Sony - 20-F annual report

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

In this document, Sony Corporation and its consolidated subsidiaries are together referred to as “Sony.” In addition, sales and operating revenue is referred to as “sales” in the narrative description except in Consolidated Financial Statements.

The noon buying rate for yen in New York City as certified for customs purposes by the Federal Reserve Bank of New York on June 18, 2002 was 124.56 yen = U.S. 1 dollar.

As of March 31, 2002, Sony Corporation had 1,068 consolidated subsidiaries. It has applied the equity accounting method in respect to its 98 affiliated companies.

Statements made in this annual report with respect to Sony’s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of Sony. Forward-looking statements include but are not limited to those 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 or financial performance. 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, 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 (particularly in the Electronics business), and subjective and changing consumer preferences (particularly in the Game, Music, and Pictures businesses); (iv) Sony’s ability to implement successfully the restructuring initiatives in its Electronics, Music and Pictures businesses and its network strategy for its Electronics, Music and Pictures businesses; (v) Sony’s ability to compete and develop and implement successful sales and distribution strategies in light of internet and other technological developments in its Music and Pictures businesses; (vi) Sony’s continued ability to devote sufficient resources to research and development and, with respect to capital expenditures, to prioritize investments (particularly in the Electronics business); (vii) the success of Sony’s joint ventures and alliances; and (viii) the outcome of contingencies. Risks and uncertainties are also include the impact of any future events with material unforeseen impacts.

Important information regarding risks and uncertainties is also set forth elsewhere in this annual report, including in “Risk Factors” included in“Item 3. Key Information”, “Item 4. Information on the Company”, “Item 5. Operating and Financial Review and Prospects”, “Legal Proceedings” included in“Item 8. Financial Information”, Sony’s Consolidated Financial Statements referenced in “Item 8. Financial Information”, and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

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This section contains forward-looking statements that are subject to the Cautionary Statement Regarding Forward-Looking Statements appearing elsewhere in this annual report. Risks to Sony are also discussed elsewhere in this annual report, including without limitation in the other sections of the annual report referred to in the “Cautionary Statement with Respect to Forward-Looking Statements.”

Purchases of Sony’s products are to a very significant extent discretionary. Economic downturns and declines in consumption in Sony’s major markets, including Japan, the U.S., Europe, and Asia/Latin America may thus adversely affect the level of sales and Sony’s consolidated financial results and condition.

Local currency denominated financial results in each of Sony’s subsidiaries around the world are translated into yen by applying the average market rate during each financial period and recorded on Sony’s consolidated profit and loss statement. Local currency-denominated assets and liabilities/stockholder’s equity are translated into yen by applying the market rate at the end of each financial period and recorded on Sony’s consolidated balance sheets. Accordingly, the results, assets, and liabilities/stockholder’s equity in such worldwide businesses

In addition, especially in the Electronics and Game businesses, operating profits and losses are highly sensitive to the yen’s appreciation because the research and development/production activities and headquarters functions are concentrated in Japan, so that the ratio of yen-denominated costs to total costs is higher than in other business segments. Profits and losses resulting from differences between hedged rates and market rates in the evaluation or execution of contracts entered for the purpose of currency hedging such as foreign exchange forward contracts and foreign currency option contracts by Sony Corporation and its subsidiaries such as Aiwa Co., Ltd., Sony Computer Entertainment Inc., and finance subsidiaries in the U.S., Europe, and Asia are recorded on a net basis in other income and expenses, and are not included in operating profits and losses. Although Sony engages in hedging transactions for actual requirements to minimize the negative effects from short-term fluctuations of foreign exchange rates among major invoicing currencies such as the U.S. dollar, euro and yen, mid-to-long-term volatile changes of the exchange rate levels make it difficult for Sony to execute planned procurement, production, logistics, and sales activities and may adversely affect Sony’s consolidated financial results and condition.

In June 2001, the FASB issued FAS No. 143, “Accounting for Asset Retirement Obligations”. This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement shall be effective for fiscal years beginning after June 15, 2002. Sony is now in the process of assessing the impact that the statement will have on Sony’s results of operations and financial position.

In April 2002, the FASB issued FAS No. 145, effective for fiscal years beginning or transactions occurring after May 15, 2002. This statement rescinds certain authoritative pronouncements and amends, clarifies or describes the applicability of others. Sony is now in the process of assessing the impact that the statement will have on Sony’s results of operations and financial position.

From time to time, Sony has entered into various financing arrangements with special purpose entities. The assets and financings associated with these arrangements generally qualify for off-balance sheet treatment. Various generally accepted accounting principles specify the conditions that Sony observes in not consolidating special purpose entities. The accounting for special purpose entities is under review by the Financial Accounting Standards Board, and their non-consolidated status may change as a result of those reviews. Please see “Other Financing Arrangements” section in “Item. 5 Operating and Financial Review and Prospects” for more information.

Changes in accounting standards that may be promulgated in the future cannot be predicted and may have a material adverse effect on Sony’s reported consolidated financial results and condition.

Sony has adopted stock-price linked incentive compensation programs for selected management employees, and such compensation costs are recognized in income based on the excess, if any, of the quoted market price of Sony Corporation’s stock at the grant date of the award or other measurement date over the stated exercise price

Continued technological superiority of Sony’s products and services is a critical element of Sony’s competitive success. An increasingly important factor in Sony’s competitiveness is the continuing performance of skilled managerial and technical personnel. Experienced personnel in the industries in which Sony competes are in high demand, and competition for their talents is intense. There can be no assurance that Sony will be successful in attracting and retaining the key personnel it needs, and the expenses in obtaining and retaining these personnel are expected to increase.

Sony carries out many activities with other companies such as alliances, joint ventures, and strategic investments, including investments in venture companies. Sony’s reliance on these strategies of partnering with third parties is increasing. These activities are important for Sony to introduce new products such as information and communication equipment, for which demand is increasing, and to introduce new services using digital network technologies. In addition, Sony may carry out a large amount of strategic investment in other entities in order to proceed with broadband network businesses in the future. However, because results from these activities are largely dependent on business trends as well as the financial condition of partner companies, weak trends or disappointing performance of such partners may adversely affect the success of these activities. In addition, the success of these activities may be adversely affected by the inability of Sony and its partners to successfully define and reach their common objectives. Although Sony strives to avoid business duplication among its group subsidiaries, by entering into alliances, joint ventures, and strategic investments which are designed to improve the corporate value of the Sony group by diversifying the businesses of its subsidiaries, business overlaps and inefficiencies may arise.

There can be no assurance that claims of infringement will not be asserted against Sony or against our customers in connection with their use of Sony’s systems and products, nor can there be any assurance as to the outcome of any such claims, given the technological complexity of our systems and products.

In order to properly allocate managerial resources and improve operating efficiency, Sony is undertaking the concentration/selection of its businesses, realignment of its facilities, and reduction in the number of its employees around the world. In connection with these actions, it is possible that there may be reorganization expenses which adversely affect Sony’s consolidated financial results and condition. Moreover, the intended beneficial effects from such reorganizations may not be achieved.

In addition, with the increasing necessity of pursuing quick business development and operating efficiency with limited managerial resources, Sony increasingly procures important technologies from external suppliers. Sony also increasingly consigns to external suppliers extensive activities including procurement, manufacturing, logistics, sales and services, and procures from external suppliers infrastructures such as fixed assets and communications. Accordingly, Sony’s reliance on such external suppliers, including from strategic alliances or

Sony’s businesses face a broad range of competitors from large international companies to an increasing number of relatively small, rapidly growing, and highly specialized organizations. Sony has a portfolio of businesses in different industries while many of its competitors specialize in one or more of these business areas. As a result, Sony may not fund or invest in certain of its businesses to the same degree that its competitors do and these companies may have greater financial, technical, and marketing resources available to them than the businesses of Sony against which they compete.

In the Electronics business, the environment is becoming more demanding due to a number of factors, including the following:

Sony continues to incur significant expenses, including depreciation expenses resulting from a high level of capital expenditures for critical devices including semiconductors, high levels of research and development expenses for development of digital equipment that requires new technologies and of basic technologies, royalty expenses to acquire technologies indispensable for the development and production of information and communication equipment, advertising expenses, and personnel expenses. However, Sony may face difficulties in adequately providing for such expenses and capital expenditures due to weak sales caused by such factors as a lack of products and services that appeal to customers, decreases in unit sales stemming from either a rise in the market penetration ratios of products or from increases in sales prices in response to volatile fluctuations of exchange rates, or supply shortages of core devices/other parts and inventory shortages of products, especially when product demand is the highest. Moreover, such factors as reductions in production/inventories in response to weak sales in certain areas or product categories may adversely affect Sony’s consolidated financial results and condition. Furthermore, regarding Aiwa Co., Ltd., an approximately 61 percent owned consolidated subsidiary of Sony Corporation, reorganization expenses, such as severance expenses and loss on sale and disposal of long-lived assets, and writedown of inventories relating to a reduction of fixed costs before the company is taken private by Sony in October 2002, will likely adversely affect Sony’s consolidated financial results and condition. In addition, there can be no assurance that continued restructuring initiatives at Aiwa will be successful.

In the Game business, the competitive environment is becoming more difficult due to competitors’ introduction of new hardware and software with various formats that can have increasing appeal to customers, rapid technological progress, a rise in the market penetration ratios of products, and

diversification of customers’ preferences. Sony continues to incur significant expenses such as depreciation expenses resulting from a high level of capital expenditures in prior years to increase production of semiconductors for PlayStation 2 hardware, research and development expenses for semiconductors and software, advertising expenses, and personnel expenses. However, Sony may face difficulties in adequately providing for such expenses and capital expenditures due to weak sales caused by such factors as supply shortages of core devices/other parts and inventory shortages of hardware, especially when product demand is the highest, delays in introductions or decreases in the number of software titles that appeal to customers, or decreases in hardware unit sales stemming from a rise in the market penetration ratios of products. Also, delays in cost reductions and reductions in production/inventories, in response to a changeover to new hardware or slow sales, may adversely affect Sony’s consolidated financial results and condition.

Furthermore, the fact that in the Game business Sony offers a relatively small range of products and is dependent upon seasonal demand makes it particularly susceptible to weak sales and supply shortages.

In the Music business, market growth continues to contract due to the slowdown in worldwide economic growth, the saturation of the CD market, the effects of piracy and other illegal duplication, parallel imports, diversification of customer preferences, and pricing pressures. Due to this market contraction, it will be difficult for Sony to maintain profit margins. The Music business is highly dependent on establishing artists that appeal to customers, and the competition among record companies for such talent is intense. Therefore, if the Music business is unable to find and establish new talented artists, it may adversely affect Sony’s consolidated financial results and condition. Furthermore, advances in technologies which allow for the transfer and downloading of digital music files from the Internet without authorization from rights owners may threaten the conventional copyright-based business model and may adversely affect Sony’s Music business. Corresponding to this change in the business model, expenses to develop new services, which combine digital network technologies and music content, and other strategic investments may also adversely affect Sony’s near-term consolidated financial results and condition.

The Pictures business is highly competitive. Major motion picture studios and independent film production companies are aggressively competing in the production and distribution of films all over the world. Companies within the Pictures business also compete against other forms of entertainment and leisure-time activities, including sporting events, concerts, video games, the Internet and other computer-related activities. To remain competitive in this environment, higher levels of spending are generally required for production, talent, marketing and worldwide distribution of films. Although Sony is working to hold down production and exploitation costs for certain films by collaborating with and purchasing product from other studios, sales of film product may not adequately provide for the recovery of all related film costs due to factors such as a lack of acceptance by customers or varying customer preferences. Furthermore, technological developments have created new risks with respect to Sony’s ability to protect its intellectual property, which may adversely affect Sony’s consolidated financial results and condition.

In the fiscal year ended March 31, 2001, Sony consolidated its domestic television operations and downsized its network television development and production investments. Sony remains a producer and distributor for the broadcast syndication and cable markets while pursuing selected network programming opportunities. In the Television production and distribution business, available network broadcast time is limited and the audience is increasingly fragmented among the major broadcast networks, cable and independent television stations. Competition to obtain customers between major networks and other production and distribution companies is becoming more intense. Furthermore, broadcast networks are increasingly producing their own shows internally. This competitive environment has resulted in fewer opportunities to produce shows for the networks and a shorter lifespan for ordered shows that do not

immediately achieve favorable ratings. As a result, Sony, as well as other participants in the industry, have seen an increase in the number of new programs being distributed yet cancelled in their first or second season, shows which are generally less profitable, and a decrease in the number of network programs that are able to achieve syndication, the latter being shows which are generally more profitable. In addition, Sony and other members of the industry have experienced significant increases in talent spending. Such developments may adversely affect Sony’s consolidated financial results and condition despite the downsizing discussed above. Furthermore, spending required to develop new services which combine digital network technologies and movies/television programs and other strategic investments may adversely affect Sony’s consolidated financial results and condition.

The Pictures Business may be directly or indirectly dependent upon union members, and work stoppages or strikes organized by such unions could materially adversely impact Sony’s business or financial result and condition.

In the Financial Services business, with deregulation of the industry in Japan, the number of new market entrants from outside Japan and from other industries is increasing. Also, customers are becoming more exacting in regards to product selection and prices. In this environment, if Sony’s life insurance business cannot provide products and services that fit customers’ needs and achieve stable investment returns from its stock, bond, and real estate assets, Sony’s consolidated financial results and condition may be adversely affected. Moreover, increases in insurance claims that Sony cannot accurately predict and shifts in customers’ demand from such profitable products as life guarantees to such less profitable products as annuities may adversely affect Sony’s consolidated financial results and condition. Moreover, if additional competitors in the insurance industry go bankrupt, further increases in the amount of mandatory contributed reserves for the Life Insurance Policyholders Protection Corporation of Japan may adversely affect Sony’s consolidated financial results and condition. In the non-life insurance business, revenues have not yet been sufficient to cover such expenses as advertising expenses necessary for business expansion, and increases in insurance claims that Sony cannot accurately predict may adversely affect Sony’s consolidated financial results and condition.

In addition, Sony’s banking business, Sony Bank Inc. started operations in June 2001. This business may not be able to collect sufficient deposits from customers to earn sufficient return on its loans and portfolio investments to cover expenses such as development costs for the information systems and general expenses; this may adversely affect Sony’s consolidated financial results and condition. Furthermore the bank may not be able to effectively control the various risks it faces including, credit risks, liquidity risks, operational risk, legal risk, and reputational risk; this inability could also adversely affect the achievement of its business goals and may adversely affect Sony’s consolidated financial results and condition.

In the leasing and credit financing business, increases in funds required for purchasing goods to be leased and in leasehold assets, increases in non-performing receivables due to default in payment by customers, and decreases in profitability attributable to intensifying competition may adversely affect Sony’s consolidated financial results and condition.

Sony is actively expanding Internet related businesses and other new businesses. Such businesses include Sony Communication Network Corporation, whose main business is an Internet service provider. In addition, new businesses utilizing “FeliCa”, a non-contact IC card technology developed independently by Sony for Internet shopping and transportation services are also included in such businesses mentioned above. These businesses operate in competitive markets characterized by rapid advancements in technology and competition with existing large companies/new market entrants. In this environment, Sony’s consolidated financial results and condition may be adversely affected as a result of the substantial

expenditures that are required to compete and that may exceed revenues. In addition, if these businesses fail to attract customers due to delays in expansion of Internet subscribers or customers’ anxieties in terms of security, these businesses may be forced to change their business models.

In recent years, Sony has recorded substantial losses and writedowns in some of its equity affiliates. These losses and writedowns have included those at Loews Cineplex Entertainment Corporation (“Loews”), including a total writedown of the carrying value of Loews, at Sony Ericsson Mobile Communications (“SEMC”), at The Columbia House Company (“CHC”), at American Video Glass Company (“AVGC”), and at Telemundo Communications Group, Inc. and affiliates (“Telemundo”). Similar losses and writedowns may occur in the future.

In April 2002, Sony completed the sale of its equity interest in Telemundo. Also, Sony plans to sell most of each interest in CHC by June 2002, subject to conditions including regulatory approval in the U.S.

In addition, equity affiliates include newly established businesses in which expenses may exceed revenues.

Corresponding to rapid advancements in technologies and increases in demand for digital equipment, such technologies as software and electronic devices including semiconductors, that are utilized in products and services Sony introduces in the market, are becoming increasingly sophisticated and complicated. At the same time, since the technological life cycle is becoming shorter, Sony is required to introduce products and services in a shorter period of time. These factors apply particularly to Sony because of the importance to it of technological and product leadership as a feature of its competitive success. Accordingly, product quality/liability issues present greater risks. Sony endeavors to prevent the occurrence of such issues in advance by incorporating such measures as the Six Sigma method for improving management quality. Further, in order to minimize damages generated from any product quality/liability issues, Sony is seeking to develop a risk management structure designed to allow Sony group headquarters and each business unit to closely cooperate and to enable prompt awareness of the situation and appropriate execution of countermeasures. However, there is no assurance that Sony will be able to completely eliminate or mitigate occurrences of the aforementioned issues and consequent damages. If such factors adversely affect Sony’s operating activities, generate expenses such as those for product recalls, service, and compensation, or hurt Sony’s brand image, Sony’s consolidated financial results and condition or reputation for quality products may be adversely affected.

A substantial portion of Sony’s activity is conducted outside Japan, including in developing and emerging markets in Latin American and Asia. There are a number of risks inherent in doing business in those markets, including the following:

Our inability to manage successfully the risks inherent in our international activities may adversely affect our business, financial condition and operating results.

Sony’s group headquarters functions, part of Sony’s major data centers, and many of Sony’s most advanced device manufacturing facilities, including those for semiconductors, are located in Japan, where the possibility of disaster or damage from earthquake is generally higher than in other parts of the world. In addition, Sony’s facilities or offices, including those for research and development, material procurement, manufacturing, logistics, sales, and services are located throughout the world and subject to the possibility of disaster or outage or similar disruption as a result of any of a number of events. Sony periodically carries out disaster prevention checks, facility maintenance, and safety measures to minimize possible negative effects caused by such disasters as earthquakes, water, fire, electricity failure, or accidents to its operating activities, major facilities, and employees’/customers’ health. Furthermore, as the role of information systems is becoming ever more important in Sony’s operating activities, such issues as shutdowns of information systems due to the aforementioned disasters, software/hardware defects, and computer viruses, as well as leakage, falsifications, and disappearances of internal databases, including information of customers or vendors, pose increasing risks. Although Sony is working to establish appropriate backup structures for information systems and databases, advanced levels of security, and employee education, there is no assurance that Sony will be able to completely prevent or mitigate the effect of such issues as the aforementioned disasters, outflows of harmful substances, shutdowns of information systems, and leakage, falsifications, and disappearances of internal databases. If such factors adversely affect Sony’s operating activities, generate expenses relating to physical or personal damage, or hurt Sony’s brand image, Sony’s consolidated financial results and condition may be adversely affected.

Various regulations by governments in countries in which Sony does businesses, such as required business/investment approvals, export regulations based on national-security or other reasons and other export/import regulations such as tariffs, as well as commercial, antitrust, patent, consumer and business taxation, exchange control, and environment/recycling laws and regulations, apply to Sony. If Sony is unable to comply with these regulations, they can serve to limit Sony’s activities. In addition, even if Sony is able to comply, these regulations can result in increased costs. In either event, Sony’s consolidated financial results and financial condition may be adversely affected.

In the case of environmental issues, Sony aggressively endeavors to carry out decreases in the amount of waste materials, reductions in the use of harmful substances, and comprehensive risk management in manufacturing activities, as well as in final products, the use of lead-free soldering, decreases in the level of standby power, and the recycling of products and packaging materials. Nonethless, there can be no assurance that Sony can comply in all cases with environmental regulations, and environmental regulation and the effects on Sony can adversely affect its consolidated financial results and condition.

Regarding benefit obligations and plan assets, Sony funds and accrues the cost of benefits to asufficient level based on conservative accounting policies. However, if returns from investment assets decrease due to conditions in, for example, stock or bond markets, additional funding and accruals may be required, and such funding and accruals may adversely affect Sony’s consolidated financial results and condition.

Sony Corporation, the ultimate parent company of the Sony group, was established in Japan in May 1946 as Tokyo Tsushin Kogyo Kabushiki Kaisha, a joint stock company (Kabushiki Kaisha) under the Japanese

Sony Corporation’s registered office is located at 7-35, Kitashinagawa 6-chome, Shinagawa-ku, Tokyo 141-0001, Japan, telephone +81-3-5448-2111.

In April 2002, Sony established “Network Application and Content Services”, a new sector in Sony’s organization which aims to link the Electronics, Game and Content—Music and Pictures—businesses in an effort to create synergies and new horizontal business models.

In the fiscal years ended March 31, 2000, 2001 and 2002, Sony’s capital expenditures (additions to fixed assets on the balance sheets) were 435.9 billion yen, 465.2 billion yen and 326.7 billion yen respectively. Regarding breakdown of principal capital expenditures and divestitures (including interests in other companies), refer to “Item 5. Operating and Financial Review and Prospects” and “Note 19 of Notes to Consolidated Financial Statements.” Regarding capital expenditures in progress, Sony constructed a semiconductor-related manufacturing facility in Japan, which started operations in October 2001. Cumulative capital expenditures for the facility are expected to be approximately 100 billion yen by the end of the fiscal year ending March 31, 2006, approximately 53 billion yen of which had been invested by the end of the fiscal year ended March 31, 2002. The funding requirements of such various capital expenditures are financed by cash provided by operating and financing activities or cash and cash equivalents.

The following table sets forth the significant subsidiaries owned, directly or indirectly, by Sony Corporation.

In the “Electronics” business, Sony is engaged in the development, design, manufacture, and sale of various kinds of electronic equipment, instruments, and devices for consumer and professional markets. Sony’s principal manufacturing facilities are located in Japan, the U.S. and Mexico, Europe, and Asia, and its products are marketed by sales subsidiaries and unaffiliated local distributors as well as direct sales via the Internet, throughout the world. In addition to internationalizing its production operations, Sony has been promoting the transfer of research and development activities and management functions overseas to bring its overseas operations into closer proximity to local communities and markets. Sony Corporation holds 61.4 percent of the shares of Aiwa Co., Ltd. (“Aiwa”), a TSE listed company, which develops, manufactures, and markets its products entirely independently from Sony Corporation. Sony has decided to take the company private on October 1, 2002.

In the “Game” business, Sony develops, produces, manufactures, markets, and distributes home-use entertainment hardware and related software. This business is principally conducted through SCEI in Japan, a 99.7 percent directly and indirectly owned subsidiary of Sony Corporation. Sony Computer Entertainment America Inc. (“SCEA”) in the U.S. and Sony Computer Entertainment Europe Limited (“SCEE”) in Europe are both 100 percent-owned subsidiaries of SCEI.

In the “Music” business, Sony is engaged in the development, production, manufacture, marketing and distribution of recorded music in all commercial formats and musical genres, through SMEI and, in Japan, through SMEJ, both of which are 100 percent directly or indirectly owned subsidiaries of Sony Corporation.

In the“Pictures” business, Sony is engaged in the development, production, marketing, distribution, and broadcasting of image-based software, including film, video, television, and new entertainment technologies, principally through SPE, a 100 percent indirectly owned subsidiary of Sony Corporation.

In the “Financial Services”business, Sony conducts insurance operations primarily through Sony Life, a Japanese stock life insurance subsidiary, and Sony Assurance Inc. (“Sony Assurance”), a Japanese non-life insurance subsidiary. Sony is engaged in leasing and credit financing business in Japan through Sony Finance International Inc. These three subsidiaries are 100 percent directly owned by Sony Corporation. Sony also conducts an Internet-based banking business in Japan through Sony Bank Inc., which is an 80 percent directly owned subsidiary of Sony Corporation.

In “Other” business, Sony is engaged in an internet-related business mainly in Japan, advertising agency business in Japan and location-based entertainment businesses in Japan and the U.S.

Commencing with the first quarter ended June 30, 2001, Sony has partly realigned its business segment configuration, used for disclosing the breakdown of operating results, and its product category configuration in the Electronics segment, used for disclosing the breakdown of sales and operating revenue. Within the Electronics segment, sales and operating revenue are reported using the following seven product categories: “Audio”, “Video”, “Televisions”, “Information and Communications”, “Semiconductors”, “Components” and “Other”. Results for the previous fiscal year have been reclassified to conform to the presentations for the current year (see“Operating Results” for the fiscal year ended March 31, 2002 in “Item 5. Operating and Financial Review and Prospects”).

The following table sets forth Sony’s sales and operating revenue by operating segments and product categories.

“Audio” includes home audio, portable audio, car audio, car navigation systems and home telephones.

“Video” includes video cameras, digital still cameras, video decks, and DVD-Video players/recorders.

“Televisions” includes televisions incorporating cathode ray tubes (“CRTs”), projection televisions, and set-top-boxes such as digital broadcasting reception systems and Internet terminals.

“Information and Communications” includes PCs, computer displays, printer systems, personal digital assistants, and broadcast—and professional use—audio/video/monitors and other professional-use equipment.

This category contained the results of Sony’s mobile phone handset business until the end of September 2001. On October 1, 2001, the mobile handset business was transferred to SEMC, leaving only sales of mobile handsets manufactured by Sony on consignment from SEMC to appear in the “Other” category of Electronics (see below). Sales figures for past fiscal years have not been restated in either category.

“Semiconductors” includes liquid crystal displays (“LCD”), charge coupled devises (“CCD”) and other semiconductors.

“Components” includes optical pickups, batteries, CRTs, audio/video/data recording media, and data recording systems.

“Other” includes Aiwa Co., Ltd., Sony Trading International Corporation, and products and services which are not included in the above categories.

Sales of mobile phone handsets manufactured on consignment from SEMC have been recorded in this category since October 1, 2001. Sales of this category for past fiscal years have not been restated.

SCE, which includes SCEI, SCEA, and SCEE, develops, produces, manufactures, markets, and distributes PlayStation, PS one, and PlayStation 2 entertainment hardware and related software, primarily in Japan, the U.S., and Europe and enters into licenses with third party software developers.

SMEI and SMEJ produce recorded music and video through contracts with many artists worldwide in all musical genres. SMEI and SMEJ produce, manufacture, market and distribute CDs, MDs, DVDs, Super Audio CDs, and pre-recorded audio and video cassettes and produce and manufacture CD-ROMs and DVD-ROMs.

The Music business has an extensive and geographically diversified software manufacturing capacity, with plants in the U.S., Austria, Japan, Brazil, Australia, India, Canada, Hong Kong, and Mexico. Software is manufactured primarily for the Music business, the Game business, the Pictures business and third parties.

Pictures business global operations encompass motion picture production, acquisition and distribution; television programming, syndication, production, acquisition and distribution; home video acquisition and distribution; television broadcasting; and operation of studio facilities.

SPE’s motion picture arm, the Columbia TriStar Motion Picture Group, includes SPE’s principal motion picture production organizations, Columbia Pictures, Screen Gems and Sony Pictures Classics as well as Columbia TriStar Home Entertainment, Sony Pictures Releasing and Columbia TriStar Film Distributors International. SPE is an equity investor in Revolution Studios and markets and distributes its motion picture product in over 80 percent of countries around the world.

SPE’s Columbia TriStar Television Group is primarily comprised of Columbia TriStar Domestic Television and Columbia TriStar International Television with various channel investments.

Sony Pictures Digital Entertainment operates SPE’s digital production, online distribution, and broadband services including Sony Online Entertainment, Sony Pictures Imageworks, Sony Pictures Animation and Sony Pictures Digital Networks.

SPE’s Digital Studios encompass Post Production facilities, Sony Pictures Digital Authoring Center and Worldwide Product Fulfillment Group.

SPE also manages two studio facilities, Sony Pictures Studios and The Culver Studios, both of which are located at SPE’s world headquarters in Culver City, California.

Financial Services business includes Sony Life Insurance Co., Ltd., which conducts an insurance-related underwriting business, primarily individual life insurance business in Japan, Sony Assurance Inc., which conducts individual automobile insurance business in Japan, Sony Bank Inc., which conducts an Internet-based banking business in Japan, and Sony Finance International Inc., which conducts leasing and credit financing business in Japan, focusing on a new business utilizing a non-contact IC card technology developed independently by Sony for Internet shopping.

Other business consists of various operating activities, including an Internet-related business mainly in Japan, an advertising agency business in Japan and a location-based business in Japan and the U.S.

The following table shows Sony’s sales in each of its major markets for the periods indicated.

Figures in parentheses indicate percentage of sales and operating revenue.

Sony’s electronics products and services are marketed throughout the world under the trademark “Sony”, which has been registered in 204 countries and territories.

In most cases, sales of Sony’s electronics products are made to sales subsidiaries of Sony Corporation located or responsible for sales in the countries and territories where Sony’s products and services are marketed, and these subsidiaries sell products to local distributors and dealers. In some regions, sales of certain products and services are made directly to local distributors by Sony Corporation.

Sales in the Electronics business are particularly dependent on seasonality, in addition to the timing of new product introductions and economic conditions of each country. Sales for the third quarter ending December 31 of each fiscal year are generally higher than other quarters of the same fiscal year due to demand in the year-end holiday season.

Sony Marketing (Japan) Inc. markets consumer electronics products through retailers and also markets professional electronics products and services. For electronic components, Sony directly sells products to wholesalers and manufacturers.

Sony markets its electronics products and services through Sony Electronics Inc. in the U.S.

In Europe, Sony’s consumer electronics products and services are marketed through 19 sales subsidiaries including Sony United Kingdom Limited, Sony Deutschland G.m.b.H., and Sony France S.A. Sales of professional electronics products, electronic components, and services are made through several divisions, differentiated by product, covering all of Europe.

In overseas areas other than the United States and Europe, Sony’s electronics products and services are marketed through 19 sales subsidiaries including Sony Corporation of Hong Kong Limited, Sony Gulf FZE in the United Arab Emirates, Sony Electrónicos de México, S.A. de C.V., Sony of Canada Ltd., and Sony Australia Limited.

SCE markets and distributes PlayStation, PS one, and PlayStation 2 entertainment hardware and related software, through SCEI in Japan, SCEA in the U.S., and SCEE in Europe.

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

SMEI and its affiliates conduct business in countries other than Japan under“Columbia Records Group”, “Epic Records Group”, “LOUD Recordings”, “Sony Classical”, and other labels. CHC, a 50:50 partnership between Sony and AOL Time Warner, is engaged in direct marketing of music and home-video products in the U.S., Canada, and Mexico. In May 2002, Sony and AOL Time Warner agreeded to sell most of each interest in CHC to Blackstone Capital Partners III LP, an affiliate of The Blackstone Group, an investment bank. The sales is expected to take place by June 2002, subject to conditions including regulatory approval in the U.S.

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

SPE, with its global operations in 67 countries, generally secures all rights relating to the worldwide distribution of its internally produced motion pictures, including rights for theatrical exhibition, videocassette and DVD distribution, pay and free television exhibition and other markets. SPE also acquires distribution rights to motion pictures produced by other companies, and these rights may be limited to particular geographic regions or specific forms of media. SPE uses its own distribution service business, Sony Pictures Releasing, for the U.S. theatrical release of its films and those acquired from and produced by others.

Outside the U.S., SPE generally distributes and markets its films through one of its Columbia TriStar Film Distributors International subsidiaries. However, in certain countries, SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.

The worldwide home entertainment distribution of motion pictures and television programming of SPE (and those acquired or licensed from others) is handled through Columbia TriStar Home Entertainment, except in certain countries where SPE has joint distribution arrangements with other studios or arrangements with independent local distributors.

SPE produces original programming in eight different languages around the world in conjunction with local partners. This programming, along with SPE’s library of television programming and motion pictures, is licensed to affiliated and independent stations in the U.S., and to international television stations and other broadcasters throughout the world. In the U.S., SPE, jointly with Liberty Media, Inc. owns and operates the cable channel, Game Show Network. SPE also has worldwide broadcasting investments in more than 30 international channels.

Sony Life conducts life insurance business primarily in Japan, using Lifeplanner financial consultants to serve customers. As of March 31, 2002, Sony Life employed 4,403 such consultants. Sony Life maintains an extensive service network including 127 Lifeplanner branch offices, 33 regional sales offices, and 1,872 independent agencies in Japan, as of the end of March 2002. In addition, aiming to apply Sony Life’s insurance expertise in countries other than Japan, Sony Life Insurance (Philippines) Corporation has operated in the Philippines since November 1999.

Sony Assurance has conducted non-life insurance business since October 1999. Using a direct marketing model that Sony believes is tailored to today’s networked society, the company is working to build a new type of relationship between an insurer and its customers. Sony Assurance sells automobile insurance directly to individuals by telephone and over the Internet.

Sony Finance International conducts a leasing business for corporations, and a consumer financing business through the channel of Sony’s electronic retailers. Sales staff are posted at seven main branch offices and two customer centers in Japan. In April 2002, Sony Finance International started to sell “My Sony Card”, a credit card for individual customers.

Sony Bank has conducted banking operations since June 2001, using an Internet-based marketing channel.

Sony has pursued a long-term strategy of actively expanding its production capabilities in each region following a general policy of seeking to manufacture its products in the markets in which they are sold. As of March 31, 2002, Sony operated 25 manufacturing facilities in Japan, 9 in the U.S., 8 in Europe, and 28 in other areas outside Japan (the numbers include those of CD manufacturing facilities in the Music business as well as those in the Electronics business). To build a corporate structure less susceptible to the impact of foreign exchange rate fluctuations and to reduce inventory and cost, Sony continues to seek to localize its overseas production, research and development, design, materials and parts procurement, and management.

Sony pursues procurement of raw materials, parts and components to be used in the production of its products on a global basis on the most favorable terms that it can achieve. These items are purchased from various suppliers around the world. Generally, Sony maintains multiple suppliers for most significant categories of parts and components. However, the restructuring and other movement in the semiconductor industry may cause the shortage of semiconductor supply and affect Sony’s production and/or the cost of goods sold because Sony consumes a tremendous volume of semiconductor parts and components for its products.

Sony provides repair and servicing functions in the areas where its electronics products are sold. Sony provides these services through its own service centers, factories, authorized independent service centers, authorized servicing dealers, and its subsidiaries.

In line with industry practice, almost all of Sony’s electronic products sold in Japan carry a warranty, generally for a period of one year from the date of purchase, for repairs, free of charge, for malfunctions occurring in the course of ordinary use. In the case of broadcast- and professional-use products, Sony maintains support contracts with customers in addition to warranties. Overseas warranties are generally provided for various periods of time depending on the product and the area where it is marketed.

To further ensure customer satisfaction, Sony maintains customer information centers in its principal markets.

Sony has a number of Japanese and foreign patents relating to its products. Sony is licensed to use a number of patents owned by others, covering a wide range of products. Certain licenses are important to Sony’s business, such as that for optical disc related products. Sony products that employ DVD-Video Player functions, including PlayStation 2 hardware, are substantially dependent upon certain patents licensed by MPEG LA LLC, Dolby Laboratories Licensing Corporation and Nissim Corp., which cover technologies essential to DVD specification. Sony considers its overall license position beneficial to its operations.

In each of its principal product lines, Sony encounters intense competition throughout the world. Sony believes, however, that in the aggregate it competes successfully and has a major position in all of the principal product lines in which it is engaged, although the strength of its position varies with products and markets. See also “Risk Factors” in “Item 3. Key Information.”

In the Electronics business, Sony believes that its attractive product planning, the high quality of its products, its record of innovative product introductions and product improvements, and its extensive marketing and servicing efforts are important factors in maintaining its competitive position.

The Game business is a historically volatile and highly dynamic industry and Sony’s competitive position is affected by changing technology and product introductions, limited platform life cycles, popularity of software titles, seasonality, consumer spending and other economic trends. Sony’s chief competitors in the field of hardware also market their own game consoles and software titles. In the software business, development of hit titles is becoming increasingly difficult.

Success in the Music business is dependent to a large extent upon the artistic and creative abilities of employees and outside talent and is subject to the vagaries of public taste. Although SMEI is one of the largest recorded music companies in the world, its future competitive position depends on its continuing ability to attract and develop talent that can achieve a high degree of public acceptance. This position also depends on making appropriate investments in new technologies for digitization and networking. In addition, the recorded music business continues to be adversely affected by large-scale counterfeiting, digital piracy, CD burning, parallel imports, and downloading of digital music files from the Internet without authorization from rights owners.

In the Pictures business, SPE faces intense competition from other major motion picture studios and, to a lesser extent, from independent production companies, to attract the attention of the movie-going public worldwide. Competition in television production, distribution, and syndication is also intense because available broadcast time is limited and the audience is increasingly fragmented among broadcast, cable, and other networks both in the U.S. and internationally. Additionally, in supplying television programming, SPE faces significant long-term competition from U.S. network productions.

In the Financial Services business, as Japan begins the deregulation of the life insurance industry, the marketplace will likely become increasingly product and price competitive with more newcomers entering the business from other industries and from outside Japan. Although Sony Life, Sony Assurance and Sony Bank have competitive strengths in products and marketing, it is not possible to predict the impact which the deregulation of the financial services market will have on the business of Sony Life, Sony Assurance and Sony Bank.

In the Internet-related business, Sony Communication Network Corporation (“SCN”) faces competition in Japan from many existing, large companies and new entrants to the market. Telecommunication companies that

Sony’s business activities are subject to various governmental regulations in countries in which it operates, including regulations relating to business/investment approvals, export regulations including those related to national security considerations, tariffs, antitrust, intellectual property, consumer and business taxation, exchange controls, and environmental and recycling requirements. In Japan, insurance, banking and financing businesses are subject to approvals from the Financial Services Agency. In addition, satellite broadcasting and telecommunication businesses are subject to approvals from the Ministry of Public Management, Home Affairs, Posts and Telecommunications. Sony is also subject to environmental regulation in the jurisdictions in which it operates, particularly those in which it has manufacturing, research, or similar operations in its Electronics and Game businesses. (See also “Risk Factors” in “Item 3. Key Information.”)

During the fiscal year ended March 31, 2002, Sony faced an environmental issue in Europe. In October 2001, Sony Computer Entertainment Europe temporary halted shipments of the PS one game console destined for the European market after Dutch authorities determined levels of cadmium above the limits allowed under Dutch regulations. PS one shipments were resumed after confirming that there was no health risk to users during use and Sony worked closely with Dutch authorities to replace non-compliant components to meet their standards. Concurrent to its response to the PS one issue, Sony initiated its own program to inspect all its products and discovered other occurrences. In recognition of the environmental implications involved, Sony has embarked on a company-wide, comprehensive program of measures, including revisions to specific policies and standards and tighter management and control systems, in order to prevent any problems occurring with cadmium and similar chemical substances in the future.

Sony has a number of offices, plants and warehouses throughout the world. Most of the buildings and land on which they are located are owned by Sony, free from significant encumbrances.

The following table sets forth information as of March 31, 2002 with respect to principal plants for the manufacturing of products for the Electronics business and entertainment hardware for the Game business with floor space of more than 500,000 square feet:

In addition to the above, Sony has a number of other plants for electronic products throughout the world. Sony owns research and development facilities, and employee housing and recreation facilities, as well as Sony Corporation’s headquarters buildings in Tokyo, Japan, where administrative functions and product development activities are carried out. SCEI leases its corporate headquarters buildings located in Tokyo, where administrative functions, product development, and software production are carried out. SCEA and SCEE lease their offices in the U.S. and Europe, respectively.

The following table sets forth information as of March 31, 2002 with respect to principal plants for the manufacturing of software for the Music and Game businesses with floor space of more than 500,000 square feet:

In addition to the above, SMEI and its affiliates have several plants in various parts of the world and lease their corporate headquarters located in New York City from Sony. Most of SMEJ’s offices, including leased premises, are located in Tokyo, Japan.

SPE’s corporate offices and major motion picture and television production facilities are headquartered in Culver City, California, where it owns and operates two studio facilities, Sony Pictures Studios and The Culver Studios. SPE also leases office spaces and motion picture and television support facilities from affiliates of Sony Corporation and other third parties. Its film and videotape storage operations are located in Inwood, New York, where SPE also leases space.

In December 2001, Sony entered into a new lease for the corporate headquarters of its U.S. subsidiaries. The aggregate approximate floor space of this building is approximately 723,000 square feet. Please see the “Other Financing Arrangements” section in “Item 5. Operating and Financial Review of Prospects” for more information on this lease.

(The fiscal year ended March 31, 2002 compared with the fiscal year ended March 31, 2001)

During the fiscal year ended March 31, 2002, the average value of the yen was 124.1 yen against the U.S. dollar, and 109.1 yen against the euro, which was 11.7 percent lower against the U.S. dollar and 9.3 percent lower against the euro, respectively, compared with the average of the previous year. Operating results on a local currency basis described in “Operating Performance” compare results of sales and operating revenue (“sales”) and operating income obtained by applying the yen’s monthly average exchange rate in the previous year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2002, as if the value of the yen had remained the same. Regarding the Music segment, Sony consolidates the yen-translated results of Sony Music Entertainment Inc. (“SMEI”—a U.S. based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of Sony Music Entertainment (Japan) Inc. (“SMEJ”—an operation which aggregates the results of its operations in yen). Regarding the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of Sony Pictures Entertainment (“SPE”—a U.S. based operation with worldwide subsidiaries). Therefore, regarding the results of SMEI and SPE, analysis of operating results is on a U.S. dollar basis; accordingly, discussion of certain portions of these two companies’ results is specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s financial statements and do not conform with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”). In addition, Sony does

Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from inter-company accounts receivable and payable associated with export and import of materials, parts and products. In the Electronics segment, this is related to products manufactured in Asia (including Japan) and shipped to the U.S. and Europe, and in the Game segment, this is related to products manufactured in Japan and shipped to the U.S. and Europe. Against its aggregate net balance of foreign exchange exposure from these activities, from time to time Sony engages in foreign exchange transactions. During the fiscal year ended March 31, 2002, the total net foreign exchange Sony sold as a result of such activities in major currencies was 8.6 billion U.S. dollars and 3.7 billion euro. Sony engaged in hedging activities throughout the year to reduce this exchange rate risk by employing foreign exchange forward contracts and foreign currency option contracts. Furthermore, to minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, when appropriate, Sony seeks to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.

During the fiscal year ended March 31, 2002, worldwide economic conditions turned poor as countries in Europe and Asia, including Japan, experienced a deterioration in their economies following a worsening of economic conditions in the U.S., particularly in the information-technology sector. The atmosphere of global recession grew after the terrorist attacks in the U.S. on September 11, 2001, causing the economic outlook to become even more uncertain. While the deterioration of the Japanese, U.S. and European economies showed signs of bottoming out in the early months of calendar year 2002, the fiscal year ended on March 31, 2002 without a strong sense of recovery. Under such difficult market conditions and reflecting the impact of the translation of financial results into yen in accordance with U.S. GAPP, the currency in which Sony’s financial statements are prepared, Sony’s sales for the fiscal year increased 3.6 percent compared with the previous year, due to the positive impact of the depreciation of the yen and a significant increase in sales in the Game segment. Although profitability of the Game and Pictures segments improved significantly, operating income decreased 40.3 percent compared with the previous year, primarily reflecting the operating loss recorded in the Electronics segment due to poor worldwide market conditions and the recording of restructuring charges.

On a local currency basis (in connection with all references herein to results on a local currency basis, refer to “Impact of Foreign Exchange Fluctuations and Basic Countermeasures”), Sony’s sales for the fiscal year ended March 31, 2002 decreased approximately 4 percent compared with the previous year, and an operating loss was recorded compared to operating income recorded in the previous year.

Sales for the fiscal year ended March 31, 2002 increased by 263.4 billion yen, or 3.6 percent, to 7,578.3 billion yen compared with the previous year, for the reasons discussed above.

Cost of sales for the fiscal year ended March 31, 2002 increased by 192.9 billion yen, or 3.8 percent, to 5,239.6 billion yen compared with the previous year and, as a percentage of sales, increased from 73.9 percent to 74.2 percent. Despite a decrease in personnel expenses primarily in the Electronics and Music segments, cost of sales increased primarily due to increases in manufacturing-related expenses, such as raw materials and depreciation, and in research and development expenses, mainly in the Game segment. Research and development expenses during the fiscal year increased by 16.5 billion yen, or 4.0 percent, to 433.2 billion yen compared with the previous year, with much of this increase in the Game segment. However, the ratio of research and development expenses to sales was 6.1 percent, which approximated that of the previous year.

Selling, general and administrative expenses for the fiscal year ended March 31, 2002 increased by 129.8 billion yen, or 8.0 percent, to 1,742.9 billion yen compared with the previous year. The ratio of selling, general and administrative expenses to sales increased from 23.6 percent to 24.7 percent. The increase in expenses was due to the depreciation of the yen; a total of approximately 40.0 billion yen in severance-related charges due to restructuring initiatives primarily in the Electronics segment, including Aiwa Co., Ltd., and the Music segment; an increase of 25.6 billion yen in loss on sales, disposal or impairment of long-lived assets, net, primarily in the Electronics segment; and an increase of 18.6 billion yen in after-sales service expenses relating to the mobile phone business. However, advertising expenses decreased 23.9 billion yen, mainly in the Electronics and Music segments, while those in the Game segment increased, because sales also increased significantly.

Restructuring expenses for the fiscal year amounted to approximately 106 billion yen. On a segment basis, the primary charges were made in Electronics, approximately 85 billion yen, Music, approximately 9 billion yen, and Pictures, approximately 8 billion yen.

Partially offsetting the increase in cost of sales and selling, general and administrative expenses was a cessation of amortization in accordance with a change in the accounting standard regarding goodwill and other intangible assets adopted in the first quarter of the fiscal year (refer to Notes 2 and 11 of Notes to Consolidated Financial Statements). The adoption of this new accounting standard resulted in a 20.1 billion yen decrease in expenses. By segment, the change in accounting standard positively affected the Electronics segment by 3.0 billion yen, the Game segment by 10.5 billion yen, the Music segment by 3.4 billion yen, and the Pictures segment by 3.2 billion yen.

The aforementioned analysis of cost of sales and selling, general and administrative expenses does not include an analysis of the Financial Services segment. Therefore, Financial service revenue is excluded from “Sales” in the ratio of selling, general and administrative expenses to sales.

As a result of the factors discussed above, operating income for the fiscal year ended March 31, 2002 decreased by 90.7 billion yen, or 40.3 percent, to 134.6 billion yen compared with the previous year. Operating margin decreased from 3.1 percent to 1.8 percent.

The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions (refer to Note 25 of Notes to Consolidated Financial Statements).

Sony’s mobile handset business, previously included in the“Electronics” segment, has been moved to Sony Ericsson Mobile Communications (“SEMC”), a mobile handset joint venture which began operations in October 2001, and has become an affiliated company accounted for under the equity method.

Commencing with the first quarter ended June 30, 2001, Sony has partly realigned its business segment configuration, used for disclosing the breakdown of operating results, and its product category configuration in the Electronics segment, used for disclosing the breakdown of sales and operating revenue, as described below. Results for the previous fiscal year have been reclassified to conform to the presentations for the current year.

sales of broadcast and professional use monitors, previously included in the “Televisions” category; and sales of other professional-use equipment, previously included in the“Electronic components and other” category, have been integrated into the “Information and Communications” category.

Sales for the fiscal year ended March 31, 2002 were 5,310.4 billion yen, a decrease of 162.9 billion yen, or 3.0 percent, compared with the previous year. An operating loss of 8.2 billion yen was recorded compared to operating income of 247.1 billion yen in the previous year. The significant deterioration of results was due to a worsening of worldwide market conditions, intensified price competition, and restructuring expenses. Regarding sales by area, sales increased slightly in the U.S., primarily because of the especially strong performance of consumer-oriented desktop PCs and personal digital assistants, in addition to the positive impact of the depreciation of the yen. In Japan, Europe, and Other areas sales decreased. Of these areas, Japan had the largest decrease, which accounted for almost the entire decrease in sales of the segment. This decrease in sales in Japan resulted from a significant decline in sales of mobile phones due to quality issues in the first half of the fiscal year ended March 31, 2002 (before that business was transferred to Sony Ericsson Mobile Communications (“SEMC”), which started operations in October 2001). The decrease in sales also resulted from a decrease in sales of semiconductors and consumer-oriented products in the audio, video, and televisions categories. The transfer of Sony’s mobile phone business to SEMC also had a negative impact on the sales of the segment. The deterioration in profit performance for the segment resulted from the decrease in sales of the segment, partially offset by the positive impact of the yen’s depreciation. In addition, profitability was also negatively impacted by a drop in world market prices; a decrease in demand for semiconductors and OEM products, including PC peripherals; restructuring expenses of approximately 60.0 billion yen, excluding those at Aiwa Co., Ltd. (“Aiwa”), a consolidated subsidiary; losses in the mobile phone business in the first half of the fiscal year; and a 38.0 billion yen operating loss (including 25.5 billion yen in restructuring expenses) at Aiwa.

Sales and operating revenue by product category discussed below represent sales to customers, which do not include intersegment transactions (refer to Note 25 of Notes to Consolidated Financial Statements).

“Audio” sales decreased by 8.9 billion yen, or 1.2 percent, to 747.5 billion yen. While demand for CD/MD format headphone stereos increased in Western Europe, withdrawal from the home telephone business in the U.S. and Japan, decreased sales of radio-cassette recorders and home-use audio in most geographic areas, and decreased sales of car audio in Japan, the U.S., and Europe brought about the overall decrease in sales for the category.

“Video” sales increased by 14.9 billion yen, or 1.9 percent, to 806.4 billion yen. Sales of digital format home-use video cameras, digital still cameras, and DVD-Video players increased in most geographic areas as a result of the positive impact of the depreciation of the yen and increased demand. However, in the intensely competitive Japanese market, sales of digital home-use video cameras and DVD-Video players decreased. In addition, sales of analog format home-use video cameras and home-use VHS video decks decreased in most geographic areas as a result of lower demand and declining prices.

“Televisions” sales increased by 44.2 billion yen, or 6.3 percent, to 747.9 billion yen. The increase was primarily due to higher sales of large-screen projection televisions in the U.S. and China. Sales of set-top-boxes also increased due to increased sales in the U.S., brought on by the introduction of digital cable-TV set-top-boxes, partially offset by a decrease in sales in Japan where, in the previous fiscal year, the merger of two satellite broadcasting companies had created a temporary increase in demand. On the other hand, sales of televisions (mainly comprised of CRT televisions) decreased slightly as a result of a large decline in sales in Japan, despite an increase in sales of televisions (mainly comprised of CRT televisions) in Europe and the U.S. due to the positive impact of the depreciation of the yen.

“Information and communications” sales decreased by 95.1 billion yen, or 7.2 percent, to 1,227.7 billion yen. Sales of mobile phones, with their primary market in Japan and Europe, decreased as a result of quality issues that arose in Japan in the first half of the fiscal year, as well as due to the fact that sales of all mobile phone handsets were recorded in the “Other” category from the second half of the fiscal year as a result of their becoming consignment sales to SEMC. Sales of CRT-based computer displays decreased significantly in the primary markets of Europe and the U.S. due to deterioration of the PC market. In addition sales of broadcast and professional use products in the U.S. decreased due to a weakened broadcasting industry. Partially offsetting the decline in sales of the category was an increase in sales in the U.S. of desktop PCs and personal digital assistants.

“Semiconductors” sales decreased by 55.4 billion yen, or 23.3 percent, to 182.3 billion yen. The decrease was due to significant decreases in sales of LSI (Large Scale Integration) for AV devices in Japan and significant decreases in sales of memory chips in Europe and the U.S. The drop in sales reflected a drop in demand across all electronics products including AV devices and PC related devices that was due to the weakening of the global information and communications industry.

“Components” sales decreased by 40.1 billion yen, or 6.5 percent, to 572.5 billion yen. The decrease was due to significant decreases in sales of CD-R/RW drives and CRTs for computer displays in Asia, the primary base for PC manufacturers. On the other hand, sales of Memory Stick increased in most areas, especially in the U.S., reflecting the increase in the variety of products that are compatible with the Memory Stick format, such as strong selling digital still cameras.

“Other” sales decreased by 66.0 billion yen, or 11.5 percent, to 508.9 billion yen. The decrease was due to a large decline in the sales of Aiwa in almost all geographic areas because of a slowdown in the market and a drop in the competitiveness of the company’s mainstay: audio products.

Cost of sales in the Electronics segment increased primarily due to the effect of the depreciation of the yen on manufacturing-related expenses such as raw materials. Partially offsetting the increase in cost of sales was a decrease in personnel and other expenses included in the cost of sales. Selling, general and administrative expenses increased as losses on the sale, disposal and impairment of long-lived assets and personnel expenses, including severance related expenses, both increased. These increases resulted from the consolidation of manufacturing facilities and the reduction in personnel that took place in accordance with the implementation of restructuring efforts. Also contributing to the increase in selling, general and administrative expenses was an increase in after-sales service expenses caused by a recall of products for quality reasons in the mobile phone business during the first half of the fiscal year. Partially offsetting the increase in selling, general and administrative expenses was a decrease in advertising expenses due to a reevaluation of the effectiveness of these expenses. As a result of the decrease in sales, the ratio of cost of sales to sales and the ratio of selling, general and

During the year, regarding the geographical breakdown of Sony’s total production volume (excluding Aiwa, which represented less than 5 percent of sales in the Electronics segment), slightly less than 50 percent of total production was in Japan, more than 25 percent was in Asia (countries other than Japan), and approximately 25 percent was in the Americas and Europe combined. By cutting back on excess production capacity to meet changes in market conditions, Sony is working to improve its break-even point through a reduction in fixed costs. During the fiscal year, Sony continued to realign its manufacturing facilities. In Europe, Sony sold subsidiaries in Italy and France, which manufactured magnetic storage media. In the U.S., Sony streamlined a production line used to manufacture CRTs for computer displays. In Japan, Sony consolidated two manufacturing sites that manufacture audio devices. In Mexico, Sony consolidated two manufacturing sites that manufacture televisions, computer displays and other home AV products.

Results in the Electronics segment were positively impacted by the yen’s depreciation against the U.S. dollar and the euro. On a local currency basis, sales for the fiscal year ended March 31, 2002 decreased approximately 10 percent compared with the previous year and an operating loss was recorded where operating income had been recorded in the previous year. This was due to a deterioration of market conditions, intensified price competition, and a significant decrease in the sales of almost all products with the exception of desktop PCs and digital personal assistants. The decline in operating performance on a local currency basis was also due to the recording of restructuring expenses and a loss in our mobile phone business, as well as a significant deterioration of profitability caused by weak performance at Aiwa. Regarding sales by area on a local currency basis, in Japan, sales of mobile phones, semiconductors, audio products as a whole, televisions, home-use video cameras, and optical pickups decreased, while sales of digital still cameras increased. In the U.S., sales of PC displays decreased significantly and sales of audio products as a whole, broadcast and professional use products, televisions, home-use video cameras, notebook PCs, semiconductors, and home-use telephones decreased, although sales of desktop PCs increased significantly. In Europe, sales of mobile phones, PC displays, home-use audio, notebook PCs, broadcast and professional use products, and analog format home-use video cameras decreased. In other areas, sales of digital format home-use video cameras increased, primarily in Asia and the Middle East, and sales of PCs increased in South America, while sales of CD-R/RW drives, semiconductors, and CRTs for computer displays decreased mainly in Asia. Sales at Aiwa decreased significantly in almost all geographic areas.

Sales for the fiscal year ended March 31, 2002 increased by 342.8 billion yen, or 51.9 percent, to 1,003.7 billion yen compared with the previous year. Regarding profit performance, compared with an operating loss of 51.1 billion yen recorded in the previous year, operating income of 82.9 billion yen was recorded.

Regarding sales by area, in Japan PS one hardware unit sales decreased significantly and software sales decreased slightly, but sales of PlayStation 2 hardware units continued to increase. As a result, overall sales in Japan increased slightly. In the U.S. and Europe, PlayStation 2 hardware unit sales increased significantly and software sales increased. As a result, overall sales in both the U.S. and Europe almost doubled; in these regions, the depreciation of the yen had a positive impact on sales.

Total worldwide production shipments of hardware and software were as follows:

In terms of total software unit sales, PlayStation 2 titles represented 57 percent for the fiscal year ended March 31, 2002, an increase from 21 percent recorded for the previous year.

In terms of profitability, operating income was recorded compared with an operating loss in the previous year. This was due to an improvement in profitability of the hardware business as a result of reductions in the cost of producing PlayStation 2 hardware and the positive impact of the yen’s depreciation, as well as an increase in profitability of the software business brought on by an increase in unit sales. Although cost of sales in the Game segment increased due to an increase in manufacturing-related expenses in accordance with increased unit sales of PlayStation 2 hardware, the ratio of cost of sales to sales significantly decreased compared with the previous year due to a significant increase in sales and a reduction in the cost of each PlayStation 2 hardware unit. Similarly, although selling, general and administrative expenses increased primarily due to advertising and marketing expenses in conjunction with the expansion of business, the ratio of selling, general and administrative expenses to sales decreased compared with the previous year because of a significant increase in sales.

Sales in the Game segment were positively impacted by the yen’s depreciation against the U.S. dollar and the euro. On a local currency basis, sales for the fiscal year ended March 31, 2002 increased approximately 40 percent and operating profit was recorded compared with an operating loss in the previous year.

Sales for the fiscal year ended March 31, 2002 increased by 30.7 billion yen, or 5.0 percent, to 642.8 billion yen compared with the previous year. Operating income decreased by 0.3 billion yen, or 1.6 percent, to 20.2 billion yen and the operating margin decreased from 3.3 percent to 3.1 percent.

On a local currency basis, both sales and operating income in the Music segment for the fiscal year decreased approximately 3 percent compared with the previous year.

Regarding the results of the Music segment in Japan, comprised of Sony Music Entertainment (Japan) Inc. (“SMEJ”) and its subsidiaries, sales increased 2 percent and operating income increased 18 percent. Despite the negative impact of the contraction of the global music industry, profitability improved due to the positive impact of best selling albums, a reduction of selling, general and administrative expenses (particularly advertising expenses) and a gain of 2.5 billion yen on the sale of a studio facility, which was replaced by a new studio facility.

Sales for the fiscal year ended March 31, 2002 increased by 80.6 billion yen, or 14.5 percent, to 635.8 billion yen compared with the previous year. Operating income increased by 27.0 billion yen, or 624.6 percent, to 31.3 billion yen and the operating margin increased from 0.8 percent to 4.9 percent. The results in the Pictures segment consist of the results of Sony Pictures Entertainment, a U.S. based operation.

On a U.S. dollar basis, sales for the fiscal year in the Pictures segment increased approximately 2 percent and operating income increased more than tenfold compared with the previous year. The increase in sales was due to the strong box office performance of releases such as A Knight’s Tale, America’s Sweethearts, and Black Hawk Down, strong DVD software sales of films released in the previous fiscal year, and the continued success of game shows. However, the sales increase was partially offset by a decrease in the number of network television series episodes distributed and lower advertising sales. Regarding profit performance, despite losses on two major films released during the fiscal year, Ali and Riding in Cars With Boys, operating income was favorably impacted by a stronger performance from the film slate, compared with that of the previous year, strong sales of DVD software in the worldwide home entertainment market, and an insurance recovery for losses on previous years’ released films. In addition, lower deficits on network television shows due to the consolidation of U.S. television operations had a positive impact on profit performance. Partially offsetting the increase in operating income was a one-time restructuring charge of 67 million U.S. dollars recorded in connection with the consolidation of U.S. television operations, a provision with respect to income recorded from a licensee of feature film and television product and a weak advertising sales market.

Financial services revenue for the fiscal year ended March 31, 2002 increased by 33.4 billion yen, or 7.0 percent, to 512.2 billion yen compared with the previous year. Operating income increased by 4.7 billion yen, or 27.0 percent, to 22.1 billion yen and the operating margin increased from 3.6 percent to 4.3 percent.

Regarding the results of Sony Life Insurance Co., Ltd. (“Sony Life”), both revenue and profit increased compared with the previous year. Insurance revenue increased as insurance-in-force from individual life insurance products increased. Regarding profit performance, despite the negative impact of a 8.4 billion yen impairment loss on Argentine bonds held in Sony Life’s investment portfolio, profit increased because of the significant increase in insurance revenue that accompanied the increase in insurance-in-force from individual life insurance products mentioned above.

Regarding the results of Sony Assurance Inc. (“Sony Assurance”), revenue increased due to a net increase in newly acquired automobile insurance-in-force and the maintenance of a high ratio of renewed contracts during the fiscal year. Regarding profit performance, a loss was recorded, as was also recorded in the previous year, because Sony Assurance was unable to generate sufficient insurance revenue to cover expenses such as payments for insurance benefits, advertising expenses and personnel expenses. However, total losses decreased because insurance revenue increased.

Regarding the results of Sony Finance International, Inc., a leasing and credit financing business subsidiary in Japan, revenue decreased slightly because there was a one-time revenue from the receipt of a lease cancellation fee in the previous fiscal year. In terms of profitability, operating income was recorded compared with an operating loss in the previous year due to revaluation losses from interest rate swaps in the previous year. Sony Bank Inc., which started business on June 2001, recorded a loss primarily due to start-up expenses.

The results of the Financial Services segment are included in Sony’s consolidated financial statements. The following schedule shows unaudited condensed financial statements for the Financial Services and all other segments excluding Financial Services as well as condensed consolidated financial statements. 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, such as Electronics, Game, Music and Pictures, Sony believes that a comparative presentation may be useful in understanding and analyzing Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services are eliminated in the consolidated figures shown below.

During the fiscal year ended March 31, 2002, the Other segment included Sony Communication Network Corporation (“SCN”), an Internet related service business subsidiary mainly in Japan, location-based entertainment businesses in Japan and the U.S., and an advertising agency business in Japan.

Sales for the fiscal year ended March 31, 2002 decreased by 10.0 billion yen, or 6.4 percent, to 146.4 billion yen, compared with the previous year. Approximately 40 percent of sales in the Other segment reflected intersegment transactions during the year. Operating losses for the segment decreased from 9.4 billion yen to 8.6 billion yen.

During the fiscal year, sales decreased primarily due to a decrease in sales of the advertising agency business, reflecting a reduction in advertising spending by clients due to weak economic conditions. Regarding profit performance, losses were recorded at the location-based entertainment businesses in Japan and the U.S. In comparison with the previous year, segment losses decreased primarily due to a significant decrease in operating losses in the location-based entertainment business in Japan, which recorded a devaluation of assets for an entertainment facility in the previous year. Despite the fact that an operating loss was recorded at SCN, compared with an operating profit in the previous year, mainly due to a significant drop in Internet connection rates charged to customers, the operating loss for the segment decreased.

In the consolidated results for the fiscal year ended March 31, 2002, other income decreased by 71.3 billion yen, or 42.5 percent, to 96.3 billion yen, while other expenses increased by 11.1 billion yen, or 8.7 percent, to 138.2 billion yen, compared with the previous year.

The decrease in other income was primarily due to the fact that one-time gains on sales of securities investments and other, net, gains on issuance of stock by equity investees, and gains from the contribution of certain marketable investment securities to employee retirement benefit trusts were recorded in the previous fiscal year. These gains were minimal in the fiscal year ended March 31, 2002. Regarding gains on sales of securities investments and other, net, the 41.7 billion yen recorded in the previous fiscal year decreased to 1.4 billion yen; in the previous year gains were recorded from the sale to Liberty Digital of 50 percent of the equity of the Game Show Network, a subsidiary in the U.S. that provides television programming services exclusively dedicated to interactive game playing and pre-recorded game shows; the sale of a small portion of the equity of a subsidiary engaged in operation of a television channel in India; and the sale of a subsidiary engaged in the in-flight entertainment business in the U.S. Regarding gains on the issuance of stock by equity investees, the 18.0 billion yen recorded in the previous fiscal year decreased to 0.5 billion yen; in the previous year gains were recorded primarily from public offerings by Crosswave Communications Inc. which provides high-capacity/high-speed network services in Japan; Monex, Inc., which provides on-line security trading services in Japan; and SKY Perfect Communications Inc., which provides satellite broadcasting services in Japan (refer to Note 21 of Notes to Consolidated Financial Statements). Moreover, other income during the previous fiscal year included 11.1 billion yen recorded for gains from the contribution of marketable investment securities held by Sony Corporation and its subsidiaries to employee retirement benefit trusts. Interest and dividends decreased from 18.5 billion yen in the previous fiscal year to 16.0 billion yen, primarily due to a decrease in interest received at subsidiaries inside and outside Japan.

The increase in other expenses was primarily due to an increase in foreign exchange loss, net and an increase in write downs of security investments. Foreign exchange loss, net increased to 31.7 billion yen compared with the 15.7 billion yen recorded in the previous year primarily due to losses on foreign exchange forward contracts entered into to hedge the foreign currency risk associated with receivables generated from sales originating from Japan. The losses on foreign exchange contracts resulted from the rapid depreciation of the yen since December 2001. Interest expense decreased from 43.0 billion yen in the previous year to 36.4 billion yen due to a refinancing of long-term debt at lower interest rates and a decrease in U.S. dollar interest rates on short-term debt. As a result, the balance of interest and dividend income, less interest expense, decreased from 24.5 billion yen of net interest expense in the previous fiscal year to 20.4 billion yen of net interest expense.

Income before income taxes for the fiscal year ended March 31, 2002 decreased by 173.1 billion yen or 65.1 percent, to 92.8 billion yen compared with the previous year.

Income taxes for the fiscal year ended March 31, 2002 decreased by 50.3 billion yen, or 43.6 percent, to 65.2 billion yen, and the ratio of income taxes to income before income taxes (the effective tax rate) increased from 43.5 percent to 70.3 percent. This was due to an expansion of losses at subsidiaries such as Aiwa Co., Ltd. (“Aiwa”) and certain consolidated subsidiaries in the U.S. that are not expected to be able to utilize their loss carryforwards for tax purposes within the period set aside for those carryforwards. Partially offsetting the increase in effective tax rate was a reduction in taxes, due to a decrease in deferred tax liabilities on undistributed earnings of foreign subsidiaries. (Refer to “Critical Accounting Policies”).

Deferred tax assets are recognized on operating loss carryforwards for tax purposes since these losses may reduce future taxable income. However, a valuation reserve is established against those deferred tax assets that

During the fiscal year ended March 31, 2002, equity affiliates included i) in the Electronics segment – Sony Ericsson Mobile Communications (“SEMC”), a joint venture focused on mobile phone handsets, which began operations in October 2001, S.T. Liquid Crystal Display Corp. (“ST-LCD”), an LCD joint venture in Japan, Crosswave Communications Inc. (“CWC”), a provider of high-capacity/high-speed network services in Japan, and American Video Glass Company (“AVGC”), a joint venture which produces CRT glass material in the U.S., ii) in the Music segment—The Columbia House Company (“CHC”), a direct marketer of music and videos, iii) in the Pictures segment—Telemundo Communications Group, Inc. and affiliates (“Telemundo”), a U.S. based Spanish language television network and station group.

During the fiscal year, equity in net losses of affiliated companies decreased from 44.5 billion yen in the previous fiscal year to 34.5 billion yen. The principal contributor to equity in net losses of affiliated companies in the previous fiscal year was Loews Cineplex Entertainment Corporation (“Loews”), a theatrical exhibition company, which caused Sony to record a 25.0 billion yen loss, including a 17.0 billion yen impairment loss, for the entire carrying value of its investment in Loews. Since the impairment, no additional equity losses were recorded. In March 2002, Loews completed its reorganization in the U.S. under Chapter 11 of the U.S. Bankruptcy Code, and in Canada under the Companies-Creditors Agreement Act. As a result, Sony is no longer a shareholder in Loews. The principal contributors to equity in net losses of affiliated companies in the fiscal year ended March 31, 2002 were SEMC, which accounted for 7.4 billion yen in losses to Sony, CHC, AVGC, Telemundo, CWC and ST-LCD.

In April 2002, U.S. based Sony Pictures Entertainment and other non-Sony investors completed the sale of Telemundo to NBC, a media company owned by the General Electric Company. This sale resulted in cash proceeds to Sony of 679 million U.S. dollars and a gain of approximately 500 million U.S. dollars.

In addition, in May 2002, U.S. based Sony Music Entertainment Inc. and AOL Time Warner Inc.’s Warner Music Group, which jointly own CHC, agreed to sell most of each interest in CHC to Blackstone Capital Partners III LP, an affiliate of The Blackstone Group, an investment bank. The sale is expected to take place by June 2002, subject to conditions including regulatory approval in the U.S. Peter G. Peterson, Chairman of The Blackstone Group, served on the Board of Directors of Sony from June 1991 to June 2002.

In the fiscal year ended March 31, 2002, minority interest in loss of consolidated subsidiaries, which is deducted from income before income taxes, increased by 0.9 billion yen, or 5.8 percent, to 16.2 billion yen compared with previous year. This deduction increased net income by the same amount. The minority interest in loss of consolidated subsidiaries for the fiscal year resulted from a net loss at Aiwa Co., Ltd., a subsidiary of Sony Corporation.

Income before cumulative effect of accounting changes for the fiscal year ended March 31, 2002 decreased by 111.9 billion yen, or 92.3 percent, to 9.3 billion yen compared with the previous year, due to the factors discussed above. As a percentage of sales, income before cumulative effect of accounting changes decreased from 1.6 percent to 0.1 percent.

Net income for the fiscal year ended March 31, 2002 decreased by 1.4 billion yen, or 8.6 percent, to 15.3 billion yen compared with the previous year. As a percentage of sales, net income was 0.2 percent, and the return

Basic net income per share was 16.7 yen compared with 18.3 yen in the previous year, and diluted net income per share was 16.7 yen compared with 19.3 yen in the previous year (refer to Note 2 and 23 of Notes to Consolidated Financial Statements).

(The fiscal year ended March 31, 2001 compared with the fiscal year ended March 31, 2000)

During the fiscal year ended March 31, 2001, the average value of the yen was 109.6 yen against the U.S. dollar, and 98.9 yen against the euro, which was 0.9 percent higher against the U.S. dollar and 15.1 percent higher against the euro, respectively, compared with the average of the previous year. Operating results on a local currency basis described in “Operating Performance” show results of sales and operating revenue (“sales”) and operating income obtained by applying the yen’s monthly average exchange rate in the previous year to monthly local currency-denominated sales, cost of sales, and selling, general and administrative expenses for the fiscal year ended March 31, 2001, as if the value of the yen had remained the same. Regarding the Music segment, Sony consolidates the yen-translated results of Sony Music Entertainment Inc. (“SMEI”—a U.S. based operation which aggregates the results of its worldwide subsidiaries on a U.S. dollar basis) and the results of Sony Music Entertainment (Japan) Inc. (“SMEJ”—a Japan based operation which aggregates the results of its operations in yen). Regarding the Pictures segment, Sony translates into yen the U.S. dollar consolidated results of Sony Pictures Entertainment (“SPE”—a U.S. based operation which has worldwide subsidiaries). Therefore, regarding the results of SMEI and SPE, analysis of operating results is on a U.S. dollar basis, so discussion of certain portions of their results is specified as being on “a U.S. dollar basis.” Results on a local currency basis and results on a U.S. dollar basis are not on the same basis as Sony’s financial statements and do not conform with Generally Accepted Accounting Principles in the U.S. (“U.S. GAAP”). In addition, Sony does not believe that these measures are a substitute for U.S. GAAP measures. However, Sony believes that local currency basis results provide additional useful information to investors regarding operating performance.

Sony’s consolidated results are subject to foreign currency fluctuations mainly derived from inter-company accounts receivable and payable associated with export and import of materials, parts and products. In the Electronics segment, this is related to products manufactured in Asia (including Japan) and shipped to the U.S. and Europe, and in the Game segment, this is related to products manufactured in Japan and shipped to the U.S. and Europe. During the fiscal year ended March 31, 2001, the total net foreign exchange Sony needed to sell as a result of such activities in major currencies was 9.2 billion U.S. dollars and 4.6 billion euro. Sony engaged in hedging activities throughout the year to reduce this risk exposure by employing foreign exchange forward contracts and foreign currency option contracts to cover this foreign exchange exposure. Furthermore, to minimize the adverse effects of foreign exchange fluctuations on its financial results, particularly in the Electronics segment, Sony seeks, when appropriate, to localize material and parts procurement, design, and manufacturing operations in areas outside of Japan.

For the fiscal year ended March 31, 2001, worldwide economic conditions were generally favorable during the first half of the year in such major regions as Japan, the U.S., Europe, Asia excluding Japan (“Asia”), and Latin America, reflecting continued strong economic growth in the U.S. and Europe. However in the second half of the year, an economic slowdown was clearly seen in the U.S., where there was a rapid deceleration in the growth of personal consumption. Corresponding to this negative trend in the U.S., economies of such regions as Asia and Europe as well as Japan also showed signs of slowing down toward the end of the year. In Japan, full-

On a local currency basis (In connection with all references herein to results of operations expressed on a local currency basis, refer to “Impact of Foreign Exchange Fluctuations and Basic Countermeasures.”), Sony’s sales for the fiscal year ended March 31, 2001 increased approximately 12 percent and operating income increased approximately 40 percent compared with the previous year.

Sales for the fiscal year ended March 31, 2001 increased by 628.2 billion yen, or 9.4 percent, to 7,314.8 billion yen compared with the previous year, for the reasons discussed above.

Cost of sales for the fiscal year ended March 31, 2001 increased by 451.6 billion yen, or 9.8 percent, to 5,046.7 billion yen compared with the previous year and increased from 72.9 percent to 73.3 percent as a percentage of sales. The increase in cost of sales was primarily due to increases in manufacturing-related expenses, such as raw materials and depreciation, and research and development expenses. This increase in cost of sales was partially offset by the yen’s strength against the U.S. dollar and particularly the euro. In addition, in the Pictures segment, due to Sony’s adoption in April 2000 of the new film accounting standard (refer to Note 2 of Notes to Consolidated Financial Statements), certain exploitation costs such as advertising expenses and marketing costs are now recorded as incurred in selling, general and administrative expenses for the current fiscal year, rather than deferred as film inventory and amortized in cost of sales as in previous fiscal years. Research and development expenses for the fiscal year ended March 31, 2001 increased by 22.2 billion yen, or 5.6 percent, to 416.7 billion yen compared with the previous year, primarily in the Electronics segment. However, the ratio of research and development expenses to sales decreased from 6.3 percent to 6.0 percent.

Selling, general and administrative expenses for the fiscal year ended March 31, 2001 increased by 125.0 billion yen, or 8.3 percent, to 1,634.0 billion yen compared with the previous year. Despite this increase, the ratio of selling, general and administrative expenses to sales decreased from 23.9 percent to 23.7 percent. The increase in expenses was primarily due to the effects of the new film accounting standard, an increase in amortization expenses for intangible assets and goodwill resulting from the acquisition transactions of three listed subsidiaries (refer to Note 4 of Notes to Consolidated Financial Statements), and an increase in royalty expenses. However, the increase in selling, general and administrative expenses was partially offset by the yen’s strength against the U.S. dollar and particularly the euro and the approximately 5.6 billion yen reversal of stock-price linked incentive compensation, reflecting the decrease in Sony Corporation’s stock price during the year. In comparison, the previous year included an approximately 19.2 billion yen charge related to incentive compensation. In addition, gains or losses on the sale and disposal, net and losses from impairment of long-lived assets, which were previously recorded in other income and expenses, are now recorded in selling, general and administrative expenses. Losses on the sale and disposal, net and losses from impairment of long-lived assets increased by 6.9 billion yen, or 39.5 percent, to 24.3 billion yen compared with the previous year. During the year, losses on the sale and disposal of long-lived assets were recorded primarily in the Electronics segment, in which Sony actively proceeded with new equipment purchases and realignment of manufacturing facilities.

The aforementioned analysis of cost of sales and selling, general and administrative expenses does not include an analysis of the Financial Services segment. Therefore, Financial service revenue is excluded from “Sales” in the ratio of selling, general and administrative expenses to sales.

As a result of the factors discussed above, operating income for the fiscal year ended March 31, 2001 increased by 2.1 billion yen, or 1.0 percent, to 225.3 billion yen compared with the previous year. However, the operating margin decreased from 3.3 percent to 3.1 percent.

(Refer to “Operating Results” for the fiscal year ended March 31, 2002 “Realignment of Business Segment Configuration”)

The following discussion is based on segment information. Sales and operating revenue in each business segment include intersegment transactions. In the Electronics segment, sales and operating revenue by product category represent sales to customers, which do not include intersegment transactions.

Sales for the fiscal year ended March 31, 2001 increased by 802.4 billion yen, or 17.2 percent, to 5,473.4 billion yen compared with the previous year. Operating income increased by 148.5 billion yen, or 150.7 percent,

“Audio” sales increased by 23.0 billion yen, or 3.1 percent, to 756.4 billion yen. The increase was primarily due to higher sales of home-use audio and headphone stereos, offset to a certain extent by lower sales of radio-cassette recorders and home telephones. The sales increase of home-use audio was primarily due to higher demand, which included that for DVD home theater-use, especially in the U.S. and Europe, and also increased demand in Latin America, although sales in Europe were negatively affected by the significant strength of the yen against the euro. Regarding headphone stereos, overall sales increased primarily because demand for the CD/MD format increased, although demand for the compact cassette format decreased especially in the U.S. and Europe. Sales of radio-cassette recorders decreased in most areas and those of home telephones also decreased especially in the U.S., both primarily due to weak demand and lower prices.

“Video” sales increased by 126.0 billion yen, or 18.9 percent, to 791.5 billion yen. The increase was primarily due to higher sales of digital still cameras, home-use video cameras, and DVD-Video players, although sales of home-use VHS video decks decreased. Regarding digital still cameras, sales increased due to higher demand primarily in Japan, the U.S., and Europe, reflecting improvement in picture quality and further penetration of PCs. Regarding home-use video cameras, overall sales increased due to higher demand for digital format primarily in the U.S., Europe, and Asia, although sales in Europe decreased due to the significant strength of the yen against the euro. Regarding DVD-Video players, sales increased due to higher demand especially in the U.S. and Europe, reflecting increased availability of content. On the other hand, overall sales of home-use VHS video decks decreased primarily due to weak demand in Japan as well as lower prices, despite higher demand in the U.S.

“Televisions” sales increased by 67.5 billion yen, or 10.6 percent, to 703.7 billion yen. The increase was primarily due to higher sales of televisions (including large-screen projection televisions). Regarding televisions, sales increased due to higher demand for large-screen televisions that incorporate flat surface CRTs and projection televisions, especially in the U.S. and Latin America, although sales decreased in Europe reflecting the significant strength of the yen against the euro.

“Information and Communications” sales increased by 291.2 billion yen, or 28.2 percent, to 1,322.8 billion yen. The increase was primarily due to higher sales of PCs, mobile phones, and projectors. Overall sales of PCs increased significantly due to higher demand for notebook PCs in Japan, the U.S., and Europe, and also for desktop PCs in Japan and the U.S., reflecting aggressive introduction of high value-added new models. Regarding mobile phones, sales increased significantly due to higher demand in Japan and Europe, reflecting

“Semiconductors” sales increased by 73.5 billion yen, or 44.7 percent, to 237.7 billion yen. The increase was primarily due to significant sales increases of CCDs, LCDs, memory chips, and other semiconductors including system LSIs, reflecting higher demand for most electronics products such as digital AV and PC-related equipment.

“Components” sales increased by 44.1 billion yen, or 7.8 percent, to 612.5 billion yen. The increase was primarily due to significant sales increases of CD-R/RW drives, Memory Stick, and optical pickups. For CD-R/RW drives, sales increased primarily in Asia, reflecting sales to PC vendors, due to higher demand, which reflected lower prices of the recording media for this format. Regarding Memory Stick, sales increased primarily due to Sony’s aggressive introduction, aimed at further penetration, of this format and also due to increases in the number of products which support the format. In April 2001, Sony’s cumulative production of Memory Stick reached 10 million units. Sales of optical pickups increased primarily due to increased market demand for optical disc-related products such as DVD-Video players and CD-R/RW drives.

“Other” sales decreased by 23.0 billion yen, or 3.9 percent, to 574.9 billion yen, primarily due to lower sales of Aiwa, especially in the U.S. and Japan.

Cost of sales in the Electronics segment increased primarily in manufacturing-related expenses such as raw materials, reflecting increases in manufacturing output due to higher demand, and in research and development expenses. Selling, general and administrative expenses increased primarily in advertising expenses, reflecting Sony’s efforts to expand sales further, especially in the second half of the year, and royalty expenses relating to information- and communications-related technologies. On the other hand, the increases in cost of sales as well as selling, general and administrative expenses were partially offset by the yen’s strength against the U.S. dollar and particularly the euro. However, the ratio of cost of sales to sales and the ratio of selling, general and administrative expenses to sales decreased, due to the aforementioned significant sales increase. Regarding profit performance by product category, operating income for the year was primarily derived from home-use video cameras, digital still cameras, semiconductors, and televisions. On the other hand, losses were recorded in such categories as HiFD drives (a high-capacity floppy disk-based data recording system), which incurred expenses relating to termination of its development, manufacture, and sale during the year; and the WLL (wireless local loop access system) service business, which incurred expenses relating to investment for wireless communication infrastructure. Compared with the previous year, profit of semiconductors increased significantly and that of such categories as televisions and PCs also increased. Regarding mobile phones, results were negatively impacted by research and development expenses relating to next-generation telecommunication technologies and the significant strength of the yen against the euro. However, the operating loss for this category decreased significantly as large expenses were recorded in the previous year, primarily due to the discontinuation of the mobile phone business in North America. In addition, sales of mobile phones newly introduced in Japan were favorable during the year under review compared with the previous year.

During the year, regarding the geographical breakdown of Sony’s total production amount (excluding Aiwa, which represented less than 10 percent of sales in Sony’s Electronics segment) and the final destination of such production, more than half of total production was in Japan, where production of digital AV products, information and communication products, and electronic devices increased significantly, and slightly more than 50 percent of such production was destined for other regions. Asia (countries other than Japan) accounted for approximately a quarter of total production, slightly less than 70 percent of which was destined for other regions. The Americas and Europe together accounted for the remaining quarter of total production, most of which was destined for use in the respective area of production. Regarding realignment of manufacturing facilities in the Electronics segment, during the year, Sony consolidated in Japan a subsidiary where batteries were manufactured with a subsidiary where electronic devices were manufactured. Sony sold to Solectron Corporation a subsidiary in Japan that manufactured car AV products and a subsidiary in Taiwan that manufactured audio equipment. Sony closed a subsidiary in Taiwan where video products were manufactured. As a result, the number of manufacturing facilities at March 31, 2001 was 60, compared with 64 at March 31, 2000.

Results in the Electronics segment were negatively impacted by the yen’s strength against the U.S. dollar and particularly the euro. On a local currency basis, sales for the fiscal year ended March 31, 2001 increased approximately 21 percent and operating income increased approximately 358 percent compared with the previous year. This was due to improved profitability primarily from significant sales increases in digital products and electronic devices, along with improved efficiencies of manufacturing facilities. Regarding sales by area on a local currency basis, in Japan, sales of PCs, mobile phones, semiconductors, digital still cameras, and broadcast- and professional-use equipment increased, while sales of home-use video decks and most categories of audio equipment decreased. In the U.S., sales of PCs, televisions, home-use video cameras, digital still cameras, DVD-Video players, and semiconductors increased, although sales of broadcast- and professional-use equipment and home telephones decreased. In Europe, sales of PCs, home-use video cameras, digital still cameras, mobile phones, computer displays, DVD-Video players, home-use audio, televisions, and semiconductors increased, while sales of home-use video decks and radio cassette recorders decreased. In Other areas, sales of CD-R/RW drives, semiconductors, and optical pickups increased in Asia, and sales of televisions and home-use audio increased in South America.

Sales for the fiscal year ended March 31, 2001 increased by 6.2 billion yen, or 0.9 percent, to 660.9 billion yen compared with the previous year. Regarding profit performance, compared with an operating profit of 76.9 billion yen recorded in the previous year, an operating loss of 51.1 billion yen was recorded.

Regarding sales by area, in Japan, despite a decrease in software sales, overall sales in Japan were almost flat due to higher sales of hardware, reflecting the introductions of PlayStation 2 in March 2000 and PS one in July 2000. In the U.S., overall sales increased due to higher sales of hardware, reflecting the introductions of PS one in September 2000 and PlayStation 2 in October 2000 although software sales decreased. The strength of the yen against the U.S. dollar had a negative effect on sales. In Europe, although hardware sales increased reflecting the introduction of PS one in September 2000 and PlayStation 2 in November 2000, overall sales decreased in Europe due to lower sales of software. The significant strength of the yen against the euro had a significant negative effect on sales. In addition, in the U.S. and Europe, due to shortages in production shipments and supplies of PlayStation and PS one hardware in certain periods during the year, sales of such hardware decreased in the corresponding periods, and software sales in those areas were negatively affected.

Total worldwide production shipments of hardware and software were as follows:

Operating losses were recorded during the year principally due to the software sales decrease and start-up expenses for the PlayStation 2 format. Cost of sales in the Game segment increased principally due to manufacturing-related expenses for PlayStation 2 hardware, including raw materials and depreciation, which are

Sales in the Game segment were negatively impacted by the yen’s strength against the U.S. dollar and particularly the euro. On a local currency basis, sales for the fiscal year ended March 31, 2001 increased approximately 2 percent and an operating loss was recorded compared with an operating profit in the previous year.

Sales for the fiscal year ended March 31, 2001 decreased by 94.8 billion yen, or 13.4 percent, to 612.1 billion yen compared with the previous year. Operating income decreased by 7.8 billion yen, or 27.5 percent, to 20.5 billion yen and the operating margin decreased from 4.0 percent to 3.3 percent.

On a local currency basis, sales in the Music segment for the fiscal year ended March 31, 2001 decreased approximately 14 percent and operating income decreased approximately 38 percent compared with the previous year.

Regarding the results of Sony Music Entertainment Inc. (“SMEI”), the U.S. based operation on a U.S. dollar basis, sales decreased 14 percent and operating income decreased 62 percent. The lower sales were primarily due to soft market conditions in a number of international territories, the delayed timing of certain new releases, and the strengthening of the U.S. dollar against foreign currencies, despite the strong sales of several albums. Regarding profit performance, the decrease in profit was primarily due to the aforementioned factors which resulted in lower sales, as well as increased spending associated with various digital media development and investing activities and expenses associated with the discontinuation and closure in March 2001 of a U.S. manufacturing facility where cassette music software was previously manufactured. Despite the lower sales, the ratio of selling, general and administrative expenses to sales during the year was almost flat compared with the previous year due to the benefit of global cost reduction initiatives. During the year, SMEI reduced its worldwide work force by 10 percent.

Regarding the results of the Music segment in Japan, comprised of Sony Music Entertainment (Japan) Inc. (“SMEJ”) and its subsidiaries, overall sales decreased approximately 12 percent, primarily due to lower sales of SMEJ reflecting the delay of releases from certain artists and due to discontinuation of a business to sell CD-ROM software at an SMEJ subsidiary. Despite the decrease in sales, operating income increased approximately 5 times, due to pursuing efficiencies in such areas as advertising expenses at SMEJ.

Sales for the fiscal year ended March 31, 2001 increased by 60.5 billion yen, or 12.2 percent, to 555.2 billion yen compared with the previous year. Operating income decreased by 31.6 billion yen, or 88.0 percent, to 4.3 billion yen and the operating margin decreased from 7.3 percent to 0.8 percent, primarily due to the adoption of the new film accounting standard (refer to Note 2 of Notes to Consolidated Financial Statements). The results in the Pictures segment consist of the results of Sony Pictures Entertainment (“SPE”), a U.S. based operation.

On a U.S. dollar basis, sales for the fiscal year ended March 31, 2001 in the Pictures segment increased approximately 11 percent and operating income decreased approximately 93 percent compared with the previous year. The sales increase was primarily due to higher box office revenues from successful current year releases as well as the growth of DVD software sales in the home entertainment business. However, the sales increase was partly offset by fewer network television series episodes and lower television syndication sales. Regarding profit performance, despite the contribution from higher sales of DVD software, operating income significantly

Financial service revenue for the fiscal year ended March 31, 2001 increased by 40.1 billion yen, or 9.1 percent, to 478.8 billion yen compared with the previous year. Operating income decreased by 5.9 billion yen, or 25.2 percent, to 17.4 billion yen and the operating margin decreased from 5.3 percent to 3.6 percent.

The sales increase was primarily due to higher revenues in the life insurance and non-life insurance businesses. Operating income decreased primarily due to lower profit in the life insurance business and a loss recorded in the non-life insurance business. Regarding the results of the life insurance business conducted by Sony Life, revenue increased and profit decreased compared with the previous year. The revenue increase was due to a net increase in life insurance-in-force from individual life insurance products such as term-life and medical expense coverage. However, reflecting the weak Japanese stock market conditions during the year, the revenue increase was partially offset by revaluation losses from investments under separate account for variable life insurance and variable annuity products. Regarding profit performance, operating profit decreased primarily because reserves for the Life Insurance Policyholders Protection Corporation of Japan were recorded, and because the amount accrued to policy reserves increased, reflecting a reduction in interest rates related to the valuation of such reserves for newly acquired policies during the year. As the profit performance from investments under the aforementioned separate account is solely for the account of policyholders, while it impacts revenues, it does not affect the profit performance of Sony. Regarding the results of the non-life insurance business conducted by Sony Assurance, although sales increased due to a net increase in non-life insurance-in-force from automobile insurance, losses continued to be recorded since expenses, including advertising expenses and payments for insurance benefits, were higher than revenue.

Regarding the results of the leasing and credit financing business conducted by Sony Finance, revenue increased due to higher leasing and credit financing revenues. However, an operating loss was recorded compared with operating income in the previous year. This was due to revaluation losses from interest rate swaps.

The Financial Services segment is included on a consolidated basis in Sony’s consolidated financial statements. The following schedule shows unaudited condensed financial statements for the Financial Services segment and for all other segments excluding Financial Services segment as well as condensed consolidated financial statements. While these presentations are not required under U.S. GAAP used in Sony’s consolidated financial statements, because the Financial Services segment is different in nature from Sony’s other segments such as Electronics, Game, Music, and Pictures, Sony believes that these types of comparative presentations help the understanding and analysis of Sony’s consolidated financial statements. Transactions between the Financial Services segment and all other segments excluding Financial Services segment are eliminated in the consolidated figures shown below.

Policy reserves, included in future insurance policy benefits and other in the following condensed balance sheets, are recorded under U.S. GAAP. As for the statutory books of account, Sony Life has consistently satisfied a sufficient level of policy reserves as authorized by the Financial Services Agency in Japan (the “FSA”), and in March 2001, aiming to further strengthen its financial condition, Sony Life increased its capital through a 50.0 billion yen capital injection from Sony Corporation and achieved a more conservative level of policy reserves as recommended by the FSA.