SONY CORPORATION
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of June 2005
Commission File Number: 001-06439

SONY CORPORATION

(Translation of registrant’s name into English)

7-35 KITASHINAGAWA 6-CHOME, SHINAGAWA-KU, TOKYO, JAPAN
(Address of principal executive offices)

The registrant files annual reports under cover of Form 20-F.

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F,

Form 20-F  þ          Form 40-F  o

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934, Yes  o   No  þ

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-                    

 
 

 


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
  SONY CORPORATION
(Registrant)
 
 
  By:   /s/ Katsumi Ihara    
    (Signature)   
    Katsumi Ihara
Executive Deputy President, Group Chief Strategy Officer and Chief Financial Officer 
 
 

Date: June 3, 2005

 


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List of materials

     Document attached hereto:

1.   Consolidated Financial Statements for the fiscal year ended March 31, 2005

 


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(SONY LOGO)

Consolidated Financial Statements
For the year ended March 31, 2005

Sony Corporation
TOKYO, JAPAN


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Sony’s Corporate Governance Practices

For an explanation as to the significant differences between the New York Stock Exchange’s corporate governance standards and Sony’s corporate governance practices, please visit us on the internet at:

http://www.sony.net/SonyInfo/IR/NYSEGovernance.html

CautionaryStatement

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

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Financial Highlights


Sony Corporation and Consolidated Subsidiaries — Year ended March 31

Operating Results

                                 
    Yen in billions             Dollars in millions  
    except per share amounts and             except per share  
    number of employees     Percent change     amounts  
    2004     2005     2005/2004     2005  
 
FOR THE YEAR
                               
Sales and operating revenue
  ¥ 7,496.4     ¥ 7,159.6       -4.5 %   $ 66,912  
Operating income
    98.9       113.9       +15.2       1,065  
Income before income taxes
    144.1       157.2       +9.1       1,469  
Income before cumulative effect of accounting changes
    90.6       168.6       +86.0       1,575  
Net income
    88.5       163.8       +85.1       1,531  
 
                               
Per share of common stock:
                               
Income before cumulative effect of an accounting change
                               
– Basic
  ¥ 98.26     ¥ 180.96       +84.2 %   $ 1.69  
– Diluted
    89.03       162.59       +82.6       1.52  
Net income
                               
– Basic
    95.97       175.90       +83.3       1.64  
– Diluted
    87.00       158.07       +81.7       1.48  
Cash dividends
    25.00       25.00             0.23  
 
                               
AT YEAR-END
                               
Stockholders’ equity
  ¥ 2,378.0     ¥ 2,870.3       +20.7 %   $ 26,826  
Total assets
    9,090.7       9,499.1       +4.5       88,777  
 
                               
Number of employees
    162,000       151,400                  
 
             
Notes:
    1.     U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107 = U.S. $1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.
 
           
    2.     In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by ¥5,156 million ($48 million) for the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized ¥4,713 million ($44 million) of loss (net of income taxes of ¥2,675 million) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.
 
           
    3.     In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with FAS No.128, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise the associated stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and its net income for the year ended March 31, 2004 were restated. Sony’s diluted EPS of its income before cumulative effect of an accounting change and net income for the year ended March 31, 2005 were decreased by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to those before the adoption of EITF Issue No. 04-8.
 
           
    4.     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No.46, “Consolidation of Variable Interest Entities – an Interpretation of Accounting Research Bulletins (“ARB”) No.51”, and the revised FIN No.46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony adopted FIN No.46 on July 1, 2003. As a result of the adoption of FIN No.46, Sony recognized ¥2,117 million of loss as the cumulative effect of an accounting change. Additionally, Sony’s assets and liabilities increased by ¥96,776 million and ¥97,950 million, respectively, including cash and cash equivalents of ¥1,521 million.

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Operational Review


Consolidated Results for the Fiscal Year ended March 31, 2005

Unless otherwise specified, all amounts are on the basis of Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”).
U.S. dollar amounts have been translated from yen, for convenience only, at the rate of C107=U.S.$1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.

Sales and operating revenue (“sales”) decreased 4.5% compared with the previous fiscal year; on a local currency basis sales decreased 3%. (For all references herein to results on a local currency basis, see Note I on page 11.) This reflects both the establishment of Sony BMG Music Entertainment (“Sony BMG”) (please refer to note on Page 5) and a change in revenue recognition method at Sony Life Insurance Co., Ltd. (“Sony Life”).

Sales within the Electronics segment remained largely unchanged. Although sales of flat panel televisions, digital still cameras and LCD rear projection televisions increased, there was a decrease in sales primarily of CRT televisions and portable audio products. In the Game segment, an increase in software sales was more than offset by a decline in hardware sales mainly due to strategic price reductions, resulting in a decrease to overall segment sales. In the Music segment, although sales at Sony Music Entertainment (Japan) Inc. (“SMEJ”) increased, overall sales decreased due to the fact that Sony BMG, a recorded music business joint venture formed with Bertelsmann AG, has been accounted for by the equity method since August 2004 (please refer to the note on page 5). In the Pictures segment, despite the strong contribution of Spider-Man 2, there was a decrease in sales as a result of the appreciation of the yen. In the Financial Services segment, revenue decreased mainly due to a decrease in revenue from insurance premiums at Sony Life.

Operating income increased 15.2% (a 26% increase on a local currency basis) compared with the previous fiscal year.

In the Electronics segment, the operating loss increased mainly due to a continued deterioration in the cost of sales ratio associated with a decline in unit selling prices. In the Game segment, as a result of a decline in hardware sales, there was a decrease in operating income. The Pictures segment had record operating income primarily due to the substantial contribution from Spider-Man 2.

Restructuring charges, which are recorded as operating expenses, amounted to ¥90.0 billion ($841.1 million) for the fiscal year compared to ¥168.1 billion in the previous fiscal year. In the Electronics segment, restructuring charges were ¥81.8 billion ($764.5 million) compared to ¥145.4 billion in the previous fiscal year.

Income before income taxes increased 9.1% compared to the previous fiscal year. There was a deterioration in the net effect of other income and expenses compared to the previous fiscal year despite an improvement due to a smaller loss on the devaluation of securities investments compared to the previous year, and gains of ¥9.0 billion ($84 million) from a change in interest from Monex Inc., an equity affiliate of Sony, following its business integration by way of a share transfer with Nikko Beans, Inc., and total gains of ¥4.7 billion ($44 million) from the sale of stock and a

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change in interest in a subsidiary resulting from the initial public offering of So-net M3 Inc., a consolidated subsidiary of Sony Communication Network Corporation. This deterioration was mainly the result of the recording of a net foreign exchange loss in the current fiscal year, compared to the net foreign exchange gain recorded in the previous fiscal year.

Income taxes: Compared to an effective tax rate of 36.6% in the previous fiscal year, the effective tax rate was 10.2% in the current fiscal year. As fully discussed in Sony’s Annual Report on Form 20-F for the fiscal year ended March 31, 2004, as a result of the recording of operating losses in the past, the U.S. subsidiaries of Sony have had valuation allowances against deferred tax assets for U.S. federal and certain state taxes. However, in the current fiscal year, based on both an improvement in recent years and a sound outlook for the operating performance at Sony’s U.S. subsidiaries, Sony reversed ¥67.9 billion ($635 million) of such valuation allowances, resulting in a reduction to income tax expense. This reversal was the major factor impacting the effective tax rate decline for the fiscal year.

Equity in net income of affiliated companies increased ¥27.3 billion compared to the previous fiscal year. Sony Ericsson Mobile Communications AB (“Sony Ericsson”) contributed ¥17.4 billion ($163 million) to equity in net income, an increase of ¥11.0 billion compared to the previous fiscal year. Equity in net income of affiliated companies for the current fiscal year includes the recording of ¥12.6 billion ($118 million) as equity in net income from InterTrust Technologies Corporation (“InterTrust”). This amount reflects InterTrust’s proceeds from a license agreement with Microsoft Corporation arising from the settlement of a patent-related lawsuit. In addition, an equity loss of ¥3.4 billion ($32 million) was recorded at Sony BMG, established in August 2004. Furthermore, equity in net loss was recorded at affiliates such as Star Channel Inc., a Japan-based subscription television company specializing in the broadcast of movies, and S-LCD Corporation, a joint-venture with Samsung Electronics Co., Ltd. for the manufacture of amorphous TFT LCD panels. (For operating results of major affiliates accounted for by the equity method, please refer to page 9.)

Net income, as a result, increased 85.1% compared to the previous fiscal year.

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Operating Performance Highlights by Business Segment

Note: As of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. The newly formed company, Sony BMG, is 50% owned by each parent company. Under U.S. GAAP, Sony BMG is accounted for by Sony using the equity method and, since August 1, 2004, 50% of net profits or losses of this business have been included under “Equity in net income (loss) of affiliated companies.”

In connection with the establishment of this joint venture, Sony’s non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment to reflect the new management reporting structure whereby Sony’s Electronics segment has now assumed responsibility for these businesses. Results for the previous fiscal year in the Electronics and Music segments have been restated to account for this reclassification.

In the Music segment, results for this fiscal year only include the results of Sony Music Entertainment Inc.’s (“SMEI”) recorded music business for the months of April through July 2004, and the twelve months results of SMEI’s music publishing business and SMEJ. However, results for the previous fiscal year in the Music segment include the consolidated results for SMEI’s recorded music business for all twelve months, as well as the full year’s results for SMEI’s publishing business and SMEJ.

     
Electronics
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue
  ¥ 5,042.3     ¥ 5,021.6       -0.4 %   $ 46,931  
Operating loss
    (6.8 )     (34.3 )           (321 )
 

Unless otherwise specified, all amounts are on a U.S. GAAP basis.

Sales remained largely unchanged (a 1% increase on a local currency basis). Sales to outside customers decreased 1.1% compared to the previous fiscal year. There was a decline in sales of CRT televisions, due to a continued shift in demand towards flat panel televisions, and portable audio, faced with a difficult competitive environment due to the shift towards hard disc- and flash-based memory players. However, there was an increase in sales of several products including flat panel televisions, which saw increased sales in all geographic areas, digital still cameras, where sales increased outside of Japan, and LCD rear projection televisions, which saw increased unit sales particularly in the U.S.

Operating loss increased by ¥27.5 billion compared with the previous fiscal year. Although there was a decrease in restructuring charges compared with the previous fiscal year, operating loss increased due to a significant deterioration in the cost of sales ratio as a result of a decline in unit selling prices. With regard to products within the Electronics segment, the decrease in sales of CRT televisions and portable audio, as well as the decline of unit selling prices of camcorders, contributed to the increase in operating loss.

Inventory, as of March 31, 2005, was ¥514.4 billion ($4,807 million), a ¥18.4 billion, or 3.7%, increase compared with the level as of March 31, 2004 and a ¥56.5 billion, or 9.9%, decrease compared with the level as of December 31, 2004.

Note: In association with the completion of business integration of Sony Group’s semiconductor manufacturing businesses in July 2004, it was decided to account for semiconductor manufacturing operations inventory, which was previously recorded in the Game segment, within the Electronics segment as of the quarter beginning July 1, 2004. (Regarding the integration of Sony Group’s semiconductor manufacturing operations, please refer to note 25 on page 95.)

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Game
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue
  ¥ 780.2     ¥ 729.8       -6.5 %   $ 6,821  
Operating income
    67.6       43.2       -36.1       404  
 

Unless otherwise specified, all amounts are on a U.S. GAAP basis.

Sales decreased 6.5% compared with the previous fiscal year (a 6% decrease on a local currency basis).

Hardware: In addition to a decline of PlayStation 2 (“PS2”) unit sales in Japan, the U.S. and Europe, strategic price reductions on the PS2 undertaken in each of the abovementioned territories resulted in a decline in sales.

Software: Overall software sales increased mainly as a result of an increase in unit sales of PS2 software, which recorded all-time record sales. Revenue increased in Japan, the U.S. and Europe.

PlayStation Portable, on sale in Japan from December 2004 and in the U.S. from March 2005, has recorded strong hardware and software unit sales.

Operating income decreased by ¥24.4 billion, or 36.1%, compared with the previous fiscal year as a result mainly of a decrease in hardware sales coupled with the start-up expenses for PlayStation Portable, despite being partially offset by an increase in software sales.

             
Worldwide hardware production shipments*:    
 
           
  ®   PS2:   16.17 million units (a decrease of 3.93 million units)
 
           
  ®   PS one:   2.77 million units (a decrease of 0.54 million units)
 
           
  ®   PlayStation Portable   2.97 million units
 
           
Worldwide software production shipments*:    
 
           
  ®   PS2:   252 million units (an increase of 30 million units)
 
           
  ®   PlayStation:   10 million units (a decrease of 22 million units)
 
           
  ®   PlayStation Portable   5.7 million units


*Production shipment units of hardware and software are counted upon shipment of the products from manufacturing bases. Sales of such products are recognized when the products are delivered to customers.

Inventory as of March 31, 2005, was ¥77.5 billion ($724 million), a ¥53.4 billion, or 40.8%, decrease compared with the level as of March 31, 2004 and a ¥32.1 billion, or 70.7%, increase compared with the level as of December 31, 2004. (Regarding inventory, please refer to the note in the above Electronics segment.)

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Music
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue
  ¥ 440.3     ¥ 249.1       -43.4 %   $ 2,328  
Operating income (loss)
    (6.0 )     8.8             82  
 

The amounts presented above are the sum of the yen-translated results of SMEI, a U.S. -based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis, and the results of SMEJ, a Japan-based operation which aggregates results in yen. In addition, please refer to the note on page 5 regarding the establishment of Sony BMG.

Sales decreased ¥191.2 billion or 43.4% compared with the previous fiscal year. Of the Music segment’s sales, 62% were generated by SMEJ and 38% were generated by SMEI. As noted above, due to the establishment of the Sony BMG joint venture, there were no recorded music sales at SMEI after July 31, 2004. Therefore, SMEI’s results are not comparable with results of the prior year.

SMEJ: Sales increased 6.9% compared with the previous fiscal year mainly due to an increase in album and single sales. Best-selling albums and singles during the year included musiQ by ORANGE RANGE, SENTIMENTALovers by Ken Hirai and PORNO GRAFFITTI BEST BLUE’S by Porno Graffitti.

Operating income at SMEJ increased significantly compared to the previous fiscal year due to the higher sales noted above and an improvement in the cost of sales ratio. As noted above, SMEI’s results are not comparable with the results in the prior year.

     
Pictures
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue
  ¥ 756.4     ¥ 733.7       -3.0 %   $ 6,857  
Operating income
    35.2       63.9       +81.4       597  
 

The results presented above are a yen-translation of the results of Sony Pictures Entertainment (“SPE”), a U.S.-based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis. Management analyzes the results of SPE in U.S. dollars, so discussions of certain portions of its results are specified as being on “a U.S. dollar basis.”

Sales decreased 3.0% compared with the previous fiscal year (1% increase on a U.S. dollar basis) due to the appreciation of the yen. Sales, on a U.S. dollar basis, increased primarily due to higher worldwide home entertainment, international television syndication and worldwide theatrical revenues on films. Worldwide home entertainment and international television syndication revenues were higher as a result of the performance of prior year films including 50 First Dates, Big Fish and Bad Boys 2. For theatrical revenues, the success of the current year film slate, particularly Spider-Man 2, Hitch and The Grudge, more than offset the impact of releasing fewer films this year. The higher sales from films were partially offset by a decrease in television sales due to the absence in the current year of several transactions that occurred in the prior fiscal year. These included syndication sales of King of Queens and Seinfeld as well as the extension of a licensing agreement for Wheel of Fortune. Television sales in the current year benefited from the highly successful DVD release of Seinfeld.

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Operating income increased ¥28.7 billion to ¥63.9 billion ($597 million), compared with the previous fiscal year. This represented record operating income for SPE. The large increase in operating income is due to the strong overall performance of the current year film slate and the home entertainment and international television syndication carryover performance of the prior year films noted above. Spider-Man 2’s worldwide success contributed substantially to this year’s earnings offset somewhat by the disappointing theatrical performance of Spanglish. Television’s operating income decreased due to the same factors noted above for revenue.

On April 8, 2005 a consortium led by Sony Corporation of America (“SCA”) and its equity partners; Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”). Under the terms of the acquisition agreement the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. As part of this transaction, SPE will co-finance and produce new motion pictures with MGM as well as distribute MGM’s existing film and television content through SPE’s global distribution channels. MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested $257 million for 20% of the total equity capital. However, based on the percentage of common stock owned, Sony will record 45% of MGM’s net income (loss) as equity in net income of affiliated companies.

     
Financial Services
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Financial Services revenue
  ¥ 593.5     ¥ 560.6       -5.6 %   $ 5,238  
Operating income
    55.2       55.5       +0.6       519  
 

Unless otherwise specified, all amounts are on a U.S. GAAP basis. Therefore, they differ from the results that Sony Life discloses on a Japanese statutory basis.

Financial Services revenue decreased 5.6% compared with the previous fiscal year, mainly due to a decrease in revenue at Sony Life. Revenue at Sony Life was ¥474.3 billion ($4,433 million), a ¥38.7 billion, or 7.5% decrease compared with the previous fiscal year. The main reasons for this decrease were a change in the method of recognizing insurance premiums received on certain products, as of the third quarter beginning October 1, 2003, from being recorded as revenues to being offset against the related provision for future insurance policy benefits, coupled with a small decrease in valuation gains in the current fiscal year compared to the previous year in which significant valuation gains were recorded against stock conversion rights from convertible bonds.

Operating income increased by ¥0.3 billion or 0.6% compared with the previous fiscal year, as a result of the recording of losses in the previous fiscal year by Sony Finance International Inc., associated with reorganization proceedings instituted by Crosswave Communications Inc. under the Corporate Reorganization Law of Japan during the same year. Operating income at Sony Life decreased by ¥2.2 billion or 3.4% to ¥61.0 billion ($570 million), mainly due to a decrease in valuation gains against stock conversion rights from convertible bonds, although this was partially offset by an increase in revenue from insurance premiums excluding the effect of the change in revenue recognition method noted above.

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Other
  Year ended March 31
 
                                 
    Yen in billions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue
  ¥ 268.3     ¥ 254.4       -5.2 %   $ 2,378  
Operating loss
    (12.1 )     (4.1 )           (38 )
 

Unless otherwise specified, all amounts are on a U.S. GAAP basis.

Sales decreased 5.2% compared with the previous fiscal year. This was primarily the result of a decrease in intersegment sales due to contract changes at a Japanese subsidiary involved in the advertising agency business.

An operating loss of ¥4.1 billion ($38 million) was recorded, representing an improvement of ¥8.0 billion compared with the operating loss of ¥12.1 billion recorded in the previous fiscal year. This improvement was mainly due to a reduction of fixed costs, a gain from the sale of a retail and showroom building in Japan and the strong performance of a business engaged in the production and marketing of animation products during the current fiscal year, although this was partially offset by the recording of a one-time gain of ¥7.7 billion by a business operated by a U.S. subsidiary on the sale of rights related to a portion of the Sony Credit Card portfolio in the previous fiscal year.

Operating Results for Major Affiliates Accounted for by the Equity Method

The following operating results for significant companies accounted for by the equity method are not consolidated in Sony’s consolidated financial statements. However, Sony believes that this disclosure provides additional useful analytical information to investors regarding operating performance. In addition, please note that the operating results of Sony Ericsson discussed below are reported on an International Financial Reporting Standards basis, and thereby differ from the operating results reported on a U.S. GAAP basis contained within Sony’s equity in net income of affiliated companies. Furthermore, as Sony Ericsson and Sony BMG report their results on a calendar year basis, the operating results presented below have been adjusted according to Sony’s fiscal year.

Sony Ericsson recorded sales for the one year period ended March 31, 2005 of Euro 6,475 million, representing a Euro 1,269 million or 24% increase compared to the same period of the previous year. Income before taxes was Euro 460 million, a Euro 380 million increase compared to the same period of the previous year, and net income of Euro 267 million was recorded, a Euro 167 million increase compared to the same period of the previous year. Sony Ericsson experienced a strong year led by consumer demand for mid and high-end GSM models. As a result, equity in net income of ¥17.4 billion ($163 million) was recorded by Sony.

Sony BMG recorded sales revenue of $3,258 million, loss before income taxes of $53 million, and a net loss of $66 million during the period that the venture began operations on August 1, 2004 through the end of Sony’s fiscal year. Loss before income taxes includes $290 million of restructuring charges. As a result, equity in net loss of ¥3.4 billion ($32 million) was recorded by Sony.

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Table of Contents

Cash Flow

The following charts show Sony’s unaudited condensed statements of cash flows on a consolidated basis for all segments excluding the Financial Services segment and for the Financial Services segment alone. These separate condensed presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that these presentations may be useful in understanding and analyzing Sony’s consolidated financial statements.

     
n Cash Flow — Consolidated (excluding Financial Services segment)
  Year ended March 31
 
   
 
                                 
    Yen in billions     Change     Dollars in millions  
Cash flow   2004     2005     2005/2004     2005  
 
- From operating activities
  ¥ 401.1     ¥ 485.4     ¥ +84.3     $ 4,537  
- From investing activities
    (352.5 )     (472.1 )     -119.6       (4,412 )
- From financing activities
    153.8       (95.4 )     -249.1       (892 )
Cash and cash equivalents at beginning of the fiscal year
    438.5       592.9       +154.4       5,541  
Cash and cash equivalents at end of the fiscal year
    592.9       519.7       -73.2       4,857  
 

Operating Activities: During the fiscal year ended March 31, 2005, although there was an increase in notes and accounts receivable, trade mainly within the Game segment, in addition to the recording of net income, excluding depreciation and amortization primarily within the Pictures and Game segments, there was a decrease in inventory within the Electronics and Game segments and an increase in notes and accounts payable, trade, within the Game segment.

Investing Activities: During the fiscal year ended March 31, 2005, Sony made significant capital investments in semiconductors, particularly the advanced microprocessor “Cell,” as well as investments associated with the amorphous TFT LCD panel manufacturing joint venture (S-LCD Corporation) established with Samsung Electronics Co., Ltd.

As a result, cash flow from operating activities exceeded cash flow from investing activities by ¥13.3 billion ($125 million).

Financing Activities: During the fiscal year ended March 31, 2005, Sony redeemed a portion of its long-term debt. In addition, of the ¥300.0 billion of convertible bonds due on March 31, 2005, ¥5.0 billion were redeemed on the maturity date with the remainder being converted into common stock.

Cash and Cash Equivalents: The total balance of cash and cash equivalents, accounting for the effect of foreign currency exchange rate fluctuations, was ¥519.7 billion ($4,857 million) as of March 31, 2005, a decrease of ¥73.2 billion compared to March 31, 2004.

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Table of Contents

     
n Cash Flow — Financial Services segment
  Year ended March 31
 
   
 
                                 
    Yen in billions     Change     Dollars in millions  
Cash flow   2004     2005     2005/2004     2005  
 
- From operating activities
  ¥ 241.6     ¥ 168.1     ¥ -73.5     $ 1,571  
- From investing activities
    (401.6 )     (421.4 )     -19.8       (3,938 )
- From financing activities
    141.7       256.4       +114.7       2,396  
Cash and cash equivalents at beginning of the fiscal year
    274.5       256.3       -18.2       2,395  
Cash and cash equivalents at end of the fiscal year
    256.3       259.4       +3.1       2,424  
 

Operating Activities: The cash inflows from insurance premiums and other exceeded the related cash outflows, reflecting primarily an increase in insurance-in-force at Sony Life.

Investing Activities: Payments for investments and advances exceeded proceeds from maturities of marketable securities, sales of securities investments and collections of advances primarily as a result of both investments in mainly Japanese fixed income securities resulting from an increase in insurance-in-force at Sony Life, and a housing loan campaign carried out at Sony Bank.

Financing Activities: In addition to the increase in policyholders’ accounts at Sony Life, deposits from customers in the banking business increased primarily due to an increase in the number of accounts.

Cash and Cash Equivalents: As a result of the above, the balance of cash and cash equivalents was ¥259.4 billion ($2,424 million) as of March 31, 2005, which was an increase of ¥3.1 billion compared to March 31, 2004.

Notes

         
Note
  I:   During the fiscal year ended March 31, 2005, the average value of the yen was ¥106.5 against the U.S. dollar and ¥133.7 against the Euro, which was 5.2% higher against the U.S. dollar and 1.9% lower against the Euro, compared with the average rates for the previous fiscal year. Operating results on a local currency basis described herein reflect sales and operating income obtained by applying the yen’s average exchange rate in the previous fiscal year to local currency-denominated monthly sales, cost of sales, and selling, general and administrative expenses in the fiscal year. Local currency basis results are not reflected in Sony’s financial statements and are not measures conforming with U.S. GAAP. In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful analytical information to investors regarding operating performance.
 
       
Note
  II:   “Sales and operating revenue” in each business segment represents sales and operating revenue recorded before intersegment transactions are eliminated. “Operating income” in each business segment represents operating income recorded before intersegment transactions and unallocated corporate expenses are eliminated.
 
       
Note
  lll:   In the third quarter ended December 31, 2004, Sony adopted Emerging Issues Task Force (“EITF”) Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share.” As a result of adopting EITF Issue No. 04-8, diluted earnings per share of net income for the fiscal year ended March 31, 2004 have been restated (see Note 2 on page 31 regarding EITF Issue No. 04-8).

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Table of Contents

     
Business Segment Information
  Year ended March 31
 
                                 
    Yen in millions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue:
                               
Electronics –
                               
Customers
  ¥ 4,838,268     ¥ 4,786,236       -1.1 %   $ 44,731  
Intersegment
    204,051       235,411               2,200  
 
Total
    5,042,319       5,021,647       -0.4       46,931  
Game –
                               
Customers
    753,732       702,524       -6.8       6,566  
Intersegment
    26,488       27,230               255  
 
Total
    780,220       729,754       -6.5       6,821  
Music –
                               
Customers
    409,487       216,779       -47.1       2,026  
Intersegment
    30,819       32,326               302  
 
Total
    440,306       249,105       -43.4       2,328  
Pictures –
                               
Customers
    756,370       733,677       -3.0       6,857  
Intersegment
    0       0               0  
 
Total
    756,370       733,677       -3.0       6,857  
Financial Services –
                               
Customers
    565,752       537,715       -5.0       5,025  
Intersegment
    27,792       22,842               213  
 
Total
    593,544       560,557       -5.6       5,238  
Other –
                               
Customers
    172,782       182,685       +5.7       1,707  
Intersegment
    95,535       71,742               671  
 
Total
    268,317       254,427       -5.2       2,378  
Elimination
    (384,685 )     (389,551 )           (3,641 )
 
Consolidated total
  ¥ 7,496,391     ¥ 7,159,616       -4.5 %   $ 66,912  
 

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

Year ended March 31


                                 
    Yen in millions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Operating income (loss):
                               
Electronics
  ¥ (6,824 )   ¥ (34,305 )         $ (321 )
Game
    67,578       43,170       -36.1 %     404  
Music
    (5,997 )     8,783             82  
Pictures
    35,230       63,899       +81.4       597  
Financial Services
    55,161       55,490       +0.6       519  
Other
    (12,054 )     (4,077 )           (38 )
 
Total
    133,094       132,960       -0.1       1,243  
                                 
Unallocated corporate expenses and elimination
    (34,192 )     (19,041 )           (178 )
 
Consolidated total
  ¥ 98,902     ¥ 113,919       +15.2 %   $ 1,065  
 

Commencing April 1, 2004, Sony has partly realigned its business segment configuration. Results of the previous year have been reclassified to conform to the presentations for the current year (See Notes 25 on page 95).

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Table of Contents

Electronics Sales and Operating Revenue to Customers by Product Category

Year ended March 31


                                 
    Yen in millions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue:
                               
Audio
  ¥ 675,496     ¥ 571,864       -15.3 %   $ 5,345  
Video
    949,261       1,034,736       +9.0       9,670  
Televisions
    925,501       957,122       +3.4       8,945  
Information and Communications
    834,757       778,374       -6.8       7,275  
Semiconductors
    253,237       246,314       -2.7       2,302  
Components
    623,799       619,477       -0.7       5,789  
Other
    576,217       578,349       +0.4       5,405  
 
Total
  ¥ 4,838,268     ¥ 4,786,236       -1.1 %   $ 44,731  
 

The above table is a breakdown of Electronics sales and operating revenue to customers in the Business Segment Information on page 12. The Electronics segment is managed as a single operating segment by Sony’s management. However, Sony believes that the information in this table is useful to investors in understanding the product categories in this business segment. In addition, commencing April 1, 2004, Sony has partly realigned its product category configuration in the Electronics segment. Accordingly, results of the previous year have been restated. (See Note 25 on page 95)

     
Geographic Segment Information
  Year ended March 31
 
                                 
    Yen in millions     Percent change     Dollars in millions  
    2004     2005     2005/2004     2005  
 
Sales and operating revenue:
                               
Japan
  ¥ 2,220,747     ¥ 2,100,793       -5.4 %   $ 19,634  
United States
    2,121,110       1,977,310       -6.8       18,479  
Europe
    1,765,053       1,612,536       -8.6       15,070  
Other Areas
    1,389,481       1,468,977       +5.7       13,729  
 
Total
    ¥7,496,391     ¥ 7,159,616       -4.5 %   $ 66,912  
 

Classification of Geographic Segment Information shows sales and operating revenue recognized by location of customers.

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Table of Contents

Condensed Financial Services Financial Statements (Unaudited)

The results of the Financial Services segment are included in Sony’s consolidated financial statements. The following schedules show unaudited condensed financial statements for the Financial Services segment and all other segments excluding Financial Services. These presentations are not required under U.S. GAAP, which is used in Sony’s consolidated financial statements. However, because the Financial Services segment is different in nature from Sony’s other segments, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements.

Transactions between the Financial Services segment and Sony without Financial Services are eliminated in the consolidated figures shown below.

n Condensed statements of income

     Financial Services

                                 
    Yen in millions     Percent change     Dollars in millions  
Year ended March 31   2004     2005     2005/2004     2005  
 
Financial service revenue
  ¥ 593,544     ¥ 560,557       -5.6 %   $ 5,238  
Financial service expenses
    538,383       505,067       -6.2       4,719  
 
Operating income
    55,161       55,490       +0.6       519  
Other income (expenses), net
    1,958       10,204       +421.1       95  
 
Income before income taxes
    57,119       65,694       +15.0       614  
Income taxes and other
    22,975       25,698       +11.9       240  
 
Income before cumulative effect of an accounting change
    34,144       39,996       +17.1       374  
Cumulative effect of an accounting change
          (4,713 )           (44 )
 
Net income
  ¥ 34,144     ¥ 35,283       +3.3 %   $ 330  
 

      Sony without Financial Services

                                 
    Yen in millions     Percent change     Dollars in millions  
Year ended March 31   2004     2005     2005/2004     2005  
 
Net sales and operating revenue
  ¥ 6,939,964     ¥ 6,632,728       -4.4 %   $ 61,988  
Costs and expenses
    6,896,377       6,575,354       -4.7       61,452  
 
Operating income
    43,587       57,374       +31.6       536  
Other income (expenses), net
    52,746       40,639       -23.0       380  
 
Income before income taxes
    96,333       98,013       +1.7       916  
Income taxes and other
    30,916       (37,043 )           (346 )
 
Income before cumulative effect of an accounting change
    65,417       135,056       +106.5       1,262  
Cumulative effect of an accounting change
    (2,117 )                  
 
Net income
  ¥ 63,300     ¥ 135,056       +113.4 %   $ 1,262  
 

      Consolidated

                                 
    Yen in millions     Percent change     Dollars in millions  
Year ended March 31   2004     2005     2005/2004     2005  
 
Financial service revenue
  ¥ 565,752     ¥ 537,715       -5.0 %   $ 5,025  
Net sales and operating revenue
    6,930,639       6,621,901       -4.5       61,887  
 
 
    7,496,391       7,159,616       -4.5       66,912  
Costs and expenses
    7,397,489       7,045,697       -4.8       65,847  
 
Operating income
    98,902       113,919       +15.2       1,065  
Other income (expenses), net
    45,165       43,288       -4.2       404  
 
Income before income taxes
    144,067       157,207       +9.1       1,469  
Income taxes and other
    53,439       (11,344 )           (106 )
 
Income before cumulative effect of an accounting change
    90,628       168,551       +86.0       1,575  
Cumulative effect of an accounting change
    (2,117 )     (4,713 )           (44 )
 
Net income
  ¥ 88,511     ¥ 163,838       +85.1 %   $ 1,531  
 

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Table of Contents

n Condensed balance sheets

      Financial Services

                         
    Yen in millions     Dollars in millions  
March 31   2004     2005     2005  
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  ¥ 256,316     ¥ 259,371     $ 2,424  
Marketable securities
    270,676       456,130       4,263  
Notes and accounts receivable, trade
    72,273       77,023       720  
Other
    100,433       197,667       1,847  
 
 
    699,698       990,191       9,254  
 
                       
Investments and advances
    2,274,510       2,378,966       22,233  
Property, plant and equipment
    40,833       38,551       360  
Other assets:
                       
Deferred insurance acquisition costs
    349,194       374,805       3,503  
Other
    110,804       103,004       963  
 
 
    459,998       477,809       4,466  
 
 
  ¥ 3,475,039     ¥ 3,885,517     $ 36,313  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities:
                       
Short-term borrowings
  ¥ 86,748     ¥ 45,358     $ 424  
Notes and accounts payable, trade
    7,847       7,099       66  
Deposits from customers in the banking business
    378,851       546,718       5,110  
Other
    175,357       109,438       1,023  
 
 
    648,803       708,613       6,623  
 
                       
Long-term liabilities:
                       
Long-term debt
    135,811       135,750       1,269  
Accrued pension and severance costs
    10,183       14,362       134  
Future insurance policy benefits and other
    2,178,626       2,464,295       23,031  
Other
    126,349       142,272       1,329  
 
 
    2,450,969       2,756,679       25,763  
 
                       
Minority interest in consolidated subsidiaries
          5,476       51  
Stockholders’ equity
    375,267       414,749       3,876  
 
 
  ¥ 3,475,039     ¥ 3,885,517     $ 36,313  
 

      Sony without Financial Services

                         
    Yen in millions     Dollars in millions  
March 31   2004     2005     2005  
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  ¥ 592,895     ¥ 519,732     $ 4,857  
Marketable securities
    4,072       4,072       38  
Notes and accounts receivable, trade
    943,590       952,692       8,904  
Other
    1,151,879       1,116,353       10,433  
 
 
    2,692,436       2,592,849       24,232  
 
Film costs
    256,740       278,961       2,607  
Investments and advances
    358,629       445,446       4,163  
Investments in Financial Services, at cost
    176,905       187,400       1,751  
Property, plant and equipment
    1,324,211       1,333,848       12,466  
Other assets
    1,251,901       1,189,398       11,117  
 
 
  ¥ 6,060,822     ¥ 6,027,902     $ 56,336  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities:
                       
Short-term borrowings
  ¥ 409,766     ¥ 204,027     $ 1,907  
Notes and accounts payable, trade
    773,221       801,252       7,488  
Other
    1,190,563       1,132,201       10,581  
 
 
    2,373,550       2,137,480       19,976  
 
                       
Long-term liabilities:
                       
Long-term debt
    775,233       627,367       5,863  
Accrued pension and severance costs
    358,199       338,040       3,159  
Other
    348,946       263,520       2,464  
 
 
    1,482,378       1,228,927       11,486  
 
                       
Minority interest in consolidated subsidiaries
    17,554       18,471       173  
Stockholders’ equity
    2,187,340       2,643,024       24,701  
 
 
  ¥ 6,060,822     ¥ 6,027,902     $ 56,336  
 

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Table of Contents

Consolidated

                         
    Yen in millions     Dollars in millions  
March 31   2004     2005     2005  
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  ¥ 849,211     ¥ 779,103     $ 7,281  
Marketable securities
    274,748       460,202       4,301  
Notes and accounts receivable, trade
    1,011,189       1,025,362       9,583  
Other
    1,228,207       1,291,504       12,070  
 
 
    3,363,355       3,556,171       33,235  
 
                       
Film costs
    256,740       278,961       2,607  
Investments and advances
    2,512,950       2,745,689       25,661  
Property, plant and equipment
    1,365,044       1,372,399       12,826  
Other assets:
                       
Deferred insurance acquisition costs
    349,194       374,805       3,503  
Other
    1,243,379       1,171,075       10,945  
 
 
    1,592,573       1,545,880       14,448  
 
 
  ¥ 9,090,662     ¥ 9,499,100     $ 88,777  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities:
                       
Short-term borrowings
  ¥ 475,017     ¥ 230,266     $ 2,152  
Notes and accounts payable, trade
    778,773       806,044       7,533  
Deposits from customers in the banking business
    378,851       546,718       5,110  
Other
    1,349,574       1,226,340       11,461  
 
 
    2,982,215       2,809,368       26,256  
 
                       
Long-term liabilities:
                       
Long-term debt
    777,649       678,992       6,346  
Accrued pension and severance costs
    368,382       352,402       3,293  
Future insurance policy benefits and other
    2,178,626       2,464,295       23,031  
Other
    382,930       299,858       2,802  
 
 
    3,707,587       3,795,547       35,472  
Minority interest in consolidated subsidiaries
    22,858       23,847       223  
Stockholders’ equity
    2,378,002       2,870,338       26,826  
 
 
  ¥ 9,090,662     ¥ 9,499,100     $ 88,777  
 

n Condensed statements of cash flows

      Financial Services

                         
    Yen in millions     Dollars in millions  
Year ended March 31   2004     2005     2005  
 
Net cash provided by operating activities
  ¥ 241,627     ¥ 168,078     $ 1,571  
Net cash used in investing activities
    (401,550 )     (421,384 )     (3,938 )
Net cash provided by financing activities
    141,696       256,361       2,396  
 
Net increase (decrease) in cash and cash equivalents
    (18,227 )     3,055       29  
Cash and cash equivalents at beginning of the fiscal year
    274,543       256,316       2,395  
 
Cash and cash equivalents at end of the fiscal year
  ¥ 256,316     ¥ 259,371     $ 2,424  
 

      Sony without Financial Services

                         
    Yen in millions     Dollars in millions  
Year ended March 31   2004     2005     2005  
 
Net cash provided by operating activities
  ¥ 401,090     ¥ 485,439     $ 4,537  
Net cash used in investing activities
    (352,496 )     (472,119 )     (4,412 )
Net cash provided by (used in) financing activities
    153,759       (95,373 )     (892 )
Effect of exchange rate changes on cash and cash equivalents
    (47,973 )     8,890       83  
 
Net increase (decrease) in cash and cash equivalents
    154,380       (73,163 )     (684 )
Cash and cash equivalents at beginning of the fiscal year
    438,515       592,895       5,541  
 
Cash and cash equivalents at end of the fiscal year
  ¥ 592,895     ¥ 519,732     $ 4,857  
 

Consolidated

                         
    Yen in millions     Dollars in millions  
Year ended March 31   2004     2005     2005  
 
Net cash provided by operating activities
  ¥ 632,635     ¥ 646,997     $ 6,047  
Net cash used in investing activities
    (761,792 )     (931,172 )     (8,703 )
Net cash provided by financing activities
    313,283       205,177       1,918  
Effect of exchange rate changes on cash and cash equivalents
    (47,973 )     8,890       83  
 
Net increase (decrease) in cash and cash equivalents
    136,153       (70,108 )     (655 )
Cash and cash equivalents at beginning of the fiscal year
    713,058       849,211       7,936  
 
Cash and cash equivalents at end of the fiscal year
  ¥ 849,211     ¥ 779,103     $ 7,281  
 

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Table of Contents

     
Five-Year Summary of Selected Financial Data
   
 
Sony Corporation and Consolidated Subsidiaries - Year ended March 31
                                                 
                                            Dollars in  
    Yen in millions     millions except  
    except per share amounts     per share amounts  
    2001     2002     2003     2004     2005     2005  
 
FOR THE YEAR
                                               
Sales and operating revenue
  ¥ 7,314,824     ¥ 7,578,258     ¥ 7,473,633     ¥ 7,496,391     ¥ 7,159,616     $ 66,912  
Operating income
    225,346       134,631       185,440       98,902       113,919       1,065  
Income before income taxes
    265,868       92,775       247,621       144,067       157,207       1,469  
Income taxes
    115,534       65,211       80,831       52,774       16,044       150  
Income before cumulative effect of accounting changes
    121,227       9,332       115,519       90,628       168,551       1,575  
Net income
    16,754       15,310       115,519       88,511       163,838       1,531  
 
                                               
Per share data:
                                               
Common stock
                                               
Income before cumulative effect of accounting changes
                                               
– Basic
  ¥ 132.64     ¥ 10.21     ¥ 125.74     ¥ 98.26     ¥ 180.96     $ 1.69  
– Diluted
    124.36       10.18       118.21       89.03       162.59       1.52  
Net income
                                               
– Basic
    18.33       16.72       125.74       95.97       175.90       1.64  
– Diluted
    19.28       16.67       118.21       87.00       158.07       1.48  
Cash dividends
    25.00       25.00       25.00       25.00       25.00       0.23  
Subsidiary tracking stock
                                               
Net income (loss)
                                               
– Basic
          (15.87 )     (41.98 )     (41.80 )     17.21       0.16  
Cash dividends
                                   
 
                                               
Depreciation and amortization*
  ¥ 348,268     ¥ 354,135     ¥ 351,925     ¥ 366,269     ¥ 372,865     $ 3,485  
Capital expenditures (additions to property, plant and equipment)
    465,209       326,734       261,241       378,264       356,818       3,335  
Research and development expenses
    416,708       433,214       443,128       514,483       502,008       4,692  
 
                                               
AT YEAR-END
                                               
Net working capital
  ¥ 830,734     ¥ 778,716     ¥ 719,166     ¥ 381,140       746,803       6,979  
Stockholders’ equity
    2,315,453       2,370,410       2,280,895       2,378,002       2,870,338       26,826  
Stockholders’ equity per share attributable to common stock
  ¥ 2,521.19     ¥ 2,570.31     ¥ 2,466.81     ¥ 2,563.67     ¥ 2,872.21     $ 26.84  
Total assets
  ¥ 7,827,966     ¥ 8,185,795     ¥ 8,370,545     ¥ 9,090,662     ¥ 9,499,100     $ 88,777  
 
                                               
Number of shares issued at year-end (thousands of shares)
                                               
Common stock
    919,617       919,744       922,385       923,950       996,092          
Subsidiary tracking stock
          3,072       3,072       3,072       3,072          
 


* Including amortization expenses for intangible assets and for deferred insurance acquisition costs
             
Notes:
    1.     U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥107 = U.S. $1, the approximate Tokyo foreign exchange market rate as of March 31, 2005.
 
           
    2.     In July 2003, AcSEC issued Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by ¥5,156 million ($48 million) for the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recognized ¥4,713 million ($44 million) of loss (net of income taxes of ¥2,675 million) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.
 
           
    3.     In July 2004, the EITF issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with FAS No.128, Sony had not previously included in the computation of diluted earnings per share (“EPS”) the number of potential shares of common stock issuable upon the conversion of contingently convertible debt instruments (“Co-Cos”) that have not met the conditions to exercise associated the stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of shares of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise such rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and its net

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Table of Contents

             
          income for the year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and its net income for the year ended March 31, 2005 were decreased by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to those before the adoption of EITF Issue No. 04-8.
 
           
    4.     In January 2003, the FASB issued FIN No.46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletins (“ARB”) No.51”, and the revised FIN No.46 was issued in December 2003. This interpretation addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony adopted FIN No.46 on July 1, 2003. As a result of the adoption of FIN No.46, Sony recognized ¥2,117 million of loss as the cumulative effect of an accounting change. Additionally, Sony’s assets and liabilities increased by ¥96,776 million and ¥97,950 million, respectively, including cash and cash equivalents of ¥1,521 million.
 
           
    5.     On April 1, 2001, Sony adopted FAS No.133, “Accounting for Derivative Instruments and Hedging Activities” as amended by FAS No.138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of FASB Statement No.133”. As a result, Sony’s operating income, income before income taxes and net income for the year ended March 31, 2002 decreased by ¥3,007 million, ¥3,441 million and ¥2,167 million, respectively. Additionally, Sony recorded a one-time non-cash after-tax unrealized gain of ¥1,089 million in accumulated other comprehensive income in the consolidated balance sheet, as well as an after-tax gain of ¥5,978 million in the cumulative effect of accounting changes in the consolidated statement of income. In April 2003, the FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. Sony adopted FAS No. 149 on July 1, 2003. The adoption of FAS No. 149 did not have an impact on Sony’s results of operations and financial position.
 
           
    6.     In July 2001, the FASB issued FAS No. 142, “Goodwill and Other Intangible Assets”. Sony adopted FAS No. 142 retroactive to April 1, 2001. As a result, Sony’s operating income and income before income taxes for the year ended March 31, 2002 increased by ¥20,114 million and income before cumulative effect of accounting changes as well as net income for the year ended March 31, 2002 increased by ¥18,932 million.

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Table of Contents

     
Consolidated Balance Sheets
   
 
Sony Corporation and Consolidated Subsidiaries - March 31
   
                         
                    Dollars in millions  
    Yen in millions     (Note 3)  
    2004     2005     2005  
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  ¥ 849,211     ¥ 779,103     $ 7,281  
Time deposits
    4,662       1,492       14  
Marketable securities (Notes 8 and 12)
    274,748       460,202       4,301  
Notes and accounts receivable, trade (Notes 6 and 7)
    1,123,863       1,113,071       10,403  
Allowance for doubtful accounts and sales returns
    (112,674 )     (87,709 )     (820 )
Inventories (Note 4)
    666,507       631,349       5,900  
Deferred income taxes (Note 21)
    125,532       141,154       1,319  
Prepaid expenses and other current assets
    431,506       517,509       4,837  
 
Total current assets
    3,363,355       3,556,171       33,235  
 
 
                       
Film costs (Note 5)
    256,740       278,961       2,607  
 
 
                       
Investments and advances:
                       
Affiliated companies (Note 6)
    86,253       252,905       2,364  
Securities investments and other (Notes 8, 11 and 12)
    2,426,697       2,492,784       23,297  
 
 
    2,512,950       2,745,689       25,661  
 
 
                       
Property, plant and equipment (Notes 9 and 12):
                       
Land
    189,785       182,900       1,709  
Buildings
    930,983       925,796       8,652  
Machinery and equipment
    2,053,085       2,192,038       20,486  
Construction in progress
    98,480       92,611       866  
 
 
    3,272,333       3,393,345       31,713  
Less – Accumulated depreciation
    1,907,289       2,020,946       18,887  
 
 
    1,365,044       1,372,399       12,826  
 
 
                       
Other assets:
                       
Intangibles, net (Notes 10 and 15)
    248,010       187,024       1,748  
Goodwill (Note 10)
    277,870       283,923       2,653  
Deferred insurance acquisition costs (Note 11)
    349,194       374,805       3,503  
Deferred income taxes (Note 21)
    203,203       240,396       2,247  
Other
    514,296       459,732       4,297  
 
 
    1,592,573       1,545,880       14,448  
 
 
                       
 
  ¥ 9,090,662     ¥ 9,499,100     $ 88,777  
 

(Continued on following page.)

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Table of Contents

     
 
                         
                    Dollars in millions  
    Yen in millions     (Note 3)  
    2004     2005     2005  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current liabilities:
                       
Short-term borrowings (Note 12)
  ¥ 91,260     ¥ 63,396     $ 592  
Current portion of long-term debt (Notes 9, 12 and 14)
    383,757       166,870       1,560  
Notes and accounts payable, trade (Note 6)
    778,773       806,044       7,533  
Accounts payable, other and accrued expenses (Notes 5 and 15)
    812,175       746,466       6,976  
Accrued income and other taxes
    57,913       55,651       520  
Deposits from customers in the banking business (Note 13)
    378,851       546,718       5,110  
Other (Notes 21 and 24)
    479,486       424,223       3,965  
 
Total current liabilities
    2,982,215       2,809,368       26,256  
 
 
                       
Long-term liabilities:
                       
Long-term debt (Notes 9, 12 and 14)
    777,649       678,992       6,346  
Accrued pension and severance costs (Note 15)
    368,382       352,402       3,293  
Deferred income taxes (Note 21)
    96,193       72,227       675  
Future insurance policy benefits and other (Note 11)
    2,178,626       2,464,295       23,031  
Other
    286,737       227,631       2,127  
 
 
    3,707,587       3,795,547       35,472  
 
 
                       
Minority interest in consolidated subsidiaries
    22,858       23,847       223  
 
 
                       
Stockholders’ equity (Note 16):
                       
Subsidiary tracking stock, no par value –
                       
Authorized 100,000,000 shares, outstanding 3,072,000 shares
    3,917       3,917       36  
Common stock, no par value –
                       
2004–Authorized 3,500,000,000 shares, outstanding 926,418,280 shares
    476,350                  
2005–Authorized 3,500,000,000 shares, outstanding 997,211,213 shares
          617,792       5,774  
 
                       
Additional paid-in capital
    992,817       1,134,222       10,600  
Retained earnings
    1,367,060       1,506,082       14,076  
Accumulated other comprehensive income –
                       
Unrealized gains on securities (Note 8)
    69,950       62,669       586  
Unrealized losses on derivative instruments (Note 14)
    (600 )     (2,490 )     (23 )
Minimum pension liability adjustment (Note 15)
    (89,261 )     (90,030 )     (841 )
Foreign currency translation adjustments
    (430,048 )     (355,824 )     (3,326 )
 
 
    (449,959 )     (385,675 )     (3,604 )
 
                       
Treasury stock, at cost
                       
Subsidiary tracking stock
                       
(2004 – 0 shares, 2005 – 32 shares)
          (0 )     (0 )
Common stock
             
(2004 – 2,468,258 shares, 2005 – 1,118,984 shares)
    (12,183 )     (6,000 )     (56 )
 
 
    2,378,002       2,870,338       26,826  
 
 
                       
Commitments and contingent liabilities (Notes 9 and 24)
                       
 
  ¥ 9,090,662     ¥ 9,499,100     $ 88,777  
 

The accompanying notes are an integral part of these statements.

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Table of Contents

Consolidated Statements of Income
Sony Corporation and Consolidated Subsidiaries - Year ended March 31

                                 
                            Dollars in millions  
    Yen in millions     (Note 3)  
    2003     2004     2005     2005  
 
Sales and operating revenue:
                               
Net sales (Note 6)
  ¥ 6,916,042     ¥ 6,883,478     ¥ 6,565,010     $ 61,355  
Financial service revenue
    509,398       565,752       537,715       5,025  
Other operating revenue
    48,193       47,161       56,891       532  
 
 
    7,473,633       7,496,391       7,159,616       66,912  
 
Costs and expenses:
                               
Cost of sales (Notes 18 and 19)
    4,979,421       5,058,205       5,000,112       46,730  
Selling, general and administrative (Notes 17, 18 and 19)
    1,782,367       1,798,239       1,535,015       14,346  
Financial service expenses
    486,464       505,550       482,576       4,510  
Loss on sale, disposal or impairment of assets, net (Notes 10 and 18)
    39,941       35,495       27,994       261  
 
 
    7,288,193       7,397,489       7,045,697       65,847  
 
Operating income
    185,440       98,902       113,919       1,065  
 
Other income:
                               
Interest and dividends (Note 6)
    14,441       18,756       14,708       137  
Royalty income
    32,375       34,244       31,709       296  
Foreign exchange gain, net
    1,928       18,059              
Gain on sale of securities investments, net (Notes 6 and 8)
    72,552       11,774       5,437       51  
Gain on change in interest in subsidiaries and equity investees (Note 20)
          4,870       16,322       153  
Other
    36,232       34,587       29,447       275  
 
 
    157,528       122,290       97,623       912  
 
Other expenses:
                               
Interest
    27,314       27,849       24,578       230  
Loss on devaluation of securities investments
    23,198       16,481       3,715       35  
Foreign exchange loss, net
                524       5  
Other
    44,835       32,795       25,518       238  
 
 
    95,347       77,125       54,335       508  
 
Income before income taxes
    247,621       144,067       157,207       1,469  
 
Income taxes (Note 21):
                               
Current
    178,847       87,219       85,510       799  
Deferred
    (98,016 )     (34,445 )     (69,466 )     (649 )
 
 
    80,831       52,774       16,044       150  
 
Income before minority interest, equity in net income (loss) of affiliated companies and cumulative effect of an accounting change
    166,790       91,293       141,163       1,319  
Minority interest in income of consolidated subsidiaries
    6,581       2,379       1,651       15  
Equity in net income (loss) of affiliated companies (Note 6)
    (44,690 )     1,714       29,039       271  
 
Income before cumulative effect of an accounting change
    115,519       90,628       168,551       1,575  
 
Cumulative effect of an accounting change (2004: Net of income taxes of ¥0 million 2005: Net of income taxes of ¥2,675 million) (Note 2)
          (2,117 )     (4,713 )     (44 )
 
Net income
  ¥ 115,519     ¥ 88,511     ¥ 163,838     $ 1,531  
 

(Continued on following page.)

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Table of Contents

                                 
                            Dollars  
    Yen     (Note 3)  
    2003     2004     2005     2005  
 
Per share data (Note 22):
                               
Common stock
                               
Income before cumulative effect of an accounting change
                               
– Basic
  ¥ 125.74     ¥ 98.26     ¥ 180.96     $ 1.69  
– Diluted
    118.21       89.03       162.59       1.52  
Cumulative effect of an accounting change
                               
– Basic
          (2.29 )     (5.06 )     (0.05 )
– Diluted
          (2.03 )     (4.52 )     (0.04 )
Net income
                               
– Basic
    125.74       95.97       175.90       1.64  
– Diluted
    118.21       87.00       158.07       1.48  
Cash dividends
    25.00       25.00       25.00       0.23  
 
Subsidiary tracking stock (Note 16)
                               
Net income (loss)
                               
– Basic
    (41.98 )     (41.80 )     17.21       0.16  
 

The accompanying notes are an integral part of these statements.

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Table of Contents

     
Consolidated Statements of Cash Flows
   
 
Sony Corporation and Consolidated Subsidiaries - Year ended March 31
   
                                 
                            Dollars in millions  
    Yen in millions     (Note 3)  
    2003     2004     2005     2005  
 
Cash flows from operating activities:
                               
Net income
  ¥ 115,519     ¥ 88,511     ¥ 163,838     $ 1,531  
Adjustments to reconcile net income to net cash provided by operating activities –
                               
Depreciation and amortization, including amortization of deferred insurance acquisition costs
    351,925       366,269       372,865       3,485  
Amortization of film costs
    312,054       305,786       276,320       2,582  
Accrual for pension and severance costs, less payments
    37,858       35,562       22,837       214  
Loss on sale, disposal or impairment of assets, net (Notes 10 and 18)
    39,941       35,495       27,994       261  
Gain on sale or loss on devaluation of securities investments, net (Notes 6 and 8)
    (49,354 )     4,707       (1,722 )     (16 )
Gain on change in interest in subsidiaries and equity investees (Note 20)
          (4,870 )     (16,322 )     (153 )
Deferred income taxes (Note 21)
    (98,016 )     (34,445 )     (69,466 )     (649 )
Equity in net (income) losses of affiliated companies, net of dividends
    46,692       1,732       (15,648 )     (146 )
Cumulative effect of an accounting change (Note 2)
          2,117       4,713       44  
Changes in assets and liabilities:
                               
(Increase) decrease in notes and accounts receivable, trade
    174,679       (63,010 )     (22,056 )     (206 )
(Increase) decrease in inventories
    36,039       (78,656 )     34,128       319  
Increase in film costs
    (317,953 )     (299,843 )     (294,272 )     (2,750 )
Increase (decrease) in notes and accounts payable, trade
    (58,384 )     93,950       31,473       294  
Increase (decrease) in accrued income and other taxes
    14,637       (46,067 )     3       0  
Increase in future insurance policy benefits and other
    233,992       264,216       144,143       1,347  
Increase in deferred insurance acquisition costs
    (66,091 )     (71,219 )     (65,051 )     (608 )
(Increase) decrease in marketable securities held in the financial service business for trading purpose
          369       (28,524 )     (266 )
(Increase) decrease in other current assets
    29,095       (34,991 )     (29,699 )     (278 )
Increase in other current liabilities
    26,205       44,772       46,545       435  
Other
    24,950       22,250       64,898       607  
 
Net cash provided by operating activities
  ¥ 853,788     ¥ 632,635     ¥ 646,997     $ 6,047  
 

(Continued on following page.)

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Table of Contents

                                 
                            Dollars in millions  
    Yen in millions     (Note 3)  
    2003     2004     2005     2005  
 
Cash flows from investing activities:
                               
Payments for purchases of fixed assets
  ¥ (275,285 )   ¥ (427,344 )   ¥ (453,445 )   $ (4,238 )
Proceeds from sales of fixed assets
    25,711       33,987       34,184       319  
Payments for investments and advances by financial service business
    (1,012,508 )     (1,167,945 )     (1,309,092 )     (12,235 )
Payments for investments and advances (other than financial service business)
    (123,839 )     (33,329 )     (158,151 )     (1,478 )
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances by financial service business
    529,395       791,188       923,593       8,632  
Proceeds from maturities of marketable securities, sales of securities investments and collections of advances (other than financial service business)
    148,977       35,521       25,849       242  
Other
    1,124       6,130       5,890       55  
 
Net cash used in investing activities
    (706,425 )     (761,792 )     (931,172 )     (8,703 )
 
Cash flows from financing activities:
                               
Proceeds from issuance of long-term debt
    12,323       267,864       57,232       535  
Payments of long-term debt
    (238,144 )     (32,042 )     (94,862 )     (887 )
Increase (decrease) in short-term borrowings
    (7,970 )     (57,708 )     11,397       107  
Increase in deposits from customers in the financial service business (Note 13)
    142,023       129,874       294,352       2,751  
Increase (decrease) in call money and bills sold in the banking business (Note 12)
    24,700       30,300       (40,400 )     (377 )
Dividends paid
    (22,871 )     (23,106 )     (22,978 )     (215 )
Other
    (3,195 )     (1,899 )     436       4  
 
Net cash provided by (used in) financing activities
    (93,134 )     313,283       205,177       1,918  
 
Effect of exchange rate changes on cash and cash equivalents
    (24,971 )     (47,973 )     8,890       83  
 
Net increase (decrease) in cash and cash equivalents
    29,258       136,153       (70,108 )     (655 )
Cash and cash equivalents at beginning of the fiscal year
    683,800       713,058       849,211       7,936  
 
Cash and cash equivalents at end of the fiscal year
  ¥ 713,058     ¥ 849,211     ¥ 779,103     $ 7,281  
 
 
                               
Supplemental data:
                               
Cash paid during the year for –
                               
Income taxes
  ¥ 171,531     ¥ 114,781     ¥ 65,477     $ 612  
Interest
    22,216       22,571       18,187       170  
 
Non-cash investing and financing activities –
                               
Conversion of convertible bonds
  ¥ 344     ¥ 7,977     ¥ 282,744     $ 2,641  
Obtaining assets by entering into capital lease
    9,034       18,298       19,049       178  
Contribution of Net assets into the Joint Venture with Bertelsmann AG (Note 6)
                9,402       88  
 

The accompanying notes are an integral part of these statements..

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Table of Contents

     
Consolidated Statements of Changes in Stockholders’ Equity
   
 
Sony Corporation and Consolidated Subsidiaries - Year ended March 31
   
                                                         
    Yen in millions  
                                    Accumulated              
    Subsidiary             Additional             other     Treasury        
    tracking     Common     paid-in     Retained     comprehensive     stock, at        
    stock     stock     capital     earnings     income     cost     Total  
 
Balance at March 31, 2002
  ¥ 3,917     ¥ 472,189     ¥ 968,223     ¥ 1,209,262     ¥ (275,593 )   ¥ (7,588 )   ¥ 2,370,410  
Conversion of convertible bonds
            172       172                               344  
Stock issued under exchange offering (Note 16)
                    15,791                               15,791  
 
Comprehensive income:
                                                       
Net income
                            115,519                       115,519  
Other comprehensive income, net of tax (Note 16) –
                                                       
Unrealized gains on securities:
                                                       
Unrealized holding gains or losses arising during the period
                                    (9,627 )             (9,627 )
Less: Reclassification adjustment for gains or losses included in net income
                                    4,288               4,288  
Unrealized losses on derivative instruments:
                                                       
Unrealized holding gains or losses arising during the period
                                    (4,477 )             (4,477 )
Less: Reclassification adjustment for gains or losses included in net income
                                    395               395  
Minimum pension liability adjustment
                                    (110,636 )             (110,636 )
Foreign currency translation adjustments:
                                                       
Translation adjustments arising during the period
                                    (83,993 )             (83,993 )
Less: Reclassification adjustment for losses included in net income
                                    7,665               7,665  
 
                                                     
Total comprehensive income
                                                    (80,866 )
 
                                                     
 
Stock issue costs, net of tax
                            (19 )                     (19 )
Dividends declared
                            (23,022 )                     (23,022 )
Purchase of treasury stock
                                            (1,817 )     (1,817 )
Reissuance of treasury stock
                    10                       64       74  
 
Balance at March 31, 2003
  ¥ 3,917     ¥ 472,361     ¥ 984,196     ¥ 1,301,740     ¥ (471,978 )   ¥ (9,341 )   ¥ 2,280,895  
 

(Continued on following page.)

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Table of Contents


                                                         
    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, 2003
  ¥ 3,917     ¥ 472,361     ¥ 984,196     ¥ 1,301,740     ¥ (471,978 )   ¥ (9,341 )   ¥ 2,280,895  
Conversion of convertible bonds
            3,989       3,988                               7,977  
Stock issued under exchange offering (Note 16)
                    5,409                               5,409  
 
                                                       
Comprehensive income:
                                                       
Net income
                            88,511                       88,511  
Other comprehensive income, net of tax (Note 16)
                                                       
Unrealized gains on securities:
                                                       
Unrealized holding gains or losses arising during the period
                                    57,971               57,971  
Less: Reclassification adjustment for gains or losses included in net income
                                    (5,679 )             (5,679 )
Unrealized losses on derivative instruments:
                                                       
Unrealized holding gains or losses arising during the period
                                    7,537               7,537  
Less: Reclassification adjustment for gains or losses included in net income
                                    (3,344 )             (3,344 )
Minimum pension liability adjustment
                                    93,415               93,415  
Foreign currency translation adjustments :
                                                       
Translation adjustments arising during the period
                                    (129,113 )             (129,113 )
Less: Reclassification adjustment for losses included in net income
                                    1,232               1,232  
 
                                                     
Total comprehensive income
                                                    110,530  
 
                                                     
 
                                                       
Stock issue costs, net of tax
                            (53 )                     (53 )
Dividends declared
                            (23,138 )                     (23,138 )
Purchase of treasury stock
                                            (8,523 )     (8,523 )
Reissuance of treasury stock
                    (776 )                     5,681       4,905  
 
Balance at March 31, 2004
  ¥ 3,917     ¥ 476,350     ¥ 992,817     ¥ 1,367,060     ¥ (449,959 )   ¥ (12,183 )   ¥ 2,378,002  
 

(Continued on following page.)

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Table of Contents


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

(Continued on following page.)

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Table of Contents


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

The accompanying notes are an integral part of these statements.

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Table of Contents

     
Index to Notes to Consolidated Financial Statements
   
 
Sony Corporation and Consolidated Subsidiaries
   
             
Notes to Consolidated Financial Statements   Page  
  Nature of operations     30  
  Summary of significant accounting policies     30  
  U.S. dollar amounts     43  
  Inventories     43  
  Film costs     44  
  Related party transactions     44  
  Accounts receivable securitization programs     47  
  Marketable securities and securities investments and other     49  
  Leased assets     52  
  Goodwill and intangible assets     53  
  Insurance-related accounts     56  
  Short-term borrowings and long-term debt     57  
  Deposits from customers in the banking business     59  
  Financial instruments     60  
  Pension and severance plans     64  
  Stockholders’ equity     70  
  Stock-based compensation plans     76  
  Restructuring charges and asset impairments     79  
  Research and development costs, advertising costs and shipping and handling costs     85  
  Gain on change in interest in subsidiaries and equity investees     86  
  Income taxes     87  
  Reconciliation of the differences between basic and diluted net income per share (“EPS”)     90  
  Variable interest entities     92  
  Commitments and contingent liabilities     93  
  Business segment information     95  

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Table of Contents

     
Notes to Consolidated Financial Statements
   
 
Sony Corporation and Consolidated Subsidiaries
   

1. Nature of operations

Sony Corporation and consolidated subsidiaries (hereinafter collectively referred to as “Sony”) are engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and industrial markets. Sony also develops, produces, manufactures, and markets home-use game consoles and software. Sony’s principal manufacturing facilities are located in Japan, the United States of America, Europe, and Asia. Its electronic products are marketed throughout the world and game products are marketed mainly in Japan, the United States of America and Europe by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet. Sony is engaged in the development, production, manufacture, marketing, distribution and broadcasting of image-based software, including film, video and television product. Sony is also engaged in the development, production, manufacture, and distribution of recorded music, in all commercial formats and music genres. Further, Sony is engaged in various financial service businesses including insurance operations through a Japanese life insurance subsidiary and non-life insurance subsidiaries, banking operations through a Japanese internet-based banking subsidiary and leasing and credit financing operations in Japan. In addition to the above, Sony is engaged in Internet-related businesses, an animation production and marketing business, an imported general merchandise retail business, an IC card business and an advertising agency business in Japan.

2. Summary of significant accounting policies

Sony Corporation and its subsidiaries in Japan maintain their records and prepare their financial statements in accordance with accounting principles generally accepted in Japan while its foreign subsidiaries maintain their records and prepare their financial statements in conformity with accounting principles generally accepted in the countries of their domiciles. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments were not recorded in the statutory books of account.

  (1)   Newly adopted accounting pronouncements:

Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts -

In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants (“AcSEC”) issued the Statement of Position (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 requires insurance enterprises to record additional reserves for long-duration life insurance contracts with minimum guarantee or annuity receivable options. Additionally, SOP 03-1 provides guidance for the presentation of separate accounts. This statement is effective for fiscal years beginning after December 15, 2003. Sony

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Table of Contents

adopted SOP 03-1 on April 1, 2004. As a result of the adoption of SOP 03-1, Sony’s operating income decreased by ¥5,156 million ($48 million) for the year ended March 31, 2005. Additionally, on April 1, 2004, Sony recorded a ¥4,713 million ($44 million) charge (net of income taxes of ¥2,675 million) as a cumulative effect of an accounting change. In addition, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets.

The Effect of Contingently Convertible Instruments on Diluted Earnings per Share -

In July 2004, the Emerging Issues Task Force (“EITF”) issued EITF Issue No. 04-8, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share”. In accordance with Statement of Financial Accounting Standards (‘‘FAS’’) No.128, ‘‘Earnings per Share’’, Sony had not previously included in the computation of diluted earnings per share (‘‘EPS’’) the number of potential common stock issuable upon the conversion of contingently convertible debt instruments (‘‘Co-Cos’’) that had not met the conditions to exercise the stock acquisition rights. EITF Issue No. 04-8 requires that the maximum number of common stock that could be issued upon the conversion of Co-Cos be included in diluted EPS computations from the date of issuance regardless of whether the conditions to exercise the stock acquisition rights have been met. EITF Issue No. 04-8 is effective for reporting periods ending after December 15, 2004. Sony adopted EITF Issue No. 04-8 during the quarter ended December 31, 2004. As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the year ended March 31, 2004 were restated respectively. Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the year ended March 31, 2005 were decreased by ¥7.26 ($0.07) and ¥7.06 ($0.07), respectively, compared to those before adopting EITF Issue No. 04-8.

Employers’ Disclosures about Pensions and Other Postretirement Benefits -

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (“FAS No. 132(R)”), which revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”, an amendment of FAS No. 87, “Employers’ Accounting for Pensions”, FAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits”, and FAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. FAS No. 132(R) revised employers’ disclosures about pension plans and other postretirement benefit plans. It did not change the measurement or recognition of those plans required by FAS No. 87, 88 and 106. While retaining the disclosure requirements of FAS No. 132, FAS No. 132(R) requires additional disclosures about assets, obligations and cash flows. The provisions of FAS No. 132(R) were generally effective for financial statements with fiscal years ending after December 15, 2003, excluding the disclosure of certain information about foreign plans. The information about foreign plans is effective for fiscal years ending after June 15, 2004. In accordance with FAS No. 132(R), Note 15, Pension and severance plans, has been expanded to include the new disclosures.

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Consolidation of Variable Interest Entities -

In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51”. FIN No. 46 addresses consolidation by a primary beneficiary of a variable interest entity (“VIE”). Sony early adopted the provisions of FIN No. 46 on July 1, 2003. As a result of adopting the original FIN No. 46, Sony recognized a one-time charge with no tax effect of ¥2,117 million as a cumulative effect of accounting change in the consolidated statement of income, and Sony’s assets and liabilities increased by ¥95,255 million and ¥97,950 million, respectively. These increases were treated as non-cash transactions in the consolidated statement of cash flows. In addition, cash and cash equivalents increased by ¥1,521 million. See Note 23 for further discussion on the VIEs that are used by Sony.

      In December 2003, the FASB issued revised FIN No. 46 (“FIN No. 46R”), which replaced FIN No. 46. Sony early adopted the provisions of FIN No. 46R upon its issuance. The adoption of FIN No. 46R did not have an impact on Sony’s results of operations and financial position or impact the way Sony had previously accounted for VIEs.

  (2)   Significant accounting policies:

Basis of consolidation and accounting for investments in affiliated companies -

The consolidated financial statements include the accounts of Sony Corporation and its majority-owned subsidiary companies, general partnerships in which Sony has a controlling interest, and variable interest entities for which Sony is the primary beneficiary. All intercompany transactions and accounts are eliminated. Investments in business entities in which Sony does not have control, but has the ability to exercise significant influence over operating and financial policies generally through 20-50% ownership, are accounted for under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method. Under the equity method, investments are stated at cost plus/minus Sony’s equity in undistributed earnings or losses. Consolidated net income includes Sony’s equity in current earnings or losses of such companies, after elimination of unrealized intercompany profits. If the value of an investment has declined and is judged to be other than temporary, the investment is written down to its fair value.

     On occasion, a consolidated subsidiary or an affiliated company accounted for by the equity method may issue its shares to third parties in either a public or private offering or upon conversion of convertible debt to common stock at amounts per share in excess of or less than Sony’s average per share carrying value. With respect to such transactions, where the sale of such shares is not part of a broader corporate reorganization and the reacquisition of such shares is not contemplated at the time of issuance, the resulting gains or losses arising from the change in interest are recorded in income for the year the change in interest transaction occurs. If the sale of such shares is part of a broader corporate reorganization, the reacquisition of such shares is contemplated at the time of issuance or realization of such gain is not reasonably assured (i.e., the entity is newly formed, non-operating, a research and development or start-up/development stage entity, or where the entity’s ability to continue in existence is in question), the transaction is accounted for as a capital transaction.

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     The excess of the cost over the underlying net equity of investments in consolidated subsidiaries and affiliated companies accounted for on an equity basis is allocated to identifiable assets and liabilities based on fair values at the date of acquisition. The unassigned residual value of the excess of the cost over the underlying net equity is recognized as goodwill.

Use of estimates -

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Translation of foreign currencies -

All asset and liability accounts of foreign subsidiaries and affiliates are translated into Japanese yen at appropriate year-end current rates and all income and expense accounts are translated at rates that approximate those rates prevailing at the time of the transactions. The resulting translation adjustments are accumulated as a component of accumulated other comprehensive income.

      Foreign currency receivables and payables are translated at appropriate year-end current rates and the resulting translation gains or losses are taken into income.

Cash and cash equivalents -

Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months or less, that are readily convertible to known amounts of cash and are so near maturity that they present insignificant risk of changes in value because of changes in interest rates.

Marketable debt and equity securities -

Debt and equity securities designated as available-for-sale, whose fair values are readily determinable, are carried at fair value with unrealized gains or losses included as a component of accumulated other comprehensive income, net of applicable taxes. Debt and equity securities classified as trading securities are carried at fair value with unrealized gains or losses included in income. Debt securities that are expected to be held-to-maturity are carried at amortized cost. Individual securities classified as either available-for-sale or held-to-maturity are reduced to net realizable value by a charge to income for other than temporary declines in fair value. Realized gains and losses are determined on the average cost method and are reflected in income.

Equity securities in non-public companies -

Equity securities in non-public companies are carried at cost as fair value is not readily determinable. If the value of a non-public equity investment is estimated to have declined and such decline is judged to be other than

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temporary, Sony recognizes the impairment of the investment and the carrying value is reduced to its fair value. Determination of impairment is based on the consideration of such factors as operating results, business plans and estimated future cash flows. Fair value is determined through the use of such methodologies as discounted cash flows, valuation of recent financings and comparable valuations of similar companies.

Inventories -

Inventories in electronics, game and music as well as non-film inventories for pictures are valued at cost, not in excess of market, cost being determined on the “average cost” basis except for the cost of finished products carried by certain subsidiary companies in electronics which is determined on the “first-in, first-out” basis.

Film costs -

Film costs related to theatrical and television product (which includes direct production costs, production overhead and acquisition costs) are stated at the lower of unamortized cost or estimated fair value and classified as non-current assets. Film costs are amortized, and the estimated liabilities for residuals and participations are accrued, for an individual product based on the proportion that current period actual revenues bear to the estimated remaining total lifetime revenues. These estimates are reviewed on a periodic basis.

Property, plant and equipment and depreciation -

Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is primarily computed on the declining-balance method for Sony Corporation and its Japanese subsidiaries, except for certain semiconductor manufacturing facilities whose depreciation is computed on the straight-line method, and on the straight-line method for its foreign subsidiaries at rates based on estimated useful lives of the assets, principally, ranging from 15 years up to 50 years for buildings and from 2 years up to 10 years for machinery and equipment. Significant renewals and additions are capitalized at cost. Maintenance and repairs, and minor renewals and betterments are charged to income as incurred.

Goodwill and other intangible assets -

Goodwill and certain other intangible assets that are determined to have an indefinite life are not amortized and are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount. Fair value for those assets is generally determined using a discounted cash flow analysis.

      Intangible assets that are determined not to have an indefinite life mainly consist of artist contracts, music catalogs, acquired patent rights and software to be sold, leased or otherwise marketed. Artist contracts and music catalogs are amortized on a straight-line basis over a period of up to 40 years. Acquired patent rights and software to be sold, leased or otherwise marketed are amortized on a straight-line basis over 3 to 10 years.

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Accounting for computer software to be sold -

Sony accounts for software development costs in accordance with FAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”.

      In the Electronics segment, costs related to establishing the technological feasibility of a software product are expensed as incurred as a part of research and development in cost of sales. Costs that are incurred to produce the finished product after technological feasibility is established are capitalized and amortized over the estimated economic life of the product, which is generally three years. Sony performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.

      In the Game segment, technological feasibility of the underlying software is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established are not material, and accordingly, Sony expenses software development costs for the Game segment as incurred as a part of research and development in cost of sales.

Deferred insurance acquisition costs -

Costs that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs include such items as commission, medical examination and inspection report fees. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits.

Product warranty -

Sony provides for the estimated cost of product warranties at the time revenue is recognized by either product category group or individual product. The product warranty is calculated based upon product sales, estimated probability of failure and estimated cost per claim. The variables used in the calculation of the provision are reviewed on a periodic basis.

      Certain subsidiaries in the Electronics segment offer extended warranty programs. The consideration received through extended warranty service is deferred and amortized on a straight-line basis over the term of the extended warranty.

Future insurance policy benefits -

Liabilities for future insurance policy benefits are primarily comprised of the present value of estimated future payments to policyholders. These liabilities are computed by the net level premium method based upon the assumptions such as future investment yield, morbidity, mortality and withdrawals. These assumptions are reviewed on a periodic basis. Liabilities for future insurance policy benefits also include liabilities for guaranteed benefits related to certain non-traditional long-duration life and annuity contracts.

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Accounting for the impairment of long-lived assets -

Sony periodically reviews the carrying value of its long-lived assets held and used, other than goodwill and intangible assets with indefinite lives, and assets to be disposed of, whenever events or changes in circumstances indicated that the carrying amount may not be recoverable. Long-lived assets to be held and used are reviewed for impairment by comparing the carrying value of the assets with their estimated undiscounted future cash flows. If it is determined that an impairment loss has occurred, the loss would be recognized during the period. The impairment loss would be calculated as the difference between asset carrying value and the present value of estimated net cash flows or comparable market values, giving consideration to recent operating performance. Long-lived assets that are to be disposed of other than by sale are considered held and used until they are disposed of. Long-lived assets that are to be disposed of by sale are reported at the lower of their carrying value or fair value less cost to sell. Reductions in carrying value are recognized in the period in which the long-lived assets are classified as held for sale.

Derivative financial instruments -

All derivatives, including certain derivative financial instruments embedded in other contracts, are recognized as either assets or liabilities in the balance sheet at fair value. Changes in the fair value of derivative financial instruments are either recognized periodically in income or stockholders’ equity (as a component of accumulated other comprehensive income), depending on whether the derivative financial instrument qualifies as a hedge and the derivative is being used to hedge changes in fair value or cash flows.

      In accordance with FAS No. 133, the derivative financial instruments held by Sony are classified and accounted as below.

Fair value hedges

Changes in the fair value of derivatives designated and effective as fair value hedges for recognized assets or liabilities or unrecognized firm commitments are recognized in earnings as offsets to changes in the fair value of the related hedged assets or liabilities.

Cash flow hedges

Changes in the fair value of derivatives designated and effective as cash flow hedges for forecasted transactions or exposures associated with recognized assets or liabilities are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. Changes in the fair value of the ineffective portion are recognized in current period earnings.

Derivatives not designated as hedges

Changes in the fair value of derivatives that are not designated as hedges under FAS No. 133 are recognized in current period earnings.

      Sony formally documents all hedging relationships between the derivatives designated as hedges and hedged items, as well as its risk management objectives and strategies for undertaking various hedging activities. Sony

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links all hedges that are designated as fair value or cash flow hedges to specific assets or liabilities on the balance sheet or to the specific forecasted transaction. Sony also assesses, both at the inception of the hedge and on an on-going basis, whether the derivatives that are designated as hedges are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Sony discontinues hedge accounting.

Stock-based compensation -

Sony applies Accounting Principle Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”, and its related interpretations in accounting for its stock-based compensation plans and follows the disclosure-only provisions of FAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123”. In accordance with APB No. 25, stock-based compensation cost is recognized in income based on the excess, if any, of the quoted market price of the common stock or subsidiary tracking stock of Sony Corporation at the grant date of the award or other measurement date over the stated exercise price of the award. As the exercise prices for Sony’s stock-based compensation plans are generally determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans is not significant. For awards that generate compensation expense as defined under APB No. 25, Sony calculates the amount of compensation expense and recognizes the expense over the vesting period of the award.

      The following table reflects the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation”, to its stock-based compensation. See Note 17 for detailed assumptions.

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                            Dollars in  
    Yen in millions     millions  
                            Year ended  
    Year ended March 31     March 31,  
    2003     2004     2005     2005  
Income before cumulative effect of an accounting change allocated to common stock:
                               
As reported
  ¥ 115,648     ¥ 90,756     ¥ 168,498     $ 1,575  
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects
    (7,008 )     (6,334 )     (4,690 )     (44 )
 
                       
 
                               
Pro forma
  ¥ 108,640     ¥ 84,422     ¥ 163,808     $ 1,531  
 
                       
 
                               
Net income allocated to common stock:
                               
As reported
  ¥ 115,648     ¥ 88,639     ¥ 163,785     $ 1,531  
Deduct: Total stock-based compensation expense determined under the fair value based method, net of related tax effects
    (7,008 )     (6,334 )     (4,690 )     (44 )
 
                       
 
                               
Pro forma
  ¥ 108,640     ¥ 82,305     ¥ 159,095     $ 1,487  
 
                       
                                 
    Yen     Dollars  
                            Year ended  
    Year ended March 31     March 31,  
    2003     2004     2005     2005  
Income before cumulative effect of an accounting change allocated to common stock:
                               
-Basic EPS:
                               
As reported
  ¥ 125.74     ¥ 98.26     ¥ 180.96     $ 1.69  
Pro forma
    118.12       91.40       175.92       1.64  
-Diluted EPS:
                               
As reported
  ¥ 118.21     ¥ 89.03     ¥ 162.59     $ 1.52  
Pro forma
    111.20       82.96       158.10       1.48  
 
                               
Net income allocated to common stock:
                               
-Basic EPS:
                               
As reported
  ¥ 125.74     ¥ 95.97     ¥ 175.90     $ 1.64  
Pro forma
    118.12       89.11       170.86       1.60  
-Diluted EPS:
                               
As reported
  ¥ 118.21     ¥ 87.00     ¥ 158.07     $ 1.48  
Pro forma
    111.20       80.94       153.58       1.44  

     Net income and net income per share allocated to the subsidiary tracking stock would not be impacted if Sony had applied the fair value recognition provisions of FAS No. 123.

     As a result of the adoption of EITF Issue No. 04-8, Sony’s diluted EPS of income before cumulative effect of an accounting change and net income for the year ended March 31, 2004 were restated in the above table.

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Free distribution of common stock -

On occasion, Sony Corporation may make a free distribution of common stock which is accounted for either by a transfer from additional paid-in capital to the common stock account or with no entry if free shares are distributed from the portion of previously issued shares in the common stock account.

      Under the Japanese Commercial Code, a stock dividend can be effected by an appropriation of retained earnings to the common stock account, followed by a free share distribution with respect to the amount appropriated by resolution of the Board of Directors’ meeting.

      Free distribution of common stock is recorded in the consolidated financial statements only when it becomes effective, except for the calculation and presentation of per share amounts.

Stock issue costs -

Stock issue costs are directly charged to retained earnings, net of tax, in the accompanying consolidated financial statements as the Japanese Commercial Code prohibits charging such stock issue costs to capital accounts which is the prevailing practice in the United States of America.

Revenue recognition -

Revenues from electronics, game and music sales are recognized upon delivery which is considered to have occurred when the customer has taken title to the product and the risk and rewards of ownership have been substantively transferred. If the sales contract contains a customer acceptance provision, then sales are recognized after customer acceptance occurs or the acceptance provisions lapse.

      Revenues from the theatrical exhibition of motion pictures are recognized as the customer exhibits the film. Revenues from the licensing of feature films and television programming are recorded when the material is available for telecast by the licensee and when any restrictions regarding the exhibition or exploitation of the product lapse. Revenues from the sale of home videocassettes and DVDs are recognized upon availability of sale to the public.

      Traditional life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. Premiums from these policies are reported as revenue when due from policyholders.

      Amounts received as payment for non-traditional contracts such as interest sensitive whole life contracts, single payment endowment contracts, single payment juvenile contracts and other contracts without life contingencies are recognized as deposits to policyholder account balances and included in future insurance policy benefits and other. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services, which are recognized over the period of the contracts, and included in financial service revenue. Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. Premiums from these policies are reported as revenue over the period of the contract in proportion to the amount of insurance protection provided.

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Accounting for consideration given to a customer or a reseller -

In accordance with EITF Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products”, cash consideration given to a customer or a reseller including payments for buydowns, slotting fees and cooperative advertising programs, is accounted for as a reduction of revenue unless Sony receives an identifiable benefit (goods or services) in exchange for the consideration, can reasonably estimate the fair value of this benefit and receives documentation from the reseller to support the amounts spent. Any payments meeting these criteria are treated as selling, general and administrative expenses. For the years ended March 31, 2003, 2004 and 2005, consideration given to a reseller, primarily for free promotional shipping and cooperative advertising programs included in selling, general and administrative expense totaled ¥29,135 million, ¥30,338 million and ¥27,946 million ($261 million), respectively.

Cost of sales -

Costs classified as cost of sales relate to the producing and manufacturing of products and include such items as material cost, subcontractor cost, depreciation of fixed assets, personnel expenses, research and development costs, and amortization of film cost related to theatrical and television products.

Research and development costs -

Research and development costs are expensed as incurred.

Selling, general and administrative -

Costs classified as selling expense relate to the promoting and selling of products and include such items as advertising, promotion, shipping, and warranty expenses.

      General and administrative expenses include operating items such as officer’s salaries, personnel expenses, depreciation of fixed assets, office rental for sales, marketing and administrative divisions, a provision for doubtful accounts and amortization of intangible assets.

      Selling, general and administrative expenses are expensed as incurred.

Financial service expenses -

Financial service expenses include a provision for policy reserves and amortization of deferred insurance acquisition cost, and all other operating costs such as personnel expenses, depreciation of fixed assets, and office rental of subsidiaries in the Financial Services segment.

Advertising costs -

Advertising costs are expensed when the advertisement or commercial appears in the selected media, except for advertising costs for acquiring new insurance policies which are deferred and amortized as part of insurance

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acquisition costs.

Shipping and handling costs -

The majority of shipping and handling, warehousing and internal transfer costs for finished goods are included in selling, general and administrative expenses. An exception to this is in the Pictures segment where such costs are charged to cost of sales as they are integral part of producing and distributing the film under SOP 00-2, “Accounting by Producers or Distributors of Films”. All other costs related to Sony’s distribution network are included in cost of sales, including inbound freight charges, purchasing and receiving costs, inspection costs and warehousing costs for raw materials and in-process inventory. In addition, amounts paid by customers for shipping and handling costs are included in net sales.

Income taxes -

The provision for income taxes is computed based on the pretax income included in the consolidated statements of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Sony records a valuation allowances to reduce deferred tax assets to the amount that management believes is more likely than not to be realized. In assessing the likelihood of realization, Sony considers all currently available evidence for future years, both positive and negative, supplemented by information of historical results for each tax filling unit.

Net income per share -

Sony calculates and presents per share data separately for Sony’s common stock and for the subsidiary tracking stock, based on FAS No. 128. The holders of the subsidiary tracking stock have the right to participate in earnings, together with common stockholders. Accordingly, Sony calculates per share data by the “two-class” method based on FAS No. 128. Under this method, basic net income per share (“EPS”) for each class of stock is calculated based on the earnings allocated to each class of stock for the applicable period, divided by the weighted-average number of outstanding shares in each class during the applicable period.

      The earnings allocated to the subsidiary tracking stock are determined based on the subsidiary tracking stock holders’ economic interest in the targeted subsidiary’s earnings available for dividends. As defined by Sony Corporation’s articles of incorporation, the amount distributable to the subsidiary tracking stock holders is based on the declared dividends of the targeted subsidiary, which may only be declared from the amounts available for dividends of the targeted subsidiary. The targeted subsidiary’s earnings available for dividends are, as stipulated by the Japanese Commercial Code, not including those of the targeted subsidiary’s subsidiaries. If the targeted subsidiary has accumulated losses, a change in accumulated losses is also allocated to the subsidiary tracking stock. The subsidiary tracking stock holders’ economic interest is calculated as the number of the subsidiary tracking stock outstanding (3,072,000 shares as of March 31, 2005) divided by the number of the targeted subsidiary’s common stock outstanding (235,520 shares as of March 31, 2005), subject to multiplying by the Standard Ratio (tracking stock : subsidiary’s common stock = 1 : 100, as defined in the articles of incorporation). The earnings allocated to the common stock are calculated by subtracting the earnings allocated to the subsidiary

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tracking stock from Sony’s net income for the period.

      The computation of diluted net income per common stock reflects the maximum possible dilution from conversion, exercise, or contingent issuance of securities including the conversion of Co-Cos regardless of whether the conditions to exercise the conversion rights have been met.

      There are no potentially dilutive securities for net income per subsidiary tracking stock, as tracking stock shares outstanding are increased upon potential subsidiary tracking stocks’ being exercised, which results in a proportionate increase in earnings allocated to the subsidiary tracking stock. However, they could have a dilutive effect on net income per common stock, as earnings allocated to the common stock would be decreased.

  (3)   Recent Pronouncements:

Accounting for Stock-Based Compensation-

In December 2004, the FASB issued FAS No. 123 (revised 2004), “Share-Based Payment” (“FAS No. 123(R)”). This statement requires the use of the fair value based method of accounting for employee stock-based compensation and eliminates the alternative to use the intrinsic value method prescribed by APB No. 25. With limited exceptions, FAS No. 123(R) requires that the grant-date fair value of share-based payments to employees be expensed over the period the service is received. Sony has accounted for its employee stock-based compensation in accordance with the provisions prescribed by APB No. 25 and its related interpretations and has disclosed the net effect on net income and net income per share allocated to the common stock if Sony had applied the fair value recognition provisions of FAS No. 123 to stock-based compensation as described above in (2) Significant accounting policies - Stock-based compensation. This statement shall be effective for fiscal years beginning after June 15, 2005, with early adoption during the fiscal years beginning after the date this statement is issued encouraged. The options for transition methods as prescribed in FAS No. 123(R) include either the modified prospective or the modified retrospective methods. Sony intends to adopt the modified prospective method of transition, which requires that compensation expense be recorded for all unvested stock acquisition rights as the requisite service is rendered beginning with the first period of adoption. Sony is currently evaluating the impact of adopting this new pronouncement. However, Sony expects that the total expenses to be recorded in the future periods will be consistent with the pro forma information above in (2) Significant accounting policies - Stock-based compensation.

Inventory Costs -

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

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Exchanges of Nonmonetary Assets -

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

  (4)   Reclassifications:

Certain reclassifications of the financial statements for the years ended March 31, 2003 and 2004 have been made to conform to the presentation for the year ended March 31, 2005.

3. U.S. dollar amounts

U.S. dollar amounts presented in the financial statements are included solely for the convenience of the reader. These translations should not be construed as representations that the yen amounts actually represent, or have been or could be converted into U.S. dollars. As the amounts shown in U.S. dollars are for convenience only, the rate of ¥107 = U.S.$1, the approximate current rate at March 31, 2005, has been used for the purpose of presentation of the U.S. dollar amounts in the accompanying consolidated financial statements.

4. Inventories

Inventories comprise the following:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Finished products
  ¥ 427,877     ¥ 405,616     $ 3,791  
Work in process
    98,607       93,181       871  
Raw materials, purchased components and supplies
    140,023       132,552       1,238  
 
                 
 
                       
 
  ¥ 666,507     ¥ 631,349     $ 5,900  
 
                 

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5. Film costs

Film costs comprise the following:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Theatrical:
                       
Released (including acquired film libraries)
  ¥ 136,057     ¥ 119,438     $ 1,116  
Completed not released
    7,946       11,358       106  
In production and development
    79,198       118,271       1,106  
Television licensing:
                       
Released (including acquired film libraries)
    33,378       29,894       279  
In production and development
    161       0       0  
 
                 
 
                       
 
  ¥ 256,740     ¥ 278,961     $ 2,607  
 
                 

Sony estimates that approximately 88% of unamortized costs of released films (excluding amounts allocated to acquired film libraries) at March 31, 2005 will be amortized within the next three years. Approximately ¥94,790 million ($886 million) of released film costs are expected to be amortized during the next twelve months. As of March 31, 2005, unamortized acquired film libraries of approximately ¥12,371 million ($116 million) remained to be amortized on a straight-line basis over an average of the remaining life of 5 years. Approximately ¥108,833 million ($1,017 million) of accrued participation liabilities included in accounts payable, other and accrued expenses are expected to be paid during the next twelve months.

6. Related party transactions

Sony accounts for its investments in affiliated companies over which Sony has significant influence or ownership of 20% or more but less than or equal to 50% under the equity method. In addition, investments in general partnerships in which Sony does not have a controlling interest and limited partnerships are also accounted for under the equity method. Such investments include but are not limited to Sony’s interest in Sony Ericsson Mobile Communications, AB (50%), SONY BMG MUSIC ENTERTAINMENT (“SONY BMG”) (50%), S-LCD Corporation (50% minus 1 share), ST Liquid Crystal Display Corporation (50%), bit Wallet, Inc (34.6%), STAR CHANNEL, INC. (17.8%), and InterTrust Technologies Corporation (49.5%).

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     Summarized combined financial information that is based on information provided by equity investees is shown below:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Current assets
  ¥ 433,154     ¥ 942,328     $ 8,807  
Property, plant and equipment
    94,130       361,406       3,377  
Other assets
    57,756       250,245       2,339  
 
                 
 
                       
Total assets
  ¥ 585,040     ¥ 1,553,979     $ 14,523  
 
                 
 
                       
Current liabilities
  ¥ 397,242     ¥ 876,430     $ 8,191  
Long-term liabilities
    27,639       115,999       1,084  
Stockholders’ equity
    160,159       561,550       5,248  
 
                 
 
                       
Total liabilities and stockholders’ equity
  ¥ 585,040     ¥ 1,553,979     $ 14,523  
 
                 
 
                       
Number of companies at end of the fiscal year
    66       56          
                                 
                            Dollars in  
    Yen in millions     millions  
                            Year ended  
    Year ended March 31     March 31,  
    2003     2004     2005     2005  
Sales and revenue
  ¥ 785,697     ¥ 1,009,005     ¥ 1,473,273     $ 13,769  
Gross profit
    140,078       231,083       477,796       4,465  
Net income (loss)
    (81,422 )     11,323       63,404       593  

     In April 2002, Sony completed the sale of its equity interest in the Telemundo Group which resulted in cash proceeds of ¥88,373 million and a gain of ¥66,502 million. In the year ended March, 31 2003, Sony had deferred ¥5,939 million of the gain related to the sale of Telemundo as a result of certain indemnifications provided by Sony to the acquirer, which was subsequently recognized in April 2003, as these indemnifications expired with no amounts being refunded by Sony.

     In June 2002, Sony completed the partial sale of its equity investment in the Columbia House Company (“CHC”), a 50-50 joint venture between AOL Time Warner Inc. and Sony, to Blackstone Capital Partners III LP (“Blackstone”), an affiliate of The Blackstone Group, a private investment bank. The chairman of The Blackstone Group was also a director of Sony until June 2002. Under the terms of the sale agreement, Sony received cash proceeds of ¥17,839 million and a subordinated note receivable from Columbia House Holdings, Inc., a majority owned subsidiary of Blackstone, with a face amount of ¥7,827 million. The sale resulted in a gain of ¥1,324 million. As of March 31, 2005, Sony still had a 7.5% ownership interest in CHC, which was accounted for as a cost method investment as a result of the partial sale of this investment. In May 2005, an agreement was reached between Blackstone and a third party for the sale of CHC to the third party. As part of this transaction, Sony has also agreed to sell its remaining ownership interest in CHC and settle the outstanding subordinated note receivable.

     In September 2002, Sony completed the sale of its equity interest in Sony Tektronix Inc., which resulted in a gain of

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¥3,090 million.

     In January 2003, Sony acquired a 49.5% interest in InterTrust Technologies Corporation for ¥23,076 million.

     In May 2003, Sony acquired the remaining 50% interest in American Video Glass Company (“AVGC”) that it did not own from Corning Asahi Corporation. As a result, AVGC is no longer accounted for under the equity method and is now a consolidated subsidiary. The financial position and operating results of AVGC as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.

     Effective July 1, 2003, in accordance with FIN No. 46, Sony consolidated BE-ST Bellevuestrasse Development GmbH & Co. First Real Estate KG, Berlin (“BE-ST”). As a result, BE-ST is no longer accounted for under the equity method (Note 23). The financial position and operating results of BE-ST as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.

     In August 2003, Crosswave Communications Inc. (“CWC”), of which Sony owned approximately a 23.9% interest, commenced reorganization proceedings under the Corporate Reorganization Law of Japan. As a result, Sony no longer has a significant influence on the decision making of CWC. Therefore, CWC is no longer accounted for under the equity method. The financial position and operating results of CWC as of and for the years ended March 31, 2004 and 2005 are not included in the above summarized combined financial information.

     S-LCD Corporation, a joint venture with Samsung Electronics Co., LTD focused on manufacturing amorphous TFT panel, was established in April 2004 as a joint venture in which Sony has an ownership interest of 50% minus 1 share. Sony invested ¥100,073 million ($935 million) in S-LCD Corporation during the year ended March 31, 2005.

     As of August 1, 2004, Sony combined its recorded music business, except for the operations of its recorded music business in Japan, with the recorded music business of Bertelsmann AG in a joint venture. The newly formed company, known as SONY BMG, is 50% owned by each parent company. As a result, the results of the recorded music business, except for the recorded music business in Japan, are no longer consolidated but are accounted for under the equity method.

     On April 8, 2005, a consortium led by Sony Corporation of America (“SCA”) and its equity partners, Providence Equity Partners, Texas Pacific Group, Comcast Corporation and DLJ Merchant Banking Partners, completed the acquisition of Metro-Goldwyn-Mayer Inc. (“MGM”). Under the terms of the acquisition agreement, the aforementioned investor group acquired MGM for $12.00 in cash per MGM share, for a total purchase price of approximately $5.0 billion. As part of this transaction, Sony Pictures Entertainment (“SPE”) will co-finance and produce new motion pictures with MGM as well as distribute MGM’s existing film and television contents through SPE’s global distribution channels. MGM will continue to operate under the Metro-Goldwyn-Mayer name as a private company headquartered in Los Angeles. As part of the acquisition, SCA invested $257 million for 20% of the total equity capital. However, based on the percentage of common stock owned, Sony will record 45% of MGM’s net income (loss) as equity in net income of affiliated companies.

     Affiliated companies accounted for under the equity method with an aggregate carrying amount of ¥6,081 million and ¥17,676 million ($165 million) at March 31, 2004 and 2005, were quoted on established markets at an aggregate value of ¥37,603 million and ¥95,246 million ($890 million), respectively.

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     Account balances and transactions with affiliated companies accounted for under the equity method are presented below:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Accounts receivable, trade
  ¥ 62,359     ¥ 50,062     $ 468  
 
                 
 
                       
Advances
  ¥ 561     ¥ 16,756     $ 157  
 
                 
 
                       
Accounts payable, trade
  ¥ 13,547     ¥ 15,225     $ 142  
 
                 
                                 
                            Dollars in  
    Yen in millions     millions  
                            Year ended  
    Year ended March 31     March 31,  
    2003     2004     2005     2005  
Sales
  ¥ 161,983     ¥ 258,454     ¥ 256,799     $ 2,400  
 
                       
 
                               
Purchases
  ¥ 102,735     ¥ 106,100     ¥ 101,976     $ 953  
 
                       

     As of April 1, 2004, Sony Corporation made Sony Computer Entertainment Inc. (“SCE”) a wholly-owned subsidiary through a stock for stock exchange pursuant to the provision of Article 358 of the Japanese Commercial Code which does not require the approval of the General Meeting of Shareholders. The stock for stock exchange ratio was determined based on the estimated equity values of SCE and Sony on a consolidated basis. Through the stock for stock exchange, Sony Corporation provided 1,000,000 shares of its common stock to an Executive Deputy President, Corporate Executive Officer of Sony Corporation who had owned 100 shares of SCE’s common stock. This transaction did not have a material impact on Sony’s results of operations and financial position for the year ended March 31, 2005.

     Dividends from affiliated companies accounted for under the equity method for the years ended March 31, 2003, 2004 and 2005 were ¥2,002 million, ¥3,446 million and ¥13,391 million ($125 million), respectively.

7. Accounts receivable securitization programs

In the United States of America, Sony set up an accounts receivable securitization program whereby Sony can sell interests in up to ¥53,500 million ($500 million) of eligible trade accounts receivable, as defined. Through this program, Sony can securitize and sell a percentage of undivided interest in that pool of receivables to several multi-seller commercial paper conduits owned and operated by a bank. Sony can sell receivables in which the agreed upon original due dates are no more than 90 days after the invoice dates. The value assigned to undivided interests retained in securitized trade receivables is based on the relative fair values of the interest retained and sold in the securitization. Sony has assumed that the fair value of the retained interest is equivalent to its carrying value as the receivables are short-term in nature, high quality and have appropriate reserves for bad debt incidence. These

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securitization transactions are accounted for as a sale in accordance with FAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, because Sony has relinquished control of the receivables. During the period from April 2004 to January 2005, Sony sold a total of ¥80,250 million ($750 million) of accounts receivable under this program. There were no outstanding amounts due at March 31, 2005 relating to the existing undivided interests in the pool of receivables that had been sold. Losses from these transactions were insignificant. This program was terminated in May 2005.

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

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8. Marketable securities and securities investments and other

Marketable securities and securities investments and other include debt and equity securities of which the aggregate cost, gross unrealized gains and losses and fair value pertaining to available-for-sale securities and held-to-maturity securities are as follows:

                                                                 
    Yen in millions  
    March 31, 2004     March 31, 2005  
            Gross     Gross                     Gross     Gross        
            unrealized     unrealized                     unrealized     unrealized        
    Cost     gains     losses     Fair value     Cost     gains     losses     Fair value  
Available-for-sale:
                                                               
Debt securities
  ¥ 1,938,673     ¥ 55,922     ¥ (2,072 )   ¥ 1,992,523     ¥ 2,090,605     ¥ 58,161     ¥ (2,464 )   ¥ 2,146,302  
Equity securities
    86,517       63,225       (1,886 )     147,856       107,126       49,350       (814 )     155,662  
 
                                                               
Held-to-maturity Securities
    26,439       381       (28 )     26,792       27,431       530       (13 )     27,948  
 
                                               
 
                                                               
Total
  ¥ 2,051,629     ¥ 119,528     ¥ (3,986 )   ¥ 2,167,171     ¥ 2,225,162     ¥ 108,041     ¥ (3,291 )   ¥ 2,329,912  
 
                                               
                                 
    Dollars in millions  
    March 31, 2005  
            Gross     Gross        
            unrealized     unrealized        
    Cost     gains     losses     Fair value  
Available-for-sale:
                               
Debt securities
  $ 19,538     $ 544     $ (23 )   $ 20,059  
Equity securities
    1,002       461       (8 )     1,455  
 
                               
Held-to-maturity securities
    256       5       (0 )     261  
 
                       
 
                               
Total
  $ 20,796     $ 1,010     $ (31 )   $ 21,775  
 
                       

     At March 31, 2005, debt securities classified as available-for-sale securities and held-to-maturity securities mainly consist of Japanese government and municipal bonds and corporate debt securities with maturities of one to ten years.

     Proceeds from sales of available-for-sale securities were ¥215,554 million, ¥397,817 million and ¥613,035 million ($5,729 million) for the years ended March 31, 2003, 2004 and 2005, respectively. On those sales, gross realized gains computed on the average cost basis were ¥3,570 million, ¥9,525 million and ¥24,080 million ($225 million) and gross realized losses were ¥3,125 million, ¥1,906 million and ¥5,940 million ($56 million), respectively.

     Marketable securities classified as trading securities at March 31, 2004 and 2005 were ¥131,044 million and ¥315,946 million ($2,953 million), respectively, which consist of debt and equity securities including short-term investments in money market funds.

     In the ordinary course of business, Sony maintains long-term investment securities, included in securities investments and other, issued by a number of non-public companies. The aggregate carrying amounts of the investments in non-public companies at March 31, 2004 and 2005, were ¥51,367 million and ¥48,877 million ($457

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million), respectively. A non-public equity investment is valued at cost as fair value is not readily determinable. If the value is estimated to have declined and such decline is judged to be other than temporary, the impairment of the investment is recognized and the carrying value is reduced to its fair value.

     Securities investments and other as of March 31, 2004 also included separate account assets (Note 11) in the life insurance business, which were carried at fair value and excluded from the above table as gains or losses accrue directly to policyholders. As a result of the adoption of SOP 03-1, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” on the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. On April 1, 2004, assets of ¥164,461 million ($1,537 million) were reclassified from “Securities investments and other” to each respective account by nature including “Marketable securities” and “Cash and cash equivalents”. Of the total, ¥154,528 million ($1,444 million) was reclassified to “Marketable securities”.

     The net change in the unrealized gains or losses on trading securities that has been included in earnings during the years ended March 31, 2003 and 2004 was insignificant. For the year ended March 31, 2005, Sony booked ¥12,631 million ($118 million) of net unrealized gain on trading securities which is mainly derived from the general accounts in the life insurance business reclassified from the separate accounts as explained above.

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     The following table presents the gross unrealized losses on, and fair value of, Sony’s investment securities with unrealized losses, aggregated by investment category and the length of time that individual investment securities have been in a continuous unrealized loss position, at March 31, 2005.

                                                 
    Yen in millions  
    Less than 12 months     12 months or More     Total  
            Unrealized             Unrealized             Unrealized  
    Fair value     losses     Fair value     losses     Fair value     losses  
Available-for-sale:
                                               
Debt securities
  ¥ 242,388     ¥ (2,044 )   ¥ 41,523     ¥ (420 )   ¥ 283,911     ¥ (2,464 )
Equity securities
    11,010       (457 )     1,225       (357 )     12,235       (814 )
 
                                               
Held-to-maturity securities
    239       (0 )     660       (13 )     899       (13 )
 
                                   
 
                                               
Total
  ¥ 253,637     ¥ (2,501 )   ¥ 43,408     ¥ (790 )   ¥ 297,045     ¥ (3,291 )
 
                                   
                                                 
    Dollars in millions  
    Less than 12 months     12 months or More     Total  
            Unrealized             Unrealized             Unrealized  
    Fair value     losses     Fair value     losses     Fair value     losses  
Available-for-sale:
                                               
Debt securities
  $ 2,265     $ (19 )   $ 388     $ (4 )   $ 2,653     $ (23 )
Equity securities
    103       (5 )     12       (3 )     115       (8 )
 
                                               
Held-to-maturity securities
    2       (0 )     6       (0 )     8       (0 )
 
                                   
 
                                               
Total
  $ 2,370     $ (24 )   $ 406     $ (7 )   $ 2,776     $ (31 )
 
                                   

     In evaluating the factors for available-for-sale securities whose fair values are readily determinable, Sony presumes a decline in value to be other-than-temporary if the fair value of the security is 20 percent or more below its original cost for an extended period of time (generally a period of up to six to twelve months). This criteria is employed as a threshold to identify securities which may have a decline in value that is other-than-temporary. The presumption of an other-than-temporary impairment in such cases may be overcome if there is evidence to support that the decline is temporary in nature due to the existence of other factors which overcome the duration or magnitude of the decline. On the other hand, there may be cases where impairment losses are recognized when the decline in the fair value of the security is not more than 20 percent or such decline has not existed for an extended period of time, as a result of considering specific factors which may indicate the decline in the fair value is other-than-temporary.

     At March 31, 2005, Sony determined that the decline in value for securities with unrealized losses shown in the above table is not other-than-temporary in nature.

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9. Leased assets

Sony leases certain communication and commercial equipment, plant, office space, warehouses, employees’ residential facilities and other assets.

     An analysis of leased assets under capital leases is as follows:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
Class of property   2004     2005     2005  
Land
  ¥ 174     ¥ 181     $ 2  
Buildings
    12,421       11,089       104  
Machinery, equipment and others
    36,907       33,747       315  
Accumulated depreciation
    (19,385 )     (18,509 )     (173 )
 
                 
 
                       
 
  ¥ 30,117     ¥ 26,508     $ 248  
 
                 

     The following is a schedule by year of the future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of March 31, 2005:

                 
    Yen in     Dollars in  
    millions     millions  
Year ending March 31:
               
2006
  ¥ 15,211     $ 142  
2007
    11,062       103  
2008
    8,895       83  
2009
    10,873       102  
2010
    3,001       28  
Later years
    5,428       51  
 
           
Total minimum lease payments
    54,470       509  
Less - Amount representing interest
    14,169       132  
 
           
Present value of net minimum lease payments
    40,301       377  
Less - Current obligations
    11,713       110  
 
           
 
               
Long-term capital lease obligations
  ¥ 28,588     $ 267  
 
           

     Minimum lease payments have not been reduced by minimum sublease income of ¥11,480 million ($107 million) due in the future under noncancelable subleases.

     Minimum rental expenses under operating leases for the years ended March 31, 2003, 2004 and 2005 were ¥94,364 million, ¥92,649 million and ¥81,391 million ($761 million), respectively. Sublease rentals received under operating leases for the years ended March 31, 2003, 2004 and 2005 were ¥6,240 million, ¥2,923 million and ¥1,933 million ($18 million), respectively. The total minimum rentals to be received in the future under noncancelable subleases as of March 31, 2005 were ¥14,954 million ($140 million). The minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year at March 31, 2005 are as follows:

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    Yen in     Dollars in  
    millions     millions  
Year ending March 31:
               
2006
  ¥ 38,182     $ 357  
2007
    30,568       286  
2008
    22,993       215  
2009
    14,060       131  
2010
    10,496       98  
Later years
    53,652       501  
 
           
 
               
Total minimum future rentals
  ¥ 169,951     $ 1,588  
 
           

10. Goodwill and intangible assets

Intangible assets acquired during the year ended March 31, 2005 totaled ¥22,844 million ($213 million), which are subject to amortization and primarily consist of acquired patent rights of ¥6,673 million ($62 million) and software to be sold, leased or otherwise marketed of ¥11,546 million ($108 million). The weighted average amortization period for acquired patent rights and software to be sold, leased or otherwise marketed is 8 years and 3 years, respectively.

     Intangible assets subject to amortization comprise the following:

                                                 
    Yen in millions     Dollars in millions  
    March 31     March 31,  
    2004     2005     2005  
    Gross carrying     Accumulated     Gross carrying     Accumulated     Gross carrying     Accumulated  
    amount     amortization     amount     amortization     amount     Amortization  
Artist contracts
  ¥ 80,675     ¥ (68,300 )   ¥ 15,218     ¥ (11,094 )   $ 142     $ (104 )
Music catalog
    109,795       (47,610 )     65,674       (19,641 )     614       (184 )
Acquired patent rights
    52,996       (23,172 )     55,173       (26,139 )     516       (244 )
Software to be sold, leased or otherwise marketed
    31,983       (13,577 )     31,907       (16,181 )     298       (151 )
Other
    55,048       (27,422 )     27,648       (11,625 )     258       (108 )
 
                                   
Total
  ¥ 330,497     ¥ (180,081 )   ¥ 195,620     ¥ (84,680 )   $ 1,828     $ (791 )
 
                                   

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     The aggregate amortization expenses for intangible assets for the years ended March 31, 2003, 2004 and 2005 was ¥27,871 million, ¥28,866 million and ¥24,993 million ($234 million), respectively. The estimated aggregate amortization expense for intangible assets for the next five years is as follows:

                 
    Yen in     Dollars in  
    millions     millions  
Year ending March 31,
               
2006
  ¥ 22,650     $ 212  
2007
    18,287       171  
2008
    12,202       114  
2009
    10,623       99  
2010
    8,874       83  

     Total carrying amount of intangible assets having an indefinite life comprise the following:

                         
    Yen in millions     Dollars in millions  
    March 31     March 31,  
    2004     2005     2005  
Trademarks
  ¥ 57,384     ¥ 57,195     $ 535  
Distribution agreement
    18,834       18,848       176  
 
                 
 
  ¥ 76,218     ¥ 76,043     $ 711  
 
                 

     In addition to the amortizable and indefinite-lived intangible assets shown in the above tables, intangible assets at March 31, 2004 and 2005 also include unrecognized prior service costs totaling ¥21,376 million and ¥41 million ($0 million), respectively, which were recorded under FAS No. 87 as discussed in Note 15.

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     The changes in the carrying amount of goodwill by operating segment for the years ended March 31, 2004 and 2005 are as follows:

                                                         
    Yen in millions  
                                    Financial              
    Electronics     Game     Music     Pictures     Services     Other     Total  
Balance at March 31, 2003
  ¥ 53,179     ¥ 110,606     ¥ 46,021     ¥ 78,697           ¥ 1,624     ¥ 290,127  
Goodwill acquired during year
    5,634             76       1,666             534       7,910  
Impairment losses
    (6,049 )                                   (6,049 )
Other *
    (528 )     (244 )     (3,771 )     (9,574 )           (1 )     (14,118 )
 
                                         
Balance at March 31, 2004
    52,236       110,362       42,326       70,789             2,157       277,870  
 
                                                       
Reallocated from Music segment to Electronics segment
    12,329             (12,329 )                        
Goodwill acquired during year
    5,872       4,349       52       5,868     ¥ 441       2,069       18,651  
Goodwill contributed to the Joint Venture with Bertelsmann AG
                (15,626 )                       (15,626 )
Other *
    378       29       1,281       1,277             63       3,028  
 
                                         
Balance at March 31, 2005
  ¥ 70,815     ¥ 114,740     ¥ 15,704     ¥ 77,934     ¥ 441     ¥ 4,289     ¥ 283,923  
 
                                         
                                                         
    Dollars in millions  
                                    Financial              
    Electronics     Game     Music     Pictures     Services     Other     Total  
Balance at March 31, 2004
  $ 488     $ 1,031     $ 396     $ 662           $ 20     $ 2,597  
 
                                                       
Reallocated from Music segment to Electronics segment
    116             (116 )                        
Goodwill acquired during year
    55       41       1       54     $ 4       19       174  
Goodwill contributed to the Joint Venture with Bertelsmann AG
                (146 )                       (146 )
Other *
    3       0       12       12             1       28  
 
                                         
Balance at March 31, 2005
  $ 662     $ 1,072     $ 147     $ 728     $ 4     $ 40     $ 2,653  
 
                                         


    * Other consists of translation adjustments and reclassification to/from other accounts.

     During the year ended March 31, 2004, Sony performed the annual impairment test for goodwill and recorded an impairment loss of ¥6,049 million in the Electronics segment. This impairment charge reflected the overall decline in the fair value of a subsidiary within the Electronics segment. The fair value of that reporting unit was estimated principally using the expected present value of future cash flows.

     As discussed in Notes 6 and 25, as of August 1, 2004, Sony and Bertelsmann AG combined their recorded music business in a joint venture. In connection with the establishment of the joint venture, assets contributed by Sony included ¥15,626 million ($146 million) of goodwill. In addition, the non-Japan based disc manufacturing and physical distribution businesses, formerly included within the Music segment, have been reclassified to the Electronics segment and accordingly, Sony reallocated ¥12,329 million ($116 million) of goodwill relating to the non-Japan based disc manufacturing and physical distribution business from the Music segment to the Electronics segment.

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11. Insurance-related accounts

Sony’s life and non-life insurance subsidiaries in Japan maintain their accounting records as described in Note 2 in accordance with the accounting principles and practices generally accepted in Japan, which vary in some respects from U.S. GAAP.

     Those differences are mainly that insurance acquisition costs for life and non-life insurance are charged to income when incurred in Japan whereas in the United States of America those costs are deferred and amortized generally over the premium-paying period of the related insurance policies, and that future policy benefits for life insurance calculated locally under the authorization of the supervisory administrative agencies are comprehensively adjusted to a net level premium method with certain adjustments of actuarial assumptions for U.S. GAAP purposes. For purposes of preparing the consolidated financial statements, appropriate adjustments have been made to reflect such items in accordance with U.S. GAAP.

     The amounts of statutory net equity of the subsidiaries as of March 31, 2004 and 2005 were ¥146,540 million and ¥153,228 million ($1,432 million), respectively.

(1) Insurance policies:

Life insurance policies that the life insurance subsidiary writes, most of which are categorized as long-duration contracts, mainly consist of whole life, term life and accident and health insurance contracts. The life insurance revenues for the years ended March 31, 2003, 2004 and 2005 were ¥450,363 million, ¥437,835 million and ¥426,774 million ($3,989 million), respectively. Property and casualty insurance policies that the non-life insurance subsidiary writes are primarily automotive insurance contracts which are categorized as short-duration contracts. The non-life insurance revenues for the years ended March 31, 2003, 2004 and 2005 were ¥21,269 million, ¥28,371 million and ¥35,454 million ($331 million), respectively.

(2) Deferred insurance acquisition costs:

Insurance acquisition costs, including such items as commission, medical examination and inspection report fees, that vary with and are primarily related to acquiring new insurance policies are deferred as long as they are recoverable. The deferred insurance acquisition costs for traditional life insurance contracts are amortized over the premium-paying period of the related insurance policies using assumptions consistent with those used in computing policy reserves. The deferred insurance acquisition costs for non-traditional life insurance contracts are amortized over the expected life in proportion to the estimated gross profits. Amortization charged to income for the years ended March 31, 2003, 2004 and 2005 amounted to ¥44,578 million, ¥50,492 million and ¥47,120 million ($440 million), respectively.

(3) Future insurance policy benefits:

Liabilities for future policy benefits are established in amounts adequate to meet the estimated future obligations of policies in force. These liabilities are computed by the net level premium method based upon estimates as to future investment yield, morbidity, mortality and withdrawals. Future policy benefits are computed using interest rates

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ranging from approximately 1.30% to 5.20%. Mortality, morbidity and withdrawal assumptions for all policies are based on either the subsidiary’s own experience or various actuarial tables. At March 31, 2004 and 2005, future insurance policy benefits amounted to ¥1,605,178 million and ¥1,782,850 million ($16,662 million), respectively.

(4) Separate account assets:

Separate account assets are funds on which investment income and gains or losses accrue directly to policyholders. Separate account assets are legally segregated. They are not subject to the claims that may arise out of any other business of a life insurance subsidiary. As described in Note 2, the AcSEC issued SOP 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”. As a result of the adoption of SOP 03-1 on April 1, 2004, the separate account assets, which are defined by insurance business law in Japan and were previously included in “Securities investments and other” (Note 8) in the consolidated balance sheet, were excluded from the category of separate accounts under the provision of SOP 03-1. Accordingly, the assets previously treated as separate account assets are now treated within general account assets. The related liabilities are treated as policyholders’ account and included in future insurance policy benefits and other in the consolidated balance sheet. Fees earned for administrative and contract-holder services performed for the separate accounts are recognized as financial service revenue.

12. Short-term borrowings and long-term debt

Short-term borrowings comprise the following:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Unsecured loans, principally from banks:
                       
with weighted-average interest rate of 1.80%
  ¥ 26,260                  
with weighted-average interest rate of 2.79%
          ¥ 38,796     $ 362  
Secured call money:
                       
with weighted-average interest rate of 0.01%
    65,000              
Secured bills sold:
                       
with weighted-average interest rate of 0.00%
          24,600       230  
 
                 
 
                       
 
  ¥ 91,260     ¥ 63,396     $ 592  
 
                 

     At March 31, 2005, marketable securities and securities investments with a book value of ¥27,433 million ($256 million) were pledged as collateral for bills sold by a Japanese bank subsidiary.

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     Long-term debt comprises the following:

                         
                    Dollars in  
    Yen in millions     millions  
    March 31     March 31,  
    2004     2005     2005  
Secured loans, representing obligations to banks:
                       
Due 2004 to 2008 with interest ranging from 2.20% to 3.73% per annum
  ¥ 58,786                  
Due 2005 to 2008 with interest of 2.20% per annum
          ¥ 1,122     $ 11  
Unsecured loans, representing obligations principally to banks:
                       
Due 2004 to 2017 with interest ranging from 1.77% to 5.89% per annum
    77,646                  
Due 2005 to 2017 with interest ranging from 0.23% to 5.89% per annum
            113,436       1,060  
Medium-term notes of consolidated subsidiaries:
                       
Due 2004 to 2006 with interest ranging from 1.09% to 4.95% per annum
    60,537                  
Due 2006 with interest ranging from 2.78% to 4.95% per annum
            58,755       550  
Unsecured 1.4% convertible bonds, due 2005, convertible at ¥3,995.5 for one common share, redeemable before due date
    287,753              
Unsecured zero coupon convertible bonds, due 2008, convertible currently at ¥5,605 ($52) for one common share, redeemable before due date
    250,000       250,000       2,336  
Unsecured 0.03% bonds, due 2004 with detachable warrants, net of unamortized discount
    3,981              
Unsecured 0.1% bonds, due 2005 with detachable warrants, net of unamortized discount
    3,924       3,981       37  
Unsecured 1.55% bonds, due 2006 with detachable warrants
    12,000       12,000       112  
Unsecured 0.9% bonds, due 2007 with detachable warrants
    7,300       7,300       68  
Unsecured 0.9% bonds, due 2007 with detachable warrants of subsidiary tracking stock
    150       150       1  
Unsecured 1.42% bonds, due 2005, net of unamortized discount
    99,994       99,998       935  
Unsecured 0.64% bonds, due 2006, net of unamortized discount
    99,994       99,996       935  
Unsecured 2.04% bonds, due 2010, net of unamortized discount
    49,981       49,984       467  
Unsecured 1.52% bonds, due 2011, net of unamortized discount
    49,996       49,997       467  
Unsecured 2.0% bonds, due 2005
    15,000       15,000       140  
Unsecured 1.99% bonds, due 2007
    15,000       15,000       140  
Unsecured 2.35% bonds, due 2010
    4,900       4,900       46  
Capital lease obligations:
                       
Due 2004 to 2014 with interest ranging from 2.15% to 30.00% per annum
    42,689                  
Due 2005 to 2019 with interest ranging from 1.55% to 30.00% per annum
            40,301       377  
Guarantee deposits received
    21,775       23,942       224  
 
                 
 
    1,161,406       845,862       7,906  
Less - Portion due within one year
    383,757       166,870       1,560  
 
                 
 
                       
 
  ¥ 777,649     ¥ 678,992     $ 6,346  
 
                 

     At March 31, 2005, machinery and equipment with a book value of ¥4,502 million ($42 million) were pledged as collateral for secured loans, representing obligations to banks.

     There are no adverse debt covenants or cross-default provisions relating to Sony’s borrowings.

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     A summary of the exercise rights of the detachable warrants as of March 31, 2005 is as follows:

                             
                 
        Exercise price   Number of shares    
Issued on   Exercisable during   Yen   Dollars   per warrant   Status of exercise
August 23, 1999
  September 1, 2000 through August 22, 2005     7,167       67     279 shares of common stock of Sony Corporation   2,000 warrants outstanding
 
                           
October 19, 2000
  November 1, 2001 through October 18, 2006     12,457       116     100 shares of common stock of Sony Corporation   9,600 warrants outstanding
 
                           
December 21, 2001
  January 6, 2003 through December 20, 2007     6,039       56     100 shares of common stock of Sony Corporation   11,534 warrants outstanding
 
                           
December 21, 2001
  June 20, 2002 through June 20, 2007     3,300       31     75 shares of subsidiary tracking stock   600 warrants outstanding

     Aggregate amounts of annual maturities of long-term debt during the next five years are as follows:

                 
Year ending March 31   Yen in millions     Dollars in millions  
2006
  ¥ 166,870     $ 1,560  
2007
    178,117       1,665  
2008
    32,059       300  
2009
    282,430       2,640  
2010
    2,909       27  

     At March 31, 2005, Sony had unused committed lines of credit amounting to ¥863,956 million ($8,074 million) and can generally borrow up to 90 days from the banks with whom Sony has committed line contracts. Furthermore, Sony has Commercial Paper Programs, the size of which was ¥1,251,450 million ($11,696 million). There was no commercial paper outstanding at March 31, 2005. Under those programs, Sony can issue commercial paper for the period generally not in excess of 270 days up to the size of the programs. In addition, Sony has Medium Term Notes programs, the size of which was ¥536,750 million ($5,016 million). At March 31, 2005, the total outstanding balance of Medium Term Notes was ¥58,755 million ($550 million).

13. Deposits from customers in the banking business

All deposits from customers in the banking business are interest bearing deposits and are owned by a Japanese bank subsidiary which was established as an Online Internet bank for individuals. At March 31, 2004 and 2005, the balance of time deposits issued in amounts of ¥10 million ($93 thousand) or more were ¥55,164 million and ¥67,387 million ($630 million), respectively.

     At March 31, 2005, aggregate amounts of annual maturities of time deposits with a remaining term of more than

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one year include ¥25,697 million ($240 million) and ¥23,910 million ($223 million) for the years ending March 31, 2007 and 2008, respectively. There are no deposits having a maturity date after March 31, 2008.

14. Financial instruments

(1) Derivative instruments and hedging activities:

Sony has certain financial instruments including financial assets and liabilities incurred in the normal course of business. Such financial instruments are exposed to market risk arising from the changes of foreign currency exchange rates and interest rates. In applying a consistent risk management strategy for the purpose of reducing such risk, Sony uses derivative financial instruments, which include foreign exchange forward contracts, foreign currency option contracts, and interest rate and currency swap agreements. Sony does not use these derivative financial instruments for trading or speculative purposes. Foreign exchange forward contracts and foreign currency option contracts are utilized primarily to limit the exposure affected by changes in foreign currency exchange rates on cash flows generated by anticipated intercompany transactions and intercompany accounts receivable and payable denominated in foreign currencies. Interest rate and currency swap agreements are utilized primarily to lower funding costs, to diversify sources of funding and to limit Sony’s exposure associated with underlying debt instruments and available-for-sale debt securities resulting from adverse fluctuations in interest rates, foreign currency exchange rates and changes in the fair value. These instruments are executed with creditworthy financial institutions, and virtually all foreign currency contracts are denominated in U.S. dollars, euros and other currencies of major countries. Although Sony may be exposed to losses in the event of nonperformance by counterparties or unfavorable interest and currency rate movements, it does not anticipate significant losses due to the nature of Sony’s counterparties or the hedging arrangements. These derivatives generally mature or expire within 5 months after the balance sheet date.

     Certain subsidiaries in the Financial Services segment use derivatives such as interest rate forward contracts as part of portfolio investments. These derivative transactions are executed within a certain limit in accordance with an internal risk management policy.

     Derivative financial instruments held by Sony are classified and accounted for as described below pursuant to FAS No. 133.

Fair value hedges

The derivatives designated as fair value hedges include interest rate and currency swap agreements.

     Both the derivatives designated as fair value hedges and hedged items are reflected at fair value in the consolidated balance sheet. Changes in the fair value of the derivatives designated as fair value hedges as well as offsetting changes in the carrying value of the underlying hedged items are recognized in income.

     The amount of ineffectiveness of these fair value hedges, that was reflected in earnings, was not material for the years ended March 31, 2003, 2004 and 2005. In addition, there were no amounts excluded from the assessment of hedge effectiveness of fair value hedges.

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Cash flow hedges

The derivatives designated as cash flow hedges include foreign exchange forward contracts, foreign currency option contracts and interest rate and currency swap agreements.

     Changes in the fair value of derivatives designated as cash flow hedges are initially recorded in other comprehensive income and reclassified into earnings when the hedged transaction affects earnings. For the years ended March 31, 2003 and 2004, these cash flow hedges were fully effective. For the year ended March 31, 2005, the amount of ineffectiveness of these cash flow hedges that was reflected in earnings was not material. In addition, there were no amounts excluded from the assessment of hedge effectiveness of cash flow hedges. At March 31, 2005, amounts related to derivatives qualifying as cash flow hedges amounted to a net reduction of equity of ¥2,490 million ($23 million). Within the next twelve months, ¥1,615 million ($15 million) is expected to be reclassified from equity into earnings as loss. For the year ended March 31, 2005, there were no forecasted transactions that failed to occur which resulted in the discontinuance of cash flow hedges.

Derivatives not designated as hedges

The derivatives not designated as hedges under FAS No. 133 include foreign exchange forward contracts, foreign currency option contracts, interest rate and currency swap agreements, convertible rights included in convertible bonds and other. Changes in the fair value of derivatives not designated as hedges are recognized in income.

A description of the purpose and classification of the derivative financial instruments held by Sony is as follows:

Foreign exchange forward contracts and foreign currency option contracts

Sony enters into foreign exchange forward contracts and purchased and written foreign currency option contracts primarily to fix the cash flows from intercompany accounts receivable and payable and forecasted transactions denominated in functional currencies (Japanese yen, U.S. dollars and euros) of Sony’s major operating units. The majority of written foreign currency option contracts are a part of range forward contract arrangements and expire in the same month with the corresponding purchased foreign currency option contracts.

     Sony also enters into foreign exchange forward contracts, which effectively fix the cash flows from foreign currency denominated debt. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.

     Foreign exchange forward contracts and foreign currency option contracts that do not qualify as hedges are marked-to-market with changes in value recognized in other income and expenses.

Interest rate and currency swap agreements

Sony enters into interest rate and currency swap agreements, which are used for reducing the risk arising from the changes in the fair value of fixed rate debt and available-for-sale debt securities. For example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated fixed rate debt for functional currency denominated variable rate debt. These derivatives are considered to be a hedge against changes in the fair value of Sony’s foreign denominated fixed-rate obligations. Accordingly, these derivatives have been designated as fair value hedges in accordance with FAS No. 133.

     Sony also enters into interest rate and currency swap agreements that are used for reducing the risk arising from the changes in anticipated cash flow of variable rate debt and foreign currency denominated debt. For

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example, Sony enters into interest rate and currency swap agreements, which effectively swap foreign currency denominated variable rate debt for functional currency denominated fixed rate debt. These derivatives are considered to be a hedge against changes in the anticipated cash flow of Sony’s foreign denominated variable rate obligations. Accordingly, these derivatives have been designated as cash flow hedges in accordance with FAS No. 133.

     Any other interest rate and currency swap agreements that do not qualify as hedges, which are used for reducing the risk arising from changes of variable rate and foreign currency dominated intercompany debt, are marked-to-market with changes in value recognized in other income and expenses.

Interest rate forward contracts

Certain subsidiaries in the Financial Services segment have interest rate forward contracts as part of portfolio investments, which are marked-to-market with changes in value recognized in financial service revenue.

Embedded derivatives

Changes in the fair value of embedded derivatives that must be separated from the host contracts and accounted for as derivative instruments under FAS No. 133 are recognized in income. For example, the convertible rights included in convertible bonds held by Sony’s life insurance subsidiary, which are classified as available-for-sale debt securities, are considered embedded derivatives and are marked-to-market with changes in value recognized in financial service revenue.

(2) Fair value of financial instruments:

The estimated fair values of Sony’s financial instruments are summarized as follows. The following summary excludes cash and cash equivalents, time deposits, notes and accounts receivable, trade, short-term borrowings, notes and accounts payable, trade and deposits from customers in the banking business that are carried at amounts which approximate fair value. The summary also excludes debt and equity securities which are disclosed in Note 8.

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    Yen in millions  
    March 31  
    2004     2005  
                    Estimated fair                     Estimated  
    Notional amount     Carrying amount     value     Notional amount     Carrying amount     fair value  
Long-term debt including the current portion
        ¥ (1,161,406 )   ¥ (1,235,669 )         ¥ (845,862 )   ¥ (856,321 )
Foreign exchange forward contracts
  ¥ 1,348,157       (994 )     (994 )   ¥ 1,545,814       (55 )     (55 )
Currency option contracts purchased
    375,582       10,781       10,781       428,261       1,646       1,646  
Currency option contracts written
    124,925       (1,000 )     (1,000 )     146,506       (3,390 )     (3,390 )
Interest rate swap agreements
    218,101       (4,229 )     (4,229 )     171,133       (4,417 )     (4,417 )
Interest rate and currency swap agreements
    8,574       384       384       5,734       131       131  
Interest rate forward contracts
    17,007       (9 )     (9 )     136,470       (92 )     (92 )
Embedded derivatives
    421,416       12,885       12,885       405,756       11,894       11,894  
                         
    Dollars in millions  
    March 31, 2005  
    Notional amount     Carrying amount     Estimated fair value  
Long-term debt including the current portion
        $ (7,906 )   $ (8,003 )
Foreign exchange forward contracts
  $ 14,447       (1 )     (1 )
Currency option contracts purchased
    4,002       15       15  
Currency option contracts written
    1,369       (32 )     (32 )
Interest rate swap agreements
    1,599       (41 )     (41 )
Interest rate and currency swap agreements
    54       1       1  
Interest rate forward contracts
    1,275       (1 )     (1 )
Embedded derivatives
    3,792       111       111  

     The following are explanatory notes regarding the estimation method of fair values in the above table.

Long-term debt including the current portion

The fair values of long-term debt, including the current portion, were estimated based on either the market value or the discounted amounts of future cash flows using Sony’s current incremental debt rates for similar liabilities.

Derivative financial instruments

The fair values of foreign exchange forward contracts and foreign currency option contracts were estimated based on market quotations. The fair values of interest rate and currency swap agreements were estimated based on the discounted amounts of future net cash flows. The fair values of convertible rights, which were a majority of embedded derivatives, were estimated based on the market price of stock which will be acquired by the exercise of these rights.

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15. Pension and severance plans

Upon terminating employment, employees of Sony Corporation and its subsidiaries in Japan are entitled, under most circumstances, to lump-sum indemnities or pension payments as described below. For employees voluntarily retiring, payments are determined based on current rates of pay and lengths of service. In calculating the payments for employees involuntarily retiring, including employees retiring due to meeting mandatory retirement age requirements, Sony may grant additional benefits.

     In July, 2004, Sony Corporation and certain of its subsidiaries amended their pension plans and introduced a point-based plan under which a point is added every year reflecting the individual employee’s performance over that year. Under the point-based plan the amount of payment is determined by sum of cumulative points from past services and interest points earned on the cumulative points regardless of whether or not the employee is voluntarily retiring. As a result of the plan amendment, the projected benefit obligation was decreased by ¥120,873 million ($1,130 million).

     Sony Corporation and most of its subsidiaries in Japan have contributory funded defined benefit pension plans, which are pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a substitutional portion of the governmental welfare pension program, under which the contributions are made by the companies and their employees, and an additional portion representing the substituted noncontributory pension plans. Under the contributory pension plans, the defined benefits representing the noncontributory portion of the plans, in general, cover 65% of the indemnities under existing regulations to employees. The remaining indemnities are covered by severance payments by the companies. The pension benefits are determined based on years of service and the compensation amounts, as stipulated in the aforementioned regulations, are payable at the option of the retiring employee either in a lump-sum amount or monthly pension payments. Contributions to the plans are funded through several financial institutions in accordance with the applicable laws and regulations.

     In June 2001, the Japanese Government issued the Law Concerning Defined-Benefit Corporation Plans which permits each employer and employees’ pension fund plan to separate the substitutional portion from its employer pension fund and transfer the obligation and related assets to the government. In July, 2004, in accordance with the law, the Japanese Government approved applications submitted by Sony Corporation and most of its subsidiaries in Japan for an exemption from the obligation to pay benefits for future employee services related to the substitutional portion of the governmental welfare pension program. In January 2005, the government also approved applications for an exemption from the obligation to pay benefits for past employee services related to the substitutional portion. As of March 31, 2005 the benefit obligation for past employee services related to the substitutional portion and the related government-specified portion of the plan assets have not been transferred to the government.

     EITF Issue No. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”, requires employers to account for the entire separation process of a substitutional portion from an entire plan upon completion of the transfer of the substitutional portion of the benefit obligation and related plan assets to the government as the culmination of a series of steps in a single settlement transaction. In accordance with EITF Issue No. 03-2, no accounting for the transfer was recorded for the year ended March 31, 2005.

     Many of foreign subsidiaries have defined benefit pension plans or severance indemnity plans, which substantially cover all of their employees. Under such plans, the related cost of benefits is currently funded or accrued. Benefits awarded under these plans are based primarily on the current rate of pay and length of service.

     Sony uses a measurement date of March 31 for substantially all of its pension and severance plans.

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     The components of net pension and severance costs, which exclude employee termination benefits paid in restructuring activities, for the years ended March 31, 2003, 2004 and 2005 were as follows:

Japanese plans:

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

Foreign plans:

                                 
    Yen in millions     Dollars in millions  
    Year ended March 31     Year ended March 31,  
    2003     2004     2005     2005  
Service cost
  ¥ 13,954     ¥ 11,252     ¥ 6,419     $ 60  
Interest cost
    8,478       8,566       8,091       76  
Expected return on plan assets
    (7,319 )     (6,812 )     (6,712 )     (63 )
Amortization of net transition asset
    (47 )     (27 )     (18 )     (0 )
Recognized actuarial loss
    1,452       1,569       1,637       15  
Amortization of prior service cost
    (208 )     (117 )     (114 )     (1 )
(Gains) losses on curtailments and settlements
    (460 )     5,574       1,713       16  
 
                       
Net periodic benefit cost
  ¥ 15,850     ¥ 20,005     ¥ 11,016     $ 103  
 
                       

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     The changes in benefit obligation and plan assets, funded status and composition of amounts recognized in the consolidated balance sheets were as follows:

                                                 
    Japanese plans     Foreign plans  
    Yen in millions     Dollars in millions     Yen in millions     Dollars in millions  
    March 31     March 31,     March 31     March 31,  
    2004     2005     2005     2004     2005     2005  
Change in benefit obligation:
                                               
Benefit obligation at beginning of the fiscal year
  ¥ 1,031,760     ¥ 993,542     $ 9,285     ¥ 157,580     ¥ 155,838     $ 1,456  
Service cost
    54,501       31,971       299       11,252       6,419       60  
Interest cost
    19,489       21,364       200       8,566       8,091       76  
Plan participants’ contributions
    5,802       2,111       20       644       873       8  
Amendments
          (120,873 )     (1,130 )     3,900       286       3  
Actuarial (gain) loss
    (81,873 )     1,641       15       431       12,210       114  
Foreign currency exchange rate changes
                      (17,082 )     14,288       134  
Curtailments and settlements
          (2,988 )     (28 )     (66 )     (628 )     (6 )
Benefits paid
    (36,137 )     (25,042 )     (234 )     (9,387 )     (11,639 )     (109 )
Divestiture
                            (32,140 )     (301 )
 
                                   
Benefit obligation at end of the fiscal year
    993,542       901,726       8,427       155,838       153,598       1,435  
 
                                   
Change in plan assets:
                                               
Fair value of plan assets at beginning of the fiscal year
    405,248       513,095       4,795       67,937       85,662       800  
Actual return (loss) on plan assets
    93,154       (354 )     (3 )     13,065       7,513       70  
Foreign currency exchange rate changes
                      (3,420 )     3,517       33  
Employer contribution
    23,243       34,581       323       16,475       18,406       172  
Plan participants’ contributions
    5,802       2,111       20       644       873       8  
Curtailments and settlements
                            (112 )     (1 )
Benefits paid
    (14,352 )     (14,982 )     (140 )     (9,039 )     (11,168 )     (104 )
Divestiture
                            (12,666 )     (118 )
 
                                   
Fair value of plan assets at end of the fiscal year
  ¥ 513,095     ¥ 534,451     $ 4,995     ¥ 85,662     ¥ 92,025     $ 860  
 
                                   

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

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    Japanese plans     Foreign plans  
                    Dollars in                     Dollars in  
    Yen in millions     millions     Yen in millions     millions  
    March 31     March 31,     March 31     March 31,  
    2004     2005     2005     2004     2005     2005  
Funded status
  ¥ (480,447 )   ¥ (367,275 )   $ (3,432 )   ¥ (70,176 )   ¥ (61,573 )   $ (575 )
Unrecognized actuarial loss
    328,467       322,237       3,011       27,550       37,383       349  
Unrecognized net transition asset
    (479 )     (104 )     (1 )     211       7       0  
Unrecognized prior service cost
    (20,784 )     (134,440 )     (1,256 )     (748 )     (501 )     (5 )
 
                                   
Net amount recognized
  ¥ (173,243 )   ¥ (179,582 )   $ (1,678 )   ¥ (43,163 )   ¥ (24,684 )   $ (231 )
 
                                   
 
                                               
Amounts recognized in the consolidated balance sheet consist of:
                                               
Prepaid benefit cost
        ¥ 1,795     $ 17     ¥ 2,609     ¥ 1,351     $ 13  
Accrued pension and severance costs, including current portion
  ¥ (322,677 )     (309,957 )     (2,897 )     (61,452 )     (42,934 )     (401 )
Intangibles
    21,263                   113       41       0  
Accumulated other comprehensive income
    128,171       128,580       1,202       15,567       16,858       157  
 
                                   
Net amount recognized
  ¥ (173,243 )   ¥ (179,582 )   $ (1,678 )   ¥ (43,163 )   ¥ (24,684 )   $ (231 )
 
                                   

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

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

     The projected benefit obligations, the accumulated benefit obligations and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were as follows:

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

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

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Japanese plans:

                         
    March 31  
    2003     2004     2005  
Discount rate
    1.9 %     2.4 %     2.3 %
Rate of compensation increase
    3.0       3.0       3.3  

Foreign plans:

                         
    March 31  
    2003     2004     2005  
Discount rate
    6.3 %     5.8 %     5.5 %
Rate of compensation increase
    4.1       4.0       3.3  

     Weighted-average assumptions used to determine net pension and severance costs for the years ended March 31, 2003, 2004 and 2005 were as follows:

Japanese plans:

                         
    Year ended March 31  
    2003     2004     2005  
Discount rate
    2.4 %     1.9 %     2.4 %
Expected return on plan assets
    4.0       4.0       3.2  
Rate of compensation increase
    3.0       3.0       3.3  

Foreign plans:

                         
    Year ended March 31  
    2003     2004     2005  
Discount rate
    6.6 %     6.3 %     5.8 %
Expected return on plan assets
    8.1       8.3       7.8  
Rate of compensation increase
    4.5       4.1       4.0  

     As required under FAS No. 87, the assumptions are reviewed in accordance with changes in circumstances.

     To determine the expected long-term rate of return on pension plan assets, Sony considers the current and expected asset allocations, as well as historical and expected long-term rate of returns on various categories of plan assets.

     Following FAS132®, the weighted-average rate of compensation increase is calculated based on the pay-related plans only. The point-based plan discussed above is excluded from the calculation because payments made under the plan are not based on employee compensation.

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

Japanese plans:

                 
    March 31,  
    2004     2005  
Equity securities
    39.0 %     28.0 %
Debt securities
    14.7       34.7  
Cash
    42.7       33.7  
Other
    3.6       3.6  
 
           
Total
    100 %     100 %
 
           

Foreign plans:

                 
    March 31,  
    2004     2005  
Equity securities
    63.2 %     68.3 %
Debt securities
    26.6       23.4  
Real estate
    3.2       4.0  
Other
    7.0       4.3  
 
           
Total
    100 %     100 %
 
           

     For the pension plans of Sony Corporation and most of its subsidiaries, Sony’s asset investment policy is set so as to compensate the appropriate level for employee’s benefit over the long term.

     For the pension plans of Sony Corporation and most of its subsidiaries in Japan, the target allocation as of March 31, 2005, is, as a result of our Asset Liability management, 34% of public equity, 56% of fixed income securities and 10% of other. When determining an appropriate asset allocation, diversification among assets is duly considered. The actual asset allocation as of March 31, 2005 for Sony’s principal pension plans did not meet the aforementioned target allocation as the Sony Employees’ Pension Fund tentatively held cash to be paid to the Japanese government in relation to the transfer of the substitutional portion of the benefit obligation and the related government-specified portion of the plan assets discussed above. Such transfer is expected to occur in the year ending March 31, 2006.

     Sony makes contributions to its contributory funded defined benefit pension plans as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on plan assets and the present value of benefit obligations. Sony expects to contribute approximately ¥35 billion ($327 million) to the Japanese plans and approximately ¥6 billion ($56 million) to the foreign plans for the year ending March 31, 2006.

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     The future benefit payments are expected as follows:

                                 
    Japanese plans     Foreign plans  
    Yen in     Dollars in     Yen in     Dollars in  
    millions     millions     millions     millions  
Year ending March 31,
                               
2006
  ¥ 18,281     $ 171     ¥ 5,625     $ 53  
2007
    19,734       184       5,977       56  
2008
    22,075       206       6,308       59  
2009
    24,600       230       6,860       64  
2010
    29,475       275       7,912       74  
2011 - 2015
    181,527       1,697       51,919       485  

16. Stockholders’ equity

     (1) Subsidiary tracking stock:

On June 20, 2001, Sony Corporation issued shares of subsidiary tracking stock in Japan, the economic value of which is intended to be linked to the economic value of Sony Communication Network Corporation (“SCN”), a directly and indirectly wholly owned subsidiary of Sony Corporation which is engaged in Internet-related services. The subsidiary tracking stock holders have no direct rights in the equity or assets of SCN or the assets of Sony Corporation. Except as summarized below, the shares of subsidiary tracking stock have the same rights and characteristics as those of shares of common stock.

     The dividend on the shares of this series of subsidiary tracking stock is payable only when the Board of Directors of SCN has resolved to pay to its common stock holders a dividend in an amount per share of the subsidiary tracking stock equal to the amount of SCN’s dividend per share of its common stock multiplied by the Standard Ratio (as defined in the articles of incorporation), subject to statutory restriction on Sony Corporation’s ability to pay dividends on its shares of capital stock and the maximum dividend amount (as defined in the articles of incorporation). If the amount of dividends paid to the subsidiary tracking stock holders is less than the amount, which should have been paid pursuant to the formula set forth above due to the statutory restriction referred to above or for any other reason, such shortfall will be accumulated and such cumulative amount will be paid to the subsidiary tracking stock holders for subsequent fiscal years. Any such dividend on the subsidiary tracking stock is payable in priority to the payment of dividends to the common stock holders. However, the subsidiary tracking stockholders have no right to participate in the dividends to common stock holders. Furthermore, even if the Board of Directors of SCN does not take a resolution for the payment of dividends to SCN’s common stock holders, Sony Corporation may decide to pay dividends to its common stock holders.

     The subsidiary tracking stockholders have the same voting rights as those of the common stock holders and, thus, are entitled to participate and vote at any General Meeting of Shareholders in the same way as the common stock holders. In addition, as each series of subsidiary tracking stock is a separate class of stock different from common stock, if any resolution of the General Meeting of Shareholders would adversely affect the rights of the shareholders of a particular class of subsidiary tracking stock, the shareholders of each class of subsidiary tracking stock will have

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the right to approve or disapprove such resolution by a special resolution of the meeting of shareholders of that class of subsidiary tracking stock.

     In the event of distribution of residual assets to the shareholders of Sony Corporation where, as long as such assets include shares of common stock of SCN, the number of shares of SCN common stock obtained by multiplying the number of shares of the subsidiary tracking stock held by each holder by the Standard Ratio or the net proceeds from the sale of the shares of SCN common stock so to be distributed will be distributed to the holders of the subsidiary tracking stock.

     The shares of subsidiary tracking stock may be subject to repurchase and retirement in the same manner and under the same restriction as the shares of common stock. In addition, at any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may retire the entire amount of all outstanding shares of that series of subsidiary tracking stock upon paying to the shareholders thereof an amount equal to the current market price of the subsidiary tracking stock out of Sony Corporation’s retained earnings available for dividend payments. Sony Corporation may also retire the shares of a series of subsidiary tracking stock in their entirety pursuant to the procedures prescribed by the Japanese Commercial Code for the reduction of capital upon payment to the subsidiary tracking stock holders an amount equal to the market value thereof as set forth above.

     At any time after the passage of three years from the date of the initial issuance of shares of a series of subsidiary tracking stock, it may convert the entire amount of all outstanding shares of the subsidiary tracking stock into the shares of Sony Corporation’s common stock at the rate of the multiple of 1.1 of the market value (as defined in the articles of incorporation) of shares of the subsidiary tracking stock divided by the market value (as similarly defined) of the shares of Sony Corporation’s common stock.

     If any events (as defined in the articles of incorporation) occur, the entire amount of all outstanding shares of the subsidiary tracking stock will be either retired or converted into shares of Sony Corporation’s common stock at the price or rate set forth above. On April 26, 2005, Sony Corporation decided at the Board of Directors to go through procedures for the initial public offering of SCN. If the listing of SCN common stock is approved by the stock exchange, subject to required procedures, all of the subsidiary tracking stock will be compulsorily terminated pursuant to the articles of incorporation. The method of such termination will be one of the following: 1) compulsory retirement in cash, 2) compulsory conversion to common stock of Sony Corporation, or 3) compulsory exchange with common stock of SCN.

     The number of shares of the subsidiary tracking stock issued and outstanding at March 31, 2005 was 3,072,000. At March 31, 2005, 136,454 shares of the subsidiary tracking stock would be issued upon exercise of warrants and stock acquisition rights outstanding.

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(2) Common stock:

Changes in the number of shares of common stock issued and outstanding during the years ended March 31, 2003, 2004 and 2005 have resulted from the following:

         
    Number of  
    shares  
Balance at March 31, 2002
    919,744,355  
Conversion of convertible bonds
    138,330  
Stock issued under exchange offering
    2,502,491  
 
     
Balance at March 31, 2003
    922,385,176  
Conversion of convertible bonds
    2,944,800  
Stock issued under exchange offering
    1,088,304  
 
     
Balance at March 31, 2004
    926,418,280  
Conversion of convertible bonds
    70,765,533  
Exercise of stock acquisition rights
    27,400  
 
     
Balance at March 31, 2005
    997,211,213  
 
     

     At March 31, 2005, 55,609,085 shares of common stock would be issued upon conversion or exercise of all convertible bonds, warrants and stock acquisition rights outstanding.

     On October 1, 2002, Sony Corporation implemented a share exchange as a result of which Aiwa Co., Ltd. became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 2,502,491 new shares, the minority interest in Aiwa Co., Ltd. was eliminated from the balance sheet, and additional paid-in capital increased ¥15,791 million.

     On May 1, 2003, Sony Corporation implemented a share exchange as a result of which CIS Corporation became a wholly-owned subsidiary. As a result of this share exchange, Sony Corporation issued 1,088,304 new shares, and additional paid-in capital increased ¥5,409 million.

     On November 20, 1991, Sony Corporation made a free share distribution of 33,908,621 shares in ratios of one share for each ten shares held for which no accounting entry was required in Japan. Had the distribution been accounted for in the manner adopted by companies in the United States of America, ¥201,078 million would have been transferred from retained earnings to the appropriate capital accounts. This has been the only free distribution of common stock where no accounting entry was required in Japan.

     Conversions of convertible bonds into common stock are accounted for in accordance with the provisions of the Japanese Commercial Code by crediting approximately one-half of the conversion proceeds to the common stock account and the remainder to the additional paid-in capital account.

     Prior to the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase and retirement by Sony Corporation of its own shares could be made at any time by resolution of the Board of Directors. No common stock and subsidiary tracking stock had been acquired under the approval during the year ended March 31, 2002.

     Following the amendments to the Japanese Commercial Code enacted on April 1, 2002, purchase by Sony Corporation of its own shares was subject to the prior approval of shareholders at the Ordinary General Meeting of Shareholders, which included the maximum number of shares and the maximum total amount to be purchased for each class of stock. Once such approval of shareholders was obtained, Sony Corporation could purchase its own shares at any time during the period up to the conclusion of the next Ordinary General Meeting of Shareholders.

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     The Ordinary General Meeting of Shareholders held on June 20, 2002 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in total not exceeding ¥650 billion and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding ¥1 billion until the conclusion of the General Meeting of Shareholders held for the year ended March 31, 2003. As a result, no common stock and subsidiary tracking stock had been acquired under this approval.

     The Ordinary General Meeting of Shareholders held on June 20, 2003 approved that Sony Corporation acquire up to a total not exceeding 90 million outstanding shares of its common stock at an amount in total not exceeding ¥400 billion and a total not exceeding 300 thousand outstanding shares of the subsidiary tracking stock at an amount in total not exceeding ¥1 billion. As a result, Sony Corporation had acquired 2 million outstanding shares of its common stock at an amount in ¥8,200 million. No subsidiary tracking stock had been acquired under this approval.

     The Ordinary General Meeting of Shareholders held on June 22, 2004 approved to amend the articles of incorporation that Sony Corporation may purchase its own shares by a resolution of the Board of Directors, in accordance with the amendments to the Japanese Commercial Code enacted on September 25, 2003. With the amendment of the articles of incorporation, Sony Corporation may purchase its own shares at any time by a resolution of the Board of Directors up to the retained earnings available for dividends to shareholders. No common stock and subsidiary tracking stock had been acquired by the resolution of the Board of Directors during the year ended March 31, 2005.

(3) Retained earnings:

The amount of statutory retained earnings of Sony Corporation available for dividends to shareholders as of March 31, 2005 was ¥557,856 million ($5,214 million). The appropriation of retained earnings for the year ended March 31, 2005 including cash dividends for the six-month period ended March 31, 2005 has been incorporated in the accompanying consolidated financial statements. This appropriation of retained earnings was approved at the meeting of the Board of Directors of Sony Corporation held on April 26, 2005 and was then recorded in the statutory books of account, in accordance with the Japanese Commercial Code.

     Retained earnings include Sony’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ¥2,261 million and ¥2,724 million ($25 million) at March 31, 2004 and 2005, respectively.

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(4) Other comprehensive income:

     Other comprehensive income for the years ended March 31, 2003, 2004 and 2005 were as follows:

                         
    Yen in millions  
    Pre-tax     Tax     Net-of-tax  
    amount     expense     amount  
For the year ended March 31, 2003:
                       
Unrealized gains on securities -
                       
Unrealized holding gains (losses) arising during the period
  ¥ (18,575 )   ¥ 8,948     ¥ (9,627 )
Less: Reclassification adjustment for gains (losses) included in net income
    3,421       867       4,288  
Unrealized losses on derivative instruments -
                       
Unrealized holding gains (losses) arising during the period
    (6,268 )     1,791       (4,477 )
Less: Reclassification adjustment for gains (losses) included in net income
    682       (287 )     395  
Minimum pension liability adjustment
    (181,725 )     71,089       (110,636 )
Foreign currency translation adjustments -
                       
Translation adjustments arising during the period
    (87,103 )     3,110       (83,993 )
Less: Reclassification adjustment for losses included in net income
    7,665             7,665  
 
                 
 
                       
Other comprehensive income
  ¥ (281,903 )   ¥ 85,518     ¥ (196,385 )
 
                 
 
                       
For the year ended March 31, 2004:
                       
Unrealized gains on securities -
                       
Unrealized holding gains (losses) arising during the period
  ¥ 89,861     ¥ (31,890 )   ¥ 57,971  
Less: Reclassification adjustment for gains (losses) included in net income
    (7,371 )     1,692       (5,679 )
Unrealized losses on derivative instruments -
                       
Unrealized holding gains (losses) arising during the period
    11,586       (4,049 )     7,537  
Less: Reclassification adjustment for gains (losses) included in net income
    (5,961 )     2,617       (3,344 )
Minimum pension liability adjustment
    162,408       (68,993 )     93,415  
Foreign currency translation adjustments -
                       
Translation adjustments arising during the period
    (134,312 )     5,199       (129,113 )
Less: Reclassification adjustment for losses included in net income
    1,232             1,232  
 
                 
 
                       
Other comprehensive income
  ¥ 117,443     ¥ (95,424 )   ¥ 22,019  
 
                 

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    Yen in millions  
    Pre-tax     Tax     Net-of-tax  
    amount     expense     amount  
For the year ended March 31, 2005:
                       
Unrealized gains on securities -
                       
Unrealized holding gains (losses) arising during the period
  ¥ 7,184     ¥ (1,541 )   ¥ 5,643  
Less: Reclassification adjustment for gains (losses) included in net income
    (18,140 )     5,216       (12,924 )
Unrealized losses on derivative instruments -
                       
Unrealized holding gains (losses) arising during the period
    (2,015 )     1,806       (209 )
Less: Reclassification adjustment for gains (losses) included in net income
    (2,848 )     1,167       (1,681 )
Minimum pension liability adjustment
    (1,700 )     931       (769 )
Foreign currency translation adjustments -
                       
Translation adjustments arising during the period
    76,585       (2,361 )     74,224  
 
                 
 
                       
Other comprehensive income
  ¥ 59,066     ¥ 5,218     ¥ 64,284  
 
                 
                         
    Dollars in millions  
    Pre-tax     Tax     Net-of-tax  
    amount     expense     amount  
For the year ended March 31, 2005
                       
Unrealized gains on securities -
                       
Unrealized holding gains (losses) arising during the period
  $ 68     $ (15 )   $ 53  
Less: Reclassification adjustment for gains (losses) included in net income
    (170 )     49       (121 )
Unrealized losses on derivative instruments -
                       
Unrealized holding gains (losses) arising during the period
    (19 )     17       (2 )
Less: Reclassification adjustment for gains (losses) included in net income
    (27 )     11       (16 )
Minimum pension liability adjustment
    (16 )     9       (7 )
Foreign currency translation adjustments -
                       
Translation adjustments arising during the period
    716       (22 )     694  
 
                 
 
                       
Other comprehensive income
  $ 552     $ 49     $ 601  
 
                 

     During the years ended March 31, 2003 and 2004, ¥7,665 million and ¥1,232 million of foreign currency translation adjustments were transferred respectively from other comprehensive income and charged to income as a result of the liquidation of certain foreign subsidiaries.

     As discussed in Note 6, as of August 1, 2004, Sony and Bertelsmann AG combined their recorded music businesses in a joint venture. In connection with the establishment of the joint venture, the minimum pension liability attributable to employees who were transferred to SONY BMG totaling ¥6,053 million ($57 million) was transferred from other comprehensive income to the carrying value of Sony’s investment in SONY BMG.

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17. Stock-based compensation plans

Sony has four types of stock-based compensation plans as incentive plans for directors, corporate executive officers and selected employees.

(1) Warrant plan:

Upon issuance of unsecured bonds with detachable warrants which are described in Note 12, Sony Corporation has purchased all of the detachable warrants and distributed them to the directors, corporate executive officers and selected employees of Sony. By exercising a warrant, directors, corporate executive officers and selected employees can purchase the common stock or subsidiary tracking stock of Sony Corporation, the number of which is designated by each plan. The warrants generally vest ratably over a period of three years, and are exercisable up to six years from the date of grant.

(2) Convertible Bond plan:

Sony has an equity-based compensation plan for selected executives of Sony’s United States of America subsidiaries using U.S. dollar-denominated non-interest bearing convertible bonds which have characteristics similar to that of an option plan. Each convertible bond can be converted into 100 shares of the common stock of Sony Corporation at an exercise price based on the prevailing market rate shortly before the date of grant. The convertible bonds vest ratably over a three-year period and are exercisable up to ten years from the date of grant. As the convertible bonds were issued in exchange for a non-interest bearing employee loan and a right of offset exists between the convertible bonds and the employee loans, no accounting recognition was given to either the convertible bonds or the employee loans in Sony’s consolidated balance sheet.

(3) Stock Acquisition Rights:

During the year ended March 31, 2003, Sony adopted an equity-based compensation plan that issues common stock acquisition rights for the purpose of granting stock options to the directors, corporate executive officers and selected employees of Sony, and subsidiary tracking stock acquisition rights for the purpose of granting stock options to the directors and selected employees of Sony Communication Network Corporation, pursuant to the Commercial Code of Japan. The stock acquisition rights generally vest ratably over a period of three years and are exercisable up to ten years from the date of grant.

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     Presented below is a summary of the activities regarding common stock warrant, convertible bond and stock acquisition rights plans for the years shown:

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

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

                                                         
    Outstanding     Exercisable  
            Weighted-     Weighted-     Weighted-             Weighted-     Weighted-  
Exercise price   Number of     average     average     average     Number of     average     average  
range   Shares     exercise price     exercise price     remaining life     Shares     exercise price     exercise price  
Yen         Yen     Dollars     Years           Yen     Dollars  
¥3,782 ~ 7,000
    10,497,600     ¥ 4,680     $ 43.74       8.24       4,608,000     ¥ 5,250     $ 49.07  
7,001 ~ 13,202
    2,615,600       10,065       94.07       3.14       2,615,600       10,065       94.07  
 
                                                   
 
                                                       
¥3,782 ~ 13,202
    13,113,200     ¥ 5,754     $ 53.78       7.22       7,223,600     ¥ 6,994     $ 65.36  
 
                                                   

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

                                                         
    Outstanding     Exercisable  
            Weighted-     Weighted-     Weighted-             Weighted-     Weighted-  
Exercise price   Number of     average     average     average             average     average  
range   Shares     exercise price     exercise price     remaining life     Number of Shares     exercise price     exercise price  
Yen         Yen     Dollars     Years           Yen     Dollars  
¥815 ~ 3,300
    181,500     ¥ 1,591     $ 14.87       7.22       90,300     ¥ 2,118     $ 19.79  

     As the exercise prices for the warrant, convertible bond and stock acquisition rights plans were determined based on the prevailing market price shortly before the date of grant, the compensation expense for these plans was

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not significant for the years ended March 31, 2003, 2004 and 2005.

     As a result of the establishment of the joint venture between Sony’s recorded music business with the recorded music business of Bertelsmann AG (Note 6), employees of Sony’s recorded music business who were granted options under the convertible bond and stock acquisition rights plans prior to the establishment of the joint venture are no longer considered employees of Sony under FAS No. 123 as these individual are now employees of SONY BMG which is accounted for under the equity method. As a result, a compensation charge of ¥340 million ($3 million) was recorded based on the fair value method of accounting for stock-based compensation using the Black-Scholes model. The fair value of the options as of August 1, 2004, the date on which the joint venture was established, was ¥538 million ($5 million) and is being recognized into income over the remaining vesting period of the options.

     The weighted-average fair value per share at the date of grant of common stock warrants, convertible bond options and stock acquisition rights granted during the years ended March 31, 2003, 2004 and 2005 were ¥2,063, ¥1,413 and ¥1,085 ($10.14), respectively. The fair value of common stock warrants, convertible bond options and stock acquisition rights granted on the date of grant, which is amortized to expense over the vesting period in determining the pro forma impact, is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

                         
    Year ended March 31  
Weighted-average                  
assumptions   2003     2004     2005  
Risk-free interest rate
    2.76 %     2.18 %     2.04 %
Expected lives
    4.23 years     3.67 years     3.54 years
Expected volatility
    47.33 %     42.83 %     35.56 %
Expected dividend
    0.47 %     0.57 %     0.62 %

(4) SAR plan:

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