undergone a worldwide restructuring program since restructuring charges of ¥4,936 million ($46 million) have been the year ended March 31, 2001 to reduce staffing and other incurred through March 31, 2005. The remaining liability balance costs through the consolidation and rationalization of facilities as of March 31, 2005 was ¥161 million ($2 million) and will be worldwide excluding Japan. As part of this restructuring pro- paid or settled through the year ended March 31, 2006. gram, Sony combined its recorded music business with the During the year ended March 31, 2003, Sony recorded recorded music business of Bertelsmann AG to form SONY restructuring charges totaling ¥5,856 million, which consisted BMG, a joint venture that is accounted for under the equity of the accelerated depreciation of equipment of ¥3,128 million, method. See Note 6 for more information on this transaction. personnel related costs of ¥1,329 million and the devaluation of For the years ended March 31, 2003, 2004 and 2005, Sony inventory and other costs of ¥1,399 million. These charges were recorded total restructuring charges of ¥22,350 million, ¥10,691 all recorded in cost of sales in the consolidated statements million and ¥3,025 million ($28 million), respectively, related to of income. the restructuring of the Music segment excluding Japan. Of During the year ended March 31, 2004, Sony recorded net these restructuring charges, ¥7,950 million and ¥2,122 million restructuring charges totaling ¥874 million which consisted of for the years ended March 31, 2003 and 2004, respectively, the accelerated depreciation and write-down of equipment of were recorded in the non-Japan based disc manufacturing and ¥1,982 million, gain on disposal of assets of ¥1,962 million, and physical distribution businesses, formerly included within the ¥854 million of other costs including lease contract termination Music segment but reclassified to the Electronics segment. See costs. Among these charges ¥1,760 million was recorded in Notes 6 and 25 for more information on this reclassification. This cost of sales, while asset write-down and disposal costs of worldwide restructuring of the Music segment is expected to be ¥1,076 million and the gain on asset disposals of ¥1,962 million completed during the year ended March 31, 2006, and the total were included in loss on sale, disposal or impairment of assets, cost of the program is estimated to be ¥53,106 million ($496 net in the consolidated statements of income. million), of which ¥52,573 million ($491 million) was incurred from During the year ended March 31, 2005, Sony sold the facilities the inception of the program through the year ended March 31, and recorded a gain on disposal of ¥1,794 million ($17 million). 2005. The restructuring costs within the Music segment do not The gain was included in loss (gain) on disposal or impairment of include the restructuring costs of SONY BMG since the establish- assets, net in the consolidated statements of income. ment of the joint venture. At March 31, 2005, the liability balance was ¥1,856 million ($17 million) with most of the liabilities to be Retirement programs paid or settled during the year ending March 31, 2006. In addition to the restructuring efforts disclosed above, Sony has In addition to the above, Sony also recorded restructuring undergone several headcount reduction programs to further reduce charges of ¥1,519 million, ¥1,291 million and ¥ 803 million ($8 operating costs in the Electronics segment. As a result of these million) for the years ended March 31, 2003, 2004 and 2005, programs, Sony recorded restructuring charges totaling ¥22,236 respectively, in Japan, which were primarily personnel related million, ¥114,870 million and ¥50,276 million ($470 million) for costs included in selling, general and administrative expenses the years ended March 31, 2003, 2004 and 2005, respectively, in the consolidated statement of income. and these charges were included in selling, general and admin- Significant restructuring activities included the following: istrative expenses in the consolidated statements of income. In the year ended March 31, 2003, restructuring charges related These staff reductions were achieved worldwide mostly through to the worldwide restructuring of the Music segment totaled the implementation of early retirement programs. The remaining ¥22,350 million. Restructuring activities included the further liability balance as of March 31, 2005 was ¥14,011 million ($131 consolidation of operations through the shutdown of a cassette million) and will be paid through the year ending March 31, 2006. and CD manufacturing and distribution center in Holland and a Sony will continue seeking the appropriate level of headcount to CD manufacturing facility in the U.S. as well as further staff optimize the workforce in the Electronics segment. reductions in other areas. The restructuring charges consisted of personnel related costs of ¥14,932 million, non-cash asset Music Segment impairment and disposal costs of ¥3,256 million and other costs Due to the continued contraction of the worldwide music market of ¥4,162 million including lease termination costs. Among these due to slow worldwide economic growth, the saturation of the charges ¥19,094 million was recorded in selling, general and

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BH6/30 Page 114 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC administrative expenses, and ¥3,256 million was included in loss companies and other production and distribution companies to on sale, disposal or impairment of assets, net in the consolidated license product to the major televisions networks is becoming statements of income. Employees were eliminated across more intense. This competitive environment has resulted in various employee levels, business functions, operating units, fewer opportunities to produce shows for the networks and a and geographic regions during this phase of the worldwide shorter lifespan for ordered shows that do not immediately restructuring program. achieve favorable ratings. This trend has resulted in an increase During the year ended March 31, 2004, Sony broadened the in the number of new programs being distributed yet canceled in scope of its worldwide restructuring of the Music segment, their first or second season, which are generally less profitable, which resulted in restructuring charges totaling ¥10,691 million. and a decrease in the number of network programs that are Restructuring activities included the continuation of the shut- able to achieve syndication, which are generally more profitable. down of the CD manufacturing facility in the U.S. as well as the As a result, in the year ended March 31, 2002, Sony decided to restructuring of music label operations and the further rational- consolidate its television operations and downsize the network ization of overhead functions through staff reductions. The television production business in the Pictures segment. In the year restructuring charges consisted of personnel related costs of ended March 31, 2003, Sony recorded restructuring charges ¥5,137 million, lease abandonment costs of ¥1,323 million and totaling ¥480 million. These costs were included in cost of sales other related costs of ¥4,231 million including non-cash asset in the consolidated statements of income. This restructuring impairment and disposal costs. Most of these charges are program was completed in the year ending March 31, 2005, included in selling, general and administrative expenses in the and the total cost of the program from the inception was ¥8,932 consolidated statements of income. Employees were eliminated million ($83 million). No liability existed as of March 31, 2005. across various employee levels, business functions, operating units, and geographic regions during this phase of the world- Fixed cost reduction program wide restructuring program. During the year ended March 31, 2004, the Pictures segment During the year ended March 31, 2005, in continuation of the implemented a fixed cost reduction program to further reduce its worldwide restructuring program and in connection with the operating costs. This restructuring program primarily related to establishment of the joint venture with Bertelsmann AG (Note 6), the reduction of staffing levels and the disposal of certain long- Sony recorded restructuring charges totaling ¥3,025 million ($28 lived assets. This restructuring program was substantially com- million) within the Music segment. Restructuring activities included pleted during the year ended March 31, 2005 and the total cost the shutdown of certain distribution operations that were no of this restructuring program was ¥4,996 million ($47 million). longer required as a result of the recorded music joint venture The Pictures segment recorded ¥4,611 million of these costs with Bertelsmann AG as well as the further rationalization of during the year ended March 31, 2004. These restructuring overhead functions through staff reductions. The restructuring charges consisted of personnel related costs of ¥993 million, charges consisted of personnel related costs of ¥883 million non-cash asset impairment and disposal costs of ¥1,746 million, ($8 million) and other related costs of ¥2,142 million ($20 mil- and other costs of ¥1,872 million including those relating to the lion). These charges are included in selling, general and adminis- buy-out of term deal commitments. Of the restructuring costs trative expenses in the consolidated statements of income. incurred, ¥1,525 million was included in cost of sales, ¥1,340 Employees were eliminated across various employee levels, million was included in selling, general and administrative business functions, operating units, and geographic regions expenses, and ¥1,746 million was included in loss on sale, during this phase of the worldwide restructuring program. disposal or impairment of assets, net in the consolidated statements of income. Pictures Segment During the year ended March 31, 2005, the Pictures segment In an effort to improve the performance of the Pictures segment, substantially completed the fixed cost reduction program and Sony has undergone a number of restructuring efforts to reduce recorded ¥385 million ($4 million) of additional restructuring its operating costs. For the years ended March 31, 2003, 2004 costs. These restructuring charges consisted primarily of per- and 2005, Sony recorded total restructuring charges of ¥480 sonnel related costs of ¥292 million ($3 million) which were million, ¥4,611 million and ¥385 million ($4 million), respectively, included in selling, general and administrative expenses in the within the Pictures segment. Significant restructuring activities consolidated statements of income. At March 31, 2005, the are the following: remaining liability balance was ¥207 million ($2 million), which will be paid or settled over the next year. Consolidation of television operations Due to changes within the television production and distribution business, the competition between network owned production

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BH6/30 Page 115 05.7.7, 3:33 AM Adobe PageMaker 6.0J/PPC The changes in the accrued restructuring charges for the years ended March 31, 2003, 2004 and 2005 are as follows: Yen in millions Employee Non-cash Other termination write-downs associated benefits and disposals costs Total Balance at March 31, 2002 ...... ¥ 6,243 — ¥ 13,637 ¥ 19,880 Restructuring costs ...... 46,953 ¥ 42,768 16,530 106,251 Non-cash charges ...... — (42,240) — (42,240) Cash payments ...... (38,548) — (23,172) (61,720) Adjustments ...... 136 (528) (1,208) (1,600) Balance at March 31, 2003 ...... 14,784 — 5,787 20,571 Restructuring costs ...... 133,367 19,170 15,554 168,091 Non-cash charges ...... — (19,170) — (19,170) Cash payments ...... (124,674) — (13,686) (138,360) Adjustments ...... 1,173 0 333 1,506 Balance at March 31, 2004 ...... 24,650 — 7,988 32,638 Restructuring costs ...... 53,563 25,564 10,836 89,963 Non-cash charges ...... — (25,564) — (25,564) Cash payments ...... (61,523) — (10,427) (71,950) Adjustments* ...... (1,705) — (3,096) (4,801) Balance at March 31, 2005 ...... ¥ 14,985 — ¥ 5,301 ¥ 20,286 Dollars in millions Employee Non-cash Other termination write-downs associated benefits and disposals costs Total Balance at March 31, 2004 ...... $ 230 — $ 75 $ 305 Restructuring costs ...... 501 $ 239 101 841 Non-cash charges ...... — (239) — (239) Cash payments ...... (575) — (97) (672) Adjustments* ...... (16) — (29) (45) Balance at March 31, 2005 ...... $ 140 — $ 50 $ 190 *Adjustments primarily consist of the transfer of the accrued restructuring charges to SONY BMG, a joint venture with Bertelsmann AG (Note 6).

19. Research and development costs, advertising and ¥107,983 million ($1,009 million), respectively, which included costs and shipping and handling costs the internal transportation costs of finished goods. (1) Research and development costs: Research and development costs charged to cost of sales for the years ended March 31, 2003, 2004 and 2005 were ¥443,128 20. Gain on change in interest in subsidiaries and million, ¥514,483 million and ¥502,008 million ($4,692 million), equity investees respectively. In January 2004, FeliCa Networks, Inc., whose field of business is Mobile FeliCa IC chip development and production/sales (2) Advertising costs: licensing and operation of the Mobile FeliCa service platform, Advertising costs included in selling, general and administrative issued 115,000 shares at ¥100,000 per share with a total value expenses for the years ended March 31, 2003, 2004 and 2005 of ¥11,500 million in connection with its private offering. As a were ¥442,741 million, ¥421,433 million and ¥359,661 million result of this issuance, Sony recorded a gain of ¥3,364 million ($3,361 million), respectively. and provided deferred taxes on this gain. This issuance reduced Sony’s ownership interest from 100% to 60%. (3) Shipping and handling costs: In addition to the above transaction, for the year ended March Shipping and handling costs for finished goods included in selling, 31, 2004, Sony recognized ¥1,506 million of other gains on general and administrative expenses for the years ended March change in interest in subsidiaries and equity investees resulting 31, 2003, 2004 and 2005 were ¥98,195 million, ¥106,590 million in total gains of ¥4,870 million.

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BH6/30 Page 116 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC In August 2, 2004, Monex Inc., which provides on-line security In June 6, 2005, SCN sold 17,935 shares of So-net M3 Inc., trading services in Japan, and Nikko Beans, Inc. established at ¥694,600 ($6,492) per share with a total value of ¥12,458 Monex Beans Holdings, Inc. by way of share transfer of the million ($116 million). As a result of this sale, Sony records existing shares of Monex Inc. and Nikko Beans, Inc.. At this ¥11,979 million ($112 million) gain on the sale of its stock for the establishment, 1 share of Monex Beans Holdings, Inc. was year ending March 31, 2006, and Sony’s ownership interest has allotted to each share of Monex Inc. and 3.4 shares of Monex been reduced from 74.8% to 60.8%. Beans Holdings, Inc. were allotted to each share of Nikko In January 2005, DeNA Co., Ltd., whose field of business is Beans, Inc.. As a result of this share transfer, Monex Beans operation of on-line auction websites in Japan, issued 14,000 Holdings, Inc. issued 2,341,287 shares and Sony recorded a shares at ¥204,600 ($1,912) per share with a total value of gain of ¥8,951 million ($84 million) and provided deferred taxes ¥2,864 million ($27 million) in connection with its initial public on this gain. This issuance reduced Sony’s ownership interest offering. In March 2005, SCN, which had owned 27.7% interest from 29.9% to 20.1%. in DeNA Co., Ltd., sold 2,000 shares of DeNA Co., Ltd. at In September 2004, So-net M3 Inc., which provides medical ¥204,600 ($1,912) per share with a total value of ¥409 million services via the Internet in Japan, issued 2,800 shares at ($4 million). As a result of these transactions, Sony recorded a ¥850,000 ($7,944) per share with a total value of ¥2,380 million ¥686 million ($6 million) gain on issuance of stock by DeNA Co., ($22 million) in connection with its initial public offering. SCN, a Ltd. and provided deferred taxes on this gain. In addition, Sony parent company of So-net M3 Inc., sold 3,260 shares of So-net recorded a ¥76 million ($1 million) gain on the sale of its stock. M3 Inc., at ¥790,500 ($7,388) per share with a total value of These transactions reduced Sony’s ownership interest from ¥2,577 million ($24 million). In October 2004, SCN sold 740 27.7% to 24.8%. shares of So-net M3 Inc., at ¥790,500 ($7,388) per share with a In addition to the above transactions, for the year ended total value of ¥585 million ($5 million). As a result of these trans- March 31, 2005, Sony recognized ¥1,911 million ($18 million) of actions, Sony recorded a ¥1,823 million ($17 million) gain on other gains on change in interest in subsidiaries and equity issuance of stock by So-net M3 Inc. and provided deferred investees resulting in total gains of ¥16,322 million ($153 million). taxes on this gain. In addition, Sony recorded a ¥2,876 million These transactions were not part of a broader corporate reorgani- ($27 million) gain on the sale of its stock. These transactions zation and the reacquisition of such shares was not contemplated reduced Sony’s ownership interest from 90.0% to 74.8%. at the time of issuance.

21. Income taxes Income before income taxes and income tax expense comprise the following:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Income (loss) before income taxes: Sony Corporation and subsidiaries in Japan ...... ¥ (7,998) ¥ (84,571) ¥005,005 $0,047 Foreign subsidiaries ...... 255,619 228,638 152,202 1,422 ...... ¥247,621 ¥144,067 ¥157,207 $1,469 Income taxes—Current: Sony Corporation and subsidiaries in Japan ...... ¥069,311 ¥ 22,286 ¥ 23,497 $ 220 Foreign subsidiaries ...... 109,536 64,933 62,013 579 ...... ¥178,847 ¥ 87,219 ¥ 85,510 $ 799 Income taxes—Deferred: Sony Corporation and subsidiaries in Japan ...... ¥ (90,016) ¥ (32,845) ¥ 0(4,976 $ 47 Foreign subsidiaries ...... (8,000) (1,600) (74,442) (696) ...... ¥ (98,016) ¥ (34,445) ¥ (69,466) $ (649)

Sony is subjected to a number of different income taxes. Due ning with the year ended March 31, 2004. Under the Japanese to changes in Japanese income tax regulations, a consolidated consolidated tax filing system, a 2% surtax was imposed only tax filing system was introduced on April 1, 2002. Sony applied for the year ended March 31, 2004. As a result, the statutory tax to file its return under the consolidated tax filing system begin- rate was 43.9% for the year ended March 31, 2004.

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BH6/30 Page 117 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC During the year ended March 31, 2005, a corporation size- approximately 41% effective April 1, 2004. The effect of the based enterprise tax was introduced in Japan and the portion change in the tax rate on the balance of deferred tax assets of enterprise tax subject to income was reduced. As a result, and liabilities was insignificant. the statutory tax rate for the year ended March 31, 2005 was

Reconciliation of the differences between the statutory tax rate and the effective income tax rate is as follows:

Years ended March 31 2003 2004 2005 Statutory tax rate ...... 42.0% 43.9% 41.0%

Increase (reduction) in taxes resulting from: Income tax credits ...... (1.9) (2.4) (0.1) Change in valuation allowances ...... 5.5 6.5 (22.7) Decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries ...... (14.8) (9.2) (4.0) Lower tax rate applied to life and non-life insurance business in Japan...... (0.6) (2.6) (1.9) Other ...... 2.4 0.4 (2.1) Effective income tax rate ...... 32.6% 36.6% 10.2%

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

Dollars in Yen in millions millions March 31 2004 2005 2005 Deferred tax assets: Operating loss carryforwards for tax purposes ...... ¥(196,308 ¥(193,212 $(1,806 Accrued pension and severance costs ...... 150,073 159,610 1,492 Film costs ...... 54,194 56,746 530 Warranty reserve and accrued expenses ...... 45,664 56,551 529 Future insurance policy benefits ...... 35,855 36,654 343 Accrued bonus ...... 36,285 34,536 323 Inventory—intercompany profits and write-down ...... 30,241 30,270 283 Depreciations ...... 14,108 15,320 143 Tax credit carryforwards ...... 13,740 8,552 80 Reserve for doubtful accounts ...... 14,005 6,574 61 Other ...... 141,731 153,525 1,434 Gross deferred tax assets ...... 732,204 751,550 7,024 Less: Valuation allowance ...... (127,577) (89,110) (833) Total deferred tax assets ...... 604,627 662,440 6,191

Deferred tax liabilities: Insurance acquisition costs ...... (125,768) (135,083) (1,262) Unbilled accounts receivable in the Pictures business ...... (71,586) (57,314) (536) Unrealized gains on securities ...... (45,239) (41,564) (388) Intangible assets acquired through exchange offerings ...... (36,490) (35,418) (331) Undistributed earnings of foreign subsidiaries ...... (44,778) (30,865) (288) Gain on securities contribution to employee retirement benefit trust ...... (16,899) (6,184) (58) Other ...... (39,435) (58,714) (550) Gross deferred tax liabilities ...... (380,195) (365,142) (3,413) Net deferred tax assets ...... ¥(224,432 ¥(297,298 $(2,778

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BH6/30 Page 118 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC The valuation allowance mainly relates to deferred tax assets At March 31, 2005, no deferred income taxes have been of Sony Corporation and certain consolidated subsidiaries with provided on undistributed earnings of foreign subsidiaries not operating loss carryforwards and tax credit carryforwards for tax expected to be remitted in the foreseeable future totaling purposes that are not expected to be realized. The net changes in ¥988,515 million ($9,238 million), and on the gain of ¥61,544 the total valuation allowance were a decrease of ¥136,140 million million on a subsidiary’s sale of stock arising from the issuance for the year ended March 31, 2003, an increase of ¥11,509 of common stock of Sony Music Entertainment (Japan) Inc. million for the year ended March 31, 2004 and a decrease of (“SMEJ”) in a public offering to third parties in November 1991, ¥38,467 million ($360 million) for the year ended March 31, 2005. as Sony does not anticipate any significant tax consequences As a result of recording of operating losses in the past, the on possible future disposition of its investment based on its tax U.S. subsidiaries of Sony have had valuation allowances against planning strategies. The unrecognized deferred tax liabilities as deferred tax assets for U.S. federal and certain state taxes. of March 31, 2005 for such temporary differences amounted to However, based on both improved operating results in recent ¥217,792 million ($2,035 million). years and a sound outlook for the future operating performance Operating loss carryforwards for corporate income tax and of Sony’s U.S. subsidiaries, Sony reversed ¥67,892 million ($635 local income tax purposes of Sony Corporation and certain million) of valuation allowance, resulting in a reduction of income consolidated subsidiaries in Japan at March 31, 2005 amounted tax expenses for the year ended March 31, 2005. to ¥266,763 million ($2,493 million) and ¥520,556 million For the year ended March 31, 2003, ¥33,525 million of the ($4,865 million), respectively, which are available as an offset decrease in the valuation allowance relates to the realization of tax against future taxable income. Deferred tax asset on the operat- benefits from operating loss carryforwards that were acquired in ing loss carryforwards for corporate income tax and local in- connection with Sony’s acquisition of companies within the come tax in Japan are calculated by multiplying approximately Electronics, Music and Pictures segments. The reversal of the 28% and 13%, respectively. valuation allowance upon realization of tax benefit from operating Operating loss carryforwards for tax purposes of certain loss carryforwards resulted in the reduction of goodwill. foreign consolidated subsidiaries at March 31, 2005 amounted Tax benefits which have been realized through utilization of to ¥139,100 million ($1,300 million). operating loss carryforwards for the years ended March 31, With the exception of ¥115,714 million ($1,081 million) with no 2003, 2004 and 2005 were approximately ¥19,000 million, expiration period, total available operating loss carryforwards ¥12,000 million and ¥30,000 million ($280 million), respectively. expire at various dates primarily up to 7 years. Net deferred tax assets are included in the consolidated Tax credit carryforwards for tax purposes at March 31, 2005 balance sheets as follows: amounted to ¥8,552 million ($80 million). With the exception of ¥6,995 million ($65 million) with no expiration period, total Dollars in Yen in millions millions available tax credit carryforwards expire at various dates prima- March 31 2004 2005 2005 rily up to 9 years. Realization is dependent on whether such companies will be able to generate sufficient taxable income Current assets— prior to expiration of the loss carryforwards and tax credit Deferred income taxes . . . . ¥125,532 ¥141,154 $1,319 carryforwards. Although realization is not assured, management Other assets— believes it is more likely than not that all of the deferred tax Deferred income taxes . . . . 203,203 240,396 2,247 assets, less valuation allowance, will be realized. The amount of Current liabilities— such net deferred tax assets considered realizable, however, Other ...... (8,110) (12,025) (113) could be changed in the near term if estimates of future taxable Long-term liabilities— income during the carryforward period are changed. Deferred income taxes . . . . (96,193) (72,227) (675) Net deferred tax assets . . . . ¥224,432 ¥297,298 $2,778

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BH6/30 Page 119 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC 22. 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:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Income before cumulative effect of an accounting change allocated to the common stock . . ¥115,648 ¥90,756 ¥168,498 $1,575 Income before cumulative effect of an accounting change allocated to the subsidiary tracking stock ...... (129) (128) 53 0 Income before cumulative effect of an accounting change ...... ¥115,519 ¥90,628 ¥168,551 $1,575

Net income allocated to the common stock ...... ¥115,648 ¥88,639 ¥163,785 $1,531 Net income allocated to the subsidiary tracking stock ...... (129) (128) 53 0 Net income ...... ¥115,519 ¥88,511 ¥163,838 $1,531

As discussed in Note 2, the earnings allocated to the subsid- in Note 16) used for computation of earnings per share attribut- iary tracking stock are determined based on the subsidiary able to subsidiary tracking stock were ¥779 million, ¥1,764 tracking stockholders’ economic interest. The accumulated million and ¥1,358 million ($13 million) as of March 31, 2003, losses of SCN (the subsidiary tracking stock entity as discussed 2004 and 2005, respectively.

(2) EPS attributable to common stock: Reconciliation of the differences between basic and diluted EPS for the years ended March 31, 2003, 2004 and 2005 is as follows: . Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Income before cumulative effect of an accounting change allocated to the common stock . . ¥115,648 ¥90,756 ¥168,498 $1,575 Effect of dilutive securities: Convertible bonds ...... 2,398 2,260 1,209 11 Subsidiary tracking stock ...... —— (0) (0) Income before cumulative effect of an accounting change allocated to the common stock for diluted EPS computation ...... ¥118,046 ¥93,016 ¥169,707 $1,586

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

YenDollars Basic EPS ...... ¥125.74. ¥98.26. ¥180.96. $1.69. Diluted EPS ...... ¥118.21. ¥89.03. ¥162.59. $1.52. .

Potential common stock upon the exercise of warrants and have a potentially dilutive effect by decreasing net income stock acquisition rights, which were excluded from the compu- allocated to common stock, were excluded from the computa- tation of diluted EPS since they have an exercise price in excess tion of diluted EPS since they did not have a dilutive effect. of the average market value of Sony’s common stock during the Stock options issued by affiliated companies accounted for fiscal year, were 4,141 thousand shares, 6,796 thousand under the equity method for the years ended March 31, 2003, shares, and 7,987 thousand shares for the years ended March 2004 and 2005, which have a potentially dilutive effect by 31, 2003, 2004 and 2005, respectively. decreasing net income allocated to common stock, were ex- Warrants and stock acquisition rights of subsidiary tracking cluded from the computation of diluted EPS since such stock stock for the years ended March 31, 2003 and 2004, which options did not have a dilutive effect.

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BH6/30 Page 120 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC On October 1, 2002, Sony implemented a share exchange as defined, and is responsible for all distribution and marketing a result of which Aiwa Co.,Ltd. became a wholly-owned subsid- expenses, which are recouped from such distribution fees. The iary. As a result of this share exchange, Sony issued 2,502 VIE was capitalized with total financing of ¥43,584 million. Of thousand shares. The shares were included in the computation this amount, ¥1,181 million was contributed by the subsidiary, of basic and diluted EPS. ¥10,198 million was provided by unrelated third party investors On May 1, 2003, Sony implemented a share exchange as a and the remaining funding is provided through a ¥32,205 million result of which CIS Corporation became a wholly-owned subsid- bank credit facility. On July 1, 2003, Sony consolidated this entity. iary. As a result of this share exchange, Sony issued 1,088 Upon consolidation of the VIE, assets and liabilities increased by thousand shares. The shares were included in the computation ¥10,179 million and ¥10,586 million, respectively, and a cumula- of basic and diluted EPS. tive effect of accounting change of ¥388 million was charged to As a result of the adoption of EITF Issue No. 04-8, Sony’s net income with no tax effect. As of March 31, 2005, the total diluted EPS of income before cumulative effect of an accounting outstanding under the bank credit facility was ¥6,441 million change for the year ended March 31, 2004 was restated in the ($60 million). Under the agreement, the subsidiary’s ¥1,181 above table (Note 2). million ($11 million) equity investment is the last equity to be repaid. Additionally, it must pay to the third party investors up (3) EPS attributable to subsidiary tracking stock: to ¥2,040 million ($19 million) of any losses out of a portion of Weighted-average shares used for computation of EPS attribut- its distribution fees. Any losses incurred by the VIE over and able to subsidiary tracking stock for the years ended March 31, above ¥3,221 million ($30 million) will be shared by the other 2003, 2004 and 2005 were 3,072 thousand shares. As dis- investors. The subsidiary acquired the international distribution cussed in Note 2, there were no potentially dilutive securities for rights, as defined, to twelve pictures meeting certain minimum EPS of subsidiary tracking stock outstanding at March 31, requirements within the time period provided in the agreement. 2003, 2004 and 2005. 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 23. Variable interest entities July 1, 2003, Sony consolidated this entity. Upon consolidation Sony has, from time to time, entered into various arrangements of the VIE, assets and liabilities increased by ¥61,320 million and with VIEs. These arrangements consist of facilities which provide ¥60,329 million, respectively. However, there was no impact to for the leasing of certain property, the financing of film production, Sony’s net income. On November 4, 2004, Sony purchased the the development and operation of a multi-use real estate complex remaining shares of the VIE from other partners. As a result, it is and the implementation of a stock option plan for Japanese now a 100% owned subsidiary and no longer a VIE. employees. As described in Note 2, the FASB issued FIN No. 46, Sony has utilized a VIE to implement a stock option plan for which requires the consolidation or disclosure of VIEs. The VIEs selected Japanese employees. The VIE has been consolidated by that have been consolidated by Sony are described as follows: Sony since its establishment. With respect to this entity, there was Sony leases the headquarters of its U.S. subsidiary from a no impact to Sony’s results of operations and financial position VIE, which has been consolidated by Sony since July 1, 2003. upon the adoption of FIN No. 46. Under the terms of the stock Upon consolidation of the VIE, assets and liabilities increased by option plan, upon exercise, Japanese employees receive cash ¥25,277 million and ¥27,035 million, respectively, and a cumula- equal to the amount that the market price of Sony Corporation’s tive effect of accounting change of ¥1,729 million was charged to common stock exceeds the strike price of the plan. In order to net income with no tax effect. Sony has the option to purchase minimize cash flow exposure associated with the plan, Sony the building at any time during the lease term which expires in holds treasury stock through the VIE. The VIE purchased the December 2008 for ¥27,374 million ($256 million). The debt held common stock with funding provided by the employee’s cash by the VIE is unsecured. At the end of the lease term, Sony has contribution and a bank loan. At March 31, 2005, the balance of agreed to either renew the lease, purchase the building or the bank loan was ¥3,034 million ($28 million). remarket it to a third party on behalf of the owner. If the sales price As of March 31, 2005, there is no VIE in which Sony holds a is less than ¥27,374 million ($256 million), Sony is obligated to significant variable interest that Sony is not the primary beneficiary. make up the lesser of the shortfall or ¥22,973 million ($215 million). As described in Note 6, on April 8, 2005, a consortium led by A subsidiary in the Pictures segment entered into a joint SCA and its equity partners completed the acquisition of MGM. venture agreement with a VIE for the purpose of funding the Sony has reviewed the investment and determined that MGM is acquisition of certain international film rights. The subsidiary is a VIE. However, MGM will not be consolidated but accounted required to distribute the product internationally, for contractually for under the equity method as Sony is not the primary beneficiary defined fees determined as percentages of gross receipts, as of this VIE.

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BH6/30 Page 121 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC 24. Commitments and contingent liabilities B. Loan Commitments (1) Commitments: Subsidiaries in the Financial Services segment have entered into A. Purchase Commitments loan agreements with their customers in accordance with the Commitments outstanding at March 31, 2005 amounted to condition of the contracts. As of March 31, 2005, the total unused ¥240,729 million ($2,250 million). The major components of portion of the line of credit extended under these contracts was these commitments are as follows: ¥199,878 million ($1,868 million). In the ordinary course of business, Sony makes commitments At August 2004, Sony and Bertelsmann AG (“Bertelsmann”) for the purchase of property, plant and equipment. As of March combined their recorded music businesses in a joint venture. In 31, 2005, such commitments outstanding were ¥83,683 million connection with the establishment of the SONY BMG joint ($782 million). venture, Sony and Bertelsmann have entered into a 5 year Certain subsidiaries in the Pictures segment have entered into Revolving Credit Agreement with the joint venture. Under the agreements with creative talent for the development and pro- terms of the Credit Agreement, Sony and Bertelsmann have duction of films and television programming as well as agree- each agreed to provide one-half of the funding. The Credit ments with third parties to acquire completed films, or certain Agreement, which matures on August 5, 2009, provides for a rights therein. These agreements cover various periods through base commitment of $300 million and additional incremental March 31, 2008. As of March 31, 2005, these subsidiaries were borrowings of up to $150 million. As of March 31, 2005, the joint committed to make payments under such contracts of ¥51,625 venture had no borrowings outstanding under the Credit Agree- million ($482 million). ment. Accordingly, Sony’s outstanding commitment under the A subsidiary in the Pictures segment has also entered into a Credit Agreement as of March 31, 2005 was ¥24,075 million distribution agreement with a third party to distribute, in certain ($225 million). markets and territories, all feature length films produced or The aggregate amounts of future year-by-year payments for acquired by the third party during the term of the agreement. these loan commitments cannot be determined. The distribution agreement expires on December 31, 2006 if a minimum of 36 films have been delivered as of that date. If 36 (2) Contingent liabilities: films have not been delivered by December 31, 2006, the Sony had contingent liabilities including guarantees given in the distribution agreement expires on the earlier of the delivery of the ordinary course of business, which amounted to ¥26,049 million 36th film or May 25, 2007. It is estimated that the third party will ($243 million) at March 31, 2005. The major components of the produce or acquire a total of 39 films under the distribution contingent liabilities are as follows: agreement. The subsidiary has the right to distribute the films for Sony has issued loan guarantees to related parties comprised 15 years from the initial theatrical release of the film. Under the of affiliated companies accounted for under the equity method terms of the distribution agreement, the subsidiary must fund a and unconsolidated subsidiaries. The terms of these guarantees portion of the production cost and is responsible for all distribu- are mainly within 1 year. Sony would be required to perform tion and marketing expenses. As of March 31, 2005, 29 films under these guarantees upon non-performance of the primary have been released or funded by the subsidiary. The subsidiary’s borrowers. The contingent liability related to these guarantees estimated commitment to fund the production of the remaining was ¥7,642 million ($71 million) and was not recorded on the films under this agreement is ¥30,455 million ($285 million). consolidated balance sheet as of March 31, 2005. The schedule of the aggregate amounts of year-by-year The European Commission (“EC”) has issued the Waste payment of purchase commitments during the next five years Electrical and Electronic Equipment (“WEEE”) directive in February and thereafter is as follows: 2003. The WEEE directive will require electronics producers after August 2005 to be responsible for organizing a scheme, and Yen in Dollars in millions millions possibly financing the cost, for collection, treatment, recovery and safe disposal of waste products. While the cost of this Year ending March 31: directive to Sony cannot be determined before regulation is 2006 ...... ¥145,111 $1,357 adopted in individual member states, Sony continues to evaluate 2007 ...... 53,753 502 the impact of adopting this regulation. 2008 ...... 16,412 153 Sony has agreed to indemnify certain third parties against tax 2009 ...... 1,632 15 losses resulting from transactions entered into in the normal 2010 ...... 712 7 course of business. The maximum amount of potential future Thereafter ...... 23,109 216 payments under these guarantees cannot be estimated at this Total ...... ¥240,729 $2,250 time. These guarantees were not recorded on the consolidated balance sheet as of March 31, 2005.

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BH6/30 Page 122 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Sony Corporation and certain of its subsidiaries are defen- lawsuits, if any, would not have a material effect on Sony’s dants in several pending lawsuits. However, based upon the consolidated financial statements. information currently available to both Sony and its legal The changes in product warranty liability for the years ended counsel, management of Sony believes that damages from such March 31, 2004 and 2005 are as follows:

Dollars in Yen in millions millions Years ended March 31 2004 2005 2005 Balance at beginning of the fiscal year ...... ¥ 51,892 ¥ 50,670 $ 474 Provision for warranty reserve ...... 51,569 33,493 313 Settlements (in cash or in kind) ...... (46,971) (40,358) (377) Changes in estimate for pre-existing warranty reserve ...... (2,970) (751) (7) Translation adjustment ...... (2,850) 1,865 17 Balance at end of the fiscal year ...... ¥ 50,670 ¥ 44,919 $ 420

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

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BH6/30 Page 123 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Business segments Sales and operating revenue:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Sales and operating revenue: Electronics— Customers ...... ¥4,624,181 ¥4,838,268 ¥4,786,236 $44,731 Intersegment ...... 471,798 204,051 235,411 2,200 Total ...... 5,095,979 5,042,319 5,021,647 46,931 Game— Customers ...... 936,274 753,732 702,524 6,566 Intersegment ...... 18,757 26,488 27,230 255 Total ...... 955,031 780,220 729,754 6,821 Music— Customers ...... 433,147 409,487 216,779 2,026 Intersegment ...... 33,191 30,819 32,326 302 Total ...... 466,338 440,306 249,105 2,328 Pictures— Customers ...... 802,770 756,370 733,677 6,857 Intersegment ...... 0000 Total ...... 802,770 756,370 733,677 6,857 Financial Services— Customers ...... 509,398 565,752 537,715 5,025 Intersegment ...... 27,878 27,792 22,842 213 Total ...... 537,276 593,544 560,557 5,238 Other— Customers ...... 167,863 172,782 182,685 1,707 Intersegment ...... 93,282 95,535 71,742 671 Total ...... 261,145 268,317 254,427 2,378 Elimination ...... (644,906) (384,685) (389,551) (3,641) Consolidated total ...... ¥7,473,633 ¥7,496,391 ¥7,159,616 $66,912

Electronics intersegment amounts primarily consist of transactions with the Game and Pictures segments. Game intersegment amounts primarily consist of transactions with the Electronics segment. Music intersegment amounts primarily consist of transactions with the Game segment. Other intersegment amounts primarily consist of transactions with the Electronics segment.

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BH6/30 Page 124 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Segment profit or loss:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Operating income (loss): Electronics ...... ¥065,939 ¥ (6,824) ¥ (34,305) $ (321) Game ...... 112,653 67,578 43,170 404 Music ...... (28,261) (5,997) 8,783 82 Pictures ...... 58,971 35,230 63,899 597 Financial Services ...... 22,758 55,161 55,490 519 Other ...... (28,316) (12,054) (4,077) (38) Total ...... 203,744 133,094 132,960 1,243 Elimination ...... 15,065 13,226 13,530 126 Unallocated amounts: Corporate expenses ...... (33,369) (47,418) (32,571) (304) Consolidated operating income ...... 185,440 98,902 113,919 1,065 Other income ...... 157,528 122,290 97,623 912 Other expenses ...... (95,347) (77,125) (54,335) (508) Consolidated income before income taxes ...... ¥247,621 ¥144,067 ¥157,207 $1,469

Operating income is sales and operating revenue less costs future insurance policy benefits, reducing revenue in the Financial and operating expenses. Services segment in the year ended March 31, 2004 and 2005, In the quarter beginning October 1, 2003, the recognition by approximately ¥30.8 billion and ¥32.5 billion ($304 million), method for insurance premiums received on certain products by respectively. This change did not have a material effect on Sony Life Insurance Co., Ltd., was changed from being recorded operating income. as revenues to being offset against the related provision for

Assets:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Total assets: Electronics ...... ¥2,973,972 ¥2,995,306 ¥3,434,138 $32,095 Game ...... 673,208 684,226 482,037 4,505 Music ...... 500,627 483,990 325,928 3,046 Pictures ...... 868,395 856,517 863,056 8,066 Financial Services ...... 2,897,119 3,475,039 3,885,517 36,313 Other ...... 333,485 371,720 347,885 3,251 Total ...... 8,246,806 8,866,798 9,338,561 87,276 Elimination ...... (266,167) (319,204) (439,489) (4,107) Corporate assets ...... 389,906 543,068 600,028 5,608 Consolidated total ...... ¥8,370,545 ¥9,090,662 ¥9,499,100 $88,777

Unallocated corporate assets consist primarily of cash and cash equivalents, securities investments and property, plant and equipment maintained for general corporate purposes.

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BH6/30 Page 125 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Other significant items:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Depreciation and amortization: Electronics ...... ¥203,433 ¥210,888 ¥275,701 $2,577 Game ...... 53,496 57,256 16,504 154 Music ...... 20,008 16,123 9,451 88 Pictures ...... 8,552 7,844 5,598 52 Financial Services, including deferred insurance acquisition costs ...... 52,041 56,586 52,788 494 Other ...... 10,157 13,455 8,564 80 Total ...... 347,687 362,152 368,606 3,445 Corporate ...... 4,238 4,117 4,259 40 Consolidated total ...... ¥351,925 ¥366,269 ¥372,865 $3,485

Capital expenditures for segment assets: Electronics ...... ¥181,316 ¥251,980 ¥311,101 $2,908 Game ...... 40,986 100,360 18,824 176 Music ...... 9,291 3,651 2,894 27 Pictures ...... 7,138 6,013 5,808 54 Financial Services ...... 3,655 4,618 3,845 36 Other ...... 16,993 10,124 6,149 57 Total ...... 259,379 376,746 348,621 3,258 Corporate ...... 1,862 1,518 8,197 77 Consolidated total ...... ¥261,241 ¥378,264 ¥356,818 $3,335

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

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Audio ...... ¥0,784,114 ¥0,675,496 ¥0,571,864 $05,345 Video ...... 828,308 949,261 1,034,736 9,670 Televisions ...... 981,655 925,501 957,122 8,945 Information and Communications ...... 836,724 834,757 778,374 7,275 Semiconductors ...... 204,710 253,237 246,314 2,302 Components ...... 527,782 623,799 619,477 5,789 Other ...... 460,888 576,217 578,349 5,405 Total ...... ¥4,624,181 ¥4,838,268 ¥4,786,236 $44,731

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BH6/30 Page 126 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Geographic information: Sales and operating revenue which are attributed to countries based on location of customers for the years ended March 31, 2003, 2004 and 2005 and long-lived assets as of March 31, 2003, 2004 and 2005 are as follows:

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Sales and operating revenue: Japan ...... ¥2,093,880 ¥2,220,747 ¥2,100,793 $19,634 U.S.A...... 2,403,946 2,121,110 1,977,310 18,479 Europe ...... 1,665,976 1,765,053 1,612,536 15,070 Other ...... 1,309,831 1,389,481 1,468,977 13,729 Total ...... ¥7,473,633 ¥7,496,391 ¥7,159,616 $66,912

Dollars in Yen in millions millions March 31 2003 2004 2005 2005 Long-lived assets: Japan ...... ¥1,365,160 ¥1,430,443 ¥1,414,632 $13,221 U.S.A...... 713,524 671,534 662,120 6,188 Europe ...... 164,459 211,147 183,620 1,716 Other ...... 148,616 133,640 144,896 1,354 Total ...... ¥2,391,759 ¥2,446,764 ¥2,405,268 $22,479

There are not any individually material countries with respect to There are no sales and operating revenue with a single major the sales and operating revenue and long-lived assets included in external customer for the years ended March 31, 2003, 2004 Europe and Other areas. and 2005. Transfers between reportable business or geographic segments are made at arms-length prices.

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BH6/30 Page 127 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC The following information shows sales and operating revenue supplemental information in accordance with disclosure require- and operating income by geographic origin for the years ended ments of the Japanese Securities and Exchange Law, to which March 31, 2003, 2004 and 2005. In addition to the disclosure Sony, as a Japanese public company, is subject. requirements under FAS No. 131, Sony discloses this

Dollars in Yen in millions millions Years ended March 31 2003 2004 2005 2005 Sales and operating revenue: Japan— Customers ...... ¥(2,247,030 ¥(2,352,923 ¥(2,249,548 $(21,024 Intersegment ...... 2,433,998 2,514,698 2,575,093 24,066 Total ...... 4,681,028 4,867,621 4,824,641 45,090 U.S.A.— Customers ...... 2,632,176 2,341,304 2,166,323 20,246 Intersegment ...... 189,502 198,450 235,362 2,200 Total ...... 2,821,678 2,539,754 2,401,685 22,446 Europe— Customers ...... 1,520,930 1,647,694 1,524,182 14,244 Intersegment ...... 121,598 66,950 52,417 490 Total ...... 1,642,528 1,714,644 1,576,599 14,734 Other— Customers ...... 1,073,497 1,154,470 1,219,563 11,398 Intersegment ...... 789,444 813,798 804,721 7,521 Total ...... 1,862,941 1,968,268 2,024,284 18,919 Elimination ...... (3,534,542) (3,593,896) (3,667,593) (34,277) Consolidated total ...... ¥(7,473,633 ¥(7,496,391 ¥(7,159,616 $(66,912

Operating income: Japan ...... ¥(0,011,444 ¥0,0(69,875) ¥0,000,(765) $00,00(7) U.S.A...... 98,762 85,290 72,414 677 Europe ...... 62,206 78,822 12,186 114 Other ...... 63,773 70,543 58,554 547 Corporate and elimination ...... (50,745) (65,878) (28,470) (266) Consolidated total ...... ¥(0,185,440 ¥(0,098,902 ¥(0,113,919 $(01,065

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BH6/30 Page 128 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Report of Independent Auditors

Sony Corporation 129

BH6/30 Page 129 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Stock Information

Ownership and Distribution of Shares

2003 2004 2005 Number of Number of Number of Number of Number of Number of Years ended March 31 shares held shareholders shares held shareholders shares held shareholders Foreign institutions and individuals ...... 331,477,756 1,660 366,289,954 1,444 480,990,694 1,409 Japanese financial institutions ...... 249,934,658 446 192,651,120 386 172,413,987 350 Japanese individuals and others ...... 281,939,398 791,371 316,428,972 823,335 300,072,586 776,192 Other Japanese corporations...... 51,973,659 6,017 44,113,525 5,726 37,334,315 5,240 Japanese securities firms ...... 10,131,705 121 10,006,709 97 9,471,631 72 Total ...... 925,457,176 799,615 929,490,280 830,988 1,000,283,213 783,263

Japanese Other Japanese securities Foreign institutions and individuals Japanese financial institutions Japanese individuals and others corporations firms

2003 35.8% 27.0% 30.5% 5.6% 1.1%

2004 39.4% 20.7% 34.0% 4.8% 1.1%

2005 48.1% 17.2% 30.0% 3.7% 1.0%

Stock Price Range and Trading Volume on the Tokyo Stock Exchange Stock price and Years ended March 31 Nikkei stock average Nikkei stock average Closing price of Sony Corporation stock Subsidiary tracking stock (Yen)

25,000

20,000

15,000

10,000

5,000 Trading volume (Million shares) 0 200

100

0 20012002 2003 2004 2005

Notes: 1. This trading volume shows the monthly volume of trade on the Tokyo Stock Exchange. Each fiscal year starts in April and ends in March. 2. Stock prices and the Nikkei stock average is based on a simple average of daily closing prices for each day of every month at the Tokyo Stock Exchange. 3. Stock prices have been adjusted to reflect the two-for-one stock split completed on May 19, 2000. 4. On June 20, 2001, Sony issued 3,072,000 shares of subsidiary tracking stock.

Years ended March 31 2001 2002 2003 2004 2005 Stock price (Yen) At year-end ...... 8,900 6,700 4,200 4,360 4,270 High ...... 15,100 10,340 7,530 4,670 4,710 Low ...... 7,510 3,960 4,070 2,720 3,550 Annual increase/decrease ...... –38.6.% –24.7.% –37.3.% +3.8.% –2.1%. Number of shares outstanding at year-end (thousands of shares) ...... 919,617 919,744 922,385 926,418 997,211 Market capitalization at year-end (Yen in trillions) ...... 8.18. 6.16. 3.87. 4.04. 4.26. Per share of common stock data (Yen) Cash dividends applicable to the year ...... 25.0. 25.0. 25.0. 25.0. 25.0. Net Income (diluted) ...... 19.28. 16.67. 118.21. 89.03. 162.59. Stockholders’ equity ...... 2,521.19. 2,570.31. 2,466.81. 2,563.67. 2,872.21. Note: Stock prices and per share data have been adjusted to reflect the two-for-one stock split completed on May 19, 2000. However, no adjustment to reflect such stock split has been made to the number of shares outstanding at the year ended March 31, 2000. Stock price data are based on daily closing prices.

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BH6/30 Page 130 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Stock Acquisition Rights and Bond Information As of March 31, 2005

Stock Acquisition Rights (SARs) Date of issue Total number of Exercise Outstanding Percentage of Name (Exercise period) SARs to be issued price balance SARs exercised (%) The first series of common stock acquisition rights December 9, 2002 12,004 ¥5,396.00 12,004 0 (December 8, 2012) The second series of subsidiary tracking stock December 9, 2002 455 ¥1,008.00 455 0 acquisition rights (December 8, 2012) The third series of common stock acquisition rights March 31, 2003 14,475 U.S.$36.57 14,201 1.9 (March 31, 2013) The fourth series of common stock acquisition rights November 14, 2003 13,978 ¥4,101.00 13,978 0 (November 13, 2013) The fifth series of subsidiary tracking stock November 14, 2003 455 ¥ 815.00 455 0 acquisition rights (November 13, 2013) The sixth series of common stock acquisition rights March 31, 2004 12,236 U.S.$40.90 12,236 0 (March 31, 2014) The seventh series of common stock acquisition rights November 18, 2004 14,242 ¥3,782.00 14,242 0 (November 17, 2014) The eighth series of subsidiary tracking stock November 18, 2004 455 ¥1,259.00 455 0 acquisition rights (November 17, 2014) The ninth series of common stock acquisition rights March 31, 2005 10,094 U.S.$40.34 10,094 0 (March 31, 2015) Note: Stock acquisition rights numbers 1 through 9 were issued at no cost for the purpose of granting stock options. The number of shares to be issued upon exercise of each stock acquisition right is 100.

Convertible Bonds Interest rate Total amount Conversion Outstanding balance Name Date of issue Years (%) of issue price (Percentage of bonds converted) Euroyen-denominated notes with convertible bond-type December 18, 2003 5 0 ¥250,000.million ¥ 5,605.0 ¥250,000.million stock acquisition rights and conversion restrictions (0%) U.S. dollar convertible bonds April 17, 2000 10 0 U.S.$57,331.thousand ¥13,220.0 U.S.$47,665.thousand (0%) U.S. dollar convertible bonds April 16, 2001 10 0 U.S.$77,056.thousand ¥ 8,814.0 U.S.$53,307.thousand (0%) U.S. dollar convertible bonds December 17, 2001 5 0 U.S.$57,307.thousand ¥5,952.23 U.S.$56,492.thousand (0%) U.S. dollar convertible bonds April 15, 2002 10 0 U.S.$67,297.thousand ¥ 6,931.0 U.S.$43,073.thousand (0%) Notes: 1. The stock acquisition rights of the bonds with stock acquisition rights (principal amount of ¥250 billion) cannot be detached from the bonds, and the exercise of a stock acquisition right causes the corresponding bond to be canceled in lieu of a cash payment for purchase of shares. Due to this close interrelation between the bonds and stock acquisition rights, and in consideration of the value of the stock acquisition rights and the economic value obtainable by issuing the bonds with the coupon, issue price and other terms of the issue, the stock acquisition rights are issued at no cost. 2. All U.S. dollar convertible bonds were issued to provide equity-based compensation to certain executives in Sony’s U.S. subsidiary companies. All U.S. dollar convertible bonds were issued for distribution to certain executives in Sony Corporation’s U.S. subsidiary companies as an equity-based incentive plan. Although the conversion ratio is 0% for all these bonds, the value of bonds issued does not match the outstanding balance of bonds because Sony Corporation purchased and canceled a portion of these warrants that were not used for the incentive plan. 3. The fourth series of unsecured convertible bonds (outstanding balance: ¥5,008 million) was redeemed at maturity on March 31, 2005..

Bonds with Warrants Interest rate Total amount Conversion Outstanding balance Name Date of issue Years (%) of issue price (Percentage of warrants exercised) The seventh series of unsecured August 23, 1999 6 0.1 ¥ 4,000 million ¥ 7,166.5 ¥ 4,000 million bonds with warrants (0%) The tenth series of unsecured October 19, 2000 6 1.55 ¥12,000 million ¥12,457.0 ¥11,490 million bonds with warrants (0%) The thirteenth series of unsecured December 21, 2001 6 0.9 ¥ 7,300 million ¥ 6,039.0 ¥ 6,920 million bonds with warrants (0%) The fourteenth series of unsecured bonds with December 21, 2001 6 0.9 ¥ 150 million ¥ 3,300.0 ¥ 150 million warrants for shares of subsidiary tracking stock (0%) Notes: 1. All bonds with warrants were issued for distribution to the directors and other executives of Sony Corporation as an equity-based incentive plan. The fourteenth series of unsecured bonds with warrants for shares of subsidiary tracking stock was issued for distribution to the directors and other executives of Sony Communication Network. Regarding the tenth series of unsecured bonds with warrants and the thirteenth series of unsecured bonds with warrants, Sony Corporation canceled a portion of the warrants that were not used for the incentive plan. As a result, although the exercise ratio is 0% for both issues, the value of bonds issued does not match the outstanding balance of warrants. 2. The sixth series of unsecured bonds with warrants (¥4,000 million) was redeemed at maturity on August 17, 2004.

Straight Bonds Name Date of issue Years Interest rate (%) Total amount of issue Outstanding balance The sixth (2) series of unsecured bonds October 23, 1998 7 2.00 ¥ 15,000 million ¥ 15,000 million The seventh (2) series of unsecured bonds July 26, 2000 7 1.99 ¥ 15,000 million ¥ 15,000 million The eighth (2) series of unsecured bonds July 26, 2000 10 (Note 2) ¥ 5,000 million ¥ 4,900 million The eighth series of unsecured bonds September 13, 2000 5 1.42 ¥100,000 million ¥100,000 million The ninth series of unsecured bonds September 13, 2000 10 2.04 ¥ 50,000 million ¥ 50,000 million The eleventh series of unsecured bonds September 17, 2001 5 0.64 ¥100,000 million ¥100,000 million The twelfth series of unsecured bonds September 17, 2001 10 1.52 ¥ 50,000 million ¥ 50,000 million Notes: 1. Sony Corporation assumed responsibility for the sixth (2) series of unsecured bonds, the seventh (2) series of unsecured bonds and the eighth (2) series of unsecured bonds as a result of its merger with AIWA Corporation. Sony Corporation repurchased and canceled ¥100 million of the eighth (2) series of unsecured bonds. 2. The interest rate of the eighth (2) series of unsecured bonds is calculated by subtracting 2-year interest rate swap from 20-year interest rate swap and then adding 1.00%. (If the result of this calculation is negative, the interest rate is 0%.)

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BH6/30 Page 131 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Investor Information

SONY CORPORATION DEPOSITARY, TRANSFER AGENT AND REGISTRAR 7-35, Kitashinagawa 6-chome, Shinagawa-ku FOR AMERICAN DEPOSITARY RECEIPTS Tokyo 141-0001, Japan JPMorgan Chase Bank Phone: 81-(0)3-5448-2111 270 Park Avenue, Facsimile: 81-(0)3-5448-2244 New York, NY 10017-2070

INVESTOR RELATIONS OFFICES ■ Contact Address: If you have any questions or would like a copy of our Form 20-F, JPMorgan Service Center filed with the U.S. Securities and Exchange Commission, or our JPMorgan Chase Bank annual report to shareholders, please direct your request to: P.O. Box 43013 Providence, RI 02940-3013 ■ Japan Phone: U.S. 800-360-4522 SONY CORPORATION International 1-781-575-4328 IR Office 7-35, Kitashinagawa 6-chome, CO-TRANSFER AND CO-REGISTRAR AGENT Shinagawa-ku, Tokyo 141-0001 CIBC Mellon Trust Company Phone: 81-(0)3-5448-2180 2001 University Street, 16th Floor, Facsimile: 81-(0)3-5448-2183 Montreal, Quebec, H3A 2A6, Canada Phone: 1-514-285-3600 ■ U.S.A. SONY CORPORATION OF AMERICA TRANSFER AGENT OF COMMON SHARES HANDLING Investor Relations OFFICE 550 Madison Avenue, 27th Floor UFJ Trust Bank Limited New York, NY 10022-3211 Corporate Agency Department Phone: U.S. and Canada 800-556-3411 10-11, Higashisuna 7-chome, Koto-ku, International 1-402-573-9867 Tokyo 137-8081, Japan Facsimile: 1-212-833-6938 Phone: 81-(0)3-5683-5111

■ U.K. OVERSEAS STOCK EXCHANGE LISTINGS SONY GLOBAL TREASURY SERVICES PLC. New York, Pacific, Chicago, Toronto, London, Paris, Frankfurt, Investor Relations Düsseldorf, Brussels, Vienna and Swiss stock exchanges 11th Floor, St. Helens, 1 Undershaft London EC3A 8EE JAPANESE STOCK EXCHANGE LISTINGS Phone: 44-(0)20-7444-9713 Tokyo and Osaka stock exchanges Facsimile: 44-(0)20-7444-9763 NUMBER OF SHAREHOLDERS SONY ON THE INTERNET (As of March 31, 2005) Sony’s Investor Relations Home Pages on the World Wide Web 783,263 offer a wealth of corporate information, including the latest annual report and financial results. Information regarding CSR http://www.sony.net/IR/ (Corporate Social Responsibility) Sony’s CSR and Environmental Activities Report and ORDINARY GENERAL MEETING OF SHAREHOLDERS information about Sony CSR and environmental The Ordinary General Meeting of Shareholders is held in June activities can be accessed at the following web site. in one of the wards of Tokyo or in the city of Yokohama in http://www.sony.net/csr/ Kanagawa Prefecture, Japan. Inquiries concerning the aforementioned activities can be INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM directed to: ChuoAoyama PricewaterhouseCoopers Sony Corporation Tokyo, Japan Social and Environmental Affairs, Compliance Office Phone: 81-(0)3-5448-3533 Facsimile: 81-(0)3-5448-7838

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BH6/30 Page 132 05.7.7, 3:32 AM Adobe PageMaker 6.0J/PPC Motion pictures and artwork © 2005 Sony Pictures Entertainment Inc. Printed on 100% recycled paper. All rights reserved. Printed using VOC (volatile organic compound)-free vegetable oil-based ink.

SONY AR-E0629 Page 37 05.7.6, 2:16 PM Adobe PageMaker 6.0J/PPC