Annual Report 2008 Year Ended March31, 2008

(1,1) -1- 184295.indd 08.8.7 2:22:12 PM Annual Report 2008 Year Ended March31, 2008

Annual Report 2008

184295.indd 1 008.8.78.8.7 22:22:12:22:12 PMPM (1,1) -2- 184295.indd 08.8.7 2:21:53 PM

Contents

Financial Highlights 1 Business Overview 2 Letter to Shareholders 4 Mid-Term Corporate Strategy 8 Review of Operations 14 Special Features OLED Television 16 FIFA Partnership Program 22 Blu-ray Disc 36 Corporate Governance/New Directors and Corporate Executive Offi cers 40 Corporate Social Responsibility 44 Cautionary Statement Statements made in this annual report with respect to Sony’s current plans, estim Financial Section of Sony. Forward-looking statements include, but are not limited to, those statem “might” and words of similar meaning in connection with a discussion of future o A Message from the CFO 48 other materials released to the public. These statements are based on manage uncertainties could cause actual results to differ materially from those discussed Sony to update or revise any forward-looking statements, whether as a result of Operating and Financial Review 49 are not limited to (i) the global economic environment in which Sony operates, as and the U.S. dollar, the euro and other currencies in which Sony makes signifi can as well as achieve suffi cient cost reductions for, its products and services, inclu Consolidated Financial Statements 92 product introductions, rapid development in technology and subjective and chang to recoup large-scale investments required for technology development and incre ability to implement successfully its network strategy for its Electronics, Game an Stock Information 100 in its Pictures segment and the music business in light of the Internet and other capital expenditures, to correctly prioritize investments (particularly in the Electro joint ventures and alliances; (x) the outcome of pending legal and/or regulatory p Stock Acquisition Rights and Management in the Financial Services segment; and (xii) the impact of unfavorabl Bond Information 101 of the Financial Services segment. Risks and uncertainties also include the impac Investor Information 102

Cover page design concept: Represents the joy and excitement inspired by Sony’s diversiﬁ ed businesses, products and services, as well as Sony’s global presence and innovation.

1184295.indd84295.indd 2 08.8.7 2:21:52 PM Financial Highlights

Sales and operating revenue Operating income ¥8,871.4 billion +6.9% ¥374.5 billion 5.2 times

Rose 6.9%, owing to increased sales in the Electronics and Game More than ﬁ ve times the previous year’s level, bolstered by operat- businesses, achieving a ﬁ scal-year record ing income gains in the Electronics and Pictures businesses and a decrease in the operating loss in the Game business

(Yen in trillions) (Yen in billions) 0 2 4 6810 0 100 200 300 400 500 3.0% 2006 7.5 2006 226.4

0.9% 2007 8.3 2007 71.8

4.2% 2008 8.9 2008 374.5

068102 4 *Years ended March 31 Operating income Operating margin (％)

*Years ended March 31

Net income Free cash ﬂ ow (excluding Financial Services) ¥369.4 billion 2.9 times ¥504.2 billion

A fi scal year record, refl ecting higher operating income, as well as Substantial increase in free cash fl ow, a result of higher net income an improvement in net non-operating income and an increase in and gains on the sale of shares in a fi nancial services subsidiary equity in net income of affi liated companies

(Yen in billions) (Yen in billions) 0100 200 300 400 -800 -400 0 400 800 4.1% (44.4) 2006 123.6 2006 (296.4) 252.0

3.8% 2007 126.3 2007 (431.1) 305.6 (125.5) 10.8% 2008 369.4 2008 (14.9) 519.1 504.2 09123 6 Net income ROE (％) Cash fl ows from operating activities Cash fl ows from investing activities *Years ended March 31 Free cash fl ow (Combined total of cash fl ows from operating and investing activities)

*Years ended March 31

Capital expenditures R&D investment ¥335.7 billion ¥520.6 billion

(Yen in billions) (Yen in billions) 0 200 400 600 800 0 200 400 600 800

2006 384.3 2006 531.8

2007 414.1 2007 543.9

2008 335.7 2008 520.6

*Years ended March 31 *Years ended March 31

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 1 008.8.78.8.7 22:17:37:17:37 PMPM Business Overview (Fiscal Year in Review)

Proportion of sales* by business segment Proportion of sales* by region and Electronics sales by product category

Audio (9%) 3.5% 6.2% Video (22%) 25.5% 23.2% Electronics 9.7% Japan Game Televisions (23%) U.S.A. Pictures Europe 2008 13.7% 2008 Financial Services Information and Other Communications (19%) All Other 66.9% 26.2% 25.1% Semiconductors (4%) Components (14%) Other (9%) *Year ended March 31 *Year ended March 31 *Percentage of sales and Electronics *Percentage of sales and operating revenue to outside customers operating revenue to outside customers *Sales and operating revenue accounted for by customers in each particular region

Electronics

Sales: ¥6,613.8 billion (+8.9%) Sales in the Electronics business increased 8.9%. Operating income: ¥ 356.0 billion (+121.8%) Higher unit sales of BRAVIA™ LCD televisions, VAIO™ PCs and Cyber-shot™ compact Sales Operating income Operating margin (%) digital cameras in all regions contributed to higher segment sales. (Yen in billions) Operating income was 2.2 times higher than in ﬁ scal year 2006. 6,613.8 6,072.4 The sharp increase in operating income was primarily due to higher segment sales and 5,190.2 the positive impact of the yen’s depreciation against the euro. 5.4% Also contributing to the increase in operating income was a ¥51.2 billion provision 2.6% recorded in the previous ﬁ scal year for charges related to the notebook PC battery

0.1% 356.0 pack recalls and subsequent global replacement program, and a ¥15.7 billion reversal 8.8 160.5 2006 2007 2008 of the same provision recorded in the period under review. *Years ended March 31

Game

Sales: ¥1,284.2 billion (+26.3%) Sales in the Game business rose 26.3%. Operating loss: ¥ 124.5 billion ( – ) Hardware sales increased, due to higher sales of PLAYSTATION®3 (PS3™) and PSP®

Sales Operating income (loss) Operating margin (%) (PlayStation®Portable). Sales of PS3™ software contributed to an increase in software (Yen in billions) sales. 1,284.2 Operating loss reduced by ¥107.8 billion. 958.6 1,016.8 The reduction in the operating loss reﬂ ects decreased operating losses in the PS3™

business—a result of successful PS3™ hardware cost reductions and increased sales

0.9% of PS3™ software—as well as the strong performance of the PSP® business. 8.7

(232.3) (124.5) 2006 2007 2008 *Years ended March 31

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 2 008.8.78.8.7 22:17:38:17:38 PMPM Pictures

Sales: ¥857.9 billion (–11.2%) Sales in the Pictures business decreased 11.2%. Operating income: ¥ 54.0 billion (+26.5%) The decline in sales refl ected lower worldwide motion pictures sales as fewer fi lms were Sales Operating income Operating margin (%) released during the period. (Yen in billions) Operating income rose 26.5%. 966.3 857.9 Higher operating income was the result of the strong performance of prior year fi lms in 745.9 6.3% the home entertainment and television markets, as well as the sale of a bankruptcy 4.4.% 3.7% claim against a former licensee of fi lm and television product.

27.4 42.7 54.0 2006 2007 2008 *Years ended March 31 Financial Services

Revenue: ¥581.1 billion (–10.5%) Revenue in the Financial Services business declined 10.5%. Operating income: ¥ 22.6 billion (–73.1%) Sony Life Insurance Co., Ltd. (Sony Life) reported a decrease in revenue due to a net Revenue Operating income Operating margin (%) loss from investments in its separate account, a deterioration of net valuation gains (Yen in billions) 743.2 from convertible bonds and an impairment loss on equity securities in its general 25.3% 649.3 account, all of which resulted from a sharp decline in the Japanese stock market. 581.1 Operating income fell 73.1%.

13.0% The deterioration of net valuation gains from convertible bonds and an impairment loss

188.3 on equity securities in Sony Life’s general account led to a decrease in overall segment 3.9% 84.1 operating income. 22.6 2006 2007 2008 *Years ended March 31

All Other

Sales: ¥382.2 billion (+7.6%) Aggregate sales from businesses in this category increased 7.6%. Operating income: ¥ 50.2 billion (+73.9%) Higher sales were largely due to the contribution from sales at a U.S. music publishing Sales Operating income Operating margin (%) company acquired during the period, the receipt of a settlement payment related to (Yen in billions) 411.5 copyright infringement claims, an increase in sales at Sony Music Entertainment 382.2 355.1 (Japan), Inc., and higher fee revenue from broadband connection services, particularly

13.1% ﬁ ber-optic, at So-net Entertainment Corporation. Operating income climbed 73.9%. 8.1% 4.8% Operating income increased mainly as a result of a gain on the sale of the Sony Center 50.2 18.8 28.9 am Potsdamer Platz in Berlin, the receipt of payment related to copyright infringement 2006 2007 2008 claims and an increase in trademark royalty income from Sony Ericsson Mobile *Years ended March 31 Communications AB.

Notes: 1. Sales = Sales and operating revenue 2. Operating margin = Operating income ÷ Sales and operating revenue 3. Includes intersegment transactions 3

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 3 008.8.78.8.7 22:17:38:17:38 PMPM Letter to Shareholders: A Message from Howard Stringer, CEO

I am pleased to report the results of fi scal year 2007, ended March 31, 2008, and outline our growth prospects and strategies for the future. As I wrote in my letter to you one year ago, fi scal year 2007 represented the culmination of our three-year restructuring initiative. I would like to report that we achieved nearly every goal that we had set for ourselves three years ago. We successfully re-engineered our company by dramatically reducing operating costs, streamlining our operations, and reducing headcount and the number of our product categories—all of which contributed to a signifi cant improvement in operating results. As a result, on an annual basis and compared to three years prior, sales and operating revenue rose 23% to nearly ¥9 trillion, and both operating income and net income more than doubled to ¥375 billion and ¥369 billion, respectively. Success was achieved across many of our businesses. Notably, Sony Group worked together to successfully make Blu-ray Disc™ the de facto standard for high defi nition recording and playback. To date, more than 15 million Blu-ray Disc players, recorders and Blu-ray Disc-enabled PLAYSTATION®3 (PS3™) systems have been sold. In the Electronics segment, which represents approximately two-thirds of our consolidated sales, operating income rose from approximately zero three years ago to more than ¥350 billion in the most recent fi scal year. The operating profi t margin achieved in fi scal year 2007 was 5.4%, far exceeding the 4% goal which we had established in 2005. From a product perspective, Sony’s LCD television business has moved from having a limited presence three years ago to being one of the market leaders today on the strength of the BRAVIA brand, and it is in a position to strive for signifi cantly improved profi tability. In addition, we were the fi rst to market with the next generation television—the organic light-emitting diode, or OLED, TV—which is a sleek 3 millimeters in thickness. These are but a few examples of the successes achieved. In the Game segment, over the past three years we have benefi ted from the continued strength of the PlayStation®2 platform and a resurgence in sales of the PSP® (PlayStation®Portable) platform, as well as the launch of the PS3™ platform. While the segment recorded a loss for the most recent fi scal year, it was an improvement of more than ¥100 billion versus the previous fi scal year, and we are expecting further improvements. With 50 million users of network-enabled PSP® and PS3™ units worldwide, we have an enormous global base upon which we can build a video delivery service. Our Pictures segment recorded more than ¥50 billion of operating income in the most recent fi scal year, benefi ting from the strength of the home entertainment releases of a number of successful titles and the continued vitality of our television business. Over the past three years Sony Pictures

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 4 008.8.78.8.7 22:17:38:17:38 PMPM Entertainment Inc. (SPE) has expanded its theatrical, home entertainment and local language production businesses into markets across the globe, and has set the stage for future growth. In fi scal year 2008 a number of exciting new releases, including Hancock starring Will Smith and Quantum of Solace, the latest James Bond fi lm starring Daniel Craig, are expected to contribute to our results. Sony Financial Holdings—which accounts for a majority of the revenue of our Financial Services segment—launched a successful initial public offering in fi scal year 2007, despite a very challenging market environment. The life insurance, non-life insurance and banking businesses all continued to grow steadily. However, valuation losses on the portfolio in the life insurance businesses, caused by the signifi cant decline in the Japanese stock market, negatively impacted segment results.* Finally, our key joint ventures, including Sony Ericsson Mobile Communications AB and SONY BMG MUSIC ENTERTAINMENT— contributed signifi cantly to net income for the year. On a consolidated basis, Sony recorded operating income of ¥375 billion, which was fi ve times the prior year’s results of ¥72 billion. The operating profi t margin achieved was 4.2%, shy of the company’s 5% goal, primarily as a result of the portfolio valuation losses in the life insurance businesses noted above. We achieved net income of ¥369 billion for fi scal year 2007, a 192% improvement over the prior fi scal year and a record high. In short, over the past three years, we have successfully restructured our company by exiting businesses, eliminating costs and creating a strong foundation going forward. Our job, however, is not complete. We must continue our transformation into a company that successfully grows and innovates—and does so profi tably. In doing so, we need to keep Sony’s strengths while, at the same time, embracing new business models, developing new technologies and delivering new products and services that our increasingly savvy customer base demands. To do this, Sony must establish a reputation for software and services that matches our reputation for hardware and content. Our mission is to be the leading global provider of networked consumer electronics and entertainment. As we will outline in more detail in the pages that follow, there are many opportunities that lie before us, and we must aggressively pursue them. We have the talent, the resources, the experience and the will. We intend to make signifi cant investments in growing our businesses, and we will do so in a measured and disciplined way. As you will read, we are undertaking three priority actions.

* Speciﬁ cally, the deterioration of net valuation gains from convertible bonds and an impairment loss on equity securities in Sony Life’s general account, which negatively impacted our consolidated operating income on a U.S. GAAP basis.

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 5 008.8.78.8.7 22:17:39:17:39 PMPM First, we will strengthen our core businesses through improving profi t- ability in our Television and Game businesses, strategically investing approximately ¥1.8 trillion for future growth and revamping our R&D efforts, as well as continuing to focus on operating performance. Second, we will launch network initiatives. These include providing network connectivity across our devices—specifi cally, 90% of our key device categories by fi scal year 2010—and undertaking a number of network initiatives to deliver content from SPE and other providers to Sony devices, both in the home and “on the go.” Among consumer electronics companies, Sony is unique in its ownership of content, and we intend to leverage this competitive advantage. And third, we plan to capitalize on growth in developing markets and emerging economies such as Brazil, Russia, India and China (the BRIC countries), with the specifi c goal of doubling revenues in the BRIC countries by fi scal year 2010. Additionally, we have targeted a consolidated annual return on equity of 10% by the end of fi scal year 2010 and identifi ed 5% operating profi t margin as a baseline of profi tability. Many factors set Sony apart, and they are the reasons we have confi - dence in our ability to succeed in our mission. Today we stand on a strong foundation of innovation, experience, talent, capital and desire. We will leverage our unique competitive advantages. We will create exciting new products and services that customers will crave. We will be leaders in both our existing markets and in new, emerging markets. We have the will to compete and to succeed versus the competition. As we demonstrated with Blu-ray Disc, when Sony is United, Sony is Unbeatable. We thank you for your continued support of the company.

June 26, 2008

Howard Stringer Chairman and CEO Representative Corporate Executive Ofﬁ cer

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 6 008.8.78.8.7 22:17:39:17:39 PMPM Howard Stringer Ryoji Chubachi Chairman and CEO, Representative Corporate Executive Ofﬁ cer President and Electronics CEO, Representative Corporate Executive Ofﬁ cer Originally from the United Kingdom, Howard Stringer was a director and producer Ryoji Chubachi entered Sony Corporation after obtaining his Ph.D. in Resource at CBS (one of the top four TV networks in the United States) before becoming Engineering in 1977. He was involved in developing recording media, and in president of CBS News in 1986 and president of CBS Broadcast Group, CBS 1989 was transferred to Sony Magnetic Products Inc. of America. Upon returning Inc. in 1988. He joined Sony Corporation of America in 1997, and became its to Japan in 1992, he was placed in charge of the recording media business, in- Chairman and CEO the following year, as well as Sony’s COO in charge of the cluding magnetic tapes and optical discs. In 2002, he was given command of the Entertainment division, where he brought the Pictures and Music businesses to entire device/component business. The following year, he became NC President new heights. In 1999, he received the title of Knight Bachelor from Her Majesty of the Micro Systems Network Company. In 2004, he was promoted to Executive Queen Elizabeth II in recognition of his contribution to the broadcast industry. He Deputy President and COO (in charge of the Device Business and Production became Chairman and CEO of Sony Corporation in June of 2005. Strategy). He became Electronics CEO in April 2005, and subsequently President 7 of Sony Corporation in June, and currently serves in these two capacities.

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 7 008.8.78.8.7 22:17:41:17:41 PMPM Sony Group Corporate Strategy “To be the leading global provider of networked consumer electronics and entertainment”

Following the formation of Sony’s management team, led by Chairman and CEO Howard Stringer and President and Electronics CEO Ryoji Chubachi, Sony conducted an extensive business review that formed the basis of the revitalization plan announced in September 2005. Nearly all of the announced goals and targets were achieved, resulting in a signifi cantly restructured cost base and restored profi tability that have allowed us to pursue growth opportunities while also aiming for even greater fi nancial performance. In June 2008, Howard Stringer was joined by Ryoji Chubachi and Kazuo Hirai, President and Group CEO of Sony Computer Entertainment Inc., at Sony Group’s Corporate Strategy Meeting to report on the accomplishments of the past three years and to announce a new strategy. This new strategy will guide the Sony Group over the next three years in its efforts to complete a new mission: To be the leading global provider of networked consumer electronics and entertainment.

Improvement in Consolidated Results Goals achieved under the Revitalization Plan Revenue Operating Income Net Income

(Yen in billions) (Yen in billions) (Yen in billions) 374.5 8,871.4 369.4 • 15 product categories eliminated/ +23% downsized 7,191.3 +157% +125% • 10,000 person headcount reduction 163.8 145.6 • ¥120 billion in asset sales • 11 manufacturing sites closed/ consolidated • ¥200 billion annual expenses 2005 2008 2005 2008 2005 2008 reduction * Years ended March 31* Years ended March 31 * Years ended March 31

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 8 008.8.78.8.7 22:17:44:17:44 PMPM Results of Revitalization Plan Fiscal year 2005 – 2007

Financial Results A few of the highlights are as follows: On a consolidated basis we targeted a 5% operating profi t margin • Succeeded in making Blu-ray Disc™ the de facto industry stan- for the year ended March 31, 2008 (fi scal year 2007), and nearly dard, achieved by Sony’s electronics, game, pictures, music, achieved this goal, recording a 4.2% margin. External factors— disc manufacturing and marketing teams working together primarily the effect of the decline in the Japanese stock market*— alongside our partners in the Blu-ray Disc Association prevented us from attaining our 5% goal, but on an operational • Eliminated the constraints in our corporate structure that kept basis we have created a structure through which we believe a 5% Sony employees and technology from achieving their full margin can be reached. potential The Electronics segment represents approximately two-thirds of • Launched the BRAVIA™ brand of LCD televisions, and took a our consolidated sales, and due to its previous struggle for profi t- strong position in each major market ability, the revitalization plan announced in 2005, focused on • Became the fi rst to bring to market organic light-emitting diode achieving a 4% operating profi t margin target in fi scal year 2007. (OLED) televisions Thanks to a review and comprehensive overhaul of our products, • Greatly enhanced our digital imaging business through signifi - technology and operations, very strong profi t contributions from cantly improved market share and profi tability from Cyber-shot such products as Cyber-shot™ compact digital cameras, compact digital cameras, a continued leading position with Handycam® camcorders and VAIO™ PCs helped us to achieve Handycam® camcorders and the launch of our α (“alpha”) line an operating profi t margin of 5.4% for the Electronics segment. of digital SLR cameras This signifi cantly surpassed our target and is a notable achieve- • Executed our “Asset Light” strategy for semiconductors, specifi - ment given that the business had nearly zero profi t just three cally the sale of certain production equipment while maintaining years prior. semiconductor design functions We achieved all of the other goals we set for the three-year • Sony Ericsson Mobile Communications AB (Sony Ericsson) period, including our asset sales and cost reduction targets, as increased its market share and brand image through the sale of well as reductions in our product categories, headcount, and hundreds of millions of phones, including many Walkman®- and manufacturing sites. Cyber-shot-branded phones These successes, as well as the divisional successes discussed • Continued success with the PlayStation®2 platform, renewed below, have had tangible results. Over three years Sony’s revenues success with the PSP® (PlayStation®Portable) platform, and the increased 23% to nearly ¥9 trillion, and both operating income and launch of the PLAYSTATION®3 (PS3™) platform—which repre- net income more than doubled to ¥375 billion and ¥369 billion, sents a group-wide effort and signifi cant contributor to the respectively. acceptance of Blu-ray Disc • Built core franchises in the Pictures segment and strengthened * Specifi cally, the deterioration of net valuation gains from convertible bonds and home entertainment, television programming and local language an impairment loss on equity securities in Sony Life’s general account, which negatively impacted our consolidated operating income on a U.S. GAAP production to diversify revenue streams basis. • Improved our position in the music business through expanded artist rosters, streamlined operations and expanded digital distribution models as well as strategic acquisitions of music pub- Highlights by Business lishing businesses In addition to the success in restructuring our cost base, each of • And fi nally, the very successful initial public offering of a minority our businesses—independently and together—achieved notable stake in Sony Financial Holdings accomplishments over the past three years.

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 9 008.8.78.8.7 22:17:46:17:46 PMPM Overview of Corporate Strategy Fiscal Year 2008– 2010

Following the success of our 2005 revitalization Further Strengthen Our Core Businesses plan, Sony is now in a position to aim for further “Trillion Yen Businesses” growth and greater effi ciency; and has the fl exibility One method of strengthening our core businesses is to grow our to navigate in today’s uncertain markets and invest number of “trillion yen businesses”—those with annual sales for tomorrow’s growth. exceeding ¥1 trillion. We have already achieved this milestone in In addition to a restructured cost base and united our LCD television and digital imaging businesses, as well as the organizational structure, Sony’s global scale, mobile phones business of Sony Ericsson. In addition to these three superior design and engineering and world- Electronics categories, our Game segment has already passed the renowned brands will allow us to handle economic trillion yen milestone. Furthermore, by fi scal year 2010, we plan to uncertainty and evolving consumer demands to grow our VAIO PCs, Blu-ray Disc-related products and devices, become even stronger. With this in mind, we have and external components/semiconductor sales each into trillion set a new mission: “To be the leading global yen businesses. provider of networked consumer electronics and entertainment.” TV and Game Business Profi tability We believe Sony is uniquely positioned to While increasing sales are essential to expanding our presence in achieve this mission, and we are undertaking strategic markets, profitability in all of these businesses is strategic initiatives to accomplish it, specifi cally imperative—in particular our TV category and Game segment, which by strengthening our core businesses, providing recorded losses in fi scal year 2007. network connectivity services across our devices, In fi scal year 2008, we plan to improve profi tability substantially and capitalizing on international growth, particu- in the TV category, and we have a number of initiatives in place to larly in the BRIC countries—Brazil, Russia, India do this. First, we exited the rear-projection and cathode ray tube and China. (CRT) TV business and expect losses associated with these

Expand 1 Trillion Yen Business Categories

LCD TVs Digital Imaging Mobile Phones

PC Blu-ray Components/Semiconductors Game

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 1100 008.8.78.8.7 22:17:46:17:46 PMPM Sony Group Corporate Strategy Fiscal Year 2008 to Fiscal Year 20101

“To be the leading global provider of networked consumer electronics and entertainment”

• Expand our PC, Blu-ray Disc-related products and component/semiconductor businesses

into “trillion yen businesses,2” joining LCD TVs, digital imaging, game and mobile phones

and raising the total number of “trillion yen businesses” to seven

• Ensure that 90% of our electronics product categories are network-enabled and wireless-

capable by the ﬁ scal year ending March 31, 2011 (ﬁ scal year 2010)

• Roll out video services across key Sony products by ﬁ scal year 2010, starting with service

launch on the PLAYSTATION®Network in summer 2008

• Double the annual revenue from BRIC countries to ¥2 trillion3 by ﬁ scal year 2010

1 Three-year period ending March 31, 2011 2 Businesses each generating ¥1 trillion or more of annual sales to outside customers, except for Blu-ray Disc- related business which includes intersegment sales 3 Includes Sony Ericsson Mobile Communications AB and SONY BMG MUSIC ENTERTAINMENT as allocated

categories to shrink substantially. Second, we expect sales of our Sony also expects to achieve improved profi tability in our Game LCD TVs to grow dramatically, which will allow us to better cover segment in fi scal year 2008, which recorded a loss in fi scal year our fi xed costs. 2007. The most important initiative is reducing the cost of PS3™ Next, we will further differentiate our products from our hardware through such measures as continual reductions in the competitors’ through the use of internally produced key components number of components and decreasing the size of key such as advanced films, LED backlights and specialized semiconductors, such as RSX™ graphics processor, by switching semiconductors. We will also offer models with ultrathin designs, from a 90-nanometer to a 65-nanometer manufacturing process. lower power consumption and high frame rates. Also very important Increasing sales of PS3™ software titles is the other key to are cost minimization initiatives such as efficient LCD panel improving profi tability. We are off to a strong start for software in procurement through our two joint ventures (with Samsung fi scal year 2008, and we also have an exciting lineup of game Electronics Co., Ltd. and with Sharp Corporation) and outside software and non-game services ready to be launched. sources, further reductions in design lead times and the number of As a result of these initiatives, in fi scal year 2008 we expect to chassis, and the acceleration of local production. These initiatives achieve improved profi tability in both our TV category and Game are expected to result in increased fl exibility in the market and segment. profi tability.

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 1111 008.8.78.8.7 22:17:49:17:49 PMPM Investing for the Future Further Optimization Only through continued investment can Sony continue to deploy On top of all of the above initiatives, we will continue to further its innovative technologies to achieve growth and create sustained optimize our operating performance. In order to remain competitive, product differentiation. Accordingly, we have allocated we must continue to rigorously scrutinize our supply chain activities approximately ¥1.8 trillion for these strategic investments over the and exit businesses that have not yielded a satisfactory return. next three years. In addition to entertainment- and network-related investments, Network Initiatives we will use half of this investment—or approximately ¥900 billion— As a leading producer of consumer electronics—from PSP® and to strengthen core focus areas within components and Walkman® to BRAVIA TVs, VAIO PCs and phones from Sony semiconductors such as image sensors, batteries, display devices Ericsson—and as one of the world’s premiere holders of video, and Blu-ray Disc-related components. music, and game-related entertainment content, Sony is uniquely positioned to deliver new entertainment experiences to its Open Innovation customers. Consumers are demanding increasingly sophisticated and Our customers increasingly demand the ability to enjoy their integrated products and services, and through our R&D efforts entertainment content when, how and wherever they want. Two we can achieve innovative technology that differentiates us from steps are required to make this a reality. First, on the hardware front, our competitors. In addition to the recent reorganization of our products need to be connected to content seamlessly, without the R&D laboratories, we are accelerating what we call “open need for cables and clumsy data transfer. To this end, we have a innovation,” or the introduction of internal and external mid-term goal of making 90% of our product categories in the technologies, to offer the most attractive products and achieve Electronics business network-enabled and wireless-capable by maximum R&D effi ciency. fi scal year 2010. Second, regarding content distribution, we are launching a video service platform that will expand the delivery of Accelerate Innovation content across our devices—in the home or “on the go.” We plan to launch a video service this summer in North America Commericialization Carve-out on the PLAYSTATION®Network, which will make feature movie and television content from Sony Pictures and other major studios available on both PS3™ and PSP®. Sony Corporate R&D By the end of fi scal year 2010, we plan to extend the availability Alliances Joint Ventures of our video services—fi rst to PCs and consumer electronics for

Drive growth through disciplined investment

(Yen in trillions) • Invest in and build-out entertainment and network services 1.8 (e.g. Gracenote, 2waytrafﬁ c)

1.4 • Expand and reinforce TV Business –LCD panel production expansion –Increase OLED panel production

• Invest aggressively into Core components –Image Sensor, Li-ion Battery and Blu-ray Disc, etc

• Implement “Asset Light” strategy –System LSI for Game

2005-2007 2008-2010

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 1122 008.8.78.8.7 22:17:50:17:50 PMPM Video Service Rollout Strategy

Rollout video service across key Sony products by ﬁ scal year 2010

Summer 2008 Fiscal year 2010

(Key Phases) PlayStation PCs and consumer electronics for the home Key mobile products

the home, and then to key mobile products such as Walkman® and Financial Strategies Sony Ericsson phones. We have targeted a 5% operating profi t margin as a baseline of This initiative is expected to generate new revenue streams and profi tability needed to generate funds and continue to lead and is one of the clearest opportunities for Sony to leverage its innovate. We consider this to be the minimum acceptable level entertainment assets to differentiate our electronic products. going forward. In addition, return on invested capital (ROIC) has been formally established as a fundamental framework for evaluating International Expansion all capital investments across the Sony Group. We will thoroughly Sony’s products and services are already available around the world. review the expected return on capital before implementing However, the bulk of our sales—approximately 74% in fi scal year investments or making acquisitions. Sony is also targeting a return 2007—came in roughly equal proportion from our traditional sales on equity (ROE) of 10% by fi scal year 2010. strongholds of Japan, North America and Europe. Our largest regional growth economic opportunities exist outside these The business environment in which Sony operates is chang- comparatively mature markets, led by the BRIC countries—Brazil, ing rapidly and, with advances in digital technology and Russia, India and China. These four nations are some of the world’s broadband networks, technological innovation is moving at fastest-growing economies and represent over 40% of its a pace never experienced before. To be a leading company population. We have already achieved great success in India, with in the digital age, Sony aims to leverage its unique com- the strong presence of our fi lm, television and music content petitive advantage of producing both hardware and content, complementing our Electronics business. We can leverage this and continue to offer cutting-edge products together with model in the other BRIC countries and other emerging markets. superior content and services to meet the needs and expec- Another goal we have set is to double our revenues from the tations of our customers. We are also committed to achiev- BRIC countries over the next three years. We achieved ¥1 trillion ing our mission—to become the leading global provider of in revenues from the BRIC countries (including Sony Ericsson and networked consumer electronics and entertainment. SONY BMG MUSIC ENTERTAINMENT) in fi scal year 2007, and we aim to achieve ¥2 trillion in revenues by fi scal year 2010. June 26, 2008

008SonyE_P1_P13_0804.indd8SonyE_P1_P13_0804.indd 1133 008.8.78.8.7 22:17:51:17:51 PMPM Review of Operations

During the ﬁ scal year ended March 31, 2008, Sony reported operating results that highlight its revitalization while simultaneously demonstrating its technological prowess and united group strength. In addition to solidifying our market position in such areas as LCD televisions, camcorders and compact digital cameras, we mobilized to combine our technologies and launched an organic light-emitting diode (OLED) television that realizes both an astonishing thinness and extraordinary image quality. Sony also made progress in expanding the “HD World.” This concept represents the integration of Sony products—from electronics to motion pictures, games and other entertainment content—enabling users to view, shoot, edit and enjoy images with the same dazzling high definition (HD) quality. Collaboration among Sony Group companies contributed to the success of the movie Spider-Man 3, as well as increasing market penetration for PLAYSTATION®3 and advancing the adoption of the Blu-ray Disc format. Such achievements are inspired by Sony’s position as both a hardware and content provider. In this section, we take a look at Sony’s efforts and achievements during the period under review.

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1144 008.8.78.8.7 22:18:30:18:30 PMPM Sony launched XEL-1, the world’s ﬁ rst OLED In February 2008, we announced plans to LCD television sales and market share television, in Japan in December 2007. invest approximately ¥22 billion to establish (Millions of units) (%) 12 20 Defying accepted ideas, XEL-1 features an production technologies for medium-sized 10.6 11-inch display that measures only 3mm at and large OLED panels. Although LCD televi- 9 14% 15 its thinnest point, as well as a high contrast sions remain the mainstay of our television 12% 12%

ratio of 1,000,000:1, high peak brightness, business, we have positioned the OLED 6 6.3 10 excellent color reproduction and rapid panel as a new device that will expand 2.8 response time, resulting in unprecedented potential applications for televisions and 3 5 picture quality. other audiovisual (AV) products. We plan to 0 0 In commercializing XEL-1, we leveraged continue producing new applications espe- 2006 2007 2008 many of our proprietary advanced technolo- cially suited to OLEDs as we steadily develop *Years ended March 31 gies, including high-resolution display tech- this business. nologies developed since the era of the period, Sony recorded unit sales of 10.6 cathode ray tube (CRT) televisions and high- During the ﬁ scal year ended March 31, 2008, million BRAVIA LCD televisions—an density mounting technologies from our the global market for LCD televisions increase of 68% from the previous ﬁ scal year mobile product development. expanded rapidly to 85 million units. For this and well exceeding the growth rate for the

The world’s ﬁ rst OLED television has opened a new chapter in the innovation of display technology. BRAVIA has emerged as one of the world’s top LCD television brands. By linking its displays and electronics products, Sony is creating new digital entertainment experiences.

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1155 008.8.78.8.7 22:18:31:18:31 PMPM global market—owing to robust sales of current fi scal year, we are taking steps to shrink, we will continue to focus on the LCD large-screen and Full HD models. In spring further increase unit sales and implement television business, which is expected to 2008, we reinforced the BRAVIA lineup by cost reductions, with the aim of achieving a experience continued growth. introducing new medium and small-sized substantial improvement in profi tability. With With the market for LCD televisions models—some with thinner profi les and sales of LCD rear projection and CRT televi- expanding rapidly, ensuring a stable supply others with different color variations. In the sions continuing to decrease as markets of LCD panels is becoming increasingly

New Technology: The World’s First OLED Television ExtraordinaryExtraEx image quality, elegantelegantan desdesign and an astaastonastonishingonishing ththinness of only 3mm

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1166 008.8.78.8.7 22:18:34:18:34 PMPM important. In August 2007, S-LCD of 50,000 panels, one of the highest in the In addition, in February 2008 we announced Corporation (S-LCD), our joint venture with industry for eighth-generation panels. plans to establish a joint venture with Sharp Samsung Electronics Co., Ltd., began Additionally, S-LCD has bolstered the Corporation to produce large LCD panels. In production of eighth-generation amorphous monthly production capacity of its seventh- ﬁ scal year 2009, the joint venture is expected thin-ﬁ lm transistor (TFT) LCD panels. The generation LCD panel line, and is currently to begin production at a panel plant that will new production line has a monthly capacity producing 120,000 panels monthly. use the industry’s first 10th-generation

What was your initial impression of the OLED panel? When I ﬁ rst saw the images displayed by the prototype, I was absolutely astounded. The image quality was inspiring, and unlike anything I had ever seen before. Even if we started with an 11-inch model, I just knew we had to show this technology to the world. As a television engineer, I remember being unable to contain my excitement.

What are the advantages of the OLED as a next-generation display? The XEL-1 has attracted a great deal of attention because of its sleek profi le—about 3mm at the thinnest point—but what I think is truly impressive is the display’s expressiveness and its unparalleled ability to reproduce black. OLEDs reproduce subtle gradations of black more accurately than any other display. What this Ken Kikuchi Engineer, E Products & means, for example, is that they convey beautifully the gleam of a black sofa in a dark room or the luster of Business Development Dept, a piano. Another unique attribute of OLEDs is the ability to deliver high peak brightness, which ensures faith- TV Business Group, ful reproduction of the glittering surface of water, the sheen of metal or the explosive fl are of fi reworks. This Sony Corporation new level of picture quality has taken the lead over existing display technologies. Ken Kikuchi has been involved in Sony’s OLED project since its inauguration in the summer What were the most challenging aspects of development? of 2006. In his capacity as an Development efforts were focused on optimizing the color gamut, contrast and other features, as well as engineer in charge of panels for on developing a display driver that would accurately reproduce black. It was also important to establish a televisions, Ken brought his stable mass production capability that would ensure uniform quality and otherwise draw out and leverage considerable experience in CRT and LCD televisions to the exceptional panel quality. Initially yield was a major issue, but the collective efforts of those involved in bear in helping to realize the the production processes have led to steady improvements. Our success in commercializing this product commercialization of XEL-1. was propelled by the coordinated efforts of all the teams involved: device, set design and development, production and marketing.

What efforts are being made to produce larger panels? Huge crowds gathered to see the OLED prototypes we exhibited recently at trade shows in Japan and the United States. Both times, I was impressed by the level of anticipation regarding this latest Sony innovation. It was clear that if we were to continue bringing the superb image quality of OLED to market, we would have to ﬁ nd a way to make the panels bigger. We must proceed with R&D that will enable us to realize necessary innovations and move us closer to the commercialization of larger panels.

What are some of the notable features of the XEL-1’s design? I knew I wanted to design a television that would immediately inspire in users the same feelings of surprise and excitement as I had when I fi rst saw the incredibly thin OLED panel. I sought to create a simple and defi nitive form that reinforced the impression of sleekness. In its simplest form, the television would have a base and a central arm supporting the panel. However, as long as the arm was centered, the result would be a familiar silhouette similar to any other monitor or television, not the innovative look I was after. Realizing this, I made the bold decision to move the arm to one side. By using an offset aluminum arm, I sought to make the ultrathin panel appear to be fl oating on air.

Hiroaki Yokota What facets of the design process did you fi nd particularly diffi cult? Product Designer, The most diffi cult challenge was to create a design that was defi nitive, so that no matter how small the Creative Center, Sony Corporation picture, and no matter who or from where the TV is seen, anyone would immediately recognize it as a Sony OLED television. Of course, I also sought to design a set that would accentuate the outstanding image qual- Designer of the world’s first OLED television, Hiroaki Yokota ity and one that would stand on its own as a work of art even when switched off, no matter what angle you sought to develop an iconic look at it from. OLED panels have a particular sheen when they are off that is quite unlike LCD panels. We design by creating a new form chose glossy black for the main body color, which integrates the screen, bezel and base nicely and helps factor and distinctive style. the set blend into the surrounding decor as light refl ects off it.

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1177 008.8.78.8.7 22:18:37:18:37 PMPM mother glass substrate. Having secured a The key to realizing the world of HD envi- disc recording media, and the XDCAM EX™, supply of LCD panels through S-LCD and sioned by Sony is high-quality HD content. which uses a memory card. Also, we have the joint venture with Sharp, we expect to In the area of broadcasting equipment and developed HD solutions for customers in a be assured of a steady volume of LCD other professional-use devices, we are

panels in a broad range of sizes, enabling introducing a vast array of cutting-edge HD PC sales

us to establish a stable, cost-competitive equipment especially for the production of (Millions of units) procurement structure. HD programming that addresses the needs 8 BRAVIA LCD televisions play a central role of professional users. Sony HD cameras and 6 in our “HD World” initiative. Going forward, videotape recorders have already been 5.2

we will continue to promote the “HD World” adopted by broadcasters around the world 4.0 4 3.7 by offering a variety of hardware, as well as and are being used to generate an unprec- movies and other HD content, all of which edented array of high-quality HD content. 2 share a common link—the LCD television. We have also released professional-use

This will enable us to deliver powerfully vivid products that respond to the random access 0 2006 2007 2008 and detailed HD images that will inspire an and other needs of the digital age, including *Years ended March 31 increasing number of users. XDCAM™ camcorders, which use optical

Sony’s vast range of electronics products and content enables us to expand the realm of high deﬁ nition from the movie and broadcasting business to television, games and other home entertainment.

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1188 008.8.78.8.7 22:18:41:18:41 PMPM HD World

XDCAM HD camcorder and stationary deck

HD Handycam® Broadcasting Filming CineAlta digital cinema cameras and the 4K SXRD ﬁ lm projector

Cinema

Fun

HD TV and Blu-ray Disc player VAIO PC with built-in Blu-ray Disc drive

Viewing PLAYSTATION®3 Storage/ Content Editing

wide range of other ﬁ elds. For example, in record, edit and otherwise freely manipulate Camcorder sales and market share

the area of digital cinema equipment, we HD content while retaining superb HD image (Millions of units) (%) 10.0 80 offer CineAlta™ digital cinema cameras and quality. Looking ahead to this era, we have

the 4K SXRD™ ﬁ lm projector, which are being taken steps to bolster our lineup of Blu-ray 7.6 7.5 7.7 7.5 60 deployed in movie theaters. Disc-compatible models. In the ﬁ scal year 43% ended March 31, 2008, our PCs—notably 42% 41% 5.0 40 VAIO PCs play a crucial role in the “HD the VAIO C series, which allows consumers

World” by enabling users to edit and store to color-coordinate their notebooks—per- 2.5 20 content. The age of high definition has formed strongly, with unit sales rising 30%, arrived, and soon people will be able to to 5.2 million units. 0 0 2006 2007 2008 *Years ended March 31 19

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 1199 008.8.78.8.7 22:18:43:18:43 PMPM Camcorders and compact digital cameras are major proﬁ t pillars for Sony while digital single-lens reﬂ ex (SLR) cameras offer particular promise for future market growth. These products are supported by Sony’s image sensor technologies.

We have consistently led the industry by with HDDs registering particularly robust lightest* camcorder, which records to developing format standards ranging from results. We also launched a number of Memory Stick. Reﬂ ecting solid support for 8mm video to digital video (DV) and high groundbreaking new models, including a our broad lineup of camcorders, which are definition video (HDV), and by commercial- “hybrid” Handycam® camcorder with a tailored to the needs of customers around

izing Handycam® camcorders that deliver face-detection function that is capable of ∗As of April 2008 improved image quality and convenience. HD recording to three separate media—

In the fiscal year ended March 31, 2008, internal memory, Memory Stick and Compact digital camera sales and ® market share we further enhanced our Handycam DVD—as well as the world’s smallest and (Millions of units) (%) portfolio with Full HD-compatible models 25 23.5 40 that record on hard disc drives (HDDs), 20 30 DVDs and Memory Stick™ recording media, 17.0 22% 23% thereby accelerating efforts to realize the 15 13.5 21% 20 “HD World.” 10 In the period under review, camcorder 10 5 sales progressed favorably to 7.7 million

units, with HD-compatible models mounted 0 0 Compact digital camera DSC-W110 2006 2007 2008

*Years ended March 31

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2200 008.8.78.8.7 22:18:45:18:45 PMPM the world, Sony camcorders consistently introduced products that respond to compact digital cameras increased 38% maintain a global market share of approxi- different consumer needs, including new year on year to 23.5 million units, signifi - mately 40%, and are a major profi t pillar of models in the affordably priced Cyber-shot cantly outpacing global market growth and Sony’s Electronics segment. W- and S-series and the advanced, slim- contributing to earnings. design T-series. Within the digital imaging domain, the global Recently, we launched models equipped A newcomer to digital SLR cameras, Sony market for compact digital cameras with newly developed functions such as entered this highly promising market in 2006. showed a dramatic growth of 27% in the “Smile Shutter,” which ensures users never Following on the heels of our fi rst model, the fi scal year ended March 31, 2008. This was miss those natural smiles, and a face- α100, we unveiled several new models in a due to replacement demand and continued, detection capability, where focus, exposure bid to expand our product portfolio during robust new demand in emerging markets. and skin tone are automatically detected the period under review. These included the For these and other markets, Sony has and adjusted. As a result, unit sales of Sony α200, which offers enhanced basic features;

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2211 008.8.78.8.7 22:18:47:18:47 PMPM the α350, featuring Quick AF Live View, realizing superb image quality. Going forward, and digital SLR cameras is made possible which enables users to shoot from various we will strive to continue to enhance the α by our image sensor technologies. We angles by using the LCD monitor; and the (“alpha”) series, enabling us to offer a wide have positioned digital image sensors— α700, which is mounted with the newly range of attractive, easy-to-use cameras. already the key device in our digital imaging developed Exmor™ complementary metal business—as a focus of our semiconductor oxide semiconductor (CMOS) sensor that The outstanding image quality delivered by business. We are also working to strengthen delivers 12.24-megapixel resolution, thus Sony camcorders, compact digital cameras our technological capabilities for CMOS

Global Branding: Sony FIFA An initiative to strengthen the Sony brand through a partnership with FIFA

Sony has signed a global partnership program contract with Fédération Internationale de Football Association (FIFA) making it a “FIFA Partner,” the highest level of FIFA sponsorship. During the eight-year period of the contract (2007–2014), Sony will exercise a broad array of rights in the “Digital Life” category—which covers a wide range of businesses, from electronics to entertainment—at the FIFA World Cup™ in 2010 (South Africa) and in 2014 (Brazil), as well as at more than 50 other FIFA competitions. As it continues to expand its presence around the world, Sony recognizes that it is increasingly important to enhance the corporate value of the Sony Group. Accordingly, Sony is strengthening its technologies and product appeal, enabling it to offer competitive products and services, as well as conducting effective marketing activities that enhance brand afﬁ nity and customer trust. Through a variety of initiatives as a FIFA Partner, Sony aims to develop new businesses and reinforce and broaden global awareness of the Sony brand. At the same time, the Sony Group will work as one to deliver dreams, happiness and excitement to people everywhere through soccer, the world’s most popular sport.

FIFA Partnership Rights and Initiatives

Marketing Media • Use of offi cial FIFA marks and designations • Display of logos on stadium advertising boards, FIFA publications and • Use of FIFA archival footage for promotional purposes offi cial websites • Rights to produce and use premium goods • Advertising and display of logos at FIFA-sponsored events • Displays and sales of products in and around stadiums • Preferential negotiation rights for television broadcasting • On-screen ID (sponsor tag displayed on television screen) • Stadium advertising boards used in the offi cial FIFA video game Others • Preferential negotiation rights for the production, distribution and commercial use of the offi cial music for FIFA World Cup™ competitions • Use of PLAYSTATION®3 (PS3™) as offi cial hardware for the offi cial FIFA video game (“FIFA Interactive World Cup”)

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2222 008.8.78.8.7 22:18:48:18:48 PMPM image sensors to accommodate expanding Kumamoto Technology Center. Over the next with advanced processing speeds, for use applications. three years, while maintaining an industry- in growth-market products, such as camera- We have allocated approximately ¥60 leading position in charge-coupled device equipped mobile phones. billion over three years—ﬁ scal years 2007, (CCD) image sensors, we will work to con- 2008 and 2009—to invest in expanding the tinue to strengthen our CMOS image sensor In our semiconductor business, we plan to image sensor fabrication capacity of Sony manufacturing with the aim of developing continue to invest actively in the develop- Semiconductor Kyushu Corporation’s sensors that combine superb image quality ment and production of image sensors,

Tomoyo Ouchi FIFA Partnership Project Offi ce, Brand Management Department, Sony Corporation A PR and communications offi cer in the FIFA Partnership Project Offi ce, Tomoyo Ouchi is responsible for distributing information to the public and promoting information sharing within the Sony Group.

Why become a FIFA partner? Our principal objective is to enhance the brand value of the Sony Group worldwide. The FIFA partnership encompasses Sony’s core business categories, including electronics, games, mobile phones, music and movies. We will make practical use of the partnership as a common, group-wide platform, rallying the capabilities of Sony An in-stadium promotional activity (Commercial display) as a whole for maximum impact. Through partnership initiatives, we are seeking to highlight the unity and collective strengths of the Sony Group. a catalyst for the development of new businesses. This is why the Another objective is to further strengthen the Sony brand. To this term “partner” is used, rather than simply “sponsor.” end, we are striving to replicate soccer’s stylish, exciting and active image in our various activities. Can you tell us a little about the FIFA partnership activities throughout the Sony Group? What are the merits of the FIFA partnership? SONY BMG MUSIC ENTERTAINMENT and Sony Music Entertainment The FIFA World Cup™ is the world’s single biggest sporting event. (Japan) Inc.(SMEJ) wrote the theme songs for many competitions, The 2006 competition in Germany was broadcast to more than 200 including the FIFA World Cup™, while in the Electronics business we countries and regions and had a cumulative viewing audience of are offering comprehensive support by, for example, providing HD approximately 30 billion people. As such, the greatest benefi t of this footage and audiovisual equipment. We are also actively developing partnership is that it provides us with essentially exclusive access promotions for various businesses that make use of HD content. to this massive audience for our global advertising, promotional and In Japan, a television program about soccer called S–The Stories– marketing activities. is being aired that uses archival FIFA footage. A production of Sony Another important merit is that soccer is an especially popular Corporation and Sony Pictures Entertainment, the program also and appealing sport among the “digital” generation and residents features music by SMEJ and is sponsored by Sony Marketing of strategically important emerging markets—both of which are (Japan), thus illustrating the advantages of collaboration among crucial to Sony’s future growth. We are already seeing results, with Sony Group companies in a common branding effort. Also, PS3™ a greater affi nity for the Sony brand and an improvement in our brand has been chosen as the official platform for “FIFA Interactive image in Central and South America. World Cup,” the official FIFA video game. The partnership has also given rise to new business opportunities. These and other FIFA partnership efforts refl ect the teamwork We are creating new ways to enjoy soccer by leveraging HD and and cooperation inherent in the concept of “Sony United.” Going other technologies, as well as the entertainment expertise accumu- forward, we will continue to take on the challenge of capitalizing on lated through involvement in the motion pictures business, among the attractive opportunity provided by FIFA and soccer in a way others. FIFA has high expectations that we will add new value that that only Sony can. is distinctly Sony, while our hope is that the partnership will serve as

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2233 008.8.78.8.7 22:18:50:18:50 PMPM A comprehensive array of cutting-edge device technologies allows Sony to create unique products for a new world of entertainment.

which give us a competitive advantage. established between Toshiba Corporation, By focusing attention on image sensors Conversely, we have implemented a number Sony and Sony Computer Entertainment Inc. and other core areas, we will strive to of measures in the area of system LSIs in (SCE) to produce semiconductors using the improve the efﬁ ciency of investment in our line with our “Asset Light” strategy for above-mentioned production equipment. semiconductor business. reducing in-house production. In March This will enable us to outsource the manu- 2008, we sold certain semiconductor pro- facture of system LSIs to the joint venture, R&D continues to yield a wealth of revolu- duction equipment to Toshiba Corporation, while keeping system LSI development and tionary technologies that allow us to develop and in April 2008 a joint venture was engineering in-house. products which are unique to Sony. Recent

TransferJet TransferJet™ is a close proximity wireless transfer technology that facilitates the high-speed transfer of photographs, videos and other large ﬁ les from a cellular phone, digital camera or video camera to a PC or television simply by touching the two devices together. Straightforward enough for anyone to use, this revolutionary technology is expanding the world of wireless communication.

What prompted you to develop TransferJet? Cell phones, compact digital cameras and other mobile devices are popular across all age groups, but for many people printing their photographs or watching home videos on a television is still not as easy as they would like. We wanted to create a wireless system that would be easy for anyone to use—even people who are not entirely comfortable with PCs and networks. This was what prompted us to develop TransferJet. Sony’s superior craftsmanship consistently inspires new lifestyles. Just as the development of FeliCa has given rise to the “touch & go” style of electronic ticketing for public transportation, we believe that our new wireless technology has the potential to signiﬁ cantly transform the way people live.

Jun Iwasaki What is so revolutionary about TransferJet? Deputy General Manager, Wireless communication generally requires authentication and other complex settings. Even I fi nd such systems TransferJet Business counterintuitive, and I’m an engineer. Our idea was to make wireless recognition between devices possible Promotion Department, simply by touching them together. It was this new concept that allowed us to develop a revolutionary interface Corporate R&D, Sony using low-intensity radio waves that only travel a maximum of 3cm, making it possible to transfer large volumes Corporation of data easily and quickly. By intentionally limiting the communication distance to 3cm, we prevent crossed signals and ensure the radio waves only reach the device with which they are intended to communicate. The A wireless engineer, Jun Iwasaki merits of this are that it reduces the need for security and data encryption circuits, as well as minimizing power has been involved in technology consumption, which will make it easier to promote global adoption of the system. With a maximum transmission development—including ultra- rate of 375Mbps, this system facilitates things like stress-free downloading of video from a camcorder to an wideband wireless technology— LCD television for easy viewing. for many years. Building on his considerable experience and How do you anticipate this technology being used? expertise, Iwasaki leads the The chip used in the TransferJet technology is miniscule, so it can be easily mounted in compact digital cameras team responsible for the and PCs, as well as in cell phones and other mobile devices. Mounting it together with FeliCa, for example, development of the TransferJet would allow the user to “touch & get” music, videos and information via TransferJet while using FeliCa to settle close proximity wireless transfer payment. This mechanism will also make it possible to develop business models for offering a variety of new technology. services. We will make the technological specifi cations available while promoting TransferJet as a universal interface and accelerating development efforts with the aim of achieving commercialization in fi scal year 2009.

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2244 008.8.78.8.7 22:18:51:18:51 PMPM The market for digital music players is expanding together with the digital music distribution industry. As developers of the Walkman® brand and technologies, which have inspired a range of products since the launch of the ﬁ rst Walkman® in 1979, we are working to create a new chapter in Sony’s audio history.

achievements in the area of CMOS image digital SLR camera. We also announced sensors—a key focus for semiconductors— the commercialization of a 35mm full-frame include a high-speed Exmor CMOS image CMOS image sensor with 24.81 effective sensor with 12.24 effective megapixel megapixel resolution. resolution, which is mounted in the α700 From technology that supports product Sound entertainment player differentiation to technology that creates Rolly new markets, we continue to actively We recently unveiled Rolly™, a newly pursue R&D in a variety of fields. These developed sound entertainment player that activities range from the development of a integrates Sony’s accumulated audio tech- thin, light and bendable OLED display nologies with motion control-related robot made with plastic film to TransferJet, a new technologies. As a music player that dances close proximity wireless transfer technol- to the rhythm of the music being played, ogy that facilitates the high-speed transfer Rolly is bursting with a uniquely Sony sense of content from a mobile device to a com- of fun, and has won acclaim as a music puter or a television just by touching the player that offers a new way of listening to two together. music and an innovative user interface.

Full-color OLED display using thin-ﬁ lm transistors mounted on a plastic substrate

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2255 008.8.78.8.7 22:18:52:18:52 PMPM Digital music player sales and With the trend in televisions shifting toward intense sound to life, allowing users to create market share models with large screens and HD compat- an environment for enjoying high-quality (Millions of units) (%) ibility, demand is increasing for easy-to-enjoy sound in the comfort of their own home. 8 12 full-scale home theater systems that deliver We have also enhanced our lineup of NET 5.8 more realistic sound to enrich the viewing JUKE™ hard disk component stereo systems. 6 8% 9 4.5 experience. The Sony S-Master is a compact, NET JUKE allows users to download music 4.5 7% 4 6% 6 fully digital ampliﬁ er that facilitates the digital and store it on the system’s hard drive without signal processing of the entire audio chain, a PC, and transfer it easily to a Walkman®, 2 3 from sound input through to speaker output, thus making it possible for them to take their generating highly efficient, high-fidelity music wherever they go. 0 0 2006 2007 2008 sound. Incorporated into products ranging *Years ended March 31 from home theater systems to golf ball-sized In the digital music player category, sales speakers, S-Master technology brings of Walkman® units with noise canceling

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2266 008.8.78.8.7 22:18:55:18:55 PMPM functions and compatibility with one-seg to create a new, ﬂ exible environment for of music-enabled handsets reaching 145 (terrestrial digital broadcasting) were strong enjoying music. million units at 2007 year-end, including in Japan. In the U.S. and European markets, more than 57 million Walkman®-branded we expanded our business by introducing Sony Ericsson Mobile Communications units, Sony Ericsson continues to enjoy a new models that responded to consumer AB (Sony Ericsson)—established as a leading position globally in this key market. demand for WMA/WMT (Windows Media joint venture between Sony Corporation In calendar year 2008, Sony Ericsson Audio/Windows Media Technology) com- and LM Ericsson—shipped more than 100 plans to launch XPERIA™, a new brand of patibility. As a consequence, in the ﬁ scal million handsets in calendar year 2007 at high-performance handsets that will offer year ended March 31, 2008, total unit sales a growth rate of more than double that of not only music and camera functions, but of digital music players increased 29%, to the global market. During the year, Sony also the ability—comparable with that of 5.8 million units. Ericsson established a solid business a PC—to enjoy a wide range of additional In the Japanese market, we also kicked foundation in order to strategically position content. off the ‘au×Sony “MUSIC PROJECT,”’ in itself to capture market share with an collaboration with KDDI Corporation. This expanded product portfolio, in line with its In fiscal year 2007, the SONY BMG new service allows subscribers to download goal of becoming one of the top three MUSIC ENTERTAINMENT (SONY BMG) music to their mobile phones for listening players in the industry. Investments are joint venture focused on identifying and on a Walkman® or NET JUKE hard disk currently being made in both R&D and developing talented new artists, as well as component stereo system, thereby bridging brand-building with the aim of strengthen- on expanding the fan bases of its estab- the traditionally separate platforms of ing Sony Ericsson’s presence in new and lished and superstar artists. SONY BMG mobile phones, PCs and audio equipment emerging markets. With cumulative sales earned a total of 21 GRAMMY® awards in

008SonyE_P14_27_0802.indd8SonyE_P14_27_0802.indd 2277 008.8.78.8.7 22:18:57:18:57 PMPM Artists from SONY BMG & SMEJ

Alicia Keys Bruce Springsteen Leona Lewis

Chris Brown Avril Lavigne Celine Dion

YUI Ken Hirai L’Arc-en-Ciel

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 2288 008.8.78.8.7 22:19:39:19:39 PMPM calendar year 2007 and enjoyed success launched MusicPass, a series of MP3 gift Sony is also focusing efforts on expanding with a wide range of both new and car- cards that provide consumers with access its music publishing business. Sony/ATV ryover releases, including multimillion-selling to digital albums and bonus material. A Music Publishing (Sony/ATV)—a joint albums from artists such as Daughtry, similar product, musicbon, was launched venture between Sony and Michael Alicia Keys, Avril Lavigne, Celine Dion, in Germany. Jackson—owns or administers more than Bruce Springsteen and Foo Fighters. Moving ahead, SONY BMG plans to 500,000 copyrights and has achieved Breakthrough artist development success develop new products, explore additional considerable success in capitalizing on stories included Leona Lewis, Sara Bareilles distribution channels and develop a wide these copyrights. In the period under and Sean Kingston. range of business models. review, Sony/ATV bolstered its business by SONY BMG also continued to assert its increasing its focus on signing artists and presence in the Internet and mobile phone Primarily within the music production acquiring catalogs. Two key acquisitions arenas, with digital sales representing 31% industry, Sony Music Entertainment were Famous Music, which includes

The era of digital distribution has arrived, as music, ﬁ lms, games and other content can now be delivered to a variety of hardware through networks. Sony aims to maximize the potential of the digital distribution age.

of SONY BMG’s revenues in the U.S., and (Japan) Inc. (SMEJ) conducts artist man- classics such as “Footloose,” “Moon River,” 18% of revenues worldwide. agement, and video and media production, “Take My Breath Away,” “It Don’t Mean a During the period under review, SONY among others. In fi scal year 2007, top SMEJ Thing (If It Ain’t Got That Swing),” “Satin BMG began providing music via global social artists including ORANGE RANGE, Ken Hirai, Doll,” “Silver Bells,” and “That’s Amore,” and networking website MySpace and formed YUI, L’Arc-en-Ciel, Mika Nakashima and the Leiber–Stoller catalog, which includes MySpace Music with other major music YUKI contributed signifi cantly to both sales many of Elvis Presley’s greatest hits. companies—a joint venture that aims to serve and income, while CDs by artists such as as an interactive online platform for music Aqua Timez, ikimono-gakari, Yuna Ito, Digital distribution is also expanding as sales, subscription services and ad-supported UVERworld and chatmonchy recorded a sales channel for publications. Sony entertainment. SONY BMG also participated favorable sales. has offered Portable Reader System in in “Comes With Music,” a concept which In addition to CD sales, SMEJ is also the U.S. market since 2006. A single offers mobile phones bundled with access focusing on digital distribution, and in the device allows the user to download to music, enabling users to download and period under review the Chaku-Uta® and hundreds of e-books for easy portability listen to as many celebrated recordings by Chaku-Uta Full® master ringtone download and an innovative reading experience. legendary SONY BMG artists as they like. services continued to perform extremely well, To encourage interoperability across the and contributed signifi cantly to earnings. In Internet protocol television (IPTV) service music market, SONY BMG also announced addition, the animation-focused video pro- uses an Internet protocol to deliver digital an agreement with Amazon for the sale of duction business has undertaken new initia- content over a broadband connection. music MP3s that can play on computers as tives, and in April 2008 released Ano Sora Subscribers to Sony’s IPTV service can well as all MP3 players—including the iPod. wo Oboeteru in collaboration with Sony enjoy such content simply by connecting In the U.S. and Canada, SONY BMG Pictures Entertainment (Japan). the receiver directly to a BRAVIA LCD television.

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 2299 008.8.78.8.7 22:19:48:19:48 PMPM Although still new, Sony’s IPTV service Already popular for downloading music, an online store selling and distributing offers tremendous potential as a new digital ﬁ lms and other content, online services are game titles for PLAYSTATION®3 (PS3™) and content distribution format. Sony will strive also rapidly becoming a major part of the PSP® (PlayStation®Portable), as well as vir- to further develop its IPTV service business gaming market. tual items for use in games, and video by emphasizing the unique advantages of PLAYSTATION®Network delivers a wide content. PLAYSTATION®Network also offers both its hardware and content. variety of functions and services to on-line online games and AV chat features. Indicative users. One of these is PLAYSTATION®Store, of its growing popularity, PLAYSTATION®

PLAYSTATION®3—the ultimate computer entertainment system—is made possible as a result of Sony’s cutting-edge technologies. In addition to full high deﬁ nition gaming enjoyment, the system is creating a new world of entertainment through network services.

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3300 008.8.78.8.7 22:19:48:19:48 PMPM Network currently has more than 9.8 million PS3™ is a computer entertainment system Cumulative sales of PlayStation®2 (PS2) registered accounts worldwide, as of June that brings together Sony’s considerable reached approximately 130 million units, 2007, while downloads to date exceed know-how and cutting-edge technologies— making it the world’s best-selling game 170 million. including those used in Cell Broadband platform. PS2 continues to perform well, In fall 2008, SCE plans to introduce the Engine™ and other high-performance semi- particularly in Europe and North America. In Open Beta service for PLAYSTATION®Home, conductors, and advanced devices such as fi scal year 2007—the eighth year since its the online community that allows PS3™ users the Blu-ray Disc drive. launch—global sales of PS2 totaled 13.73 to meet, interact and play games. With the aim of achieving strong growth million units, highlighting its long-standing for the PS3™ platform, in fi scal year 2007 SCE contribution to profi ts in Sony’s Game busi- introduced a new 40GB model and expanded ness. SCE will continue to promote PS2 in the PS3™ software lineup. As a result of these emerging markets, such as those in Eastern and other measures targeting both software Europe, the Middle East and Asia, as well as and hardware, sales of the platform rose by expanding the PS2 software lineup. worldwide after the year-end holiday sales season, boosting sales for the fi scal year to Cumulative global sales of PSP® handheld 9.24 million units. entertainment system surpassed 37 million Going forward, SCE will cultivate even units and have also given rise to million- broader market acceptance by continuing to selling hit software titles in Japan, North enhance its software lineup and expand its America and Europe. network-related services. At the same time, In September 2007, SCE unveiled a new SCE will endeavor to continue to implement PSP® that is slimmer and lighter than the

PLAYSTATION®3 cost reductions to improve proﬁ tability. original model. SCE also enhanced the range

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3311 008.8.78.8.7 22:19:49:19:49 PMPM PlayStation® Software Titles

PLAYSTATION®3 software titles* *Some titles are yet to be released.

Gran Turismo 5 Prologue™ SOCOM™: Confrontation

LittleBigPlanet™ SingStar®

AFRIKA™ AQUANAUT’S HOLIDAY (working title)

PSP® (PlayStation®Portable) software titles* *Some titles are yet to be released.

Secret Agent Clank™ Hot Shots Golf: Open Tee® 2

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3322 008.8.78.8.7 22:19:50:19:50 PMPM PlayStation® hardware sales software title development group—has American box office in calendar year 2007,

(Millions of units) released a steady stream of hit titles, breaking the $1 billion mark for the sixth 40 including MotorStorm™, Gran Turismo 5 consecutive year. The studio was the only

9.2 Prologue™ and Uncharted: Drake’s Fortune™ one in Hollywood to exceed $8 billion in 30 ™ ® 3.6 for PS3 , and God of War : Chains of North American box office revenues for 14.1 Olympus and Ratchet & Clank®: Size the 2002–2007 timeframe.1 20 9.5 13.9 Matters for PSP®. To reinforce SCE WWS’s New releases included Spider-Man 3,

10 development capabilities, in September an explosive hit that was the No. 1 film at 16.2 14.7 13.7 2007, SCE acquired two U.K.-based the North American box office in calendar 0 software developers that are regarded year 20072 and generated ticket sales of 2006 2007 2008 highly worldwide. In addition, SCE added nearly $900 million worldwide. The film PS3™ PSP® PS2 *Years ended March 31 to its group Sony Online Entertainment set the all-time record for the biggest (SOE), a U.S. online game development opening 3-day weekend at the North and services company previously part of American box office.3 Other hits in calendar of PSP® software titles and introduced such Sony Pictures Entertainment, in April 2008. year 2007 included Superbad, Ghost Rider new features as a one-seg tuner for the SCE will step up efforts to reinforce its and This Christmas. Japanese market, and Skype™ compatibility software development business by pro- SPE expanded its international motion worldwide. This move succeeded in expand- moting shared access to SCE’s global picture production business in calendar ing customer support for the platform and software development resources and year 2007 in India and Russia and other contributed to sales of 13.89 million units in know-how, as well as cooperation among nations around the world. SPE released its ﬁ scal year 2007. In addition to bolstering its SCE WWS studios in Japan, North America first Bollywood musical, Saawariya, in lineup of appealing software titles available and Europe. November.

® only for PSP , SCE will endeavor to add new To improve the efﬁ ciency and accommo- 1 Daily Variety, January 2003-2008 2 Hollywood Reporter, January 3, 2008 functions—including linkage with PS3™—and date the various development styles of 3 Daily Variety, January 28, 2007 services in an effort to accelerate the market PlayStation® third party software developers, penetration of PSP®. SCE is taking steps to enhance the game development environment. These include Enhancing the lineup of software titles is enhancing programming tools and building a crucial aspect of SCE’s efforts to expand a stronger support framework. the PS3™, PS2 and PSP® businesses. Sony Computer Entertainment World Wide Sony Pictures Entertainment (SPE) had Studios (SCE WWS)—SCE’s in-house a very successful year at the North

PSP® (PlayStation®Portable)

©Sony Computer Entertainment Inc. Manufacturers, cars, names, brands and associated imagery featured in this game in some cases include trademarks and/or copyrighted materials of their respective owners. All rights reserved. Any depiction or recreation of real world locations, entities, businesses, or organizations is not intended to be or imply any sponsorship or endorsement of this game by such party or parties. SOCOM U.S. Navy SEALs Confrontation ©2008 Sony Computer Entertainment America Inc. Developed by Slant Six Games Inc. Published by Sony Computer Entertainment Inc. ©Sony Computer Entertainment Europe. Developed by Media Molecule Ltd. SingStar is a trademark of Sony Computer Entertainment Europe. ©2007 Sony Computer Entertainment Europe. Published by Sony Computer Entertainment America Inc. Developed by SCEE London Studio. All rights reserved. ©Sony Computer Entertainment Inc. All Rights Reserved. Clank and Ratchet is a trademark of Sony Computer Entertainment Inc. Developed by High Impact Games. ©2008 Sony Computer Entertainment America Inc. All Rights Reserved. ©2007 Sony Computer Entertain- ment Inc. All Rights Reserved. 33

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3333 008.8.78.8.7 22:19:52:19:52 PMPM Titles from Sony Pictures

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3344 008.8.78.8.7 22:19:53:19:53 PMPM Sony Pictures Television International Rescue Me and Damages. SPT also produced with the release of hit titles on Blu-ray. Since (SPTI) has established a leading position several made-for-television movies, including the inception of the Blu-ray format in North among Hollywood studios in the international A Raisin in the Sun for ABC, and launched America in June 2006, SPHE has released distribution of current and classic ﬁ lms and The Minisode Network, which airs four-to-six more than 110 titles and maintains a market television programs in all media, as well as minute versions of popular television shows share in excess of 20 percent.5 in the production of local language television over the Internet and via mobile devices. This achievement provided a vital contri- programming. The division also has a port- bution to SPHE’s overall business in calen- folio of nearly 50 cable and satellite television Sony Pictures Imageworks Inc. is a leader dar year 2007, which enjoyed a 16 percent networks in Europe, Asia, Latin America, the in the ﬁ eld of digital animation. The company increase in the year-over-year retail value

Sony Pictures Entertainment distributes motion pictures and television programming to more than 100 countries. It is also a leader in the production and distribution of digital entertainment, from the creation of world-class visual effects for motion pictures to the development of content for the Internet, mobile phones and other devices.

Middle East and Africa. SPTI is expanding used state-of-the-art computer graphics of consumer sales, primarily driven by its international network business, and imaging (CGI) to create the visual effects for blockbuster titles such as Casino Royale, currently broadcasts in 21 languages into Spider-Man 3. Spider-Man 3 and Superbad. more than 130 countries reaching some 375 Of the major studios, for the calendar year million households. Sony Pictures Animation (SPA) is involved 2007, SPHE realized the highest year-on- in the creation of CGI animated features from year increase in overall unit sales and catalog Sony Pictures Television (SPT) makes the planning to production. SPA’s critically performance.6

Studio’s considerable entertainment library acclaimed full-length feature, Surf’s Up, 4 Nielsen VideoScan, September 2007–May 2008 5 Nielsen VideoScan, March 30, 2008 ® available for broadcast, cable and digital received an Academy Award nomination for 6 Nielsen VideoScan for the year ending distribution across all platforms. The library Best Animated Feature in 2008. SPA is December 30, 2007 encompasses more than 3,500 fi lms and currently producing its next animated fi lm, 150,000 episodes of more than 500 television Cloudy With a Chance of Meatballs, and a series, including Seinfeld. direct-to-video sequel to its 2006 feature SPT continues to have the No.1 and No.2 fi lm, Open Season. daytime television dramas (The Young and the Restless and Days of Our Lives), as well Sony Pictures Home Entertainment the No.1 and No.2 syndicated game shows (SPHE) is a worldwide leader in the sale and (Wheel of Fortune and Jeopardy!) in the distribution of home entertainment content United States.4 During the fi scal year ended on DVD and Blu-ray Disc. SPHE was one of March 31, 2008, SPT produced a number of the fi rst to bring Blu-ray Disc to the world- series for U.S. broadcast and cable networks, wide market. Over the past year, SPHE has including ‘til Death, RULES OF ENGAGEMENT, continued to create consumer excitement

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3355 008.8.78.8.7 22:20:00:20:00 PMPM Sony United: Blu-ray Disc A new technology made possible through a group-wide effort

Akira Shimazu Senior General Manager, BD Strategy Offi ce, Sony Corporation Taking on the challenge of developing cutting-edge technology and cultivating new markets is part of Sony’s DNA. Sony began Blu-ray development Players/Recorders immediately after the launch of DVD. We enlisted the cooperation of leading companies in the AV, IT, game and content fi elds and worked together with them to perfect the optimal standards for a variety of applications. As a result of our uncompromising efforts, many companies, retailers and consumers joined us in our support of the Blu-ray format. Blu-ray completes your home theater. For example, you can even record the FIFA World Cup™ with the same quality of the original broadcast, keeping the resolution as crisp and sharp as your memories. In addition, you can enjoy interactive and network features on Blu-ray. From where we now stand, at the dawn of the networked, high defi nition age, it is clear that Blu-ray has a bright future ahead.

Andrew House VAIO Group Executive, Chief Marketing Ofﬁ cer, Sony Corporation Sony was uniquely placed among the Blu-ray companies in that we could see the whole of the value chain—in hardware, in games and, of course, in movies. Sony leveraged this insight to ensure Blu-ray was delivering the best proposition to consumers as well as to hardware and content partners. From a marketing perspective, Sony’s operating divisions successfully collaborated for the greater good of the initiative. For example, the electronics organization packaged movie content with hardware, the studio and the electronics divisions established a united approach to retail and Sony Computer Entertainment America, in conjunction with Sony Corporation, promoted PS3™’s Blu- ray capability alongside its game and network offerings in a Disc Manufacturing major U.S. consumer campaign. Sony proved itself a leader, not only in technology and content but also in communication, collaboration and alliance-building. The company played a pivotal role as a founding member of the “Tru Blu” Blu-ray promotions group that succeeded in building a powerful joint marketing communications campaign to convey the beneﬁ ts of Blu-ray.

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3366 008.8.78.8.7 22:20:01:20:01 PMPM At the core of Sony’s success is its ongoing commitment to exploring new technologies and developing products and services that provide unique experiences for the customer. The development of the Blu-ray Disc in association with our Blu-ray Disc Association partners is the latest example of a leading technology making a signiﬁ cant impact on our customers’ entertainment experience. Blu-ray presents an enormous opportunity for Sony. Total sales* of Blu-ray-related products such as Blu-ray Disc players and recorders, VAIO PCs and components of Electronics business, as well as PS3™ and various contents, are expected to reach approximately ¥1 trillion, in the ﬁ scal year ended March 2009. With each core business supporting this effort, Blu-ray is a prime example of what a united Sony can achieve. * Includes intersegment transactions

Kazuo (Kaz) Hirai President and Group CEO, PLAYSTATION®3 Sony Computer Entertainment Inc. PS3™ is a state-of-the-art entertainment system mounted with a Blu-ray Disc drive. PlayStation® consumers are fans of cutting-edge technology and crave HD quality in games, movies and other entertainment. While the majority of PS3™ consumers invest in our system with a primary interest in gaming, they soon discover that Blu-ray also offers a quantum leap from their previous movie-viewing experiences. The sales momentum of HD televisions is proof of how many consumers—not only PS3™ users—want the HD viewing experience. Having both the most advanced gaming system and the deﬁ nitive HD movie playback solution enables us to offer a complete entertainment system that will be at the center of consumers’ living rooms for years to come. Blu-ray’s massive storage capacity gives game developers the largest palette to create on, leading to previously unimagined creative expression. The intense realism of games and such Home sophisticated features would never have been possible without Entertainment Blu-ray.

David Bishop President, Worldwide, Sony Pictures Home Entertainment Sony is in a unique position to deliver a complete entertainment experience to consumers. Sony Pictures Home Entertainment (SPHE) has © 2006 Danjaq, LLC, United Artists Corporation and Columbia Pictures Industries, Inc. All Rights Reserved. worked closely with its sister electronics and game companies to package Blu-ray titles such as Spider-Man 3, Talladega Nights: The Ballad of Ricky Bobby and Casino Royale with their Blu-ray Disc-enabled products to reinforce the HD movie message and drive future Blu-ray title unit sales. Through a variety of technical advancements, Blu-ray delivers a true theatrical experience at home with approximately six times more picture information than that of DVD, original master audio tracks, more bonus content and greatly expanded interactivity, all thanks to its increased storage capacity. SPHE has been instrumental in bringing the Blu-ray technical advancements to market, from the ﬁ rst 50GB disc to picture-in- Components picture functionality, and the latest and most exciting feature— BD-Live. BD-Live enables the consumer to access additional content via their Internet-connected PS3™ or compatible set top player. In turn, SPHE beneﬁ ts from a new and unique ability to have a direct marketing and promotional relationship with consumers.

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3377 008.8.78.8.7 22:20:06:20:06 PMPM Blu-ray Disc: A pillar of Sony’s “HD World” initiative A high-capacity recording media that enables users to get the most enjoyment from high deﬁ nition video content, Blu-ray is a key driver in the future evolution of Sony.

Thanks to the great number of Blu-ray titles its rich ﬁ lm library. This ever growing content scope of its businesses in related areas— already available worldwide, the Blu-ray Disc further serves to enhance demand for Sony’s from Blu-ray Disc players and recorders to format is rapidly gaining consumer accep- lineup of Blu-ray Disc players and recorders, PS3™ and VAIO PCs equipped with Blu-ray tance. Sony Pictures continues to release sales of which remain strong. Disc, software and disc production. Blu-ray titles on a regular basis from both its Having positioned Blu-ray as a key tech- exciting slate of current ﬁ lms as well as from nology in the HD era, Sony is expanding the

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3388 008.8.78.8.7 22:20:09:20:09 PMPM Advances in digital technology and broadband communications have spurred an unprecedented and rapid pace of technological innovation. These trends continue to drive the rapid evolution of Sony’s operating environment. Sony will continue to maximize the competitive advantage it enjoys in both hardware and content, by identifying user needs and responding with superior-quality products, outstanding services and exceptional content. Through these efforts, Sony will strive to achieve dynamic growth as a leader of the digital age.

399

008SonyE_P28_39_0724.indd8SonyE_P28_39_0724.indd 3399 008.8.78.8.7 22:20:10:20:10 PMPM Corporate Governance/New Directors and Corporate Executive Ofﬁ cers

Corporate Governance

Sony is committed to strong corporate governance. As a part from the execution of business, and to advance the proper of this effort, Sony adopted a “Company with Committees” functioning of the statutory committees. The main provisions are as corporate governance system under the Japanese Company follows: Law. In addition to complying with the requirements of laws • separating the roles of the Board chairperson/vice chairperson and regulations, Sony has introduced its own system to help and Representative Corporate Executive Offi cers; improve the soundness and transparency of its governance by • limiting the number of terms of outside Directors and rotating strengthening the separation of the Directors’ function from committee memberships; that of management and advancing the proper functioning of • appointing chairs of statutory committees from the ranks of the statutory committees. Under Sony’s system, the Board of outside Directors; Directors defi nes the respective areas for which each of the • setting forth qualifi cations for Directors for the purpose of elimi- Corporate Executive Offi cers is responsible and delegates to nating confl icts of interest and ensuring independence; them decision-making authority to manage the business, • raising the minimum number of Nominating Committee members thereby promoting the prompt and effi cient management of the (fi ve or more) and requiring that at least two Directors of the Sony Group. Committee be Corporate Executive Offi cers; • suggesting that, as a general rule, at least one Director of the Governance Structure Compensation Committee be a Corporate Executive Offi cer, Sony Corporation is governed by its Board of Directors, which is while prohibiting the appointment of the CEO or COO of the Sony appointed by resolution at the shareholders’ meeting. The Board Group (or persons in any equivalent position) to serve on the has three committees (the Nominating Committee, Audit Committee Committee; and and Compensation Committee), consisting of Directors named by • discouraging the concurrent appointment of Audit Committee the Board of Directors. Corporate Executive Offi cers are appointed members to other committees. by resolution of the Board of Directors. In addition to these statutory

bodies and positions, Sony has Corporate Executives who carry (For more information) out business operations within designated areas. Board of Directors’ determination regarding internal control and governance framework pursuant to the Japanese Company Law: Sony Initiatives http://www.sony.net/SonyInfo/IR/library/control.html To strengthen its governance structure beyond legal requirements, Signiﬁ cant differences between the New York Stock Exchange’s corporate governance standards and Sony’s corporate governance practices (including the Sony Corporation includes several provisions in its Charter of the explanation of “outside Directors”): Board of Directors to ensure the separation of the Board of Directors http://www.sony.net/SonyInfo/IR/NYSEGovernance.html

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4400 008.8.78.8.7 22:20:39:20:39 PMPM Governance Related to the U.S. Sarbanes–Oxley Act ensure compliance with this requirement, Sony formed a cross- The United States adopted the Sarbanes–Oxley Act (SOX) in 2002 functional steering committee comprised of headquarters in response to a series of U.S. accounting scandals and corporate management to monitor necessary actions including documentation, governance abuses. Sony is subject to the SOX regulations because testing and evaluation of controls and to perform oversight and it is a foreign private issuer of equity securities registered with the assessment of the global evaluation. Based on their evaluation, U.S. Securities and Exchange Commission (SEC) and subject to management has concluded that Sony maintained effective internal SEC reporting requirements. control over fi nancial reporting as of March 31, 2008. Among other requirements, SOX requires the CEO and the CFO of Sony Corporation to sign certain certifi cations to accom- Corporate Governance Structure Appointment/ pany the Sony Annual Report on Form 20-F fi led with the SEC, dismissal Independent Shareholders’ Meeting relating to the “fair presentation” of the consolidated fi nancial state- Auditor Make proposals to Appointment/ Make proposals to appoint/ ments, disclosure controls and procedures, and internal control appoint/dismiss Directors dismissal dismiss independent auditor

over ﬁ nancial reporting. Oversight Board of Directors Audit report Sony has established “Disclosure Controls and Procedures,” Report Monitor Determine performance through which potentially material information is reported from committee of their duties members

important business units, subsidiaries, affi liated companies and Determine compensation corporate divisions and is reviewed and considered for disclosure Nominating Committee Compensation Committee Audit Committee in light of its materiality to the Sony Group. The “Disclosure Oversight/ evaluation Committee,” comprised of offi cers and senior management of the Determine Over- Monitor Delegation compensation sight performance Coordination of their duties Sony Group who oversee investor relations, accounting, corporate Management planning, legal, corporate communications, fi nance, internal audit Corporate Executive Officers and human resources, supervises the preparation of Sony’s annual reports, current reports, quarterly earnings releases and other Delegation Internal Audit Division material disclosure, and assists the CEO, the President and the CFO Corporate Executives in the establishment and implementation of this system and also in assuring the accuracy of fi nancial reporting. Effective for the fi scal year ended March 31, 2007, SOX also requires the inclusion of a management report on the company’s (For more information about Sony’s corporate governance, please refer to the internal control over fi nancial reporting in the Form 20-F. In order to following website: http://www.sony.net/SonyInfo/IR/governance.html)

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4411 008.8.78.8.7 22:20:39:20:39 PMPM Structure of Sony Corporate Governance System Supervision Board of Directors • Determines the fundamental management policies of the Sony Group. • Oversees the management of Sony Group’s business operations. • Appoints and dismisses the statutory committee members. • Appoints and dismisses Corporate Executive Ofﬁ cers.

Chairman of the Board: Yotaro Kobayashi* Sir Peter Bonfi eld* Member of the Board, Telefonaktiebolaget Vice Chairman of the Board: Yoshihiko Miyauchi* LM Ericsson Sir Howard Stringer Sony Corporation Chairman and Chief Executive Fueo Sumita* Chief of Sumita Accounting Offi ce Offi cer Fujio Cho* Chairman, Toyota Motor Corporation Ryoji Chubachi Sony Corporation President and Electronics CEO Ryuji Yasuda* Professor, Graduate School of International Katsumi Ihara Sony Corporation Executive Deputy President, Corporate Strategy, Hitotsubashi University Offi cer in charge of Consumer Product Group Yukako Uchinaga* Director, Vice Chairman, Benesse Corporation Yotaro Kobayashi* Chief Corporate Advisor, Fuji Xerox Co., Ltd. Chairman and Chief Executive Offi cer, Sakie T. Fukushima* Representative Director & Regional Managing Berlitz International, Inc. Director–Japan, Korn/Ferry International Mitsuaki Yahagi* Chairman of the Board, Yoshihiko Miyauchi* Director, Representative Executive Offi cer, The Japan Research Institute, Limited Chairman and Chief Executive Offi cer, Tsun-Yan Hsieh* Special Consultant, McKinsey & Company ORIX Corporation Roland A. Hernandez* Retired Chairman and CEO, Yoshiaki Yamauchi* Director, Sumitomo Mitsui Financial Group, Inc. Telemundo Group, Inc.

Nominating Committee Audit Committee Compensation Committee • Determines the content of • Monitors the performance of duties by Directors and • Sets policy on the contents of individual proposals regarding the Corporate Executive Offi cers (with regard to the preparation compensation for Directors, Corporate appointment/dismissal of process of fi nancial statements, disclosure controls and Executive Offi cers, Corporate Executives Directors. procedures, internal controls, compliance structure, risk and Group Executives and determines management structure, internal audit structure, internal the amount and content of individual Yotaro Kobayashi* (Chairman) hotline system, and other matters). compensation of Directors and Corporate Yoshihiko Miyauchi* • Determines the content of proposals regarding the Executive Offi cers in accordance with Sir Peter Bonfi eld* appointment/dismissal or non-reappointment of, approves the policy. Fujio Cho* the compensation of, and oversees and evaluates the work Yukako Uchinaga* of Sony’s independent auditors. Sakie T. Fukushima* (Chairman) Roland A. Hernandez* Mitsuaki Yahagi* • Reviews with Sony’s independent auditors the scope and Sir Howard Stringer results of their audit including their evaluation of Sony’s Tsun-Yan Hsieh* Ryoji Chubachi internal controls, compatibility with generally accepted accounting principles in the U.S., and the overall quality of fi nancial reporting. Yoshiaki Yamauchi* (Chairman) Fueo Sumita* Ryuji Yasuda* * An outside director who satisfi es the requirements under Item 15, Article 2 of the Japanese Company Law

Execution Corporate Executive Offi cers • Make decisions regarding the execution of Sony Group business activities within the scope of the authority delegated to them by the Board of Directors. Sir Howard Stringer** Chairman and Chief Executive Offi cer Nobuyuki Oneda Executive Vice President and Chief Financial Offi cer Ryoji Chubachi** President and Electronics CEO Keiji Kimura Executive Vice President, Offi cer in charge of Katsumi Ihara** Executive Deputy President, Offi cer in charge of Technology Strategies, Intellectual Property, Consumer Product Group Information Systems and Electronics Business Yutaka Nakagawa Executive Deputy President, Offi cer in charge of Strategies Semiconductor & Component Group, Production Nicole Seligman Executive Vice President and General Counsel Strategy, Procurement and Supply Chain ** Representative Corporate Executive Offi cer concurrently serving as Director

Corporate Executives • Carry out business operations within designated areas, including business units, research and development, and/or headquarters functions, in accordance with the fundamental policies determined by the Board of Directors and the Corporate Executive Ofﬁ cers. (Names and positions of new Directors and Corporate Executive Ofﬁ cers as of June 20, 2008)

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4422 008.8.78.8.7 22:20:40:20:40 PMPM Compliance

Ethical business conduct and compliance with applicable laws Internal Hotline System and regulations are fundamental aspects of Sony’s corporate With the adoption of the Sony Group Code of Conduct, Sony also culture. To this end, Sony has established a Compliance Offi ce established the Sony Group Compliance Hotline system as a at its corporate headquarters and regional offi ces around the resource for employees to report concerns or seek guidance about world, adopted and implemented the Sony Group Code of possible violations of laws or internal policies, and to allow the Sony Conduct, and set up Compliance Hotline systems through its Group to respond swiftly to potential risks of such possible viola- global compliance network—all in order to reinforce the tions. The Sony Group Compliance Hotline system is available in company’s worldwide commitment to integrity and help assure the Americas, Europe, Japan, East Asia and Pan-Asia, and is ready resources are available for employees to raise concerns or to receive the concerns of any Sony Group employee in any part seek guidance about legal and ethical matters. of the world through a telephone call, e-mail or letter. During fi scal 2007, the Sony Group received approximately Strengthening the Compliance System 340 hotline contacts covering issues relating to employment, labor, In July 2001, Sony Corporation established the Compliance Offi ce, work environment, information management, environmental charged with exercising overall control over compliance activities protection, possible confl icts of interest and thefts. All contacts across the Sony Group, to emphasize the importance of business received are investigated for the purpose of verifi cation and appro- ethics and compliance with applicable laws, regulations and internal priate action. In certain cases, these contacts have led to a review policies. The Compliance Offi ce establishes compliance policies of internal procedures and the strengthening or enforcement of and structures for the Sony Group and performs crisis management internal rules. functions. In July 2003, Sony established a regional compliance network Educating Employees about the Sony Group Code of Conduct comprised of offi ces in the Americas, Europe, Japan,1 East Asia2 and the Internal Hotline System and Pan-Asia,3 which are charged with assisting the Compliance To ensure that all employees are aware of the Sony Group Code of Offi ce at Sony Corporation and exercising regional control over Conduct and the internal hotline system, Sony Group companies compliance activities to strengthen the compliance system inform their employees about the Code and hotline through the throughout the Sony Group. Offi cers responsible for compliance in ongoing dissemination of e-mails, booklets, wallet cards, posters, each region have the authority to issue instructions concerning postings on the company’s intranet and/or feature articles in internal compliance to Sony Group companies in their respective regions newsletters. and, by cooperating with one another, are working to establish and Education and training sessions that use e-learning, case maintain a comprehensive global compliance structure. studies and other approaches presenting real-life examples also 1 Coverage area of Japan compliance offi ce: Japan, South Korea and Taiwan provide instruction both on business ethics generally and on 2 Coverage area of East Asia compliance offi ce: Mainland China and Hong Kong 3 Coverage area of Pan-Asia compliance offi ce: Southeast Asia, Middle East, individual aspects of the Sony Group Code of Conduct that are Africa and Oceania crucial to some or all of the Sony Group. Examples include education programs regarding fairness in competition and business Sony Group Code of Conduct dealings, and training to avoid discrimination and harassment in In May 2003, Sony adopted the Sony Group Code of Conduct, the workplace. which sets the basic internal standards to be observed by all directors, offi cers and employees of the Sony Group in order to emphasize and further strengthen corporate governance, business ethics and compliance systems throughout the entire Sony Group. This Code of Conduct sets out, in addition to legal and compliance standards, the Sony Group’s basic policies concerning ethical business practices and activities on such topics as respect for human rights, safety of products and services, environmental conservation and information disclosure.

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4433 008.8.78.8.7 22:20:40:20:40 PMPM Corporate Social Responsibility

Environmental Initiatives

The environment is one of the most critical issues of corporate 2008” to raise awareness of the importance of fi ghting climate social responsibility. Climate change, in particular, has received change. We invited industry, government and media representa- a great deal of attention in recent years. To minimize our own tives for the fi rst time to join WWF and members of Climate Savers impact on the environment, Sony acts responsibly in all areas at the annual conference. Member companies shared their and strives to resolve environmental issues together with our successful initiatives and experts joined a panel discussion to peers and business partners while taking full advantage of forecast future trends. Sony’s unique capabilities. Sony Chairman and CEO Howard Stringer presented the Tokyo Declaration, signed by 12 companies. The signatories declared that Reducing the Absolute Amount of Greenhouse Gas Emissions we will “try to widen the scope of emission reduction activities in from All Sites partnering with business partners,” and that we will “promote a When we joined the Climate Savers Programme, organized by the low-carbon lifestyle to consumers and customers.” As stated in the world-renowned environmental NGO the World Wide Fund for Declaration, member companies, including Sony, will continue Nature (WWF), Sony set a target of achieving an absolute reduction communicating with consumers about conservation and specifi c in greenhouse gas emissions from all sites of 7% by 2010 compared energy-saving steps they can take while using our products, as with the 2000 level. In fi scal 2007, Sony’s greenhouse gas emissions these goals cannot be achieved by businesses on our own. totaled approximately 2,070,000 tons. Consequently, Sony had reduced its emissions by 6.7% compared to 2000. Reducing Power Consumption of Products Under the agreement Sony signed with the WWF, we have

Calling for the Prevention of Global Warming as a Global committed to reducing CO2 emissions from products in use by Leader lowering the annual energy consumption of major Sony products. To address the global issue of climate change, in February 2008 Sony is working to promote energy saving products by employing Sony and WWF co-hosted the “Climate Savers Tokyo Summit our technical capabilities and know-how.

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4444 008.8.78.8.7 22:20:40:20:40 PMPM Television, with larger size and multifunction in demand, is the stable power that is not reliant on the weather. As the energy top priority product category. We recognize that we must address conversion effi ciency of test cells has registered an industry leading the increase in power consumed by televisions accompanying the 10% effi ciency level, we will accelerate our research. shift to larger multifunctional models. In spring 2008, Sony released Sony is also engaged in research on a bio battery that uses 11 models in its BRAVIA series of LCD televisions. The maximum sugar, another renewable source of energy. level of power reduction is 179%* under the energy reduction achievement rate set out under Japan’s Law Concerning the Rational Use of Energy, and all of these new BRAVIA models, except for one model, earned a fi ve-star rating for energy effi ciency. With the BRAVIA KDL-32JE1 released in July 2008 in Japan, Sony has succeeded in cutting the annual energy consumption to 86 kilowatt hours, which is equivalent to a reduction of 232% under the energy reduction standards. By raising the light-emitting effi ciency of Sony’s proprietary backlight system and the light trans- missivity of optical fi lm, Sony succeeded in reducing the annual energy consumption from the 194 kilowatt hours of KDL-32S1000, which was introduced in 2005. Supply Chain Management Initiative * This percentage represents power reduction when applied to the fi scal 2008 standards set out under the Law Concerning the Rational Use of Energy. In the electronics industry, manufacturers of fi nished products share the same subcontractors and parts suppliers. In 2004, Sony, IBM and a number of other companies launched the Electronic Industry Citizenship Coalition (EICC) to promote social responsibility and shared effi ciencies in the electronics industry supply chain. As of June 2008, the EICC consisted of 42 members, including manufacturers, production contractors and retailers, from Europe, the United States, Asia and Japan. Sony established the Sony Supplier Code of Conduct and, as part of efforts to assess supplier compliance, we have introduced supplier self-assessment to approximately 3,500 suppliers region Technical Innovation to Prevent Global Warming by region globally in 2007. Renewable energy sources, such as solar power, have an important Certain suppliers also received joint audits based on the EICC role to play in helping to prevent global warming. Sony is engaged standards of the code of conduct. Sony continues to work in in research on a dye-sensitized solar cell that uses an electro- partnership with our suppliers to improve their activities. chemical mechanism and photosensitive organic dyes to convert solar energy to electrical energy. Unlike conventional silicon-based solar cells, a dye-sensitized solar cell does not require a large vacuum process machine in fabrication. Also, because it can be fabricated using coating and printing processes, the cell allows low-cost production. Furthermore, the cell manufacturing process has less impact on the environment due to the need for fewer materials and less energy. It has the additional advantages of providing excellent power generation performance, even indoors with poor lighting, and of generating

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4455 008.8.78.8.7 22:20:41:20:41 PMPM ©UNICEF/Giacomo Pirozzi

Social Contribution Activities

Sony’s support of future generations, which began with science SEE III, held in 2007, 40 children from Liberia and Rwanda learned education, has expanded in scope over the years. As Sony is about basic photographic technology, composition, subject involved in the music and fi lm businesses, as well as in electronics, selection and expression through workshops led by professional we believe Sony can and should make a valuable contribution by photographers. Using cameras donated by Sony, the children took encouraging creativity, in addition to inspiring curiosity in science approximately 2,000 photographs. and the arts. Sony Corporation’s Social Contribution Committee Sony and UNICEF co-sponsored an EYE SEE III photographic implements a broad range of activities through six Sony foundations exhibition to coincide with the Tokyo International Conference on and Sony Group companies around the world. The Committee’s African Development (TICAD), a conference sponsored by the guiding principle is to donate funds and use Sony’s expertise to Japanese government and held every fi ve years, which took place help address the needs of communities in regions where Sony in Yokohama in May 2008. The exhibition succeeded in provoking conducts business. visitors to think about the various issues represented in the In fi scal 2007, Sony’s expenditure on social contribution activities photographs. totaled approximately ¥4.5 billion.* In 2006, we launched the Sony Student Project Abroad (China) * In addition to donations, sponsorships and independent program expenses (facility operation expenses), this amount includes the market prices of products (SSPA). Under the program, Sony invites Chinese high school donated. students to Japan, where they stay with the families of Sony employees, take part in Sony technology workshops with Japanese high school students and learn about Japanese environmental initiatives, including a visit to a recycling plant. The SSPA refl ects Sony’s belief that acknowledging and understanding different cultures and diversity is an important attribute for children growing up in today’s global era. Since 2006, Sony has continued to support the UNICEF EYE SEE Project by donating digital cameras and providing fi nancial Sony CSR Report 2008 assistance. The aim of the project is to give children living in societies http://www.sony.net/csr/ that face disaster, poverty, infectious diseases and other diffi culties Please refer to the Sony CSR Report the opportunity to express themselves through photography. In EYE 2008 for full details of our CSR activities.

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4466 008.8.78.8.7 22:20:41:20:41 PMPM Financial Section

Contents

A Message from the CFO 48 Operating and Financial Review 49 Five-Year Summary of Selected Financial Data 88 Quarterly Financial and Stock Information 89 Segment Information 90 Consolidated Balance Sheets 92 Consolidated Statements of Income 94 Consolidated Statements of Cash Flows 96 Consolidated Statements of Changes in Stockholders’ Equity 98

For the notes to Sony’s consolidated fi nancial statements for the fi scal year ended March 31, 2008, visit Sony’s website: http://www.sony.net/SonyInfo/IR/fi nancial/ar/2008/

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4477 008.8.78.8.7 22:20:43:20:43 PMPM A Message from the CFO

A decline in motion pictures sales—due primarily to fewer fi lm releases during the period—led to a decrease in sales in the Pictures segment. Operating income increased, refl ecting the strong performance of fi lms from previous years released for the in-home entertainment and television markets. In the Financial Services segment, the life insurance, casualty insurance and banking businesses are expanding steadily. However, a signifi cant decline in the Japanese stock market caused a deterioration of net valuation gains from convertible bonds at Sony Life Insurance Co., Ltd., which led to a decrease in overall segment revenue and operating income. Based on careful consideration of various factors, including our results for fi scal year 2007, we plan to increase the regular annual dividend by ¥15 from ¥25 to ¥40 per share, for the fi scal year ended March In the fi scal year 2005, Sony launched a three-year 31, 2009. We also plan to distribute a special divi- mid-term corporate strategy to improve profi tability dend of ¥10 per share, to be paid in December 2008. and strengthen its corporate structure. These efforts This is in recognition of the successful initial public allowed us to achieve record-high results in consoli- offering of shares in Sony Financial Holdings on the dated sales and operating revenue, income before Tokyo Stock Exchange, and of Sony’s record con- income taxes, equity in net income of affi liated solidated net income in fi scal year 2007. As a result, companies and net income in the fi scal year ended we plan to pay a total annual dividend for fi scal year March 31, 2008. 2008 of ¥50 per share, comprising an interim divi- Sales in the Electronics segment increased from dend of ¥30 and a year-end dividend of ¥20. the previous fi scal year, refl ecting robust sales of Sony will continue to focus on establishing an even such products as LCD televisions, PCs and compact stronger corporate structure that will position us to digital cameras. Higher sales, together with the respond with greater fl exibility to changes in the positive impact of foreign currency exchange rate business environment. At the same time we will fl uctuations, resulted in a sharp increase in operating devote our best efforts to further enhance our income. Both sales and operating income results operating results. set records for the segment. In the Game segment, an enhanced software lineup for PLAYSTATION®3 (PS3™) and the introduc- Nobuyuki Oneda tion of a new model helped to further expand the Corporate Executive Offi cer, PS3™ platform. The segment’s operating loss was Executive Vice President and CFO substantially reduced, owing to PS3™ hardware cost reductions and increased sales of PS3™ software.

008SonyE_P40_48_0725.indd8SonyE_P40_48_0725.indd 4488 008.8.78.8.7 22:20:43:20:43 PMPM Operating and Financial Review Sony Corporation and Consolidated Subsidiaries

TREND INFORMATION market for these products, and concentrate management resources on the LCD television business. In order to improve This section contains forward-looking statements about the profitability in the LCD television business, Sony will continue possible future performance of Sony and should be read in light cost reduction plans through the standardization of panels and of the cautionary statement on that subject, which appears on chassis and the reduction in the number of components used the inside back cover page and applies to this entire document. in production. In addition, Sony is targeting unit sales growth exceeding that of the market by continuing to focus on large- Issues Facing Sony and Management’s Response size and high value-added models, while at the same time to those Issues expanding the line-up of lower priced models and actively Below is a description of the issues management believes each developing emerging markets. segment continues to face and an explanation as to how each In anticipation of an increase in unit sales of LCD televisions, segment is approaching those issues. Sony recognizes the importance of a stable supply of LCD panels. S-LCD Corporation (“S-LCD”), Sony’s joint venture with ■ Electronics Samsung Electronics Co., Ltd. (“Samsung”), which is based in Although the Electronics segment continues to hold a very South Korea, started its 7th generation amorphous thin-film strong position in the worldwide consumer audio visual products transistor (“TFT”) LCD panel production line operation in April market, that position has become increasingly threatened as a 2005 and has a current production capacity of 120,000 sub- result of the entrance of new manufacturers and distributors. strates of mother glass per month. S-LCD also started its 8th These new entrants are threatening Sony’s position due to the generation amorphous TFT LCD panel production line opera- industry shift from analog to digital technology. In the analog era, tion in August 2007 and has a current production capacity of complicated functionality of electronics products was made 50,000 substrates per month. Furthermore, S-LCD plans to possible through the combination of several complex parts, and construct a new 8th generation LCD panel production line and Sony held a competitive advantage in the design and manufac- start production during the second quarter of calendar year ture of those parts as a result of its accumulated expertise. In 2009 with an initial production capacity of 60,000 substrates the digital era, however, complicated functionality has become per month. Also, Sony, together with Sharp Corporation concentrated in semiconductors and other key digital devices. (“Sharp”), signed a non-binding memorandum of intent in Since these semiconductors and key devices can be mass February 2008 to establish a joint venture to manufacture produced, they have become readily available to new market amorphous TFT LCD panels and modules on a 10th generation entrants, and the functionality that once commanded a high production line. Sony and Sharp aim to enter into legally bind- premium has become more affordable. This has led to intense ing joint venture documentation by September 30, 2008. price erosion in the consumer audio visual products market. Production capacity is planned to be 72,000 substrates per Also, Sony is exposed to the pressure of declines in selling month. Sony plans to receive a supply of 50 percent of the LCD prices as a result of a concentration of market share among a panels produced by S-LCD and 34 percent of the LCD panels limited number of dealers and retailers. To respond to these produced by the joint venture with Sharp. challenges, Sony is striving to keep pace with price erosion by Sony has reviewed its investment policy in the semiconductor reducing its manufacturing and other costs. It is seeking to business. In the future, Sony will carefully select investments maintain the premium pricing it enjoys on many of its end-user and adopt a strategy to more clearly focus on the charge- products by adding functionality to those products and develop- coupled devices (“CCDs”) and complementary metal oxide ing new applications and uses that appeal to the consumer. In semiconductor (“CMOS”) image sensors and television- and addition, it is taking steps to increase its competitive edge by video-related businesses. As part of this strategy, in March developing high value-added semiconductors and other key 2008, Sony sold to Toshiba Corporation (“Toshiba”) production digital devices in-house. equipment for high-performance semiconductors such as the Sony considers improving the profitability of the television “Cell Broadband Engine™” processor and the RSX™ graphics business, which recorded a loss in the fiscal year ended March engine for PLAYSTATION®3 (“PS3”), installed in the Nagasaki 31, 2008, as the most pressing issue facing the Electronics Technology Center of Sony Semiconductor Kyushu segment. As such during the fiscal year ended March 31, 2008, Corporation. Nagasaki Semiconductor Manufacturing Sony decided to exit the cathode ray tube (“CRT”) television and Corporation was established by Toshiba, Sony and Sony LCD rear-projection television businesses due to the shrinking Computer Entertainment and commenced operations on

49 April 1, 2008 to produce such high-performance semiconduc- and offer customers integrated financial services tailored to their tors with the above-mentioned production equipment made individual needs, Sony established Sony Financial Holdings Inc. available to the joint venture by Toshiba. In addition, on March (“SFH”) in April 2004. SFH functions as a holding company 31, 2008, upon the expiration of their contract, Sony and overseeing Sony Life Insurance Co., Ltd. (“Sony Life”), Sony Toshiba terminated Oita TS Semiconductor Corporation, Assurance Inc. (“Sony Assurance”) and Sony Bank Inc. (“Sony a manufacturing joint venture located within Toshiba’s Oita Bank”), with the aim of increasing the synergies among these Operations. Following the termination of the joint venture, businesses. Sony sold the related manufacturing equipment to Toshiba Sony is confronted by changes in the financial services on April 1, 2008. industry as a result of the deregulation and liberalization of additional insurance premiums, postal privatization, the ■ Game complete lifting of the ban on the sale of insurance products In the Game segment, Sony will continue to strive to significantly by banks, and the lifting of the ban on the securities interme- improve the profitability of the PS3 business through an diary services by banks and others. Sony also faces macro- enhanced line-up of software, expansion of the platform and economic challenges including Japan’s declining population, hardware cost reductions. At the same time, in order to expand low birthrate and growing proportion of elderly citizens. In the business domain of PS3, Sony will actively engage in the response to this changing environment, each of Sony’s upgrade and expansion of networked service and content. As financial services businesses, which are latecomers to the life for PLAYSTATION®2 (“PS2”), which is in its ninth year since insurance, non-life insurance and banking industries, make release, Sony expects a decrease in unit sales volume, including use of distinctive, individual industry-specific business models hardware and software, in comparison to the previous fiscal and plan to achieve further business expansion and even year. However, on the back of worldwide hardware expansion, higher levels of customer satisfaction. there are plans for a diversified portfolio of software titles to be On October 11, 2007, in conjunction with the global initial released, and, thus, Sony will strive to maintain the scale of this public offering of shares of SFH, the shares of SFH were listed business. In addition, Sony will promote the further expansion of for trading on the First Section of the Tokyo Stock Exchange the PSP® (PLAYSTATION® Portable) (“PSP®”) platform, for which (“TSE”). This offering aimed to achieve the efficient redistribution hardware unit sales increased significantly compared to the of management resources within Sony Group as a whole, and previous fiscal year, by improving the breadth of software titles, establish SFH’s self financing, which is necessary for the further functionality and services in the fiscal year ending March 31, 2009. expansion of its financial businesses and independent growth. Following this global offering, SFH remains a consolidated ■ Pictures subsidiary with Sony Corporation as the majority shareholder, In the Pictures segment, Sony faces intense competition, rising holding 60 percent of shares issued by SFH. expenses, including advertising and promotion expenses, and a growing trend toward digital piracy. In addition, the DVD format is 11 years old and is showing signs of maturation. To meet OPERATING RESULTS these challenges, Sony is working to produce and acquire a Operating Results for the Fiscal Year Ended March 31, 2008 diversified portfolio of motion pictures with broad worldwide compared with the Fiscal Year Ended March 31, 2007 appeal for distribution including those existing and new home entertainment formats, such as Blu-ray, and other emerging Overview platforms, including digital download. Sony’s sales and operating revenue (“sales”) for the fiscal year ended March 31, 2008 increased 6.9 percent compared with ■ Financial Services the previous fiscal year. Sales within the Electronics segment In the Financial Services segment, the value of assets accumu- and the Game segment increased while sales for the Pictures lated by businesses has grown continuously over the past segment and revenue for the Financial Services segment several years, resulting in a large portion (approximately 45 decreased. In the Electronics segment, while there was a percent as of March 31, 2008) of Sony’s total assets being decline in sales of such products as LCD rear-projection accounted for by the Financial Services segment. To strengthen televisions, sales to outside customers increased 9.0 percent asset management and risk management in parallel with this compared with the previous fiscal year mainly due to an increase growing asset value, enhance disclosure of business details, in sales of LCD televisions, PCs and compact digital cameras.

50 Sales within the Game segment increased 26.3 percent com- Center am Potsdamer Platz” in Berlin which was recorded in the pared to the previous fiscal year primarily as a result of a signifi- operating income of All Other. Operating income in the previous cant increase in sales of PS3. In the Pictures segment, sales fiscal year included a gain on the sale of a portion of the site of decreased 11.2 percent compared to the previous fiscal year as Sony’s former headquarters of 21.7 billion yen, of which 2.6 motion pictures sales decreased primarily due to fewer films billion yen was recorded within All Other and the remaining being released during the current fiscal year. Revenues amount was recorded in “Corporate.” decreased 10.5 percent within the Financial Services segment Operating income in the fiscal year ended March 31, 2008 primarily due to net losses from investments in the separate included a gain from the reversal of a portion of a legal provision account and the deterioration in net valuation gains from con- as a result of the resolution of a legal matter, while a comparable vertible bonds in the general account reflecting a significant gain was recorded in the previous fiscal year attributed to the decline in the Japanese stock market partially offset by an reversal of a portion of patent-related provisions. increase in insurance premium revenue at Sony Life. Operating income increased 421.9 percent compared with Restructuring the previous fiscal year. Operating income within the Electronics In the fiscal year ended March 31, 2008, Sony recorded segment increased 121.8 percent mainly as a result of an restructuring charges of 47.3 billion yen, an increase from the increase in sales and the positive impact from the depreciation 38.8 billion yen recorded in the previous fiscal year. The primary of the yen against the euro. In the previous fiscal year, a 51.2 restructuring activities were in the Electronics segment. Of the billion yen provision was recorded for charges related to recalls total 47.3 billion yen incurred, Sony recorded 12.6 billion yen in by certain notebook computer makers and the subsequent personnel-related costs. global replacement program by Sony and certain notebook Restructuring charges in the Electronics segment amounted computer makers involving battery packs containing Sony- to 45.6 billion yen for the fiscal year ended March 31, 2008, manufactured battery cells. A portion of the provision totaling compared with 37.4 billion yen in the previous fiscal year. 15.7 billion yen was reversed in the fiscal year ended March 31, Sony made the decision to exit the LCD rear-projection televi- 2008 based on the actual results of recalls and replacements as sion business in the fiscal year ended March 31, 2008 due to compared to original estimates. In the Game segment, operating the shrinking market for these products. In association with this losses decreased by 107.8 billion yen to 124.5 billion yen pri- action, Sony recorded 19.7 billion yen of restructuring charges marily due to a decrease in the operating losses of the PS3 consisting mainly of inventory write downs. Of this amount, 11.9 business as a result of successful PS3 hardware cost reductions billion yen was recorded in cost of sales and 6.7 billion yen was and increased sales of PS3 software. In the Pictures segment, recorded in loss on sale, disposal or impairment of assets, net in operating income increased 26.5 percent compared with the the consolidated statements of income. This phase of the previous fiscal year primarily due to the strong performance of restructuring program was completed in the fiscal year ended prior year films in the home entertainment and television markets March 31, 2008, and the remaining liability balance as of March as well as the benefit from the sale of a bankruptcy claim against 31, 2008 was 1.6 billion yen, which is expected to be paid Kirch Media GmbH & Co. KGaA (“Kirch Media”), a former during the fiscal year ending March 31, 2009. licensee of film and television product. In the Financial Services In addition to the restructuring efforts described above, Sony segment, operating income decreased 73.1 percent as com- has undergone several headcount reduction programs to further pared to the previous fiscal year as a result of deterioration in net reduce operating costs within its Electronics segment. As a valuation gains from convertible bonds and an impairment loss result of these programs, Sony recorded restructuring charges on equity securities in the general account of Sony Life reflecting totaling 11.0 billion yen for the fiscal year ended March 31, a significant decline in the Japanese stock market. 2008, and these charges were included in selling, general and Operating income in the fiscal year ended March 31, 2008 administrative expenses in the consolidated statements of included one-time gains primarily from a gain on the sale of a income. The remaining liability balance as of March 31, 2008 portion of the site of Sony’s former headquarters of 60.7 billion was 9.4 billion yen and will be paid throughout the fiscal year yen which was recorded in “Corporate,” a 15.6 billion yen gain ending March 31, 2009. which was recorded in the operating income of the Electronics Refer to Note 17 of Notes to Consolidated Financial segment relating to the sale of a portion of Sony’s semiconduc- Statements for more information on restructuring. (For the Notes tor operations in Nagasaki, Japan, including machinery and to Consolidated Financial Statements, visit Sony’s website: equipment, and a 10.0 billion yen gain on the sale of “The Sony http://www.sony.net/SonyInfo/IR/financial/ar/2008/)

51 Operating Performance Cost of Sales and Selling, General and Yen in billions Percent change Administrative Expense Years ended March 31 2007 2008 2008/2007 Cost of sales for the fiscal year ended March 31, 2008 increased Sales and operating revenue . . 8,295.7 8,871.4 +6.9% by 400.4 billion yen, or 6.8 percent, to 6,290.0 billion yen com- Operating income...... 71.8 374.5 +421.9 pared with the previous fiscal year, and decreased from 76.8 Income before income taxes . . 102.0 466.3 +357.0 percent to 75.6 percent as a percentage of sales. Year on year, Equity in net income of the cost of sales ratio decreased from 78.8 percent to 77.9 affiliated companies. . . . . 78.7 100.8 +28.2 percent in the Electronics segment, decreased from 102.8 per- Net income ...... 126.3 369.4 +192.4 cent to 93.9 percent in the Game segment, and decreased from 60.3 percent to 58.6 percent in the Pictures segment. Sales In the Electronics segment, there was an improvement in the Sales for the fiscal year ended March 31, 2008 increased by cost of sales ratio for several products, in particular PCs, com- 575.7 billion yen, or 6.9 percent, to 8,871.4 billion yen compact digital cameras and video cameras. The cost of sales ratio pared with the previous fiscal year. A further breakdown of sales in the Game segment improved primarily as a result of PS3 figures is presented under “Operating Performance by Business hardware cost reductions and increased sales of PS3 software. Segment” below. In the Pictures segment, the cost of sales ratio decreased com- “Sales” in this analysis of the ratio of cost of sales, including pared to the previous fiscal year mainly due to the higher home research and development costs, and selling, general and entertainment and television revenues from prior year films. administrative expenses to sales refers only to the “net sales” Personnel-related costs included in cost of sales were 487.8 and “other operating revenue” portions of consolidated sales billion yen, an increase of 30.5 billion yen, primarily recorded and operating revenue, and excludes financial service revenue. within the Electronics segment. This is because financial service expenses are recorded sepa- Research and development costs (all research and develop- rately from cost of sales and selling, general and administrative ment costs are included within cost of sales) for the fiscal year expenses. The calculations of all ratios below that pertain to ended March 31, 2008 decreased by 23.4 billion yen to 520.6 business segments include intersegment transactions. billion yen compared with the previous fiscal year. The ratio of research and development costs to sales was 6.3 percent Sales and operating revenue compared to 7.1 percent in the previous fiscal year. and operating income Selling, general and administrative expenses for the fiscal year (Yen in trillions) (Yen in billions) ended March 31, 2008 decreased by 74.0 billion yen, or 4.1 10.0 1,000 percent, to 1,714.4 billion yen compared with the previous fiscal year. The ratio of selling, general and administrative expenses to 7.5 750 sales decreased from 23.3 percent in the previous fiscal year to 20.6 percent. Year on year, the ratio of selling, general and

5.0 500 administrative expenses to sales decreased from 18.2 percent 4.2% to 16.2 percent in the Electronics segment. This improvement is 3.0% due to the recording of the provision for charges related to the 2.5 250 notebook computer battery pack recalls and subsequent global 0.9% replacement program in the previous fiscal year and a reversal of 0 0 2006 2007 2008 the portion of the provision in the fiscal year ended March 31, ■ Sales and operating revenue (left) 2008 based on the actual results of recalls and replacements as ■ Operating income (right) ● Operating margin compared to original estimates. The ratio of selling, general and *Years ended March 31 administrative expenses to sales decreased from 20.0 percent to 15.8 percent in the Game segment and from 35.2 percent to 35.1 percent in the Pictures segment.

52 Personnel-related costs in selling, general and administrative contributed to operating income. An operating loss was expenses increased by 19.8 billion yen compared with the previ- recorded within the Game segment. Refer to “Operating ous fiscal year mainly within the Electronics and the Pictures Performance by Business Segment” below for a further segment. Advertising and publicity expenses for the fiscal year breakdown of operating income (loss) for each segment. decreased by 46.2 billion yen compared with the previous fiscal year primarily due to decreased advertising and publicity Other Income and Expenses expenses within the Pictures segment. For the fiscal year ended March 31, 2008, other income Gain on sale, disposal or impairment of assets, net was 37.8 increased by 54.3 billion yen, or 57.0 percent, to 149.4 billion billion yen, compared with a 5.8 billion yen loss on sale, disposal yen, while other expenses decreased by 7.3 billion yen, or 11.2 or impairment of assets, net recorded in the previous fiscal year. percent, to 57.6 billion yen, compared with the previous fiscal The gain recorded in the fiscal year ended March 31, 2008 is year. The net amount of other income and other expenses was primarily from a gain on the sale of a portion of the site of Sony’s net other income of 91.8 billion yen, an increase of 61.5 billion former headquarters of 60.7 billion yen and gain on the sale of yen, compared with the previous fiscal year. “The Sony Center am Potsdamer Platz” in Berlin of 10.0 billion The gain on change in interest in subsidiaries and equity yen. A gain on the sale of a portion of the site of Sony’s former investees increased by 50.5 billion yen, or 160.4 percent headquarters of 21.7 billion yen was recorded in the previous compared to the previous fiscal year, to 82.1 billion yen. This fiscal year. increase is due to the recording of a gain of 81.0 billion yen for the change in interest in subsidiaries and equity investees as Research and development Cost of sales and selling, general a result of the global initial public offering of shares of SFH in expenses and as a percentage and administrative (SGA) expenses of sales as a percentage of sales connection with the listing of shares on the First Section of the (Yen in billions) (%) (%) TSE in October 2007. During the fiscal year ended March 31, 7.8% 600 8 80 75.9% 76.8% 75.6% 2007, there was a gain on change in interest in subsidiaries and 7.1% 6.3% equity investees recorded on the sale of a portion of the stock

450 6 60 held in StylingLife Holdings Inc. Interest and dividends in other income of 34.3 billion yen was

300 4 40 recorded in the fiscal year ended March 31, 2008, an increase of 6.0 billion yen, or 21.4 percent, compared with the previous fiscal 23.3% 22.5% 20.6% year. For the fiscal year ended March 31, 2008, interest expense 150 2 20 totaling 22.9 billion yen was recorded, a decrease of 4.3 billion yen, or 15.9 percent, compared with the previous fiscal year. 0 0 0 2006 2007 2008 2006 2007 2008 In addition, net foreign exchange income of 5.6 billion yen was ■¥ Research and development ● Cost of sales/sales recorded in the fiscal year ended March 31, 2008, compared to expenses ● SGA/sales ●¥Percentage of sales a net foreign exchange loss of 18.8 billion yen in the previous * Years ended March 31 * Years ended March 31 * Excluding the Financial fiscal year. Net foreign exchange income was recorded due to * Excluding the Financial Services segment Services segment the value of the yen, especially during the second through fourth quarters of the fiscal year ended March 31, 2008, appreciating in value against other currencies from the time that Sony entered Operating Income into foreign exchange forward contracts and foreign currency Operating income for the fiscal year ended March 31, 2008 option contracts. These contracts are entered into by Sony to increased by 302.7 billion yen, or 421.9 percent, to 374.5 billion mitigate the foreign exchange rate risk to cash flows that arises yen compared with the previous fiscal year. The operating from settlements of foreign currency denominated accounts income margin increased from 0.9 percent to 4.2 percent. In receivable and accounts payable, as well as foreign currency descending order by yen amount, the Electronics segment, the denominated transactions between consolidated subsidiaries. Pictures segment, All Other and the Financial Services segment

53 Income before Income Taxes Minority Interest in Income (Loss) of Income before income taxes for the fiscal year ended March 31, Consolidated Subsidiaries 2008 increased 364.3 billion yen, or 357.0 percent, to 466.3 In the fiscal year ended March 31, 2008, minority interest in loss billion yen compared with the previous fiscal year, primarily as of consolidated subsidiaries of 5.8 billion yen was recorded a result of the increase in operating income and the gain on compared to minority interest in income of 0.5 billion yen in the the change in interest in subsidiaries and equity investees previous fiscal year. Minority interest in loss was recorded mainly mentioned above. due to the loss recorded at SFH subsequent to the change in Sony Corporation’s ownership. Sony Corporation’s ownership Income Taxes percentage in SFH was reduced from 100 percent to 60 percent During the fiscal year ended March 31, 2008, Sony recorded after the global initial public offering of SFH shares during the 203.5 billion yen of income taxes resulting in an effective tax rate fiscal year ended March 31, 2008. The operating results of SFH of 43.6 percent. In the previous fiscal year, the effective tax rate in the second half of the fiscal year ended March 31, 2008 were was 52.8 percent and exceeded the Japanese statutory tax rate negatively impacted mainly by the deterioration in net valuation as a result of losses recorded by certain overseas subsidiaries gains from convertible bonds and an impairment loss on equity with tax rates that are lower than the rate in Japan. securities at Sony Life.

Results of Affiliated Companies Accounted for Net Income under the Equity Method Net income for the fiscal year ended March 31, 2008 increased Equity in net income of affiliated companies during the fiscal by 243.1 billion yen, or 192.4 percent, to 369.4 billion yen com- year ended March 31, 2008 was 100.8 billion yen, an increase pared with the previous fiscal year. As a percentage of sales, net of 22.2 billion yen, or 28.2 percent compared to the previous income increased from 1.5 percent to 4.2 percent. Return on fiscal year. Equity in net income of affiliated companies reported stockholders’ equity increased from 3.8 percent to 10.8 percent. for Sony Ericsson Mobile Communications AB (“Sony Ericsson”) (This ratio is calculated by dividing net income by the simple was 79.5 billion yen, a decrease of 5.8 billion yen compared to average of stockholders’ equity at the end of each fiscal year the previous fiscal year, due to higher research and develop- and the previous fiscal year.) ment expenses as a percentage of sales. Sony recorded equity Basic net income per share was 368.33 yen compared with in net income of 10.0 billion yen for SONY BMG MUSIC 126.15 yen in the previous fiscal year, and diluted net income ENTERTAINMENT (“SONY BMG”), an increase of 5.0 billion yen per share was 351.10 yen compared with 120.29 yen in the compared to the previous fiscal year primarily due to a reduc- previous fiscal year. Refer to Notes 2 and 21 of Notes to tion in restructuring costs compared to the previous fiscal year, Consolidated Financial Statements. lower marketing costs, a reduction in overhead costs from continued restructuring, a gain on the sale of an interest in a joint Net income and ROE Net income per share of common stock venture of SONY BMG and the favorable impact of currency fluctuations. Sony recorded equity in net income of 7.4 billion (Yen in billions) (%) (Yen) yen, a 2.4 billion yen increase compared to the prior fiscal year, 400 16 400 for S-LCD, a joint-venture with Samsung for the manufacture of 300 12 300 amorphous TFT LCD panels. 10.8% Sony did not record any equity gain or loss for Metro-

Goldwyn-Mayer Inc. (“MGM”) in the current fiscal year compared 200 8 200 to equity in net loss of 18.9 billion yen recorded in the prior fiscal 4.1% year. As of March 31, 2007, Sony no longer had any book basis 3.8% 100 4 100 in MGM and, accordingly, no additional losses were recorded during the fiscal year ended March 31, 2008. 0 0 0 Refer to Note of “Critical Accounting Policies.” 2006 2007 2008 2006 2007 2008 ■ Net income ■ Basic ● ROE ■ Diluted

*Years ended March 31 * Years ended March 31

54 Operating Performance by Business Segment compared to the previous fiscal year. Regarding sales to outside The following discussion is based on segment information. customers by geographical area, sales decreased by 2 percent Sales and operating revenue in each business segment include in Japan, but increased by 2 percent in the U.S., by 11 percent intersegment transactions. Refer to Note 24 of Notes to in Europe, and by 19 percent in non-Japan Asia and other Consolidated Financial Statements. geographic areas (“Other Areas”). In Japan, sales of products such as CCDs and CMOS imag- Business Segment Information ing sensors increased while sales of mobile phones produced Yen in billions Percent change for wireless customers decreased. In the U.S., sales of products Years ended March 31 2007 2008 2008/2007 such as LCD rear-projection and CRT televisions decreased Sales and operating revenue while sales of products such as LCD televisions, compact digital Electronics ...... 6,072.4 6,613.8 +8.9% cameras and PCs increased. In Europe, sales of products such Game...... 1,016.8 1,284.2 +26.3 as LCD televisions and PCs increased while sales of mobile Pictures ...... 966.3 857.9 –11.2 phones produced for wireless customers decreased. In Other Financial Services. . . . 649.3 581.1 –10.5 Areas, sales of LCD televisions, compact digital cameras and All Other...... 355.1 382.2 +7.6 PCs increased while sales of CRT televisions decreased. Elimination ...... (764.2) (847.9) — Consolidated...... 8,295.7 8,871.4 +6.9 Sales and operating income in the Electronics segment Operating income (loss) Electronics ...... 160.5 356.0 +121.8% (Yen in trillions) (Yen in billions) 8 400 Game...... (232.3) (124.5) — 5.4% Pictures ...... 42.7 54.0 +26.5 Financial Services. . . . 84.1 22.6 –73.1 6 300 All Other...... 28.9 50.2 +73.9 Sub-Total...... 83.9 358.4 +327.0 4 200 2.6% Elimination and unallocated corporate expenses/ 2 100 gains...... (12.2) 16.1 — 0.1% Consolidated...... 71.8 374.5 +421.9 0 0 2006 2007 2008

■ Sales (left) ■ Operating income (right) Shares of sales and operating revenue by business segment ● Operating margin

* Years ended March 31

■ Electronics 3.9% 6.0% ■ Game ● Performance by Product Category 8.8% ■ Pictures ■ Financial Services Sales and operating revenue by product category discussed ■ All Other below represent sales to outside customers, which do not 13.2% * Year ended March 31, 2008 * Including intersegment transactions include intersegment transactions. Refer to Note 24 of Notes 68.1% to Consolidated Financial Statements. “Audio” sales increased by 35.7 billion yen, or 6.8 percent, to 558.6 billion yen. Sales of flash memory digital audio players increased as worldwide unit shipments increased by approxi- ■ Electronics mately 1.3 million units to approximately 5.8 million units. Sales Sales and operating revenue for the fiscal year ended March 31, of home audio, headphones and personal navigation systems 2008 increased 541.4 billion yen, or 8.9 percent, to 6,613.8 also increased. On the other hand, due to a shift in market billion yen compared with the previous fiscal year. Operating demand, sales of CD format headphone stereos decreased. income increased by 195.5 billion yen, or 121.8 percent, to “Video” sales increased by 136.1 billion yen, or 11.9 percent, 356.0 billion yen compared with the previous fiscal year and the to 1,279.2 billion yen. Sales of compact digital cameras operating income to sales ratio increased from 2.6 percent to increased as worldwide unit shipments increased by approxi- 5.4 percent. Sales to outside customers increased 9.0 percent mately 6.5 million units to approximately 23.5 million units.

55 Sales of home-use video cameras increased as worldwide Selling, general and administrative expenses decreased by unit shipments increased by approximately 250,000 units to 34.0 billion yen, or 3.1 percent to 1,072.2 billion yen compared approximately 7.7 million units. Sales of Blu-ray Disc™ with the previous fiscal year. Although advertising and marketing recorders and players also increased. On the other hand, expenses and personnel expenses increased for the fiscal year sales of DVD recorders and players decreased, with unit ended March 31, 2008, selling, general and administrative shipments of DVD recorders decreasing by approximately expenses decreased as a provision of 51.2 billion yen was 150,000 units to approximately 1.7 million units and unit recorded in the previous fiscal year for charges related to the shipments of DVD players decreasing by approximately notebook computer battery pack recalls and subsequent global 900,000 units to approximately 7.0 million units. replacement program, while a portion of the provision totaling “Televisions” sales increased by 140.1 billion yen, or 11.4 15.7 billion yen was reversed in the fiscal year ended March 31, percent, to 1,367.1 billion yen. There was a significant 2008 based on the actual results of recalls and replacements as increase in worldwide sales of LCD televisions, as worldwide compared to original estimates. An additional provision was shipments increased by approximately 4.3 million units, to recorded during the fiscal year for free repair expenses relating approximately 10.6 million units. On the other hand, there was to Sony products and the products of other companies contain- a decrease in sales of LCD rear-projection and CRT televisions ing Sony-made CCDs, but this amount was less than in the as Sony decided to exit these businesses due to the shrinking previous year. Of the restructuring charges recorded in the market for these products. Electronics segment, the amount recorded in selling, general “Information and Communications” sales increased by and administrative expenses decreased by 1.4 billion yen from 148.1 billion yen, or 15.6 percent, to 1,098.6 billion yen. 14.0 billion yen in the previous fiscal year to 12.6 billion yen. This Sales of PCs increased as worldwide unit shipments 12.6 billion yen was for headcount reductions, including reduc- increased by approximately 1.2 million units to approximately tions through the early retirement program. The ratio of selling, 5.2 million units. Sales of broadcast- and professional-use general and administrative expenses to sales decreased 2.0 products increased as a result of favorable sales of high- percentage points from the 18.2 percent recorded in the definition (“HD”) related products. previous fiscal year to 16.2 percent. “Semiconductors” sales increased by 23.0 billion yen, or 11.2 Loss on sale, disposal or impairment of assets, net percent, to 228.7 billion yen. The increase was primarily due to increased 2.6 billion yen to 13.5 billion yen compared with an increase in sales of CCDs and CMOS image sensors. the previous fiscal year. This amount includes a 6.7 billion “Components” sales decreased by 5.9 billion yen, or 0.7 yen loss on sale, disposal or impairment of assets, net on percent, to 847.1 billion yen. Sales of lithium-ion batteries and LCD rear-projection televisions. low-temperature polysilicon TFT LCD panels for mobile devices The amount of operating income recorded in the Electronics increased. On the other hand, sales of DVD+/-R/RW drives segment for the fiscal year ended March 31, 2008 increased decreased due to a decline in unit selling prices, although unit significantly due to the impact of the provision recorded in the sales increased in association with an expansion of the market. previous fiscal year for charges related to the notebook com- “Other” sales increased by 11.2 billion yen, or 2.1 percent, to puter battery pack recalls and subsequent global replacement 552.4 billion yen. Although sales of mobile phones produced for program, the reversal of a portion of the provision in the fiscal wireless customers in Japan and Europe decreased, sales of the year ended March 31, 2008, increased sales of the segment, disc manufacturing business increased. and the positive impact of the depreciation of the yen against In the Electronics segment, cost of sales for the fiscal year the euro. Also contributing to the increase in Electronics ended March 31, 2008 increased by 372.4 billion yen, or 7.8 segment profit was the recording of a 15.6 billion yen gain percent to 5,154.6 billion yen compared with the previous fiscal relating to the sale of a portion of Sony’s semiconductor year. The cost of sales ratio improved by 0.9 percentage points operations in Nagasaki, Japan, including machinery and to 77.9 percent compared to 78.8 percent in the previous fiscal equipment. Regarding profit performance by product, profit- year. While the cost of sales ratio of such products as PCs, ability of products such as LCD televisions worsened due to compact digital cameras and home-use video cameras unit selling price declines while profit increased mainly for PCs improved, the cost of sales ratio of products such as LCD and compact digital cameras, which experienced higher sales, televisions deteriorated. Restructuring charges recorded in cost for system large-scale integration (“LSIs”), which saw an of sales amounted to 19.5 billion yen, an increase of 7.0 billion increase in sales of semiconductors for the Game segment, yen compared with the 12.6 billion yen recorded in the previous and for home-use video cameras, which experienced increased fiscal year. Research and development costs decreased 1.6 sales of high value-added models. billion yen, or 0.4 percent, from 440.4 billion yen in the previous fiscal year to 438.7 billion yen.

56 ● Manufacturing by Geographic Area The operating loss decreased significantly compared with the Approximately 50 percent of the Electronics segment’s total previous fiscal year. Although there was a loss arising from the annual production during the fiscal year ended March 31, 2008 strategic pricing of PS3 hardware at points lower than its took place in Japan, including the production of compact digital production cost, the operating losses of the PS3 business cameras, video cameras, LCD televisions, PCs, semiconduc- decreased as a result of successful hardware cost reductions tors and components such as batteries and Memory Sticks. and increased sales of software. The strong performance of the Approximately 60 percent of the annual production in Japan PSP® business with the introduction of a new model also was destined for other regions. China accounted for approxi- contributed to the decrease in the operating loss of the overall mately 15 percent of total annual production, approximately 70 Game segment. percent of which was destined for other regions. Asia, exclud- Due to these reasons, the cost of sales to sales ratio ing Japan and China, accounted for approximately 10 percent decreased 8.9 percentage points, from 102.8 percent in the of total annual production, with approximately 60 percent previous fiscal year, to 93.9 percent. The ratio of selling, destined for Japan, the U.S. and Europe. The Americas and general and administrative expenses to sales decreased 4.2 Europe together accounted for the remaining balance of percentage points from 20.0 percent in the previous fiscal year, approximately 25 percent of total annual production, most of to 15.8 percent mainly due to decreased advertising and which was destined for local distribution and sale. marketing expenses.

■ Game Sales and operating income (loss) in the Game segment Sales for the fiscal year ended March 31, 2008 increased by 267.5 billion yen, or 26.3 percent, to 1,284.2 billion yen com- (Yen in billions) (Yen in billions) pared with the previous fiscal year. An operating loss of 124.5 1,500 300 billion yen was recorded for the fiscal year ended March 31, 2008, which was a decrease of 107.8 billion yen from the fiscal 1,000 200 year ended March 31, 2007.

By region, although sales decreased slightly in Japan, there 500 100 was an increase in sales in North America and Europe. 0.9% Overall hardware sales increased as a result of a significant 0 0 increase in sales of PS3, as well as an increase in sales of PSP®, –124.5 for which a new slimmer, lighter model was released. Sales of –232.3 PS2 decreased compared to the previous fiscal year. Overall 2006 2007 2008 software sales increased as a result of an increase in PS3 ■ Sales (left) ■ Operating income (loss) (right) software sales compared to the previous fiscal year. ● Operating margin Total worldwide unit sales of hardware and software were * Years ended March 31 as follows: ■ Pictures Worldwide hardware unit sales Sales for the fiscal year ended March 31, 2008 decreased by (increase/decrease year-on-year ):* 108.3 billion yen, or 11.2 percent, to 857.9 billion yen compared PS2: 13.73 million units (a decrease of 0.98 million units) to the previous fiscal year. Operating income increased by 11.3 PSP®: 13.89 million units (an increase of 4.36 million units) billion yen, or 26.5 percent, to 54.0 billion yen and the operating PS3: 9.24 million units (an increase of 5.63 million units) margin increased from 4.4 percent to 6.3 percent. The results in Worldwide software unit sales the Pictures segment consist of the results of Sony Pictures (increase/decrease year-on-year ):*/** Entertainment Inc. (“SPE”), a U.S.-based subsidiary. PS2: 154.0 million units (a decrease of 39.5 million units) On a U.S. dollar basis, sales for the fiscal year in the Pictures PSP®: 55.5 million units (an increase of 0.8 million units) segment decreased approximately 9 percent and operating PS3: 57.9 million units (an increase of 44.6 million units) income increased by approximately 40 percent. Sales * For the fiscal year ended March 31, 2008, the method of reporting hardware and decreased primarily due to lower worldwide theatrical and software unit sales has been changed from production shipments to recorded home entertainment revenues as fewer films were released in sales. In accordance with this change, the numbers for the fiscal year ended March 31, 2007 have been restated. the current fiscal year, as compared to the number of films ** Including those both from Sony and third parties under Sony licenses. released in the previous fiscal year. Major films released in the

57 fiscal year that contributed to both theatrical and home enter- ■ Financial Services tainment revenues included Spider-Man 3 and Superbad. Sales Note that the revenue and operating income at Sony Life, for the fiscal year release slate decreased approximately 1.2 Sony Assurance and Sony Bank discussed below on the billion U.S. dollars as compared to the previous fiscal year. The basis of generally accepted accounting principles in the decrease in revenues from current year films was partially offset U.S. (“U.S. GAAP”) differ from the results that Sony Life, by an approximately 300 million U.S. dollar increase in home Sony Assurance and Sony Bank disclose on a Japanese entertainment and television revenues from prior year films (i.e., statutory basis. films that had their initial U.S. theatrical release in the prior fiscal Financial Services segment revenue for the fiscal year year). Total revenues for the Pictures segment also benefited ended March 31, 2008 decreased by 68.2 billion yen, or from the sale of a bankruptcy claim against Kirch Media, a 10.5 percent, to 581.1 billion yen compared with the previous former licensee of film and television product. Television product fiscal year. Operating income decreased by 61.5 billion yen, revenues increased by approximately 29 million U.S. dollars or 73.1 percent, to 22.6 billion yen and the operating income primarily as a result of higher advertising and subscription sales margin decreased to 3.9 percent compared with 13.0 percent from several international channels. in the previous fiscal year. Operating income for the segment increased primarily due to At Sony Life, revenue decreased by 81.0 billion yen, or the strong performance of prior year films in the home enter- 14.9 percent, to 464.1 billion yen compared with the previous tainment and television markets. Operating income from prior fiscal year. Although revenue from insurance premiums year films increased approximately 225 million U.S. dollars, due increased due to an increase in insurance-in-force, revenue to the strong performance from a number of films including decreased due to a net loss from investments in the separate Ghost Rider, Stomp the Yard and Casino Royale. Operating account, a deterioration in net valuation gains from convert- income also benefited from the sale of the bankruptcy claim ible bonds and an impairment loss on equity securities in the and the higher television business revenues referred to above. general account reflecting a significant decline in the As of March 31, 2008, unrecognized license fee revenue at Japanese stock market this fiscal year. Operating income at SPE was approximately 1.3 billion U.S. dollars. SPE expects to Sony Life decreased by 70.1 billion yen, or 85.9 percent, to record this amount in the future having entered into contracts 11.5 billion yen. This decrease was mainly due to a deteriora- with television broadcasters to provide those broadcasters with tion in net valuation gains from convertible bonds and an completed motion picture and television products. The license impairment loss on equity securities in the general account fee revenue will be recognized in the fiscal year in which the which more than offset the contribution from increased product is made available for broadcast. insurance premium revenue. At Sony Assurance, revenue increased due to higher Sales and operating income in insurance revenue brought about by a steady expansion in the Pictures segment the number of automobile policies-in-force. Despite higher

(Yen in billions) (Yen in billions) insurance revenue, operating income decreased due to a 1,000 100 deterioration in the net loss ratio and expense ratio (the ratio of sales, general and administrative expenses and

750 75 commissions to net premiums written). 6.3% At Sony Bank, revenue increased mainly due to foreign 4.4% 500 50 exchange valuation gains from part of Sony Bank’s 3.7% foreign currency deposits brought about by a significant appreciation of the yen. As a result, operating income 250 25 significantly increased.

0 0 2006 2007 2008

■ Sales (left) ■ Operating income (right) ● Operating margin

* Years ended March 31

58 At Sony Finance International, Inc. (“Sony Finance”), a leas- ● Information of Operations Separating Out the Financial ing and credit financing business subsidiary in Japan, revenue Services Segment (Unaudited) increased overall mainly due to revenue increases from the The following charts show Sony’s unaudited information of electronic settlement business and the credit card business. operations for the Financial Services segment alone and for all The operating loss at Sony Finance decreased overall primarily segments excluding the Financial Services segment. These due to increased profit at the electronic settlement business separate condensed presentations are not required under U.S. and the leasing business, as well as a decrease in losses at the GAAP, which is used in Sony’s consolidated financial state- credit card business. ments. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony utilizes this Revenue and operating income in information to analyze its results without Financial Services and the Financial Services segment believes that these presentations may be useful in understand-

(Billions of yen) (Billions of yen) ing and analyzing Sony’s consolidated financial statements. 800 25.3% 240 Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in

600 180 the consolidated figures shown below.

13.0% 400 120

200 60 3.9%

0 0 2006 2007 2008

■ Financial Services revenue (left) ■ Operating income (right) ● Operating margin

* Years ended March 31

Condensed Statements of Income Yen in millions Sony without Financial Services Financial Services Consolidated Years ended March 31 2007 2008 2007 2008 2007 2008 Financial Service revenue...... 649,341 581,121 — — 624,282 553,216 Net sales and operating revenue ...... — — 7,680,578 8,324,828 7,671,413 8,318,198 Sales and operating revenue ...... 649,341 581,121 7,680,578 8,324,828 8,295,695 8,871,414 Costs and expenses ...... 565,199 558,488 7,694,375 7,974,630 8,223,945 8,496,932 Operating income (loss)...... 84,142 22,633 (13,797) 350,198 71,750 374,482 Other income (expenses), net...... 9,886 (383) 27,917 100,479 30,287 91,835 Income before income taxes ...... 94,028 22,250 14,120 450,677 102,037 466,317 Income taxes and other...... 33,536 11,908 (57,991) 93,373 (24,291) 96,882 Net income ...... 60,492 10,342 72,111 357,304 126,328 369,435

■ ALL Other Ericsson is also included in sales and operating income of During the fiscal year ended March 31, 2008, sales within All Other. All Other were comprised mainly of sales from Sony Music Sales for the fiscal year ended March 31, 2008 increased Entertainment (Japan) Inc. (“SMEJ”), a Japanese domestic by 27.1 billion yen, or 7.6 percent, to 382.2 billion yen, recorded music business; Sony Music Entertainment Inc.’s compared with the previous fiscal year. Of total sales, 82 music publishing business; So-net Entertainment Corporation percent were sales to outside customers. In terms of profit (“So-net”), an Internet-related service business subsidiary performance, operating income for All Other increased by operating mainly in Japan; and an advertising agency 21.3 billion yen, or 73.9 percent from the previous fiscal year, business in Japan. Trademark royalty income from Sony to 50.2 billion yen.

59 The increase in sales is mainly due to the contribution of sales Foreign Exchange Fluctuations and Risk from Famous Music LLC (“Famous Music”), a U.S.-based Hedging music publishing company that was acquired by Sony’s U.S.- During the fiscal year ended March 31, 2008, the average value based music publishing subsidiary Sony/ATV Music Publishing of the yen was 113.3 yen against the U.S. dollar, and 160.0 yen LLC (“Sony/ATV”) and consolidated in the current fiscal year, against the euro, which was 2.4 percent higher against the U.S. the receipt of a settlement payment related to copyright dollar and 7.1 percent lower against the euro, respectively, infringement claims and an increase in sales at SMEJ and compared with the average of the previous fiscal year. So-net. An increase in trademark royalty income from Sony In the Pictures segment, Sony translates into yen the U.S. Ericsson also contributed to the increase in sales. dollar consolidated results of SPE (a U.S.-based operation that Sales at SMEJ increased compared with the previous fiscal has worldwide subsidiaries). Therefore, analysis and discussion year mainly due to an increase in music download sales. Best of certain portions of the operating results of SPE are specified selling albums that contributed to sales during the fiscal year as being on “a U.S. dollar basis.” Results on a U.S. dollar basis included ORANGE RANGE’s ORANGE and RANGE, Ken Hirai’s are not on the same basis as Sony’s consolidated financial FAKIN’ POP and YUI’s CAN’T BUY MY LOVE. statements and do not conform with U.S. GAAP. Sony does Sales at So-net increased compared to previous fiscal year not believe that these measures are a substitute for U.S. GAAP primarily due to higher fee revenue from broadband connections, measures. However, Sony believes that results presented on a especially fiber-optic. local currency basis provide additional useful information to Operating income for All Other increased compared to the investors regarding operating performance. previous fiscal year, primarily due to recording a 10.0 billion Sony’s consolidated results are subject to foreign currency yen gain on the sale of “The Sony Center am Potsdamer rate fluctuations largely because the countries where manufac- Platz” in Berlin, the receipt of a settlement payment related to turing takes place may be different from those where such copyright infringement claims, an increase in trademark royalty products are sold. In order to reduce the risk caused by such income from Sony Ericsson and an increase in operating fluctuations, Sony employs derivatives, including foreign income at So-net. exchange forward contracts and foreign currency option Operating income at SMEJ increased approximately 4 contracts, in accordance with a consistent risk management percent, compared with the previous fiscal year, mainly due strategy. Such derivatives are used primarily to mitigate the to an increase in animation DVD sales as well as the above- effect of foreign currency exchange rate fluctuations on cash mentioned increase in music download sales. flows generated by anticipated intercompany transactions and Part of the gain on the sale of a portion of Sony’s former intercompany accounts receivable and payable denominated in headquarters site in the amount of 2.6 billion yen was included foreign currencies. in operating income within All Other in the previous fiscal year. Sony Global Treasury Services Plc (“SGTS”) in London provides integrated treasury services for Sony Corporation and Sales and operating income its subsidiaries. Sony’s policy is that Sony Corporation and all in All Other subsidiaries with foreign exchange exposures should enter into (Yen in billions) (Yen in billions) commitments with SGTS for hedging their exposures. Sony 600 60 Corporation and most of its subsidiaries utilize SGTS for this 13.1% purpose. The concentration of foreign exchange exposures at 450 45 SGTS means that, in effect, SGTS hedges most of the net

8.1% foreign exchange exposure of Sony Corporation and its subsid-

300 30 iaries. SGTS in turn enters into foreign exchange transactions

4.8% with creditworthy third-party financial institutions. Most of the transactions are entered into against projected exposures before 150 15 the actual export and import transactions take place. In general, SGTS hedges the projected exposures on average three months 0 0 2006 2007 2008 before the actual transactions take place. However, in certain ■ Sales (left) cases SGTS partially hedges the projected exposures one ■ Operating income (right) ● Operating margin

* Years ended March 31

60 month before the actual transactions take place when business ■ Current Assets requirements such as shorter production-sales cycles for Current assets as of March 31, 2008 increased by 462.9 certain products arise. Sony enters into foreign exchange billion yen, or 10.2 percent, to 5,009.7 billion yen compared transactions with financial institutions primarily for hedging with the previous fiscal year-end. Current assets as of March purposes. Sony does not use these derivative financial instru- 31, 2008 in all segments, excluding the Financial Services ments for trading or speculative purposes except for certain segment, increased by 341.7 billion yen, or 9.8 percent, to derivatives in the Financial Services segment. In the Financial 3,836.7 billion yen. Services segment, Sony uses derivatives for Asset Liability Cash and cash equivalents as of March 31, 2008 in all Management (“ALM”), a method of managing interest rate segments, excluding the Financial Services segment, increased fluctuation risk through the comprehensive identification of 425.9 billion yen, or 81.4 percent, to 948.7 billion yen compared differences in duration and cash flow between assets and with the previous fiscal year-end. This was primarily due to the liabilities, and trading. sale of a portion of the shares Sony Corporation held in SFH To minimize the adverse effects of foreign exchange fluctua- pursuant to the global initial public offering of SFH in connection tions on its financial results, particularly in the Electronics with its listing on the TSE. Refer to “Cash Flows.” segment, Sony seeks, when appropriate, to localize material Notes and accounts receivable, trade (net of allowance for and parts procurement, design, and manufacturing operations doubtful accounts and sales returns) as of March 31, 2008, in areas outside of Japan. excluding the Financial Services segment, decreased 259.6 Changes in the fair value of derivatives designated as cash billion yen, or 19.3 percent, compared with the previous fiscal flow hedges are initially recorded in other comprehensive year-end to 1,083.5 billion yen. This was primarily the result of a income and reclassified into earnings when the hedged trans- decrease in sales of PS3 near the end of the fiscal year com- action affects earnings. For the fiscal years ended March 31, pared with the previous fiscal year-end when PS3 had just 2007 and 2008, these cash flow hedges were fully effective. begun shipping in Europe. Foreign exchange forward contracts, foreign currency option Inventories as of March 31, 2008 increased by 80.7 billion contracts and other derivatives that do not qualify as hedges yen, or 8.6 percent, to 1,021.6 billion yen compared with the are marked-to-market with changes in value recognized in previous fiscal year-end. This increase was primarily due to an Other Income and Expenses. The notional amounts of foreign increase in Electronics segment inventory resulting from a exchange forward contracts, currency option contracts pur- worldwide expansion of the LCD television business. The chased and currency option contracts written as of March 31, inventory to cost of sales turnover ratio (based on the average 2008 were 2,019.8 billion yen, 215.7 billion yen and 25.9 billion of inventories at the end of each fiscal year and the previous yen, respectively. fiscal year) was 1.87 months compared to 1.78 months at the end of the previous fiscal year. Sony considers this level of inventory to be appropriate in the aggregate. Assets, Liabilities and Stockholders’ Other in current assets as of March 31, 2008 in all seg- Equity ments, excluding the Financial Services segment, increased 175.6 billion yen, or 10.8 percent, to 1,801.5 billion yen Assets compared with the previous fiscal year-end. This was primar- Total assets as of March 31, 2008 increased by 836.4 billion ily due to the recording of a receivable within the Electronics yen, or 7.1 percent, to 12,552.7 billion yen compared with the segment relating to the sale of a portion of Sony’s semicon- previous fiscal year-end. Total assets as of March 31, 2008 in all ductor operations in Nagasaki, Japan, including machinery segments excluding the Financial Services segment increased and equipment. by 86.9 billion yen, or 1.2 percent, to 7,185.0 billion yen com- Current assets as of March 31, 2008 in the Financial pared with the previous fiscal year-end. Total assets as of March Services segment increased by 115.9 billion yen, or 10.6 31, 2008 in the Financial Services segment increased by 648.0 percent, to 1,205.1 billion yen compared with the previous billion yen, or 13.0 percent, to 5,625.7 billion yen compared with fiscal year-end. This increase was primarily due to an the previous fiscal year-end. expansion of banking businesses.

61 ■ IInvestments and Advances in Nagasaki, including machinery and equipment, “The Sony Investments and advances as of March 31, 2008 increased Center am Potsdamer Platz” in Berlin and a portion of the site of by 446.9 billion yen, or 11.5 percent, to 4,335.6 billion yen Sony’s former headquarters. compared with the previous fiscal year-end. Property, plant and equipment as of March 31, 2008 in the Investments and advances as of March 31, 2008 in all Financial Services segment decreased by 0.2 billion yen, or 0.4 segments, excluding the Financial Services segment, decreased percent, to 38.5 billion yen compared with the previous fiscal by 104.8 billion yen, or 16.8 percent, to 518.5 billion yen. This year-end. Capital expenditures in the Financial Services segment was primarily due to the receipt of a capital redemption payment decreased by 0.5 billion yen, or 6.7 percent, to 6.4 billion yen and dividends from Sony Ericsson. compared with the previous fiscal year. Investments and advances as of March 31, 2008 in the Consolidated capital expenditures for the fiscal year ending Financial Services segment increased by 532.0 billion yen, or March 31, 2009 are expected to increase 28 percent to 430 15.9 percent, to 3,879.9 billion yen compared with the previous billion yen primarily within the Electronics segment. For the fiscal year-end. This increase was primarily due to investments Electronics segment, capital expenditures in the semiconduc- mainly in Japanese fixed income securities by Sony Life, which tor business during the fiscal year are expected to increase by increased assets as a result of an expansion of its business, and approximately 20 billion yen to approximately 110 billion yen an increase in mortgage loans outstanding at Sony Bank. due to an increase in the amount invested in image sensors.

■ Property, Plant and Equipment (after deduction ■ Other Assets of accumulated depreciation) Other assets as of March 31, 2008 increased by 109.2 billion Property, plant and equipment as of March 31, 2008 decreased yen, or 7.0 percent, to 1,659.8 billion yen compared with the by 178.2 billion yen, or 12.5 percent, to 1,243.3 billion yen previous fiscal year end. Deferred tax assets as of March 31, compared with the previous fiscal year-end. 2008 decreased by 18.3 billion yen, or 8.4 percent, to 198.7 Property, plant and equipment as of March 31, 2008 in all billion yen compared with the previous fiscal year end. segments, excluding the Financial Services segment, decreased by 178.0 billion yen, or 12.9 percent, to 1,204.8 billion yen Liabilities compared with the previous fiscal year-end. Total current and long-term liabilities as of March 31, 2008 Capital expenditures (additions to property, plant and increased by 504.1 billion yen, or 6.1 percent, to 8,810.8 billion equipment) for the fiscal year ended March 31, 2008 yen compared with the previous fiscal year-end. Total current and decreased by 78.4 billion yen, or 18.9 percent, to 335.7 long-term liabilities as of March 31, 2008 in all segments, exclud- billion yen compared with the previous fiscal year. Capital ing the Financial Services segment, decreased by 173.4 billion expenditures in the Electronics segment decreased by 44.8 yen, or 4.2 percent, to 3,967.5 billion yen. Total current and billion yen, or 12.7 percent, to 306.7 billion yen. Of this long-term liabilities in the Financial Services segment as of March amount, approximately 90 billion yen was used for capital 31, 2008 increased by 646.7 billion yen, or 14.9 percent, to expenditures in the semiconductor business, including CCDs 4,984.4 billion yen compared with the previous fiscal year-end. and CMOS imaging sensors. Capital expenditures decreased in the Game segment by 11.1 billion yen, or 66.4 percent, to ■ Current Liabilities 5.6 billion yen. In the Pictures segment, capital expenditures Current liabilities as of March 31, 2008 increased by 471.5 decreased by 1.0 billion yen, or 9.5 percent to 9.9 billion yen. billion yen, or 13.3 percent, to 4,023.4 billion yen compared In All Other, which includes the part of Sony’s music business with the previous fiscal year-end. Current liabilities as of which is consolidated, 3.0 billion yen of capital expenditures March 31, 2008 in all segments excluding the Financial were recorded, a decrease of 2.7 billion yen, or 47.4 percent Services segment increased by 57.9 billion yen, or 2.2 compared with the previous fiscal year. percent, to 2,698.5 billion yen. Other changes resulting in a decrease in property, plant and Short-term borrowings and the current portion of long-term equipment as of March 31, 2008 compared to March 31, 2007 debt as of March 31, 2008 in all segments, excluding the include the sale of a portion of Sony’s semiconductor operations Financial Services segment, increased by 258.5 billion yen, or

62 319.4 percent, to 339.5 billion yen compared with the previous Interest-bearing liabilities fiscal year-end. This was principally due to the change from long-term to current liabilities of the 250 billion yen tranche of (Yen in billions) bonds with stock acquisition rights which will come due during 1,200 the fiscal year ending March 31, 2009. Notes and accounts payable, trade as of March 31, 2008 900 in all segments, excluding the Financial Services segment, decreased by 261.0 billion yen, or 22.4 percent, to 906.3 600 billion yen compared with the previous fiscal year-end. This was primarily due to the same reason for the decrease in 300 notes and accounts receivable, trade, discussed above: a decrease in sales of PS3 near the end of the fiscal year 0 compared with the previous fiscal year-end when PS3 had 2006 2007 2008 just begun shipping in Europe. ■ Short-term (including the current portion of long-term debt) Current liabilities as of March 31, 2008 in the Financial ■ Long-term

Services segment increased by 405.5 billion yen, or 42.4 * As of March 31 percent, to 1,363.0 billion yen, mainly due to an increase in deposits from customers at Sony Bank. Stockholders’ Equity Stockholders’ equity as of March 31, 2008 increased by 94.4 ■ Long-term Liabilities billion yen, or 2.8 percent, to 3,465.1 billion yen compared with Long-term liabilities as of March 31, 2008 increased by 32.6 the previous fiscal year-end. Retained earnings increased 339.9 billion yen, or 0.7 percent, to 4,787.4 billion yen compared with billion yen, or 19.8 percent, to 2,059.4 billion yen compared the previous fiscal year-end. with the previous fiscal year-end, primarily due to net income of Long-term liabilities as of March 31, 2008 in all segments, 369.4 billion yen. Unfavorable foreign currency translation excluding the Financial Services segment, decreased by 231.4 adjustments of 212.5 billion yen, dividends declared of 25.1 billion yen, or 15.4 percent, to 1,269.0 billion yen. In addition, billion yen and pension liability adjustments of 26.1 billion yen long-term debt as of March 31, 2008 in all segments, exclud- decreased shareholders’ equity by a total of 263.7 billion yen. ing the Financial Services segment, decreased by 274.3 billion The ratio of stockholders’ equity to total assets decreased 1.2 yen, or 29.6 percent, to 651.0 billion yen. This was primarily percentage points compared to the end of the previous fiscal due to the change to current liabilities of the bonds with stock year, from 28.8 percent to 27.6 percent. acquisition rights described above. Long-term liabilities as of March 31, 2008 in the Financial Stockholders’ equity and Stockholders’ equity per share stockholders’ equity ratio of common stock Services segment increased by 241.2 billion yen, or 7.1 percent, to 3,621.4 billion yen. This was primarily due to an increase in (Yen in billions) (%) (Yen) insurance-in-force at Sony Life. 4,000 40 4,000 27.6% 28.8% 30.2% ■ Total Interest-bearing Debt 3,000 30 3,000 Total interest-bearing debt as of March 31, 2008 decreased by 12.3 billion yen, or 1.1 percent, to 1,084.2 billion yen, 2,000 20 2,000 compared with the previous fiscal year-end. Total interest- bearing debt as of March 31, 2008 in all segments, excluding 1,000 10 1,000 the Financial Services segment, decreased by 15.7 billion yen, or 1.6 percent, to 990.5 billion yen. 0 0 0 2006 2007 2008 2006 2007 2008

■ Stockholders’ equity * As of March 31 ● Stockholders’ equity ratio Stockholders’ equity ratio = Stockholders’ equity/Total assets

* As of March 31

63 Information of Financial Position Separating is different in nature from Sony’s other segments, Sony utilizes Out the Financial Services Segment (Unaudited) this information to analyze its results without Financial Services The following charts show Sony’s unaudited information of and believes that these presentations may be useful in under- financial position for all segments excluding the Financial standing and analyzing Sony’s consolidated financial state- Services segment and for the Financial Services segment alone. ments. Transactions between the Financial Services segment These separate condensed presentations are not required and all other segments excluding Financial Services are under U.S. GAAP, which is used in Sony’s consolidated financial eliminated in the consolidated figures shown below. statements. However, because the Financial Services segment

Condensed Balance Sheets Separating Out the Financial Services Segment (Unaudited) Yen in millions Sony without Financial Services Financial Services Consolidated March 31 2007 2008 2007 2008 2007 2008 Assets Current assets ...... 1,089,254 1,205,119 3,494,971 3,836,667 4,546,723 5,009,663 Cash and cash equivalents ...... 277,048 137,721 522,851 948,710 799,899 1,086,431 Marketable securities ...... 490,237 424,709 3,078 3,000 493,315 427,709 Notes and accounts receivable, trade...... 29,163 14,143 1,343,128 1,083,489 1,369,777 1,090,285 Other ...... 292,806 628,546 1,625,914 1,801,468 1,883,732 2,405,238 Film costs ...... — — 308,694 304,243 308,694 304,243 Investments and advances ...... 3,347,897 3,879,877 623,342 518,536 3,888,736 4,335,648 Investments in Financial Services, at cost ...... — — 187,400 116,843 — — Property, plant and equipment ...... 38,671 38,512 1,382,860 1,204,837 1,421,531 1,243,349 Other assets ...... 501,820 502,151 1,100,795 1,203,849 1,550,678 1,659,836 Deferred insurance acquisition costs...... 394,117 396,819 — — 394,117 396,819 Other...... 107,703 105,332 1,100,795 1,203,849 1,156,561 1,263,017 ...... 4,977,642 5,625,659 7,098,062 7,184,975 11,716,362 12,552,739 Liabilities and stockholders’ equity Current liabilities ...... 957,459 1,362,956 2,640,601 2,698,522 3,551,852 4,023,367 Short-term borrowings...... 48,688 44,408 80,944 339,485 95,461 355,103 Notes and accounts payable, trade ...... 13,159 16,376 1,167,324 906,281 1,179,694 920,920 Deposits from customers in the banking business ...... 752,367 1,144,399 — — 752,367 1,144,399 Other...... 143,245 157,773 1,392,333 1,452,756 1,524,330 1,602,945 Long-term liabilities ...... 3,380,240 3,621,407 1,500,314 1,268,951 4,754,836 4,787,434 Long-term debt ...... 129,484 111,771 925,259 650,969 1,001,005 729,059 Accrued pension and severance costs...... 8,773 8,034 164,701 223,203 173,474 231,237 Future insurance policy benefits and other...... 3,037,666 3,298,506 — — 3,037,666 3,298,506 Other ...... 204,317 203,096 410,354 394,779 542,691 528,632 Minority interest in consolidated subsidiaries ...... 5,145 919 32,808 37,509 38,970 276,849 Stockholders’ equity ...... 634,798 640,377 2,924,339 3,179,993 3,370,704 3,465,089 ...... 4,977,642 5,625,659 7,098,062 7,184,975 11,716,362 12,552,739

64 Investments 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, 2008 Cost gain loss value Financial Services Business: Available for sale Debt securities Sony Life...... 2,564,845 77,456 (2,644) 2,639,657 Other ...... 481,159 998 (10,412) 471,745 Equity securities Sony Life...... 181,256 47,557 (14,513) 214,300 Other ...... 11,452 1,036 (1,504) 10,984 Held to maturity Debt securities Sony Life...... — — — — Other ...... 56,737 773 (34) 57,476 Total Financial Services...... 3,295,449 127,820 (29,107) 3,394,162 Non-Financial Services: Available-for-sale securities ...... 52,935 26,992 (3,574) 76,353 Held to maturity securities ...... 1,103 — — 1,103 Total Non-Financial Services...... 54,038 26,992 (3,574) 77,456 Consolidated...... 3,349,487 154,812 (32,681) 3,471,618

The most significant portion of these unrealized losses relate to As of March 31, 2008, Sony Bank had debt securities which investments held by Sony Life and Sony Bank. had gross unrealized losses of 10.4 billion yen. Of the unrealized As of March 31, 2008, Sony Life had debt and equity loss amounts recorded by Sony Bank, approximately 60.2 securities which had gross unrealized losses of 2.6 billion yen percent relate to securities being in an unrealized loss position for and 14.5 billion yen, respectively. Of the unrealized loss amounts periods greater than 12 months as of March 31, 2008. These recorded by Sony Life, approximately 1.5 percent relate to unrealized losses related principally to Japanese government securities being in an unrealized loss position for periods greater bonds. Sony Bank principally invests in Japanese national than 12 months as of March 31, 2008. Sony Life principally government bonds, Japanese corporate bonds and foreign invests in debt securities in various industries. Almost all of these bonds. Almost all of these securities were rated “BBB” or higher securities were rated “BBB” or higher by Standard and Poor’s by S&P, Moody’s or other rating agencies. These unrealized Rating Services (“S&P”), Moody’s Investors Service (“Moody’s”) losses related to numerous investments, with no single invest- or other rating agencies. The percentage of non-investment ment being in a material unrealized loss position for above- grade securities held by Sony Life represents approximately mentioned periods. In addition, there was no individual security 0.2 percent of Sony Life’s total investment portfolio, while the with unrealized losses that met the test for impairment as the percentage of unrealized losses that relate to those non- declines in value were observed to be small both in amounts investment grade securities was 0.7 percent of Sony Life’s and percentage, and therefore, the decline in value for those total unrealized losses as of March 31, 2008. investments was still determined to be temporary in nature.

65 For fixed maturity securities with unrecognized losses held by and comparable valuations of similar companies. The impair- Sony Life as of March 31, 2008 (2.6 billion yen), maturity dates ment losses that were recorded in each of the three fiscal vary as follows: years related to the unique facts and circumstances of each individual investment and did not significantly impact other ■ Within 1 year...... 4.8% investments. ■ 1 to 5 years ...... 3.9% Sony Life and Sony Bank’s investments constitute the ■ 5 to 10 years ...... 4.6% majority of the investments in the Financial Services segment. ■ Above 10 years...... 86.7% Sony Life and Sony Bank account for approximately 84 percent and 14 percent of the investments of the Financial Services In the ordinary course of business, Sony maintains long-term segment, respectively. investment securities, included in securities investments and Sony Life’s fundamental policy in managing the investments other issued by a number of non-public companies. The of its general account assets is to maintain the soundness of aggregate carrying amount of the investments in non-public its assets and build an investment portfolio capable of ensur- companies at March 31, 2008 was 62.1 billion yen. A non-public ing stable mid- to long-term returns, taking into account equity investment is valued at cost as fair value is not readily anticipated risks and returns and responding quickly to determinable. If the value is estimated to have declined and changes in financial market conditions and the investment such decline is judged to be other-than-temporary, the impair- environment. Moreover, Sony Life utilizes basic idea of ALM ment of the investment is recognized immediately and the and considers the long-term balance between assets and carrying value is reduced to its fair value. liabilities in an effort to ensure stable and sustainable returns. For the fiscal years ended March 31, 2007 and 2008, total Sony Life’s investment policy places emphasis on risk man- impairment losses were 7.4 billion yen and 37.1 billion yen of agement and seeks to achieve the goals of quality, liquidity, which 6.1 billion yen and 24.0 billion yen, respectively, were stability and profitability. In the fiscal year ended March 31, recorded by Sony Life in Financial Services revenue. Impairment 2008, considering the investment environment and its liabili- losses other than at Sony Life in each of the three fiscal years ties, Sony Life invested mainly in long-term (10 years) and were reflected in non-operating expenses and primarily relate to super long-term (more than 10 years) Japanese government certain strategic investments in non-financial services busi- bonds. As for its investments in convertible bonds, Sony Life nesses. These investments primarily relate to certain strategic diversified its portfolio by responding to changes in market investments in Japan and the U.S. with which Sony has condition and issue status. strategic relationships for the purposes of developing and Sony Bank seeks to build a portfolio that will maintain the marketing new technologies. Impairment losses were recorded strength and stability of its financial base while ensuring profit- for each of the three fiscal years as certain companies failed to ability, taking into account appropriate risk management successfully develop and market such technology, resulting in activities in light of the relevant risks associated with its invest- the operating performance of these companies being more ments. Sony Bank’s securities portfolio consists mainly of unfavorable than previously expected. As a result the decline in Japanese government bonds, Japanese corporate bonds and the fair value of these companies was judged as other-than- foreign bonds. In addition, Sony Bank invests in non-yen- temporary. None of these impairment losses were individually denominated foreign bonds as a means of matching its expo- material to Sony. sure to foreign exchange risk with respect to a portion of the Upon determination that the value of an investment is foreign currency deposits of its account holders. Separately, impaired, the value of the investment is written down to its fair Sony Bank also holds other non-yen-denominated foreign value. For publicly traded investments, fair value is determined bonds as a means of diversifying its portfolio, and hedges the by the closing stock price as of the date on which the impair- majority of those investments against foreign exchange risk by ment determination is made. For non-public investments, fair using derivative instruments. With respect to loans, Sony Bank value is determined through the use of various methodologies mainly offers mortgage loans to individuals and does not have such as discounted cash flows, valuation of recent financings any corporate loan exposure.

66 Contractual obligations, commitments, and contingent liabilities The following table summarizes Sony’s contractual obligations and major commitments as of March 31, 2008. The references to the Notes below refer to the corresponding note within the Notes to 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 11) Capital lease obligations (Notes 8 and 11) ...... 51,889 9,328 11,636 6,341 24,584 Other long-term debt (Note 11)...... 969,049 282,551 372,314 148,357 165,827 Minimum rental payments required under operating leases (Note 8). . . . 189,313 42,736 57,750 29,095 59,732 Purchase commitments for property, plant and equipment and other assets (Note 23) ...... 62,044 61,869 175 — — Expected cost for the production or purchase of films and television programming or certain rights (Note 23) ...... 57,258 44,841 11,928 452 37 Partnership program contract with Fédération Internationale de Football Association (Note 23) ...... 22,944 3,306 7,389 8,166 4,083 Gross unrecognized tax benefits** (Note 20)...... 282,098 666 — — —

* The total amount of expected future pension payments is not included in either the above table or the total amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony expects to contribute approximately 34.0 billion yen to Japanese pension plans and approximately 5.0 billion yen to foreign pension plans during the fiscal year ending March 31, 2009 (Note 14). * The total unused portion of the line of credit extended under loan agreements in the Financial Services segment is not included in either the above table or the amount of commitments outstanding at March 31, 2008 discussed below as it is not foreseeable how many loans will be executed. The total unused portion of the line of credit extended under these contracts was 298.8 billion yen as of March 31, 2008 (Note 23). * The five-year Revolving Credit Agreement with SONY BMG, which matures on August 5, 2009 and initially provided for a base commitment of 300 million U.S. dollars, which was decreased to 200 million U.S. dollars on August 5, 2007, and additional incremental borrowings of up to 150 million U.S. dollars, are not included either in the above table or the amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2008 was 17.5 billion yen (Note 23). A second Revolving Credit Agreement with SONY BMG, which matures on August 5, 2011 and provides for a base commitment of 138 million U.S. dollars is not included either in the above table or the amount of commitments outstanding at March 31, 2008 discussed below as such amount is not currently determinable. Sony’s outstanding commitment under this Credit Agreement as of March 31, 2008 was 13.8 billion yen (Note 23). ** The total amounts represent the liability for gross unrecognized tax benefits in accordance with FIN No. 48. Sony estimates 666 million yen of the liability is expected to be settled within one year. The settlement period for the remaining portion of the liability, which totaled 281.4 billion yen, cannot be reasonably estimated due to the uncertainty associated with the timing of settlements with the various taxing authorities (Note 20).

The total amount of commitments outstanding at March 31, exercise various rights as an official sponsor of FIFA events 2008 was 261.1 billion yen (Note 23). The commitments include from 2007 to 2014. As of March 31, 2008, Sony Corporation major purchase obligations as shown above. has committed to make payments under such contract of In the ordinary course of business, Sony makes commitments 22.9 billion yen. for the purchase of property, plant and equipment. As of March In order to fulfill its commitments, Sony will use cash gener- 31, 2008, such commitments outstanding were 62.0 billion yen. ated by its operating activities, intra-group loans and borrowings Certain subsidiaries in the Pictures segment have entered from subsidiaries with excess funds to subsidiaries that are short into agreements with creative talent for the development and of funds through its finance subsidiaries, and raise funds from production of films and television programming as well as the global capital markets and from banks when necessary. agreements with third parties to acquire completed films, or The following table summarizes Sony’s contingent liabilities as certain rights therein. As of March 31, 2008, the total amount of March 31, 2008...... Yen in millions of the expected cost for the production or purchase of films and television programming or certain rights under the above Contingent Liabilities (Note 23): commitments was 57.3 billion yen. Loan guarantees to related parties. . . . . 9,762 Sony Corporation has entered into a partnership program Other...... 40,043 contract with Fédération Internationale de Football Association Total contingent liabilities ...... 49,805 (“FIFA”). Through this program Sony Corporation will be able to

67 Off-Balance Sheet Arrangements On December 30, 2005, a subsidiary in the Pictures segment Sony has certain off-balance sheet arrangements that provide entered into a production/co-financing agreement with a VIE to liquidity, capital resources and/or credit risk support. co-finance 11 films that were released over the 15 months Sony set up several accounts receivable sales programs that ended March 31, 2007. The subsidiary received 376 million provide for the accelerated receipt of up to 50.0 billion yen of U.S. dollars over the term of the agreement to fund the produc- eligible trade accounts receivable of Sony Corporation. Through tion or acquisition cost of films (including fees and expenses). these programs, Sony can sell receivables to qualified special The subsidiary is responsible for the marketing and distribution purpose entities owned and operated by banks. These transac- of the product through its global distribution channels. The VIE tions are accounted for as a sale in accordance with Financial shares in the net profits, as defined, of the films after the Accounting Standards (“FAS”) No. 140, “Accounting for subsidiary recoups a distribution fee, its marketing and distribu- Transfers and Servicing of Financial Assets and Extinguishments tion expenses, and third party participation and residual costs, of Liabilities”, because Sony has relinquished control of the each as defined. The subsidiary did not make any equity receivables. Accordingly, accounts receivable sold under these investment in the VIE nor issue any guarantees with respect to transactions are excluded from receivables in the accompanying the VIE. On April 28, 2006, the subsidiary entered into a second consolidated balance sheets. Total receivables sold for the production/co-financing agreement with a VIE to co-finance fiscal years ended March 31, 2007 and 2008 were 152.5 billion additional films. Eight films are anticipated to be released under yen and 181.4 billion yen, respectively. Losses from these this financing arrangement. The subsidiary will receive approxi- transactions were insignificant. Although Sony continues mately 190 million U.S. dollars over the term of the agreement servicing the sold receivables, no servicing liabilities are to fund the production or acquisition cost of films (including fees recorded because costs regarding collection of the sold and expenses). Similar to the first agreement, the subsidiary is receivables are insignificant. responsible for the marketing and distribution of the product During the fiscal year ended March 31, 2008, a subsidiary of through its global distribution channels. The VIE shares in the the Financial Services segment set up several receivable sales net profits, as defined, of the films after the subsidiary recoups programs that provide for the accelerated receipt of up to 18.0 a distribution fee, its marketing and distribution expenses, and billion yen of eligible receivables. Through these programs, Sony third party participation and residual costs, each as defined. As can sell receivables to qualified special purpose entities owned of March 31, 2008, seven co-financed films have been released and operated by banks. These transactions are accounted for by the subsidiary and 110 million U.S. dollars has been received as a sale in accordance with FAS No. 140, because Sony has from the VIE under this agreement. The subsidiary did not make relinquished control of the receivables. Accordingly, receivables any equity investment in the VIE nor issue any guarantees with sold under these transactions are excluded from receivables in respect to the VIE. On January 19, 2007, the subsidiary entered the accompanying consolidated balance sheets. Total receiv- into a third production/co-financing agreement with a VIE to ables sold for the fiscal year ended March 2008 were 113.8 co-finance a majority of the films to be submitted through billion yen. Losses from these transactions were insignificant. March 2012. The subsidiary has received a commitment from Although Sony continues servicing the sold receivables, no the VIE that the VIE will fund up to 525 million U.S. dollars on a servicing liabilities are recorded because costs regarding revolving basis to fund the production or acquisition cost of collection of the sold receivables are insignificant. films (including fees and expenses). As of March 31, 2008, no Sony has, from time to time, entered into various arrange- films of the subsidiary have been funded by this VIE. Similar to ments with Variable Interest Entities (“VIEs”). In several of the the first two agreements, the subsidiary is responsible for arrangements in which Sony holds a significant variable interest, marketing and distribution of the product through its global Sony is the primary beneficiary and therefore consolidates these distribution channels. The VIE shares in the net profits, as VIEs. These arrangements include facilities which provide for defined, of the films after the subsidiary recoups a distribution the leasing of certain property, the financing of film production fee, its marketing and distribution expenses, and third party and the U.S.-based music publishing business. In addition, participation and residual costs, each as defined. The subsid- Sony holds a significant variable interest in VIEs in which Sony iary did not make any equity investment in the VIE nor issue any is not the primary beneficiary and therefore does not consoli- guarantees with respect to the VIE. date. These VIEs include the film production/co-financing Refer to Note 22 of Notes to Consolidated Financial arrangements noted as follows. Statements for more information on VIEs.

68 Cash Flows primarily because the increase in payments for investments and advances, carried out primarily at Sony Life and Sony Bank, Operating Activities: During the fiscal year ended March 31, exceeded the increase in proceeds from the maturities of 2008, Sony generated 757.7 billion yen of net cash from marketable securities, sales of securities investments and operating activities, an increase of 196.7 billion yen, or 35.1 collections of advances compared with the previous fiscal year. percent compared with the previous fiscal year. Of this total, all In all segments excluding the Financial Services segment, net segments excluding the Financial Services segment generated cash provided by operating and investing activities combined 519.1 billion yen of net cash from operating activities, an was 504.2 billion yen, an increase of 629.7 billion yen as increase of 213.5 billion yen, or 69.9 percent, compared with compared to net cash used of 125.5 billion yen in the previous the previous fiscal year, and the Financial Services segment fiscal year. generated 242.6 billion yen of net cash from operating activities, Financing Activities: During the fiscal year ended March 31, a decrease of 13.9 billion yen, or 5.4 percent, compared with 2008, 505.5 billion yen of net cash was provided by financing the previous fiscal year. activities. Of the total, 12.1 billion yen of net cash was used in During the fiscal year, a variety of factors had a positive impact financing activities within all segments excluding the Financial on operating cash flow, including the contribution of net income Services segment, a decrease of 71.7 billion yen compared to from the Electronics segment, after taking into account depre- the 59.6 billion yen in net cash generated by financing activities ciation and amortization, and an increase in insurance premium in the previous fiscal year. This was primarily due to the fact that revenue reflecting a steady increase in insurance-in-force at straight bonds were redeemed during the fiscal year. Sony Life. Partially offsetting these contributions was an increase In the Financial Services segment, as a result of an increase in in inventory, primarily within the Electronics segment. policyholder accounts at Sony Life and an increase in deposits Compared with the previous fiscal year, net cash provided by from customers in the banking business, financing activities operating activities increased during the fiscal year mainly as a generated 491.7 billion yen of net cash. result of the increase in net income after taking into account Accounting for all these factors and the effect of exchange depreciation and amortization. rate changes, the total outstanding balance of cash and cash Investing Activities: During the fiscal year, Sony used 910.4 equivalents at the end of the fiscal year increased by 286.5 billion yen of net cash in investing activities, an increase of 195.0 billion yen, or 35.8 percent, to 1,086.4 billion yen, compared billion yen, or 27.3 percent, compared with the previous fiscal with the end of the previous fiscal year. The total outstanding year. Of this total, all segments, excluding the Financial Services balance of cash and cash equivalents of all segments, excluding segment, used 14.9 billion yen of net cash in investing activities, the Financial Services segment, increased by 425.9 billion yen, a decrease of 416.2 billion yen, or 96.5 percent, compared with or 81.4 percent, to 948.7 billion yen, and for the Financial the previous fiscal year. The Financial Services segment used Services segment, decreased by 139.3 billion yen, or 50.3 873.6 billion yen in net cash, an increase of 596.9 billion yen, or percent, to 137.7 billion yen, compared with the end of the 215.7 percent compared with the previous fiscal year. previous fiscal year. During the fiscal year, semiconductor fabrication equipment was purchased and Sony/ATV acquired Famous Music, a Cash flows U.S.-based music publishing company. Partially offsetting these uses of net cash were proceeds from the sale of a portion of (Yen in billions) SFH shares, the sale of “The Sony Center am Potsdamer Platz” 1,000 in Berlin and the sale of a portion of the site of Sony’s former headquarters. Within the Financial Services segment, payments 500 for investments and advances, carried out primarily at Sony Life, and at Sony Bank where operations are expanding, exceeded 0 proceeds from the maturities of marketable securities, sales of securities investments and collections of advances. –500 Compared with the previous fiscal year, net cash used in investing activities decreased significantly within all segments –1,000 excluding the Financial Services segment, primarily due to the 2006 2007 2008 sale of a portion of SFH shares. On the other hand, net cash ■ Cash flows from operating activities ■ Cash flows from investing activities used in investing activities within the Financial Services segment ■ Cash flows from financing activities increased significantly compared to the previous fiscal year * Years ended March 31

69 Information of Cash Flows Separating Out the in nature from Sony’s other segments, Sony utilizes this Financial Services Segment (Unaudited) information to analyze its results without Financial Services and The following charts show Sony’s unaudited cash flow informa- believes that these presentations may be useful in understand- tion for all segments excluding the Financial Services segment ing and analyzing Sony’s consolidated financial statements. and for the Financial Services segment alone. These separate Transactions between the Financial Services segment and all condensed presentations are not required under U.S. GAAP, other segments excluding the Financial Services segment are which is used in Sony’s consolidated financial statements. eliminated in the consolidated figures shown below. However, because the Financial Services segment is different

Condensed Statements of Cash Flows Yen in millions Sony without Financial Services Financial Services Consolidated Years ended March 31 2007 2008 2007 2008 2007 2008 Net cash provided by operating activities ...... 256,540 242,610 305,571 519,112 561,028 757,684 Net cash used in investing activities...... (276,749) (873,646) (431,086) (14,925) (715,430) (910,442) Net cash provided by (used in) financing activities ...... 179,627 491,709 59,598 (12,100) 247,903 505,518 Effect of exchange rate changes on cash and cash equivalents. . — — 3,300 (66,228) 3,300 (66,228) Net increase (decrease) in cash and cash equivalents . . . . . 159,418 (139,327) (62,617) 425,859 96,801 286,532 Cash and cash equivalents at beginning of the fiscal year . . . . 117,630 277,048 585,468 522,851 703,098 799,899 Cash and cash equivalents at end of the fiscal year ...... 277,048 137,721 522,851 948,710 799,899 1,086,431

LIQUIDITY AND CAPITAL RESOURCES Sony has committed lines of credit with financial institutions, together with its cash balances. (The description below covers financial basic policy and figures for Sony’s consolidated operations except for the Financial Depreciation and amortization Capital expenditures Services segment and So-net, which secure liquidity on their (additions to property, plant and equipment) own. Furthermore, the Financial Services segment is described (Yen in billions) (Yen in billions) separately at the end of this section.) 480 480

An important financial objective of Sony is to maintain the 360 360 strength of its balance sheet, while securing adequate liquidity for business activities. 240 240 Sony intends to continue various investments for future growth. Funding requirements that arise from its business 120 120 strategy are principally covered by free cash flow generated from business operations and by cash and cash equivalents 0 0 (“cash balance”); however, as needed, Sony has demon- 2006 2007 2008 2006 2007 2008 strated the ability to procure funds from the financial and * Years ended March 31 * Years ended March 31 * Including amortization capital markets. In addition, to sustain sufficient liquidity, expenses for intangible assets and for deferred insurance acquisition costs

70 Liquidity Management and Market Access Ratings Sony defines its liquidity sources as the amount of cash balance Sony considers one of management’s top priorities to be the (excluding restrictions on capital transfers due mainly to country maintenance of stable and appropriate credit ratings in order to regulations) and the unused amount of committed lines of credit. ensure financial flexibility for liquidity and capital management Sony’s basic liquidity management policy is to secure sufficient and continued adequate access to sufficient funding resources liquidity throughout the relevant fiscal year, covering such factors in the financial and capital markets. as 50 percent of monthly consolidated sales and repayments on In order to facilitate access to global capital markets, Sony debt which comes due within six months. obtains credit ratings from two rating agencies, Moody’s and Sony has a total, translated into yen, of 597.2 billion yen in S&P. In addition, Sony maintains a rating from Rating and committed lines of credit, of which the unused amount was Investment Information, Inc. (“R&I”), a rating agency in Japan, 597.1 billion yen as of March 31, 2008. Major committed lines of for access to the Japanese capital market. credit include a total, translated into yen, of 428.8 billion yen of Sony’s current debt ratings from each agency as of June 2, 2008 Global Commitment Facilities contracted with a syndicate of are noted below: global banks effective until March 2009, and a 150 billion yen committed line of credit contracted with Japanese financial Moody’s S&P R&I institutions, effective until July 2009 where Sony Corporation Long-term debt A2 (Outlook: A– (Outlook: AA– (Outlook: and SGTS are defined as the borrowers. Positive) Stable) Stable) Sony’s working capital needs grow significantly in the third Short-term debt P-1 A-2 a-1+ quarter (from October to December) as a result of the general seasonality of Sony’s business. In order to meet such short-term Cash Management capital requirements, SGTS maintains commercial paper (“CP”) Sony is centralizing and working to make more efficient its programs for the U.S., Europe and Japan CP markets. As of global cash management activities through SGTS. The excess March 31, 2008, the total amount to be issued under these CP or shortage of cash at most of Sony’s subsidiaries is invested programs, translated into yen, was 1,201.3 billion yen. During or funded by SGTS on a net basis, although Sony recognizes the fiscal year ended March 31, 2008, the largest month-end that fund transfers are limited in certain countries and geo- outstanding balance of CP was 200.0 billion yen in September graphical areas due to restrictions on capital transactions. In 2007. There was no outstanding balance of CP as of March 31, order to pursue more efficient cash management and in the 2008. Sony controls the outstanding CP amount, as part of its event of surplus capital generation among Sony’s subsidiaries, debt risk management, so that it does not exceed the unused uneven cash distribution is managed directly or indirectly amount of committed lines of credit. In addition, SGTS maintains through SGTS so that Sony can reduce unnecessary cash a euro medium-term note (“MTN”) program with a program limit and cash equivalents and borrowings. amount that translates into 501.0 billion yen. There was no outstanding balance as of March 31, 2008. Financial Services segment In the event of a downgrade in Sony’s credit ratings, even In the Financial Services segment, the management of SFH, though the cost of borrowing could increase, there are no Sony Life, Sony Assurance and Sony Bank recognize the financial covenants in any of Sony’s material financial agree- importance of securing sufficient liquidity to cover the payment ments that would cause an acceleration of the obligation. of obligations that they incur in the ordinary course of busi- Furthermore, there are no restrictions on the uses of most ness, and these companies abide by the regulations imposed proceeds except that some borrowings may not be used to by regulatory authorities and establish and operate under com- acquire securities listed on a U.S. exchange or traded over- pany guidelines that comply with these regulations. Their pur- the-counter in the U.S., and the use of such borrowings must pose in doing so is to maintain sufficient cash and cash comply with the rules and regulations issued by authorities equivalents and secure sufficient means to pay their obliga- such as the Board of Governors of the Federal Reserve Board. tions. For instance, cash inflows for Sony Life and Sony Refer to Note 11 of Notes to Consolidated Financial Assurance come mainly from policyholders’ insurance premi- Statements for more information on short-term borrowings ums and Sony Life and Sony Assurance keep sufficient liquidity and long-term debt. in the form of investments primarily in various securities. Sony

71 Bank, on the other hand, uses its cash inflows, which come Dividend Policy mainly from customers’ deposits in local or foreign currencies, in order to offer mortgage loans to individuals or to make bond Sony believes that continuously increasing corporate value investments, and establish a necessary level of liquidity for the and providing dividends are essential to rewarding shareholders. smooth settlement of transactions. It is Sony’s policy to utilize retained earnings, after ensuring Sony Life currently obtains ratings from five rating agencies: the perpetuation of stable dividends, to carry out various A+ by S&P for insurer financial strength rating, Aa3 by Moody’s investments that contribute to an increase in corporate value for insurance financial strength rating, A+ by AM Best Company such as those that ensure future growth and strengthen Inc. for financial strength rating, AA by R&I for insurance claims competitiveness. paying ability and AA by the Japan Credit Rating Agency Ltd. A fiscal year-end cash dividend of 12.5 yen per share of for ability to pay insurance claims. Sony Bank obtained an A- Sony Corporation Common Stock was approved at the Board rating from S&P for its long-term local/foreign currency issuer of Directors meeting held on May 14, 2008 and was paid on ratings and an A-2 rating from S&P for its short-term local/ June 2, 2008. Sony Corporation has already paid an interim foreign currency issuer rating. dividend for Common Stock of 12.5 yen per share to each shareholder; accordingly, the total annual cash dividend per share of Common Stock is 25.0 yen. RESEARCH AND DEVELOPMENT In regards to the annual dividend for the fiscal year ending March 31, 2009, upon careful consideration of Sony’s results in It is necessary for Sony to continue technological innovation in that fiscal year and other factors, Sony Corporation plans to order to maintain group-wide growth. Sony believes that tech- increase its regular dividend per share by 15 yen to 40 yen per nology made possible by our research and development activi- annum. Sony Corporation also plans to distribute a special cash ties is key to the differentiation of products in existing businesses dividend of 10 yen per share as part of the interim dividend, and the source of creating value in new businesses. which would be paid in December 2008. This special dividend Research and development is focused in four key domains: would reward our shareholders for the successful global initial a common development platform technology for home and public offering of shares of SFH and be in appreciation of their mobile electronics, and semiconductor, device, and software support during the implementation of our three-year restructuring technologies which are essential for product differentiation and program and other corporate initiatives which resulted in record for creating value-added products. consolidated net income during the fiscal year ended March 31, Research and development costs for the fiscal year ended 2008. As a result, Sony Corporation plans to pay a total annual March 31, 2008 decreased 23.4 billion yen, or 4.3 percent, to dividend for the fiscal year ending March 31, 2009 of 50 yen per 520.6 billion yen, compared with the previous fiscal year. The share, comprising an interim dividend of 30 yen per share and a ratio of research and development costs to sales (which year-end dividend of 20 yen per share. excludes Financial Services segment revenue) decreased from 7.1 percent to 6.3 percent. The bulk of research and development costs were incurred in the Electronics and Game Employees segments. Expenses in the Electronics segment decreased 1.6 billion yen, or 0.4 percent, to 438.7 billion yen and As of March 31, 2008, Sony had approximately 180,500 expenses in the Game segment decreased 20.8 billion yen, or employees, an increase of approximately 17,500 employees 21.2 percent, to 77.1 billion yen. In the Electronics segment, from March 31, 2007. The total number of employees increased approximately 65 percent of expenses were for the develop- as a result of a significant increase of employees at manufactur- ment of new product prototypes while the remaining 35 per- ing sites in East Asia and East Europe with an expansion of cent were for the development of mid- to long-term new business in the Electronics segment. technologies in such areas as semiconductors, communications and displays. In the Game segment, research and devel- Risk Factors opment costs decreased mainly due to the decline in costs related to PS3. Consolidated research and development costs This section contains forward-looking statements that are for the fiscal year ending March 31, 2009 are expected to subject to the Cautionary Statement appearing on the inside increase by 4 percent to 540 billion yen. back cover page of this annual report. Risks to Sony are also

72 discussed elsewhere in this annual report, including without product introductions and transitions will have on financial limitation in the other sections of this annual report referred to condition and operating results. in the Cautionary Statement. Sony is subject to competition from firms that may be more Sony must overcome increasingly intense pricing competition, specialized or have greater resources. especially in the Electronics and Game segments. Sony has several business segments in different industries and Sony’s Electronics segment produces consumer products that has many product categories within the Electronics segment, compete against products sold by an increasing number of which causes it to face a broad range of competitors ranging competitors on the basis of several factors including price. In from large international companies to highly specialized entities order to produce products that appeal to changing and increas- that are focused on only a few businesses. As a result, Sony ingly diverse consumer preferences, and to overcome the fact may not fund or invest in certain of its businesses to the same that a relatively high percentage of consumers already possess degree that its competitors do, and these competitors may have products similar to those that Sony offers, Sony’s Electronics greater financial, technical, and marketing resources available to and Game segments must develop superior technology, them than the businesses of Sony. Sony’s financial services anticipate consumer tastes and rapidly develop attractive businesses may not be able to compete effectively, especially products. In the Electronics segment, Sony faces increasingly against established competitors with greater financial, marketing intense pricing pressure and shorter product cycles in a variety and other resources. of consumer product categories. Sony’s sales and operating income depend on Sony’s ability to continue to develop effi- Sony’s investments in research and development may not ciently and offer Electronics and Game products at competitive yield the results expected. prices that meet changing and increasingly diverse consumer Sony’s businesses, particularly the Electronics and Game preferences. If we are unable to effectively anticipate and segments, operate in intensely competitive markets character- counter the price erosion that frequently accompanies our ized by changing consumer preferences and rapid technological products, or if the average selling prices of our products innovation. Due to technological innovation and ease of imita- decrease faster than we are able to reduce our manufacturing tion, new products tend to become standardized rapidly, leading costs, our gross margins will decrease and our results of to intense competition and price declines. In order to strengthen operations and financial condition may be negatively impacted. the competitiveness of its products in this environment, Sony is continuing to invest heavily in research and development. To remain competitive and stimulate customer demand, However, these investments in research and development Sony must successfully manage frequent product and may not yield the results expected, hindering Sony’s ability to service introductions and transitions. commercialize in a timely manner new and competitive products Due to the highly volatile and competitive nature of the PC, that meet the needs of the market, which consequently, may consumer electronics and mobile communication industries, negatively impact Sony’s results. Sony must continually introduce new products, services and technologies, enhance existing products and services, and Sony may not be able to recoup the large capital effectively stimulate customer demand for new and upgraded expenditures or investments it makes to increase products and services. The success of new product and service production capacity. introductions depends on a number of factors, including timely Sony continues to invest heavily in production equipment in and successful completion of development efforts, market the Electronics segment. Sony also invests in production- acceptance, Sony’s ability to manage the risks associated with related joint ventures. One recent example is the investment new products and production ramp-up issues, the availability of Sony and Samsung made in connection with 8th generation application software for new products, the effective manage- production capacity for amorphous TFT LCD panel produc- ment of purchase commitments and inventory levels in line with tion, following investments in 7th generation production anticipated product demand, the availability of products in capacity, at S-LCD, a joint venture of the two companies. appropriate quantities and costs to meet anticipated demand, The accumulated total amount of the investment in S-LCD by and the risk that new products and services may have quality Sony and Samsung for 7th and 8th generation production or other defects in the early stages of introduction. Accordingly, capacity is approximately 400 billion yen (approximately 50 Sony cannot determine in advance the ultimate effect that new percent of which was contributed by Sony). Sony may not be

73 able to recover these capital expenditures or investments, in respectively. Sony anticipates the recording of approximately part or in full, or the recovery of these capital expenditures or 20 billion yen of restructuring charges for the fiscal year investments may take longer than expected. As a result, the ending March 31, 2009. carrying value of the related assets may be subject to an Restructuring charges are recorded in cost of sales, selling, impairment charge, which could adversely affect Sony’s general and administrative expenses and loss on sale, disposal mid-term profitability. (Refer to “Electronics” section of “Trend or impairment of assets, net and thus decrease Sony’s consoli- Information.”) dated operating and net income. Moreover, due to internal or external factors, the improved efficiencies and projected cost Sony’s utilization of joint ventures and alliances within savings may not be realized as scheduled and, even if those strategic business areas may not be successful. benefits are realized, Sony may not be able to achieve the level During the last several years Sony has moved increasingly of profitability expected due to the worsening of market toward the establishment of joint ventures and strategic conditions beyond expectations. Such possible internal factors alliances in order to supplement or replace functions that could include, for example, a decision to implement new were previously performed by divisions of Sony Corporation restructuring initiatives not already planned or a decision to or wholly-owned subsidiaries. increase research and development outlays or other expendi- Sony currently has investments in several joint ventures, tures beyond currently projected levels, either of which might including Sony Ericsson, S-LCD and SONY BMG. In February increase total costs. Possible external factors could include, for 2008, Sony and Sharp signed a non-binding memorandum of example, increased burdens from regional labor regulations intent to establish a joint venture to manufacture 10th generation and labor union agreements that could prevent Sony from amorphous TFT LCD panels and modules. If Sony and its executing its restructuring initiatives as planned. Therefore, partners are not able to reach their common financial objectives such reorganizations may not result in improved efficiency, successfully, Sony’s financial performance as a whole may be increased ability to respond to market changes or the realloca- adversely affected. Sony’s financial performance may also be tion of resources to more profitable activities. The inability to adversely affected temporarily or in the short- and medium-term fully and successfully implement restructuring programs may during the investment period of alliances, joint ventures and cause Sony to have insufficient financial resources to carry out strategic investments even if Sony and its partners remain on its research and development plans and to invest in targeted course to achieve their common objectives. growth areas for its businesses. Sony may not adequately manage the growing number of joint ventures and strategic alliances, and, in particular, may not Foreign exchange rate fluctuations can affect financial deal effectively with the legal and cultural differences that can results because a large portion of Sony’s sales and assets arise in such relationships or changes in the relationships with or are denominated in currencies other than the yen. financial status of partners. In addition, by participating in joint Sony’s consolidated statements of income are prepared from ventures or strategic alliances, Sony may encounter conflicts of the local currency-denominated financial results of Sony interest, may not maintain sufficient control over the joint venture Corporation’s subsidiaries around the world, which are then or strategic alliance, including over cash flow, and may be faced translated into yen at the monthly average currency exchange with an increased risk of the loss of proprietary technology or rate. Sony’s consolidated balance sheets are prepared using know-how. Sony’s reputation could be harmed by the actions or the local currency-denominated assets and liabilities of Sony activities of a joint venture that uses the Sony brand. Corporation’s subsidiaries around the world, which are translated into yen at the market exchange rate at the end of Sony’s business reorganization efforts are costly and may each financial period. A large proportion of Sony’s consoli- not attain their objectives. dated financial results, assets and liabilities is accounted for Sony implemented restructuring initiatives in relation to its in currencies other than the Japanese yen. For example, only mid-term corporate strategy for the three fiscal years ended 23.2 percent of Sony’s sales and operating revenue in the March 31, 2008 that focused on the reduction of the number fiscal year ended March 31, 2008 were originally recorded in of business categories and product models, the rationalization Japan. Accordingly, Sony’s consolidated financial results and of manufacturing sites, streamlining of administrative and the assets and liabilities in Sony’s businesses that operate headquarter functions, and the sale of non-core assets. In internationally, principally in its Electronics, Game and association with these restructuring initiatives, 38.8 billion yen Pictures segments, may be materially affected by changes in and 47.3 billion yen of restructuring charges were recorded the exchange rates of foreign currencies when translating into for the fiscal years ended March 31, 2007 and 2008, Japanese yen. Foreign exchange rate fluctuations may have a

74 negative impact on Sony’s results in the future, especially if is otherwise recorded at a higher value than net realizable value. the yen strengthens significantly against the U.S. dollar, the Such inventory adjustments have had and, if Sony is not euro or other foreign currencies. successful in managing its inventory in the future, will have a material adverse effect on Sony’s operating income and Foreign exchange fluctuations can affect Sony’s results of profitability. operations due to sales and expenses in different currencies. Exchange rate fluctuations affect Sony’s operating profitability Sony’s sales and profitability are sensitive to economic and because many of Sony’s products are sold in countries other other trends in Sony’s major markets. than the ones in which they were manufactured. The concen- A consumer’s decision to purchase products such as those tration of research and development, administrative functions offered by Sony is discretionary to a very significant extent. and manufacturing activities within the Electronics segment in Accordingly, weakening economic conditions or outlook can Japan, makes this segment particularly sensitive to the yen’s reduce consumption in any of Sony’s major markets, causing appreciation as the ratio of yen-denominated costs to total material declines in Sony’s sales and operating income. In the costs is higher than the ratio of yen-denominated revenue to fiscal year ended March 31, 2008, 23.2 percent, 25.1 percent total revenue. Volatile mid- to long-term changes in exchange and 26.2 percent of Sony’s sales and operating revenue were rate levels may interfere with Sony’s global allocation of attributable to Japan, the U.S. and Europe, respectively. If resources and hinder Sony’s ability to engage in research and economic conditions in Japan, the U.S. or Europe deterio- development, procurement, production, logistics, and sales rate, or if the effects of international political and military activities in a manner that is profitable after the effect of such instability or natural disasters depress consumer confidence, exchange rate changes. Sony’s short- to mid-term sales and profitability may be Although Sony hedges most of the net foreign currency significantly adversely affected. In addition, since Sony’s exposure resulting from import and export transactions shortly sales in Other Areas are growing, its sales and profitability before they are projected to occur, such hedging activity cannot may also be affected by future political, economic and entirely eliminate the risk of adverse exchange rate fluctuations. military uncertainties surrounding those areas.

Sony must efficiently manage its procurement of parts, Sony is subject to the risks of operations in different the market conditions for which are volatile, and control countries. its inventory of products and parts, the demand for which Most of Sony’s activities are conducted outside of Japan, and is volatile. international operations bring challenges. For example, in the In the Electronics and Game segments, Sony places orders for Electronics and Game segments, production and procurement components, determines production and plans inventory in of products and parts in Asian countries such as China are advance based on its forecast of consumer demand, which is increasing, and this creates a risk that production and shipping highly volatile and difficult to predict. Sony consumes a tremen- of products and parts could be interrupted by a natural dous volume of parts and components such as semiconductors disaster or pandemic in the region, similar to the spread of and LCD panels for its products. Consequently, market fluctua- Severe Acute Respiratory Syndrome (“SARS”). In addition, tions may cause a shortage of parts and components, and may production of electronics products in China and other Asian affect Sony’s production or the cost of goods sold, as could countries increases the time necessary to supply products to price fluctuations of the underlying raw or basic materials. In the Europe and the U.S., which can make it more difficult to meet past, for example, Sony has experienced both a shortage of changing customer demand. Further, Sony may encounter certain semiconductors, which resulted in Sony’s inability to difficulty in planning and managing operations due to unfavor- meet demand for its PCs and audio visual products, as well able political or economic factors, such as cultural and reli- as a surplus in certain other semiconductors that resulted in the gious conflicts, non-compliance with expected business recognition of losses when semiconductor prices fell. conduct, unexpected legal or regulatory changes such as Sony’s profitability may also be adversely affected by inventory foreign exchange, import or export controls, nationalization of adjustments that, as a result of efforts to reduce inventory by assets or restrictions on the repatriation of returns from foreign adjusting production or by reducing the price of finished goods, investments and the lack of adequate infrastructure. As will lead to an increase in the ratio of cost of sales to sales. Sony emerging markets are becoming increasingly important in our writes down the value of its inventory when components or operations, the above mentioned risks are also expected to products have become obsolete, when inventory exceeds the grow and could have an adverse impact on our financial amount expected to be used, or when the value of the inventory condition and operating results.

75 The large-scale investment required during the development The sales and profitability of Sony’s Game segment and introductory period of a new gaming platform may not depends on the penetration of its gaming platforms, be fully recovered. which is sensitive to software line-ups, including software Within the Game segment, developing and providing products produced by third parties. that maintain competitiveness over an extended life-cycle In the Game segment, the penetration of gaming platforms is a requires large-scale investment relating to research and develop- significant factor driving sales and profitability, which may be ment, particularly during the development and introductory affected by the ability to provide customers with sufficient period of a new platform. In the past, large-scale investment software line-ups, including software produced by third parties. relating to capital expenditures and research and development Software line-ups affect not only software sales and profitability, for the manufacture of key components, including semiconduc- as in many other content businesses, but also affect the tors supplied for PS3, was also recorded within the Electronics penetration of gaming platforms, which can affect hardware segment. Moreover, it is particularly important in the Game sales and profitability. segment that these products are provided to consumers at competitive prices to ensure the favorable market penetration of Operating results for Sony’s Pictures segment vary according the platform. Should the platform fail to achieve such favorable to the cost of productions, customer acceptance, timing of market penetration, there is a risk that this investment, or a part releases or syndication sales, and competing products. thereof, will not be recouped, resulting in a significant negative Operating results for the Pictures segment’s motion picture impact on Sony’s profitability. In addition, even if Sony is able to and television productions can materially fluctuate depending sufficiently recoup its investment, significant negative impact on primarily upon the cost of such productions and acceptance Sony’s operating results could occur during the introductory of such productions by the public, both of which are difficult period of the platform. Further, even if the platform is ultimately to predict, as well as the timing of new motion picture successful, it may take longer than expected to recoup the releases and the syndication of television productions. In investment, resulting in a negative impact on Sony’s profitability. addition, the commercial success of the Pictures segment’s An example of such a significant negative impact during the motion picture and television productions depends upon the introductory period of a platform are PS3-related charges that public’s acceptance of other competing productions, and the resulted in losses of 232.3 billion yen and 124.5 billion yen within availability of alternative forms of entertainment and leisure the Game segment for the fiscal years ended March 31, 2007 activities. and 2008, respectively. These losses arose from the strategic pricing of PS3 hardware at points lower than its production cost. Sony’s Pictures segment is subject to labor interruption. (Refer to “Electronics” section of “Trend Information” and “Game” The Pictures segment is dependent upon highly specialized section of “Operating Performance by Business Segment” at union members who are essential to the production of motion “Operating Results.”) pictures and television programs. A strike by one or more of these unions could delay or halt production activities. Such a Sony’s Game and Electronics segments are particularly delay or halt, depending on the length of time involved, could sensitive to year-end holiday season demand. cause delay or interruption in the release of new motion pictures Since the Game segment offers a relatively small range of and television programs and thereby could adversely affect hardware products (including PS2, PSP® and PS3) and a revenues and cash flows in the Pictures segment. significant portion of overall demand is weighted towards the year-end holiday season, factors such as changes in the Sony’s Financial Services segment operates in highly competitive environment, changes in market conditions, regulated industries and new rules, regulations and delays in the release of highly anticipated software titles and regulatory initiatives by government authorities could insufficient supply of hardware during the year-end holiday adversely affect the flexibility of its business operation. season can negatively impact the financial performance of Sony’s Financial Services segment operates in industries subject both the Game and the Electronics segments. The Electronics to comprehensive regulation and supervision, including the segment is also dependent upon year-end holiday season Japanese insurance and banking industries. Future develop- demand and, to a lesser extent than the Game segment, is ments or changes in laws, regulations or policies and their susceptible to weak sales as well as supply shortages that effects are unpredictable and could lead to increased compli- may prevent it from meeting demand for its products during ance expenses or limitations on operations. For example, this season. Japan’s Financial Services Agency (“FSA”) has recently

76 strengthened its regulatory supervision relating to non-payment The investment portfolio within Sony’s Financial Services of insurance claims. The FSA requires all life and non-life segment exposes Sony to a number of additional risks other insurance companies to perform and report on the results of a than the risks related to declines in the value of equity systematic review of non-payment of insurance claims. Based securities and changes in interest rates. on the results of such review, the FSA has issued business In Sony’s Financial Services segment, generating stable invest- improvement orders and other administrative sanctions to ment income is important to our operations and we invest in a non-life insurance companies, and it is considering issuing variety of asset classes, including Japanese government and certain administrative sanctions to life insurance companies. corporate bonds, foreign government and corporate bonds, Compliance with multiple regulatory regimes is challenging and, Japanese stocks, loans and real estate. In addition to risks due to our common branding strategy, compliance failures in related to changes in interest rates and the value of equity any of our businesses within our Financial Services segment securities, the Financial Services segment’s investment portfolio could have a negative impact on the overall business reputation exposes Sony to a variety of other risks, including foreign of the Financial Services segment. exchange risk, credit risk and real estate investment risk, any or all of which may have an adverse effect on the financial condi- Declines in the value of equity securities could have a tion and results of operations of our Financial Services segment. material adverse impact on the financial results of Sony’s Financial Services segment. Differences between actual and assumed policy benefits In the Financial Services segment, Sony Life holds both convert- and claims may require Sony’s Financial Services segment ible bonds and equity securities. The convertible bonds are to increase policy reserves in the future. required to be marked to market at the end of each accounting Sony’s life insurance and non-life insurance businesses establish period on the income statement under U.S. generally accepted policy reserves for future benefits and claims based on regula- accounting principles. Declines in equity prices, such as those tory guidelines and estimates of future payment obligations due to recent problems in the United States residential mortgage made by qualified actuaries. These reserves are calculated market that have resulted in large fluctuations in global equity based on many assumptions and estimates, including the prices, may result in valuation losses on the convertible bonds frequency and timing of the event covered by the policy, the as well as impairment losses on the equity securities held by amount of benefits or claims to be paid and the investment Sony Life. returns on the assets these businesses purchase with the premiums received. These assumptions and estimates are Changes in interest rates may significantly affect Sony’s inherently uncertain, and we cannot determine with precision the Financial Services segment’s financial condition and results. ultimate amounts that we will be required to pay for, or the We engage in ALM in an effort to manage the investment timing of payment of, actual benefits and claims or whether the assets within the Financial Services segment in a manner assets supporting the policy liabilities will grow at the level we appropriate to our liabilities, which arise from both the insur- assume prior to the payment of benefits or claims. The fre- ance policies we underwrite in both our life insurance and quency and timing of the event covered by the policy and the non-life insurance businesses and the deposits, borrowings amount of benefits or claims to be paid are subject to a number and other liabilities in our banking business. ALM considers of risks and uncertainties, many of which are outside of our the long-term balance between assets and liabilities in an control, including: effort to ensure stable returns. Any failure to appropriately conduct our ALM activities, or any significant changes in • changes in trends underlying our assumptions and estimates, market conditions beyond what our ALM could reasonably such as mortality and morbidity rates; address, could have a material adverse effect on the financial • the availability of sufficient reliable data and our ability to condition and results of operations of our Financial Services correctly analyze the data; segment. In particular, because Sony Life’s liabilities to • our selection and application of appropriate pricing and rating policyholders generally have longer durations than its invest- techniques; and ment assets, lower interest rates tend to reduce yields on • changes in legal standards, claim settlement practices and Sony Life’s investment portfolio while premiums remain medical care expenses. generally unchanged on outstanding policies. As a result, Sony Life’s profitability and long-term ability to meet policy If the actual experience of our insurance businesses is less commitments could be materially and adversely affected. favorable than our assumptions or estimates, our policy reserves

77 may be inadequate. In addition, any changes in regulatory SONY BMG may be subject to renewed judicial review by guidelines or standards with respect to the required level of the European Court. policy reserves may require that we establish policy reserves In August 2004, Sony combined its recorded music business based on more stringent assumptions, estimates or actuarial outside of Japan with the recorded music business of calculations. Such events could result in a need to increase Bertelsmann AG, forming SONY BMG, after receiving antitrust provisions for policy reserves, which may have a significant approval from, among others, the European Commission. On adverse effect on the financial condition and results of December 3, 2004, Impala, an international association of operations of the Financial Services segment. 2,500 independent recorded music companies, appealed the European Commission’s clearance decision to the EU Court Sony’s music business, including its investment in SONY of First Instance (“CFI”). On July 13, 2006, the CFI annulled BMG, and the Pictures segment are subject to digital piracy, the Commission’s decision to allow the merger to go forward, which may become increasingly prevalent with the develop- requiring the Commission to re-examine the transaction. In ment of new technologies. October 2006, Sony Corporation of America and Bertelsmann The development of digital technology has created new risks AG filed an appeal of the CFI’s judgment to the Court of Justice with respect to Sony’s ability to protect its copyrights in its of the European Communities (“ECJ”). The ECJ is scheduled to music business, including its investment in SONY BMG, as well render judgment on that appeal on July 10, 2008. On October as in the Pictures segment. Advances in technology that enable 3, 2007, following its re-examination of the merger, the the transfer and downloading of digital audio and video files Commission rendered a second clearance decision reaffirm- from the Internet without authorization from the owners of rights ing the conclusion reached in 2004 that the transaction raised to such content threaten the conventional copyright-based no competition concerns. That decision may be appealed to business model by making it easier to create and redistribute the CFI until June 26, 2008 and on June 16, 2008 Impala unauthorized audio and video files. These technological announced it had filed an appeal. If the ECJ were to affirm the advances include new digital devices such as hard disk drive CFI’s judgment annulling the Commission’s original clearance video and audio recorders, CD, DVD, and Blu-ray Disc™ decision and the CFI (and upon a further appeal, the ECJ) were recorders and peer-to-peer digital distribution services. Such to annul that second clearance decision, then, should the unauthorized distribution has adversely affected sales and Commission following a further investigation reverse the operating income within the music business, and returns from position it had taken in 2004 and 2007, the previously com- Sony’s investment in SONY BMG, and threatens to adversely bined company could be forced to unwind the merger in whole affect sales and operating income in the Pictures segment. As a or in part. In such circumstance, Sony might incur significant result, Sony has incurred and will continue to incur expenses to costs and might not be able to achieve its objectives with develop new services for the authorized digital distribution of respect to its recorded music business. music, movies and television programs and to combat unauthorized digital distribution of its copyrighted content. These Sony may not be successful in implementing its hardware, initiatives will increase Sony’s near-term expenses and may not software and content integration strategy. achieve their intended result. Sony believes that utilizing broadband networks to facilitate the integration of hardware, software and content is essential for Sony’s music business and Sony’s investment in SONY differentiating itself in the marketplace. Sony also believes that BMG are dependent on establishing new artists, and this strategy will eventually lead to consistent revenue streams. together with Sony’s Pictures segment are subject to However, this strategy depends on the development (both inside increases in talent-related costs. and outside of Sony) of certain network technologies, coordina- The success of Sony’s music business and Sony’s investment tion among Sony’s various business units, and the standardiza- in SONY BMG is highly dependent on establishing artists that tion of technological and interface specifications across appeal to customers, and the competition with other enter- business units and within industries. If Sony is not successful in tainment companies for such talent is intense. If the music implementing this strategy, it could adversely affect Sony’s business and SONY BMG are unable to find and establish competitiveness and profitability. new talented artists, sales, operating income and the returns from Sony’s investment in SONY BMG may be adversely Sony’s physical facilities and information systems are affected. In addition, with respect to the music business and subject to damage as a result of disasters, outages, the Pictures segment, as well as SONY BMG, Sony has malfeasance or similar events. experienced and may continue to experience significant Sony’s headquarters, some of Sony’s major data centers and increases in talent-related spending. many of Sony’s most advanced device manufacturing facilities,

78 including those for semiconductors, are located in Japan, Sony is subject to financial and reputational risks due to where the possibility of disaster or damage from earthquakes product quality and liability issues. is generally higher than in other parts of the world. In addition, Sony products, such as software and electronic devices Sony’s offices and facilities, including those used for research including semiconductors are becoming increasingly sophisti- and development, material procurement, manufacturing, cated and complicated as rapid advancements in technologies motion picture and television program production, logistics, occur, and as demand increases for digital equipment. At the sales and services are located throughout the world and are same time, product quality and liability issues present greater subject to possible destruction, temporary stoppage or risks. Sony’s efforts to manage the rapid advancements in disruption as a result of any number of unexpected events. If technologies and increased demand, as well as to control any of these facilities or offices were to experience a significant product quality, may not be successful. If they are not, Sony loss as a result of any of the above events, it could disrupt may incur expenses in connection with, for example, product Sony’s operations, delay production, shipments and recording recalls, after-sales service and lawsuits, and Sony’s brand image revenue, and result in large expenses to repair or replace these and reputation as a producer of high-quality products may facilities or offices. In addition, as network and information suffer. These issues are not only relevant to the final Sony systems have become increasingly important to Sony’s products that are sold directly to customers but also to the final operating activities, network and information system shut- products of other companies that are equipped with Sony’s downs caused by unforeseen events such as power outages, components, such as the semiconductors mentioned above. An disasters, terrorist attacks, hardware or software defects, example of these issues is the recording of a 51.2 billion yen computer viruses and computer hacking pose increasing risks. provision during the fiscal year ended March 31, 2007 that Although Sony is developing counter-measures, such events related to the recalls by Dell Inc., Apple Inc. and Lenovo, Inc. of could result in the disruption of Sony’s operations, delay notebook computer battery packs that use lithium-ion battery production, shipments and recognition of revenue, and result in cells manufactured by Sony as well as the subsequent global large expenditures necessary to repair or replace such network replacement program initiated by Sony for certain notebook information systems. computer battery packs used by Sony and several other notebook computer manufacturers that use lithium-ion battery Sony’s reputation and business could be harmed and Sony cells manufactured by Sony. A portion of the provision totaling could be subject to legal claims if there is loss, disclosure 15.7 billion yen was reversed in the current fiscal year based on or misappropriation of our customers’ personal information the actual results of recalls and replacements as compared to or other breaches of our security. our original estimates. (Refer to “Performance by Product Sony makes extensive use of online services and centralized Category” for “Electronics” within “Operating Results.”) data processing, including through third-party service providers, particularly in the Financial Services segment. The secure Sony may be adversely affected by its employee benefit maintenance and transmission of confidential information is a obligations. critical element of Sony’s operations. Sony’s customers’ Sony recognizes the unfunded pension obligation as consisting of personal information may be lost or disclosed or taken without the (i) Projected Benefit Obligation (“PBO”) less (ii) the fair value of customer’s consent. In addition, Sony’s information technology pension plan assets. Actuarial gains and losses are included in and other systems, or those of service providers or strategic pension expenses in a systematic manner over employees’ business partners, may be compromised. If we lose custom- average remaining service periods in a manner consistent with ers’ personal information or if a malicious third party were to FAS No. 87, “Employers’ Accounting for Pensions,” FAS No. 158, penetrate the network security of Sony, Sony’s business “Employers’ Accounting for Defined Benefit Pension and Other partners or service providers to misappropriate or acquire Postretirement Plans” and the related amendments to those customers’ personal information, or if there were an advertent standards. Any decrease of the pension asset value due to low or inadvertent loss, disclosure or misappropriation of custom- returns from investments or increases in the PBO due to a lower ers’ personal information by Sony employees, Sony’s reputa- discount rate, increases in rates of compensation and certain tion could be damaged and Sony could be subject to lawsuits other actuarial assumptions would increase the unfunded pension or claims. obligations, and could, subject to the provisions of FAS No. 87, Any loss, disclosure or misappropriation of customers’ result in an increase in pension expenses recorded as cost of personal information or other breach of our security would sales or as a selling, general and administrative expense. (Refer to likely have a serious impact on our reputation and could Note 14 of Notes to Consolidated Financial Statements for more have a significant adverse effect on our businesses and our information regarding Sony’s pension and severance plans. Also results of operations. refer to “Critical Accounting Policies.”)

79 Most pension assets and liabilities recognized on Sony’s regulatory proceedings could have a material adverse effect on consolidated balance sheets relate to Japanese plans, which are Sony’s business, results of operations, financial condition, cash subject to the Japanese Defined Benefit Corporate Pension Plan flows and reputation. Act pursuant to which Sony is required to meet certain financial criteria including periodic actuarial revaluation and annual settle- Sony may be accused of infringing others’ intellectual ment of gains or losses of the plan. In the eventuality that the property rights and be liable for significant damages. actuarial reserve required by law exceeds the fair value of pension Sony’s products incorporate a wide variety of technologies. assets, Sony may be required to make an additional contribution Claims have been and could be asserted against Sony that such to the plan, which would reduce consolidated cash flow. Similarly, technology infringes the intellectual property owned by others. if Sony is required to make an additional contribution to each Such claims might require us to enter into settlement or foreign plan to meet any funding requirements in accordance with license agreements, to pay significant damage awards, and/or local laws and regulations in each country, Sony’s consolidated to face a temporary or permanent injunction prohibiting Sony cash flow might be adversely affected. from marketing or selling certain of its products, which could have a material adverse effect on Sony’s business, results of Changes in Sony’s tax rates or exposure to additional operations, financial condition, and reputation. tax liabilities could adversely affect its earnings and financial condition. Sony is dependent upon certain intellectual property Sony is subject to income taxes in Japan and numerous other rights of others, and Sony may not be able to continue to jurisdictions. Significant judgment is required in determining its obtain necessary licenses to employ technology covered worldwide provision for income taxes. In the ordinary course of by such rights our business, there are many transactions, including intercom- Many of Sony’s products are designed under the license of pany charges, and calculations where the ultimate tax determi- patents and other intellectual property rights from third parties nation is uncertain. Also, Sony’s future effective tax rates could who have developed technologies that are protected by such be unfavorably affected by changes in the mix of earnings in rights. Based upon past experience and industry practice, Sony countries with differing statutory rates. believes that it will be able to obtain or renew licenses relating to Further, Sony is subject to continuous examination of its various intellectual properties useful in its business that it needs income tax returns by tax authorities. As a result, Sony regularly in the future; however, such licenses may not be available at all assesses the likelihood of adverse outcomes resulting from or on acceptable terms, and Sony may need to redesign or these examinations to determine the adequacy of its provision discontinue marketing or selling such products as a result. for income taxes. However, there can be no assurance that the outcomes of these examinations will not have an adverse effect Increased reliance on external suppliers may increase on Sony’s operating results and financial condition. financial, reputational and other risks to Sony. In addition, if Sony is unable to generate sufficient future With the increasing necessity of pursuing quick business taxable income in certain jurisdictions, or if there is a significant development and high operating efficiency with limited mana- change in the actual effective tax rates or the time period within gerial resources, Sony increasingly procures from third-party which the underlying temporary differences become taxable or suppliers components (including LCD panels for televisions), deductible, Sony could be required to reduce the amount of its and technologies (such as operating systems for PCs). Sony deferred tax assets or increase its valuation allowances against has also become more reliant upon the services of third-party its deferred tax assets, resulting in an increase in its effective tax original equipment and design manufacturers in the Electronics rate and an adverse impact on future operating results. and Game segments. In addition, Sony consigns to external suppliers extensive activities including procurement, logistics, Sony’s business could suffer as a result of adverse outcomes sales and other services. Reliance on outside sources of current or future litigation and regulatory actions. increases the chance that Sony will be unable to prevent Sony faces the risk of litigation and regulatory proceedings in products from incorporating defective or inferior third-party connection with its operations. Lawsuits, including regulatory technology or components. Products with such defects can actions, may seek recovery of very large indeterminate amounts adversely affect Sony’s consolidated sales and its reputation or limit Sony’s operations, and the possibility that they may arise for quality products. This reliance on external suppliers may and their magnitude may remain unknown for substantial also expose Sony to the effects of insufficient compliance with periods of time. A substantial legal liability or adverse regulatory applicable regulations or infringement of third-party intellectual outcome and the substantial cost to defend the litigation or property rights by external suppliers as well as certain risks,

80 such as accidents or natural disasters, to which an external could be taken that could affect the cost and availability of supplier might be exposed. certain chemicals, and users may have to shift to the use of more expensive and/or less effective substitutes. The various Sony is subject to environmental and occupational health obligations under REACH are to be phased in over a period and safety regulations that can increase the costs of of time, and we will continue to evaluate the potential impact operations or limit its activities. of these regulations, including whether REACH could directly Sony is subject to a broad range of environmental and occupa- or indirectly increase our costs or restrict our activities, which tional health and safety laws and regulations, including laws and could have an adverse impact on our results of operations regulations relating to air pollution, water pollution, the manage- and financial condition. ment, elimination or reduction of the use of hazardous sub- Sony has established an internal risk management system in stances, decreases in the level of standby power of certain response to two directives enacted by the EU: The Restriction of products, waste management, recycling of products, batteries Hazardous Substances Directive (“RoHS”) and the Waste and packaging materials, site remediation and worker and Electrical and Electronic Equipment Directive (“WEEE”). Similar consumer health and safety. These regulations could become regulations are being formulated in other parts of the world, more stringent or additional regulations could be adopted in the including China. We may incur substantial costs in complying future, which could cause us to incur additional compliance with other similar programs that might be enacted outside costs or limit our activities. Further, a failure to comply with Europe in the future. applicable environmental or health and safety laws could result in fines, penalties, legal judgments or other costs or remediation American Depositary Shareholders have fewer rights than obligations. Such a finding of noncompliance could also injure shareholders and may not be able to enforce judgments our brand image. Such events could adversely affect our based on U.S. securities laws. financial performance. The rights of shareholders under Japanese law to take We monitor and evaluate new environmental and health and actions, including voting their shares, receiving dividends and safety requirements that may affect our operations. Sony sees distributions, bringing derivative actions, examining Sony’s issues related to climate change as a potential risk if we do not accounting books and records and exercising appraisal rights respond or undertake environmental activities appropriately. are available only to shareholders of record. Because the Sony recognizes that climate change issues could possibly lead depositary, through its custodian agents, is the record holder to an increase in additional costs due to new regulations of the shares underlying the American Depositary Shares including carbon taxes and governmental policies regarding (“ADSs”), only the depositary can exercise those rights in energy efficiency for electronics products. A new regulation connection with the deposited shares. The depositary will regarding logistics has already been introduced in Japan and make efforts to vote the shares underlying ADSs in accor- other countries may introduce similar regulations in the near dance with the instructions of ADS holders and will pay the future. In addition, in the event that we are unable to respond dividends and distributions collected from Sony. However, appropriately to consumers’ growing concerns with issues ADS holders will not be able to bring a derivative action, related to climate change, there is a risk that Sony’s reputation examine Sony’s accounting books and records, or exercise could be harmed and that consumers may choose to purchase appraisal rights through the depositary. products from companies other than Sony. Sony Corporation is incorporated in Japan with limited The EU’s Registration, Evaluation, Authorisation and liability. A majority of our directors and corporate executive Restriction of Chemicals program (“REACH”) came into effect officers are non U.S. residents, and a substantial portion of the as of June 2007. In general, REACH requires manufacturers, assets of Sony Corporation and the assets of our directors and users and importers of a broad range of chemical substances corporate executive officers are located outside the U.S. As a to register for these chemicals and uses of chemicals up and result, it may be more difficult for investors to enforce against down the supply chain and perform a range of tests and Sony Corporation or such persons the judgments obtained in assessments on those substances, making the results U.S. courts predicated upon the civil liability provisions of the available to the public and the EU regulators. For certain federal and state securities laws of the U.S. or judgments types of chemical substances, manufacturers, users and obtained in other courts outside Japan. There is doubt as to importers of the chemical substance are required to convey the enforceability in Japanese courts, in original actions or in the information about the designated substance in its supply actions for enforcement of judgments of U.S. courts, of civil chain. Going forward, as registrations and test data are liabilities predicated solely upon the federal and state securities processed and evaluated under the REACH program, actions laws of the U.S.

81 CRITICAL ACCOUNTING POLICIES decline is temporary in nature due to the existence of positive factors that overcome the duration or magnitude of the decline. The preparation of the consolidated financial statements in On the other hand, there may be cases where impairment conformity with U.S. GAAP requires management to make losses are recognized when the decline in the fair value of the estimates and assumptions that affect the reported amounts of security is less than 20 percent or such decline has not existed assets and liabilities, disclosure of contingent assets and for an extended period of time, as a result of considering specific liabilities at the date of the financial statements and the reported factors that may indicate the decline in the fair value is other- amounts of revenues and expenses during the reporting period. than-temporary. On an ongoing basis, Sony evaluates its estimates which are The assessment of whether a decline in the value of an based on historical experience and on various other assump- investment is other-than-temporary is often subjective in nature tions that are believed to be reasonable under the circum- and involves certain assumptions and estimates concerning the stances. The results of these evaluations form the basis for expected operating results, business plans and future cash making judgments about the carrying values of assets and flows of the issuer of the security. Accordingly, it is possible that liabilities and the reported amounts of expenses that are not investments in Sony’s portfolio that have had a decline in value readily apparent from other sources. Actual results may differ that Sony currently believes to be temporary may be determined from these estimates under different assumptions. Sony to be other-than-temporary in the future based on Sony’s considers an accounting policy to be critical if it is important evaluation of additional information such as continued poor to its financial condition and results, and requires significant operating results, future broad declines in value of worldwide judgment and estimates on the part of management in its equity markets and the effect of worldwide interest rate fluctua- application. Sony believes that the following represent its critical tions. As a result, unrealized losses recorded for investments accounting policies. may be recognized and reduce income in future periods.

■ Investments ■ Valuation of inventory Sony’s investments are comprised of debt and equity securities Sony values its inventory based on the lower of cost or market. accounted for under both the cost and equity method of Sony writes down inventory in an amount equal to the differ- accounting. If it has been determined that an investment has ence between the cost of the inventory and the net realizable sustained an other-than-temporary decline in its value, the value—i.e., less reasonably predictable costs of completion investment is written down to its fair value by a charge to and disposal. However, if actual market conditions are less earnings. Sony regularly evaluates its investment portfolio to favorable than projected and further price decreases are identify other-than-temporary impairments of individual securi- needed, additional inventory write-downs may be required. ties. Factors that are considered by Sony in determining whether Additionally, as Sony evaluates its manufacturing cost in yen an other-than-temporary decline in value has occurred include: while it sets its sales prices in euros and U.S. dollars for some the length of time and extent to which the market value of the products, Sony’s results may be negatively impacted by future security has been less than its original cost, the financial exchange rate fluctuations. condition, operating results, business plans and estimated future cash flows of the issuer of the security, other specific factors ■ Impairment of Long-Lived assets affecting the market value, deterioration of credit condition of the Sony reviews the recoverability of the carrying value of its issuers, sovereign risk, and whether or not Sony is able to retain long-lived assets held and used and long-lived assets to be the investment for a period of time sufficient to allow for the disposed of whenever events or changes in circumstances anticipated recovery in market value. indicate that the carrying value of the assets may not be In evaluating the factors for available-for-sale securities whose recoverable. This review is performed using estimates of future fair values are readily determinable, Sony presumes a decline in cash flows by product category (e.g. CRT TV display) or entity value to be other-than-temporary if the fair value of the security (e.g. entertainment complex in the U.S.). If the carrying value of is 20 percent or more below its original cost for an extended the asset is considered impaired, an impairment charge is period of time (generally for a period of up to six months). This recorded for the amount by which the carrying value of the asset criterion is employed as a threshold to identify securities that exceeds its fair value. Fair value is determined using the present may have a decline in value that is other-than-temporary. The value of estimated net cash flows or comparable market values. presumption of an other-than-temporary impairment in such Management believes that the estimates of future cash flows cases may be overcome if there is evidence to support that the and fair value are reasonable; however, changes in estimates

82 resulting in lower future cash flows and fair value due to unfore- below the operating segments) with its carrying amount, seen changes in business assumptions could negatively affect including goodwill. If the fair value of a reporting unit exceeds its the valuations of those long-lived assets. carrying amount, goodwill of the reporting unit is considered not During the fiscal year ended March 31, 2006, Sony recorded impaired and the second step of the impairment test is unnec- impairment charges for long-lived assets totaling 59,762 million essary. If the carrying amount of a reporting unit exceeds its fair yen, which included 25,506 million yen for the impairment of value, the second step of the goodwill impairment test is long-lived assets of CRT TV display manufacturing facilities to be performed to measure the amount of impairment loss, if any. held and used in the U.S. in connection with certain restructur- The second step of the goodwill impairment test compares the ing activities in the Electronics segment. Fair value of these implied fair value of the reporting unit’s goodwill with the carrying assets was determined using estimated future discounted cash amount of that goodwill. If the carrying amount of the reporting flows which were based on the best information available. The unit’s goodwill exceeds the implied fair value of that goodwill, an impairment charge also included 8,522 million yen for the impairment loss is recognized immediately in an amount equal impairment of long-lived assets of Sony’s entertainment complex to that excess. The implied fair value of goodwill is determined in to be held for sale in the U.S. in connection with restructuring the same manner as the amount of goodwill recognized in a activities of non-core businesses in All Other. The impairment business combination. That is, the fair value of the reporting unit charge was based on the negotiated sales price of the complex. is allocated to all of the assets and liabilities of that unit (includ- During the fiscal year ended March 31, 2007, Sony recorded ing any unrecognized intangible assets) as if the reporting unit impairment charges for long-lived assets totaling 16,762 million had been acquired in a business combination and the fair value yen, which included 3,572 million yen for the impairment of of the reporting unit was the purchase price paid to acquire the long-lived assets of CRT TV display manufacturing facilities to be reporting unit. Other intangible assets are tested for impairment held and used in the U.S., East Asia and Southeast Asia in by comparing the fair value of the intangible asset with its connection with certain restructuring activities in the Electronics carrying value. If the carrying value of the intangible asset segment. Fair value of these assets was determined using exceeds its fair value, an impairment loss is recognized in an estimated future discounted cash flows which were based on amount equal to that excess. the best information available. Determining the fair value of a reporting unit under the first During the fiscal year ended March 31, 2008, Sony recorded step of the goodwill impairment test and determining the fair impairment charges for long-lived assets totaling 19,413 million value of individual assets and liabilities of a reporting unit yen, which included 6,457 million for impairment of long-lived (including unrecognized intangible assets) under the second assets of LCD rear-projection television manufacturing facilities step of the goodwill impairment test is judgmental in nature and to be held and used worldwide in connection with certain often involves the use of significant estimates and assumptions. restructuring activities in the Electronics segment. Fair value of Similarly, estimates and assumptions are used in determining these assets was determined using estimated future discounted the fair value of other intangible assets. These estimates and cash flows which were based on the best information available. assumptions could significantly impact whether or not an impairment charge is recognized as well as the magnitude of ■ Goodwill and Other Intangible Assets any such charge. In its impairment review, Sony performs Goodwill and certain other intangible assets that are determined internal valuation analyses or utilizes third-party valuations when to have an indefinite life are not amortized and are tested management believes it to be appropriate, and considers other annually for impairment during the fourth quarter of each fiscal market information that is publicly available. Estimates of fair year, and the assets are also tested between the annual tests if value are primarily determined using discounted cash flow an event occurs or circumstances change that would more likely analysis. This approach uses significant estimates and assump- than not reduce the fair value of these assets below their tions including projected future cash flows, the timing of such carrying amount. Such an event would include unfavorable cash flows, discount rates reflecting the risk inherent in future variances from established business plans, significant changes cash flows, perpetual growth rates, determination of appropriate in forecasted results or volatility inherent to external markets and market comparables and the determination of whether a industries, which are periodically reviewed by Sony’s manage- premium or discount should be applied to comparables. ment. Specifically, goodwill impairment is determined using a Management believes that the estimates of future cash flows two-step process. The first step of the goodwill impairment test and fair value are reasonable; however, changes in estimates is used to identify potential impairment by comparing the fair resulting in lower future cash flows and fair value due to unfore- value of a reporting unit (Sony’s operating segments or one level seen changes in business assumptions could negatively affect

83 the valuations, which may result in Sony recognizing impairment 2007 and 2008 respectively. The actual loss on pension plan charges for goodwill and other intangible assets in the future. In assets for the fiscal year ended March 31, 2008 was 8.5 order to evaluate the sensitivity of the fair value calculations on percent. Actual results that differ from the expected return on the impairment analysis, Sony applied a hypothetical 10 percent plan assets are accumulated and amortized as a component of decrease to the fair value of each reporting unit. As of March 31, pension costs over the average future service period, thereby 2008, a hypothetical 10 percent decrease to the fair value of reducing the year-to-year volatility in pension costs. As of March each reporting unit would not have resulted in a material impact 31, 2007 and 2008, Sony had net actuarial losses of 200.6 on the statement of income. billion yen and 242.1 billion yen, respectively, including losses related to plan assets. For the fiscal year ended March 31, 2008, ■ Pension Benefits Costs the net actuarial loss increased due to the difference between Employee pension benefit costs and obligations are dependent the actual rate of return on pension plan assets and the on certain assumptions including discount rates, retirement expected long-term rate of return on pension plan assets. The rates and mortality rates, which are based upon current statisti- net actuarial loss reflects the overall unfavorable return on cal data, as well as expected long-term rates of return on plan investment over the past several years and will result in an assets and other factors. Specifically, the discount rate and increase in pension costs as they are recognized. expected long-term rate of return on assets are two critical Sony adopted FAS No. 158 in the financial statements for assumptions in the determination of periodic pension costs and the year ended March 31, 2007. As a result, Sony recorded pension liabilities. Assumptions are evaluated at least annually, a pension liability adjustment for the prior service cost, net or at the time when events occur or circumstances change and actuarial loss and obligation existing at transition totaling 9.5 these events or changes could have a significant effect on these billion yen as of March 31, 2007. This adjustment was estab- critical assumptions. In accordance with U.S. GAAP, actual lished by a charge to stockholders’ equity, resulting in no results that differ from the assumptions are accumulated and impact to the accompanying consolidated statements of amortized over future periods. Therefore, actual results generally income. Refer to Note 14 of Notes to Consolidated Financial affect recognized costs and the recorded obligations for Statements for more information regarding Sony’s pension and pensions in future periods. While management believes that the severance plans. assumptions used are appropriate, differences in actual experi- The following table illustrates the effect of changes in the ence or changes in assumptions may affect Sony’s pension discount rate and the expected return on pension plan assets, obligations and future costs. while holding all other assumptions constant, for Japanese Sony’s principal pension plans are its Japanese pension plans. pension plans as of March 31, 2008. Foreign pension plans are not significant individually, to total plan assets and pension obligations. Change In Assumption Yen in billions Pre-tax Pension Equity To determine the benefit obligation of the Japanese pension PBO costs (net of tax) plans, Sony used a discount rate of 2.3 percent for its Japanese 25 basis point increase / pension plans as of March 31, 2008. The discount rate was decrease in discount rate . . . –/+25.4 –/+2.0 +/–1.2 determined by using currently available information about rates 25 basis point increase / of return on high-quality fixed-income investments available and decrease in expected expected to be available during the period to maturity of the return on assets ...... — –/+1.2 +/–0.7 pension benefit obligation in consideration of amounts and timing of cash outflows for expected benefit payments. Such available information about rates of returns is collected from ■ Stock-based compensation Bloomberg and credit rating agencies. The 2.3 percent discount Sony accounts for stock-based compensation using the fair rate remains unchanged from fiscal year ended March 31, 2007 value based method. Fair value is measured on the date of grant and reflects current market interest rate conditions. using the Black-Scholes option-pricing model. Sony estimates To determine the expected long-term rate of return on pension the forfeiture rate based on its historical experience for the stock plan assets, Sony considers the current and expected asset acquisition rights plans, and recognizes this compensation allocations, as well as historical and expected long-term rates of expense, net of an estimated forfeiture rate, only for the stock return on various categories of plan assets. For Japanese acquisition rights expected to vest over the requisite service pension plans, the expected long-term rate of return on pension period. The expense is primarily included in selling, general and plan assets was 3.7 percent and 4.0 percent as of March 31, administrative expenses.

84 The Black-Scholes option-pricing model requires various film is being produced and the related costs are being capital- highly judgmental assumptions including expected stock price ized, it is necessary for management to estimate the ultimate volatility and the expected life of each award. In addition, revenue, less additional costs to be incurred, including exploita- judgment is also required to estimate the expected forfeiture rate tion costs which are expensed as incurred, in order to determine and recognize expense only for those rights expected to vest. whether the value of a film has been impaired and thus requires Management believes that these estimates are reasonable; an immediate write off of unrecoverable film costs. Second, the however, if actual results differ significantly from these estimates, amount of film costs recognized as cost of sales for a given film stock-based compensation expense may differ materially in the as it is exhibited in various markets throughout its life cycle is future from that recorded in the current period. based upon the proportion that current period actual revenues bear to the estimated ultimate total revenues. ■ Deferred Tax Asset Valuation Management bases its estimates of ultimate revenue for Sony records valuation allowances to reduce deferred tax assets each film on several factors including the historical perfor- to the amount that management believes is more likely than not mance of similar genre films, the star power of the lead actors to be realized. In assessing the likelihood of realization, Sony and actresses, the expected number of theaters at which the considers all currently available evidence for future years, both film will be released, anticipated performance in the home positive and negative, supplemented by information of historical entertainment, television and other ancillary markets, and results and future earning plans along with tax planning strate- agreements for future sales. Management updates such gies and future reversals of existing taxable temporary differ- estimates based on the actual results to date for each film. ences for each tax jurisdiction. Sony also considers its ability to For example, a film that has resulted in lower than expected utilize operating loss carryforwards and tax credit carryforwards theatrical revenues in its initial weeks of release would prior to expiration in each tax jurisdiction. The estimates and generally have its theatrical, home entertainment and television assumptions used in determining future taxable income are distribution ultimate revenues adjusted downward; a failure to do consistent with those used in Sony’s approved forecasts of so would result in the understatement of amortized film costs for future operations. However, if Sony is unable to generate the period. sufficient future taxable income in certain jurisdictions, or if there is a significant change in the actual effective tax rates or the ■ Future Insurance Policy Benefits time period within which the underlying temporary differences Liabilities for future insurance policy benefits are established in become taxable or deductible, Sony could be required to amounts adequate to meet the estimated future obligations of reduce the amount of its deferred tax assets or increase its policies in force. These liabilities are computed by the net level valuation allowances against its deferred tax assets, resulting in premium method based upon estimates as to future investment an increase in its effective tax rate and an adverse impact on yield, mortality, morbidity, withdrawals and other factors. Future future operating results. Although realization is not assured, policy benefits are computed using interest rates ranging from management believes it is more likely than not that all of the 1.00 percent to 4.90 percent. Mortality, morbidity and with- deferred tax assets, less valuation allowance, will be realized. drawal assumptions for all policies are based on either the Although Sony Computer Entertainment Inc. (“SCEI”), subsidiary’s own experience or various actuarial tables. Sony Computer Entertainment America Inc. (“SCEA”) and Generally these assumptions are “locked-in” upon the issuance Sony Computer Entertainment Europe Limited (“SCEE”) have of new insurance. While management believes that the assump- recorded cumulative losses in recent years, Sony concluded tions used are appropriate, differences in actual experience or that it is more-likely-than-not that SCEI’s, SCEA’s and SCEE’s changes in assumptions may affect Sony’s future insurance deferred tax assets will be fully realized based on the consider- policy benefits. ation of both positive and negative evidence, including the Game segment’s projected income from operating activities ■ Equity in net income of affiliated companies and the existence of qualifying tax-planning strategies. Sony periodically reviews the presentation of its financial information to ensure that it is consistent with the way ■ Film Accounting management views the consolidated operations. Since Sony An aspect of film accounting that requires the exercise of considers its equity investments to be integral to its opera- judgment relates to the process of estimating the total revenues tions, effective for the fiscal year ending March 31, 2009, to be received throughout a film’s life cycle. Such estimate of a Sony will report equity in earnings of affiliated companies film’s ultimate revenue is important for two reasons. First, while a as a component of operating income.

85 RECENTLY ADOPTED ACCOUNTING provision of FIN No. 48. As a result of the adoption, a STANDARDS charge against beginning retained earnings totaling 4,452 million yen was recorded. As of April 1, 2007, the total ■ Accounting by insurance enterprises for unrecognized tax benefits were 223,857 million yen, of deferred acquisition costs in connection with which 129,632 million yen, if recognized, would affect modifications or exchanges of insurance Sony’s effective tax rate. contracts In September 2005, the Accounting Standards Executive ■ How taxes collected from customers and Committee of the American Institute of Certified Public remitted to governmental authorities should Accountants issued the Statement of Position (“SOP”) 05-1, be presented in the income statement “Accounting by Insurance Enterprises for Deferred Acquisition In June 2006, the Emerging Issues Task Force (“EITF”) issued Costs in Connection with Modifications or Exchanges of EITF Issue No. 06-3, “How Taxes Collected from Customers and Insurance Contracts.” SOP 05-1 provides guidance on Remitted to Governmental Authorities Should be Presented in accounting for deferred acquisition costs on internal replace- the Income Statement.” EITF Issue No. 06-3 requires disclosure ments of insurance and investment contracts other than of the accounting policy for any tax assessed by a governmental those specifically described in FAS No. 97, “Accounting and authority that is imposed concurrently on a specific revenue- Reporting by Insurance Enterprises for Certain Long-Duration producing transaction between a seller and a customer. Sony Contracts and for Realized Gains and Losses from the Sales adopted EITF Issue No. 06-3 on April 1, 2007. The adoption of of Investments.” Sony adopted SOP 05-1 on April 1, 2007. EITF Issue No. 06-3 did not have a material impact on Sony’s The adoption of SOP 05-1 did not have a material impact on results of operations. Sony’s results of operations and financial position.

■ Accounting for servicing of financial assets RECENT PRONOUNCEMENTS In March 2006, the Financial Accounting Standards Board (“FASB”) issued FAS No. 156, “Accounting for Servicing of ■ Fair value measurements Financial Assets—an amendment of FASB Statement No. 140.” In September 2006, the FASB issued FAS No. 157, “Fair This statement amends FAS No. 140, “Accounting for Transfers Value Measurements.” FAS No. 157 establishes a framework and Servicing of Financial Assets and Extinguishments of for measuring fair value, clarifies the definition of fair value, Liabilities” with respect to the accounting for separately recog- and expands disclosures about the use of fair value mea- nized servicing assets and servicing liabilities. Sony adopted surements. FAS No. 157 applies under other accounting FAS No. 156 on April 1, 2007. The adoption of FAS No. 156 did pronouncements that require or permit fair value measure- not have a material impact on Sony’s results of operations and ments and does not require any new fair value measure- financial position. ments. FAS No. 157 will be effective for Sony beginning April 1, 2008. In February 2008, the FASB issued FASB Staff ■ Accounting for uncertainty in income taxes Positions (“FSP”) FAS 157-1, “Application of FASB In June 2006, the FASB issued FASB Interpretation (“FIN”) Statement No. 157 to FASB Statement No. 13 and Other No. 48, “Accounting for Uncertainty in Income Taxes, an Accounting Pronouncements That Address Fair Value interpretation of FASB Statement No. 109.” FIN No. 48 Measurements for Purposes of Lease Classification or clarifies the accounting for uncertainty in income taxes Measurement under Statement 13” and FSP FAS 157-2, recognized in an enterprise’s financial statements in accor- “Effective Date of FASB Statement No.157.” FSP FAS 157-1 dance with FAS No. 109, “Accounting for Income Taxes.” removes certain leasing transactions from the scope of FAS FIN No. 48 prescribes a minimum recognition threshold and No. 157. FSP FAS 157-2 partially delays the effective date measurement attribute for the financial statement recogni- of FAS No. 157 for one year for certain nonfinancial assets tion and measurement of a tax position taken or expected and liabilities. The adoption of FAS No. 157 as it relates to to be taken in a tax return. FIN No. 48 also provides financial assets and liabilities is not expected to have a guidance on derecognition, classification, interest and material impact on Sony’s consolidated results of operations penalties, accounting in interim periods, disclosure, and and financial position. Sony is currently evaluating the transition. Effective April 1, 2007, Sony adopted the impact for nonfinancial assets and liabilities.

86 ■ Fair value option for financial assets and presentation and disclosure requirements. Sony is currently financial liabilities evaluating the impact of adopting FAS No. 160. In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” ■ Disclosures about derivative instruments and FAS No. 159 permits companies to choose to measure, on hedging activities an instrument-by-instrument basis, financial instruments and In March 2008, the FASB issued FAS No. 161, “Disclosures certain other items at fair value that are not currently required about Derivative Instruments and Hedging Activities—an to be measured at fair value. The fair value measurement amendment of FASB Statement No. 133.” FAS No. 161 amends election is irrevocable and subsequent changes in fair value and expands the disclosures required by FAS No. 133 to must be recorded in earnings. FAS No. 159 is required to be provide more information about how and why an entity uses adopted by Sony in the first quarter beginning April 1, 2008. derivative instruments, how derivative instruments and related The adoption of FAS No. 159 is not expected to have a hedged items are accounted for under FAS No. 133 and its material impact on Sony’s consolidated results of operations interpretations, and how derivative instruments and related and financial position. However, its effects on future periods hedged items affect an entity’s financial position, financial will depend on the nature of instruments held by Sony and its performance, and cash flows. FAS No. 161 is effective for elections under the provisions of FAS No. 159. financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Sony is currently evaluating ■ Business combinations the additional disclosures required by FAS No. 161. In December 2007, the FASB issued FAS No. 141(R), “Business Combinations,” which applies prospectively to business combi- ■ The hierarchy of generally accepted nations for which the acquisition date is on or after the beginning accounting principles of the first fiscal year beginning on or after December 15, 2008. In May 2008, the FASB issued FAS No. 162, “The Hierarchy FAS No. 141(R) requires that the acquisition method of account- of Generally Accepted Accounting Principles.” FAS No. 162 ing be applied to a broader range of business combinations, identifies the sources of accounting principles and the frame- amends the definition of a business combination, provides a work for selecting the principles used in the preparation of definition of a business, requires an acquirer to recognize an financial statements of nongovernmental entities that are pre- acquired business at its fair value at the acquisition date and sented in conformity with generally accepted accounting requires the assets and liabilities assumed in a business combi- principles. nation to be measured and recognized at their fair values as of FAS No. 162 will be effective 60 days following the SEC’s the acquisition date, with limited exceptions. Sony will adopt approval of the Public Company Accounting Oversight Board FAS No. 141(R) as of April 1, 2009, and its effects on future amendments to AU Section 411. Sony is currently evaluating periods will depend on the nature and significance of any the impact of adopting FAS No. 162. acquisitions subject to FAS No. 141(R). ■ Financial guarantee insurance contracts ■ Noncontrolling interests in consolidated In May 2008, the FASB issued FAS No. 163, “Accounting for financial statements Financial Guarantee Insurance Contracts.” FAS No. 163 In December 2007, the FASB issued FAS No. 160, “Non- clarifies how FAS No. 60, “Accounting and Reporting by controlling Interests in consolidated financial statements— Insurance Enterprises”, applies to financial guarantee insur- an amendment of ARB No. 51.” FAS No. 160 requires that ance contracts issued by insurance enterprises, including the the noncontrolling interest in the equity of a subsidiary be recognition and measurement of premium revenue and claim accounted for and reported as equity, provides revised guid- liabilities. It also requires expanded disclosures about financial ance on the treatment of net income and losses attributable guarantee insurance contracts. FAS No. 163 will be effective to the noncontrolling interest and changes in ownership for Sony as of April 1, 2009, except for disclosures about the interests in a subsidiary and requires additional disclosures insurance enterprise’s risk-management activities. Disclosures that identify and distinguish between the interests of the about the insurance enterprise’s risk-management activities controlling and noncontrolling owners. Pursuant to the tran- will be effective the first period beginning after issuance of sition provisions of FAS No. 160, Sony will adopt the state- FAS No. 163. Sony is currently evaluating the impact of ment as of April 1, 2009, via retrospective application of the adopting FAS No. 163.

87 Five-Year Summary of Selected Financial Data Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Yen in millions (Yen per share amounts) 2004 2005 2006 2007 2008 FOR THE YEAR Sales and operating revenue ...... ¥7,530,635 ¥7,191,325 ¥ 7,510,597 ¥ 8,295,695 ¥ 8,871,414 Operating income...... 133,146 145,628 226,416 71,750 374,482 Income before income taxes ...... 144,067 157,207 286,329 102,037 466,317 Income taxes...... 52,774 16,044 176,515 53,888 203,478 Equity in net income of affiliated companies. . . . . 1,714 29,039 13,176 78,654 100,817 Net income ...... 88,511 163,838 123,616 126,328 369,435

Per share data: Common stock Net income —Basic...... ¥ 95.97 ¥ 175.90 ¥ 122.58 ¥ 126.15 ¥ 368.33 —Diluted...... 87.00 158.07 116.88 120.29 351.10 Cash dividends...... 25.00 25.00 25.00 25.00 25.00 Number of weighted-average shares for basic per share data (thousands of shares). . . . 923,650 931,125 997,781 1,001,403 1,003,001 Subsidiary tracking stock Net income (loss) —Basic...... (41.80) 17.21 — — — Number of weighted-average shares for basic per share data (thousands of shares). . . . 3,072 3,072 — — —

Depreciation and amortization*...... ¥ 366,269 ¥ 372,865 ¥ 381,843 ¥ 400,009 ¥ 428,010 Capital expenditures (additions to property, plant and equipment)...... 378,264 356,818 384,347 414,138 335,726 Research and development expenses...... 514,483 502,008 531,795 543,937 520,568

AT YEAR-END Net working capital...... ¥ 381,140 ¥ 746,803 ¥ 569,296 ¥ 994,871 ¥ 986,296 Stockholders’ equity...... 2,378,002 2,870,338 3,203,852 3,370,704 3,465,089 Stockholders’ equity per share attributable to common stock...... ¥ 2,563.67 ¥ 2,872.21 ¥ 3,200.85 ¥ 3,363.77 ¥ 3,453.25 Total assets ...... ¥9,090,662 ¥9,499,100 ¥10,607,753 ¥11,716,362 ¥12,552,739

Number of shares issued at year-end (thousands of shares): Common stock...... 926,418 997,211 1,001,680 1,002,897 1,004,443 Subsidiary tracking stock ...... 3,072 3,072 — — — * Including amortization expenses for intangible assets and for deferred insurance acquisition costs

Note: Effective April 1, 2006, Sony reclassified royalty income as a component of sales and operating revenue, rather than as a component of other income as previously recorded. In connection with this reclassification, sales and operating revenue, operating income and other income for the fiscal years ended March 31, 2004, 2005 and 2006 have been reclassified to conform with the presentation of these items for the fiscal year ended March 31, 2007. The amounts of royalty income reclassified from other income to sales and operating revenue for the fiscal years ended March 31, 2004, 2005 and 2006 were 34,244, 31,709, and 35,161 million yen, respectively. In addition to the above, certain reclassifications of the financial statements for the fiscal years ended March 31, 2004, 2005 and 2006 have been made to conform to the presentation for the fiscal year ended March 31, 2007.

88 Quarterly Financial and Stock Information Sony Corporation and Consolidated Subsidiaries—Years ended March 31 (Unaudited)

Yen in billions (Yen per share amounts) 1st quarter 2nd quarter 3rd quarter 4th quarter 2007 2008 2007 2008 2007 2008 2007 2008 Sales and operating revenue ...... ¥1,744.2 ¥1,976.5 ¥1,854.2 ¥2,083.0 ¥2,607.7 ¥2,859.0 ¥2,089.6 ¥1,952.8 Operating income (loss)...... 27.0 99.3 (20.8) 90.5 178.9 189.4 (113.4) (4.7) Income (loss) before income taxes. . . 54.0 83.8 (26.1) 87.9 179.8 288.5 (105.7) 6.2 Income taxes...... 24.8 39.7 (7.6) 34.9 61.5 135.2 (24.9) (6.3) Equity in net income of affiliated companies...... 3.6 22.0 19.7 21.1 43.0 46.9 12.3 10.8 Net income (loss)...... 32.3 66.5 1.7 73.7 159.9 200.2 (67.6) 29.0 Per share data of common stock Net income (loss) —Basic...... ¥ 32.25 ¥ 66.29 ¥ 1.68 ¥ 73.50 ¥ 159.70 ¥ 199.60 ¥ (67.44) ¥ 28.95 —Diluted...... 30.75 63.14 1.60 70.09 152.49 190.29 (67.44) 27.63 Depreciation and amortization*. . . . ¥ 91.3 ¥ 104.0 ¥ 93.7 ¥ 100.6 ¥ 99.9 ¥ 109.7 ¥ 115.2 ¥ 113.8 Capital expenditures (additions to fixed assets). . . . . 134.1 95.0 90.0 75.8 88.0 67.1 102.1 97.9 R&D expenses...... 119.4 126.0 143.5 131.7 133.5 125.5 147.6 137.4 Tokyo Stock Exchange price per share of common stock: High...... ¥ 6,200 ¥ 7,190 ¥ 5,360 ¥ 6,580 ¥ 5,190 ¥ 6,410 ¥ 6,540 ¥ 6,300 Low ...... 4,660 5,860 4,610 5,050 4,340 5,100 5,120 3,910 New York Stock Exchange price per American Depositary Share: High...... $ 52.29 $ 59.84 $ 46.40 $ 54.12 . $ 43.78 $ 56.75 $ 53.34 $ 57.19 Low ...... 40.67 49.77 39.30 43.86 37.24 44.57 42.73 39.91 * Including amortization expenses for intangible assets and for deferred insurance acquisition costs

89 Segment Information Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Sales and Operating Revenue by Business Segment*

Yen in millions Years ended March 31 2006 2007 2008 Electronics Customers...... ¥4,796,061 ¥5,443,336 ¥5,931,708 Percentage of sales and operating revenue** ...... 63.9% 65.6% 66.9% Intersegment...... 394,167 629,042 682,102 Total...... 5,190,228 6,072,378 6,613,810 Game Customers...... 918,252 974,218 1,219,004 Percentage of sales and operating revenue** ...... 12.2 11.7 13.7 Intersegment...... 40,368 42,571 65,239 Total...... 958,620 1,016,789 1,284,243 Pictures Customers...... 745,859 966,260 855,482 Percentage of sales and operating revenue** ...... 9.9 11.7 9.7 Intersegment...... — — 2,452 Total...... 745,859 966,260 857,934 Financial Services Customers...... 720,566 624,282 553,216 Percentage of sales and operating revenue** ...... 9.6 7.5 6.2 Intersegment...... 22,649 25,059 27,905 Total...... 743,215 649,341 581,121 All Other Customers...... 329,859 287,599 312,004 Percentage of sales and operating revenue** ...... 4.4 3.5 3.5 Intersegment...... 81,676 67,525 70,194 Total...... 411,535 355,124 382,198 Elimination...... (538,860) (764,197) (847,892) Consolidated total ...... ¥7,510,597 ¥8,295,695 ¥8,871,414 * Electronics intersegment amounts primarily consist of transactions with the Game segment, Pictures segment and All Other. All Other intersegment amounts primarily consist of transactions with the Electronics and Game segments. ** Percentage of sales and operating revenue to outside customers.

Operating Income (loss) by Business Segment*

Yen in millions Years ended March 31 2006 2007 2008 Electronics...... ¥ 8,820 ¥ 160,536 ¥ 356,030 Game...... 8,748 (232,325) (124,485) Pictures...... 27,436 42,708 54,011 Financial Services...... 188,323 84,142 22,633 All Other...... 18,837 28,871 50,212 Total...... 252,164 83,932 358,401 Corporate and elimination ...... (25,748) (12,182) 16,081 Consolidated total ...... ¥226,416 ¥ 71,750 ¥ 374,482 * Commencing with the first quarter ended June 30, 2007, Sony has partly realigned its business segment configuration. In accordance with this change, results of the previous year have been reclassified to conform to the presentation for the fiscal year ended March 31, 2008.

90 Electronics Sales and Operating Revenue to Customers by Product Category

Yen in millions Years ended March 31 2006 2007 2008 Audio...... ¥ 536,187 ¥ 522,879 ¥ 558,624 ...... 11.2% 9.6% 9.4% Video...... 1,021,325 1,143,120 1,279,225 ...... 21.3 21.0 21.6 Televisions...... 927,769 1,226,971 1,367,078 ...... 19.3 22.5 23.0 Information and Communications...... 842,537 950,461 1,098,574 ...... 17.6 17.5 18.5 Semiconductors...... 172,249 205,757 228,711 ...... 3.6 3.8 3.9 Components ...... 800,716 852,981 847,131 ...... 16.7 15.7 14.3 Other...... 495,278 541,167 552,365 ...... 10.3 9.9 9.3 Total...... ¥4,796,061 ¥5,443,336 ¥5,931,708 Note: The above table is a breakdown of Electronics sales and operating revenue to external customers by product category. The Electronics segment is managed as a single operating segment by Sony’s management. Effective for the fiscal year ended March 31, 2007, Sony has partly changed its product category configuration. The main change is that the low-temperature polysilicon thin film transistor LCD product group has been moved from “Semiconductors” to “Components.” Accordingly, sales and operating revenue for the fiscal year ended March 31, 2006 have been restated to conform to the presentation for the fiscal year ended March 31, 2007.

Sales and Operating Revenue by Geographic Information

Yen in millions Years ended March 31 2006 2007 2008 Japan...... ¥2,203,812 ¥2,127,841 ¥2,056,374 ...... 29.3% 25.6% 23.2% U.S.A...... 1,957,644 2,232,453 2,221,862 ...... 26.1 26.9 25.1 Europe...... 1,715,775 2,037,658 2,328,233 ...... 22.8 24.6 26.2 Other...... 1,633,366 1,897,743 2,264,945 ...... 21.8 22.9 25.5 Total...... ¥7,510,597 ¥8,295,695 ¥8,871,414 Note: Classification of geographic segment information shows sales and operating revenue recognized by location of customers.

91 Consolidated Balance Sheets Sony Corporation and Consolidated Subsidiaries—As of March 31

Yen in millions 2007 2008 ASSETS Current assets: Cash and cash equivalents...... ¥ 799,899 ¥ 1,086,431 Marketable securities...... 493,315 427,709 Notes and accounts receivable, trade...... 1,490,452 1,183,620 Allowance for doubtful accounts and sales returns...... (120,675) (93,335) Inventories...... 940,875 1,021,595 Deferred income taxes...... 243,782 237,073 Prepaid expenses and other current assets...... 699,075 1,146,570 Total current assets...... 4,546,723 5,009,663

Film costs...... 308,694 304,243

Investments and advances: Affiliated companies...... 448,169 381,188 Securities investments and other...... 3,440,567 3,954,460 ...... 3,888,736 4,335,648

Property, plant and equipment: Land ...... 167,493 158,289 Buildings ...... 978,680 903,116 Machinery and equipment ...... 2,479,308 2,483,016 Construction in progress ...... 64,855 55,740 ...... 3,690,336 3,600,161 Less—Accumulated depreciation...... 2,268,805 2,356,812 ...... 1,421,531 1,243,349

Other assets: Intangibles, net...... 233,255 263,490 Goodwill...... 304,669 304,423 Deferred insurance acquisition costs ...... 394,117 396,819 Deferred income taxes...... 216,997 198,666 Other...... 401,640 496,438 ...... 1,550,678 1,659,836 Total assets ...... ¥11,716,362 ¥12,552,739 (Continued on following page)

92 Yen in millions 2007 2008 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Short-term borrowings...... ¥ 52,291 ¥ 63,224 Current portion of long-term debt...... 43,170 291,879 Notes and accounts payable, trade...... 1,179,694 920,920 Accounts payable, other and accrued expenses ...... 968,757 896,598 Accrued income and other taxes...... 70,286 200,803 Deposits from customers in the banking business ...... 752,367 1,144,399 Other...... 485,287 505,544 Total current liabilities ...... 3,551,852 4,023,367

Long-term liabilities: Long-term debt...... 1,001,005 729,059 Accrued pension and severance costs ...... 173,474 231,237 Deferred income taxes ...... 261,102 268,600 Future insurance policy benefits and other...... 3,037,666 3,298,506 Other ...... 281,589 260,032 Total long-term liabilities ...... 4,754,836 4,787,434 Total liabilities ...... 8,306,688 8,810,801

Minority interest in consolidated subsidiaries ...... 38,970 276,849

Stockholders’ equity: Common stock, no par value— 2007—Shares authorized 3,600,000,000, shares issued 1,002,897,264 ...... 626,907 2008—Shares authorized 3,600,000,000, shares issued 1,004,443,364 ...... 630,576 Additional paid-in capital ...... 1,143,423 1,151,447 Retained earnings ...... 1,719,506 2,059,361 Accumulated other comprehensive income— Unrealized gains on securities...... 86,096 70,929 Unrealized losses on derivative instruments...... (1,075) (3,371) Pension liability adjustment...... (71,459) (97,562) Foreign currency translation adjustments ...... (129,055) (341,523) ...... (115,493) (371,527)

Treasury stock, at cost Common stock (2007— 834,859 shares)...... (3,639) Common stock (2008—1,015,596 shares)...... (4,768) ...... 3,370,704 3,465,089 Commitments and contingent liabilities Total liabilities and stockholders’ equity ...... ¥11,716,362 ¥12,552,739

93 Consolidated Statements of Income Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Yen in millions 2006 2007 2008 Sales and operating revenue: Net sales...... ¥6,692,776 ¥7,567,359 ¥8,201,839 Financial service revenue...... 720,566 624,282 553,216 Other operating revenue...... 97,255 104,054 116,359 ...... 7,510,597 8,295,695 8,871,414 Costs and expenses: Cost of sales ...... 5,151,397 5,889,601 6,290,022 Selling, general and administrative...... 1,527,036 1,788,427 1,714,445 Financial service expenses...... 531,809 540,097 530,306 (Gain) loss on sale, disposal or impairment of assets, net...... 73,939 5,820 (37,841) ...... 7,284,181 8,223,945 8,496,932 Operating income ...... 226,416 71,750 374,482 Other income: Interest and dividends ...... 24,937 28,240 34,272 Foreign exchange gain, net ...... — — 5,571 Gain on sale of securities investments, net...... 9,645 14,695 5,504 Gain on change in interest in subsidiaries and equity investees...... 60,834 31,509 82,055 Other ...... 23,039 20,738 22,045 ...... 118,455 95,182 149,447 Other expenses: Interest...... 28,996 27,278 22,931 Loss on devaluation of securities investments ...... 3,878 1,308 13,087 Foreign exchange loss, net...... 3,065 18,835 — Other...... 22,603 17,474 21,594 ...... 58,542 64,895 57,612 Income before income taxes ...... 286,329 102,037 466,317 Income taxes: Current...... 96,400 67,081 183,438 Deferred...... 80,115 (13,193) 20,040 ...... 176,515 53,888 203,478 Income before minority interest, equity in net income of affiliated companies ...... 109,814 48,149 262,839 Minority interest in income (loss) of consolidated subsidiaries...... (626) 475 (5,779) Equity in net income of affiliated companies...... 13,176 78,654 100,817 Net income...... ¥ 123,616 ¥ 126,328 ¥ 369,435 (Continued on following page)

94 Yen 2006 2007 2008 Per share data: Common stock Net income —Basic...... 122.58 126.15 368.33 —Diluted...... 116.88 120.29 351.10 Cash dividends...... 25.00 25.00 25.00

95 Consolidated Statements of Cash Flows Sony Corporation and Consolidated Subsidiaries—Years ended March 31

Yen in millions 2006 2007 2008 Cash flows from operating activities: Net income...... ¥ 123,616 ¥ 126,328 ¥ 369,435 Adjustments to reconcile net income to net cash provided by operating activities— Depreciation and amortization, including amortization of deferred insurance acquisition costs...... 381,843 400,009 428,010 Amortization of film costs...... 286,655 368,382 305,468 Stock-based compensation expense ...... 150 3,838 4,130 Accrual for pension and severance costs, less payments ...... (7,563) (22,759) (17,589) Gain on the transfer to the Japanese government of the substitutional portion of employee pension fund, net...... (73,472) — — (Gain) loss on sale, disposal or impairment of assets, net ...... 73,939 5,820 (37,841) (Gain) loss on sale or devaluation of securities investments, net ...... (5,767) (13,387) 7,583 (Gain) loss on revaluation of marketable securities held in the financial service business for trading purpose, net ...... (44,986) (11,857) 56,543 Gain on change in interest in subsidiaries and equity investees...... (60,834) (31,509) (82,055) Deferred income taxes...... 80,115 (13,193) 20,040 Equity in net (income) losses of affiliated companies, net of dividends...... 9,794 (68,179) (13,527) Changes in assets and liabilities: (Increase) decrease in notes and accounts receivable, trade ...... 17,464 (357,891) 185,651 Increase in inventories...... (164,772) (119,202) (140,725) Increase in film costs...... (339,697) (320,079) (353,343) Increase (decrease) in notes and accounts payable, trade...... (9,078) 362,079 (235,459) Increase (decrease) in accrued income and other taxes...... 29,009 (14,396) 138,872 Increase in future insurance policy benefits and other...... 143,122 172,498 166,356 Increase in deferred insurance acquisition costs...... (51,520) (61,563) (62,951) (Increase) decrease in marketable securities held in the financial service business for trading purpose...... (35,346) 31,732 (57,271) Increase in other current assets...... (8,792) (35,133) (24,312) Increase in other current liabilities...... 105,865 73,222 51,838 Other...... (49,887) 86,268 48,831 Net cash provided by operating activities...... ¥ 399,858 ¥ 561,028 ¥ 757,684 (Continued on following page)

96 Yen in millions 2006 2007 2008 Cash flows from investing activities: Payments for purchases of fixed assets...... ¥ (462,473) ¥(527,515) ¥ (474,552) Proceeds from sales of fixed assets ...... 38,168 87,319 144,741 Payments for investments and advances by financial service business ...... (1,368,158) (914,754) (2,283,491) Payments for investments and advances (other than financial service business). . (36,947) (100,152) (103,082) Proceeds from maturities of marketable securities, sales of securities investments and collections of advances by financial service business...... 857,376 679,772 1,441,496 Proceeds from maturities of marketable securities, sales of securities investments and collections of advances (other than financial service business). . 24,527 22,828 51,947 Proceeds from sales of subsidiaries’ and equity investees’ stocks...... 75,897 43,157 307,133 Other ...... 346 (6,085) 5,366 Net cash used in investing activities...... (871,264) (715,430) (910,442) Cash flows from financing activities: Proceeds from issuance of long-term debt...... 246,326 270,780 31,093 Payments of long-term debt...... (138,773) (182,374) (34,701) Increase (decrease) in short-term borrowings, net...... (11,045) 6,096 15,838 Increase in deposits from customers in the financial service business, net. . . . 190,320 273,435 485,965 Increase (decrease) in call money and bills sold in the banking business, net . . . . 86,100 (100,700) — Dividends paid ...... (24,810) (25,052) (25,098) Proceeds from issuance of shares under stock-based compensation plans . . . 4,681 5,566 7,484 Proceeds from issuance of shares by subsidiaries...... 6,937 2,217 28,943 Other ...... 128 (2,065) (4,006) Net cash provided by financing activities...... 359,864 247,903 505,518 Effect of exchange rate changes on cash and cash equivalents...... 35,537 3,300 (66,228) Net increase (decrease) in cash and cash equivalents ...... (76,005) 96,801 286,532 Cash and cash equivalents at beginning of the fiscal year ...... 779,103 703,098 799,899 Cash and cash equivalents at end of the fiscal year...... ¥ 703,098 ¥ 799,899 ¥ 1,086,431

Supplemental data: Cash paid during the fiscal year for— Income taxes ...... ¥ 70,019 ¥ 104,822 ¥ 126,339 Interest ...... 24,651 23,000 18,817 Non-cash investing and financing activities— Obtaining assets by entering into capital lease ...... ¥ 19,682 ¥ 13,784 ¥ 7,017

97 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, 2005 ...... ¥3,917 ¥617,792 ¥1,134,222 ¥1,506,082 ¥(385,675) ¥(6,000) ¥2,870,338 Exercise of stock acquisition rights...... 931 932 1,863 Conversion of convertible bonds ...... 1,484 1,484 2,968 Conversion of subsidiary tracking stock...... (3,917) 3,917 — Comprehensive income: Net income...... 123,616 123,616 Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding gains (losses) arising during the period ...... 79,630 79,630 Less: Reclassification adjustment Less: included in net income...... (41,495) (41,495) Unrealized losses on derivative instruments: Unrealized holding gains (losses) arising during the period...... 7,865 7,865 Less: Reclassification adjustment Less: included in net income...... (7,424) (7,424) Minimum pension liability adjustment. . . . 50,206 50,206 Foreign currency translation adjustments Translation adjustments arising during the period ...... 140,473 140,473 Less: Reclassification adjustment Less: included in net income ...... (17) (17) Total comprehensive income...... 352,854 Stock issue costs, net of tax ...... (780) (780) Dividends declared...... (24,968) (24,968) Purchase of treasury stock ...... (394) (394) Reissuance of treasury stock ...... (1,296) 3,267 1,971 Balance at March 31, 2006 ...... ¥ — ¥624,124 ¥1,136,638 ¥1,602,654 ¥(156,437) ¥(3,127) ¥3,203,852 Exercise of stock acquisition rights...... 2,175 2,175 4,350 Conversion of convertible bonds ...... 608 608 1,216 Stock-based compensation ...... 3,993 3,993 Comprehensive income: Net income...... 126,328 126,328 Cumulative effect of an accounting change, net of tax ...... (3,785) (3,785) Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding gains (losses) arising during the period ...... 6,963 6,963 Less: Reclassification adjustment Less: included in net income...... (21,671) (21,671) Unrealized losses on derivative instruments: Unrealized holding gains (losses) arising during the period...... 6,907 6,907 Less: Reclassification adjustment Less: included in net income...... (5,933) (5,933) Minimum pension liability adjustment. . . . (2,754) (2,754) Foreign currency translation adjustments Translation adjustments arising during the period ...... 86,313 86,313 Total comprehensive income...... 192,368 Stock issue costs, net of tax ...... (22) (22) Dividends declared...... (25,042) (25,042) Purchase of treasury stock ...... (558) (558) Reissuance of treasury stock...... 9 46 55 Adoption of FAS No. 158, net of tax ...... (9,508) (9,508) Other ...... 19,373 (19,373) — Balance at March 31, 2007 ...... ¥ — ¥626,907 ¥1,143,423 ¥1,719,506 ¥(115,493) ¥(3,639) ¥3,370,704 (Continued on following page)

98 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, 2007 ...... ¥ — ¥626,907 ¥1,143,423 ¥1,719,506 ¥(115,493) ¥(3,639) ¥3,370,704 Exercise of stock acquisition rights...... 3,538 3,685 7,223 Conversion of convertible bonds ...... 131 131 262 Stock-based compensation ...... 4,192 4,192 Comprehensive income: Net income...... 369,435 369,435 Cumulative effect of an accounting change, net of tax ...... (4,452) (4,452) Other comprehensive income, net of tax Unrealized gains on securities: Unrealized holding gains (losses) arising during the period ...... 3,043 3,043 Less: Reclassification adjustment Less: included in net income...... (18,210) (18,210) Unrealized losses on derivative instruments: Unrealized holding gains (losses) arising during the period...... (1,807) (1,807) Less: Reclassification adjustment Less: included in net income...... (489) (489) Pension liability adjustment...... (26,103) (26,103) Foreign currency translation adjustments Translation adjustments arising during the period ...... (213,160) (213,160) Less: Reclassification adjustment Less: included in net income...... 692 692 Total comprehensive income...... 108,949 Stock issue costs, net of tax ...... (48) (48) Dividends declared...... (25,080) (25,080) Purchase of treasury stock ...... (1,231) (1,231) Reissuance of treasury stock...... 16 102 118 Balance at March 31, 2008 ...... ¥ — ¥630,576 ¥1,151,447 ¥2,059,361 ¥(371,527) ¥(4,768) ¥3,465,089

99 Stock Information

Ownership and Distribution of Shares 2006 2007 2008 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. . . . . 502,219,220 1,375 528,218,332 1,380 508,166,485 1,371 Japanese financial institutions ...... 184,831,560 293 198,775,896 269 216,107,606 297 Japanese individuals and others...... 270,118,452 712,033 231,442,469 624,770 234,246,294 633,045 Other Japanese corporations...... 35,031,017 4,650 33,163,266 4,054 31,101,417 4,108 Japanese securities firms...... 9,479,415 98 11,297,301 81 14,821,562 124 Total...... 1,001,679,664 718,449 1,002,897,264 630,554 1,004,443,364 638,945

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

2006 50.1% 18.5% 27.0% 3.5% 0.9%

2007 52.7% 19.8% 23.1% 3.3% 1.1%

2008 50.6% 21.5% 23.3% 3.1% 1.5%

Stock Price Range and Trading Volume on the Tokyo Stock Exchange Stock price and Nikkei stock average Years ended March 31 (Yen) Nikkei stock average Closing price of Sony Corporation stock 20,000

15,000

10,000

5,000 Trading volume (Million shares) 300 0

200

100

0 2004 2005 2006 2007 2008 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.

Years ended March 31 2004 2005 2006 2007 2008 Stock price (Yen) At year-end...... 4,360 4,270 5,450 5,990 3,970 High...... 4,670 4,710 6,040 6,540 7,190 Low...... 2,720 3,550 3,660 4,340 3,910 Annual increase/decrease...... +3.8% –2.1% +27.6% +9.9% –33.7% Number of shares outstanding at year-end (Thousands of shares). . 926,418 997,211 1,001,680 1,002,897 1,004,443 Market capitalization at year-end (Yen in trillions)...... 4.04 4.26 5.46 6.01 3.99 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)...... 87.00 158.07 116.88 120.29 351.10 Stockholders’ equity...... 2,563.67 2,872.21 3,200.85 3,363.77 3,453.25

100 Stock Acquisition Rights and Bond Information As of March 31, 2008

Stock Acquisition Rights (SARs) Total number of Number of shares to be Percentage of Name Date of issue (Exercise period) SARs issued issued or transferred Exercise price SARs exercised (%) The first series of common stock acquisition rights December 9, 2002 (December 8, 2012) 9,878 987,800 ¥5,396 17.7 The third series of common stock acquisition rights March 31, 2003 (March 31, 2013) 9,374 937,400 U.S.$36.57 35.2 The fourth series of common stock acquisition rights November 14, 2003 (November 13, 2013) 8,216 821,600 ¥4,101 41.2 The sixth series of common stock acquisition rights March 31, 2004 (March 31, 2014) 8,980 898,000 U.S.$40.90 26.6 The seventh series of common stock acquisition rights November 18, 2004 (November 17, 2014) 9,798 979,800 ¥3,782 31.2 The ninth series of common stock acquisition rights March 31, 2005 (March 31, 2015) 8,294 829,400 U.S.$40.34 17.8 The tenth series of common stock acquisition rights November 17, 2005 (November 16, 2015) 10,239 1,023,900 ¥4,060 8.9 The eleventh series of common stock acquisition rights November 17, 2005 (November 17, 2015) 10,814 1,081,400 U.S.$34.14 20.9 The twelfth series of common stock acquisition rights November 16, 2006 (November 15, 2016) 10,579 1,057,900 ¥4,756 1.1 The thirteenth series of common stock acquisition rights November 16, 2006 (November 16, 2016) 13,792 1,379,200 U.S.$40.05 4.9 The fourteenth series of common stock acquisition rights November 14, 2007 (November 13, 2017) 7,962 796,200 ¥5,514 0 The fifteenth series of common stock acquisition rights November 14, 2007 (November 13, 2017) 15,844 1,584,400 U.S.$48.15 0 Note: All series of Stock Acquisition Rights were issued for the purpose of granting stock options. Accordingly, no cash payment was required for the allocation.

BONDS with Stock Acquisition Rights Total number of Number of shares to be Percentage of Name Date of issue Years SARs issued issued or transferred Exercise price SARs exercised (%) Bonds with stock acquisition rights December 18, 2003 5 50,000 44,603,033 ¥5,605 0 Note: Bonds with Stock Acquisition Rights (total amount of issue being 250 billion yen) were issued in overseas markets mainly in Europe in order to raise funds for the development of and equipment expenditures for the next-generation semiconductors and key devices in Sony Group.

Convertible Bonds Interest rate Total amount Conversion Outstanding balance Name Date of issue Years (%) of issue price (Percentage of bonds converted) U.S. dollar convertible bonds April 17, 2000 10 0 U.S.$57,331.thousand ¥13,220 U.S.$45,550.thousand (0%) U.S. dollar convertible bonds April 16, 2001 10 0 U.S.$77,056.thousand ¥ 8,814 U.S.$46,122.thousand (0%) U.S. dollar convertible bonds April 15, 2002 10 0 U.S.$67,297.thousand ¥ 6,931 U.S.$33,295.thousand (6.2%) Note: All convertible bonds were issued to provide equity-based compensation to certain executives in Sony’s U.S. subsidiary companies. The outstanding balance of each series is not equal to the total amount of issue of such series since Sony Corporation repurchased and canceled certain portion of each series which were not used for such purpose.

Straight Bonds Name Date of issue Years Interest rate (%) Total amount of issue Outstanding balance The eighth (2) series of unsecured bonds July 26, 2000 10 (Note 2) ¥ 5,000 million ¥ 4,900 million The ninth series of unsecured bonds September 13, 2000 10 2.04 ¥50,000 million ¥50,000 million The twelfth series of unsecured bonds September 17, 2001 10 1.52 ¥50,000 million ¥50,000 million The fifteenth series of unsecured bonds September 8, 2005 5 0.80 ¥50,000 million ¥50,000 million The sixteenth series of unsecured bonds September 8, 2005 7 1.16 ¥40,000 million ¥40,000 million The seventeenth series of unsecured bonds September 8, 2005 10 1.57 ¥30,000 million ¥30,000 million The eighteenth series of unsecured bonds February 28, 2006 4 1.01 ¥40,000 million ¥40,000 million The nineteenth series of unsecured bonds February 28, 2006 7 1.52 ¥35,000 million ¥35,000 million The twentieth series of unsecured bonds February 28, 2006 10 1.75 ¥25,000 million ¥25,000 million Notes: 1. Sony Corporation assumed responsibility for the eighth (2) series of unsecured bonds as a result of its merger with AIWA Corporation. Sony Corporation repurchased and canceled 100 million yen 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 percent. (If the result of this calculation is negative, the interest rate is 0 percent.)

101 Investor Information

SONY CORPORATION DEPOSITARY, TRANSFER AGENT AND REGISTRAR 7-1, Konan 1-chome, Minato-ku, FOR AMERICAN DEPOSITARY RECEIPTS Tokyo 108-0075, Japan JPMorgan Chase Bank N.A. 4 New York Plaza, New York, NY 10004, U.S.A INVESTOR RELATIONS OFFICES If you have any questions or would like a copy of our Form 20-F, ■ Contact Address: filed with the U.S. Securities and Exchange Commission, or our JPMorgan Service Center Annual Report to shareholders, please direct your request to: P.O. Box 64504 St. Paul, MN 55164-0504 ■ Japan U.S.A. SONY CORPORATION Phone: U.S. 1-800-990-1135 IR Department International 1-651-453-2128 7-1, Konan 1-chome, Minato-ku, Tokyo 108-0075 CO-TRANSFER AND CO-REGISTRAR AGENT Phone: 81-(0)3-6748-2111 CIBC Mellon Trust Company Facsimile: 81-(0)3-6748-2244 2001 University Street, 16th Floor, Montreal, Quebec, H3A 2A6, Canada ■ U.S.A. Phone: 1-514-285-3600 SONY CORPORATION OF AMERICA Investor Relations TRANSFER AGENT 550 Madison Avenue, 27th Floor, Mitsubishi UFJ Trust and Banking Corporation 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)3-3212-1211

■ U.K. OVERSEAS STOCK EXCHANGE LISTINGS SONY GLOBAL TREASURY SERVICES PLC. New York and London stock exchanges Investor Relations 11th Floor, St. Helens, 1 Undershaft, JAPANESE STOCK EXCHANGE LISTINGS London EC3A 8EE Tokyo and Osaka stock exchanges Phone: 44-(0)20-7444-9713 Facsimile: 44-(0)20-7444-9763 NUMBER OF SHAREHOLDERS (As of March 31, 2008) SONY ON THE INTERNET 638,945 Sony’s Investor Relations Home Pages on the World Wide Web offer a wealth of corporate information, including the latest Information regarding CSR annual report and financial results. (Corporate Social Responsibility) http://www.sony.net/IR/ Sony’s CSR Report and information about Sony CSR and environmental activities can be accessed at the following ORDINARY GENERAL MEETING OF SHAREHOLDERS website. The Ordinary General Meeting of Shareholders is held in June. http://www.sony.net/csr/

INDEPENDENT Registered Public Accounting Firm Inquiries concerning the aforementioned activities can be PricewaterhouseCoopers Aarata directed to: Tokyo, Japan Sony Corporation Corporate Social Responsibility Department Phone: 81-(0)3-6748-2111 Facsimile: 81-(0)3-6748-2244

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Cautionary Statement Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include, but are not limited to, those statements using words such as “believe,” “expect,” “plans,” “strategy,” “prospects,” “forecast,” “estimate,” “project,” “anticipate,” “aim,” “may” or “might” and words of similar meaning in connection with a discussion of future operations, fi nancial 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 signifi cant sales or in which Sony’s assets and liabilities are denominated; (iii) Sony’s ability to continue to design and develop and win acceptance of, as well as achieve suffi cient cost reductions for, its products and services, including newly introduced platforms within the Game segment, which are offered in highly competitive markets characterized by continual new product introductions, rapid development in technology and subjective and changing consumer preferences (particularly in the Electronics, Game and Pictures segments, and the music business); (iv) Sony’s ability and timing to recoup large-scale investments required for technology development and increasing production capacity; (v) Sony’s ability to implement successfully business reorganization activities in its Electronics segment; (vi) Sony’s ability to implement successfully its network strategy for its Electronics, Game and Pictures segments, and All Other, including the music business, and to develop and implement successful sales and distribution strategies in its Pictures segment and the music business in light of the Internet and other technological developments; (vii) Sony’s continued ability to devote suffi cient resources to research and development and, with respect to capital expenditures, to correctly prioritize investments (particularly in the Electronics segment); (viii) Sony’s ability to maintain product quality (particularly in the Electronics and Game segments); (ix) the success of Sony’s joint ventures and alliances; (x) the outcome of pending legal and/or regulatory proceedings; (xi) shifts in customer demand for fi nancial services such as life insurance and Sony’s ability to conduct successful Asset Liability Management in the Financial Services segment; and (xii) the impact of unfavorable conditions or developments (including market fl uctuations or volatility) in the Japanese equity markets on the revenue and operating income of the Financial Services segment. Risks and uncertainties also include the impact of any future events with material adverse impacts.

Printed with volatile organic chemical (VOC)-free vegetable oil-based ink. SGS-COC-004300

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Annual Report 2008 Year Ended March 31, 2008 Sony Corporation

Printed in Japan

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