In fiscal 2005, unit sales of automobiles rose 8.7%, to 3,242,000 units, due mainly to strong sales in Asia and Europe and increased sales of parts for automobile production to Guangzhou Honda Automobile Co., Ltd., an affiliate of Honda. Segment sales grew 5.6%, to ¥6,963.6 billion, due to increased overseas sales and other factors, which compensated for the negative impact of yen appreciation against the U.S. dollar. Operating income rose 3.1%, to ¥452.3 billion, and the operating margin was 6.5%. It should be noted that the operating income figure does not include income from our affiliates in China and other countries. However, such income is recognized as equity in income of affiliates and reflected in the Company’s net income figure.

Total domestic automobile demand in calendar 2004 remained largely unchanged, at approximately 5.85 million units. For Honda, however, despite the introduction of two new models, the Elysionand Edix, total unit sales in fiscal 2005 edged down 0.6%, to 712,000 units, due mainly to a decline in sales of the Fit and Life.

In May 2004, we launched Elysion, a new eight-passenger minivan offering a luxurious sense of space and comfort for all occupants. This was followed in July by the release of Edix, a distinctive new minivan featuring six independent seats in two rows of three, creating a variety of seating arrangements to enhance in-vehicle communication. In October 2004, we introduced the all-new Legend, Honda’s flagship luxury performance sedan, featuring a number of advanced technologies, including a 300-horsepower engine and the world’s first Super Handling All-Wheel Drive (SH-AWD) system*1.

In addition to products offering new levels of value, we are applying information technology to improve marketing, sales and service. In these ways, Honda is committed to maximizing the satisfaction of its approximately 8.8 million customers.

In calendar 2004, automobile demand in the United States remained high, totaling 16.91 million units.

In the passenger car segment, the Acura TL and Acura TSX posted healthy sales increases. At the same time, demand for light truck models in North America has continued to increase. In addition to the CR-V, we reported strong sales of the Pilot, now also manufactured on the second production line of the Alabama Plant, which began operation in April 2004. As a result, overall unit sales in North America increased 1.1%, to 1,575,000 units, despite a downturn in the Canadian market.

In September 2004, the Odyssey underwent a full model change, giving it more flexible seating, as well as excellent safety performance and the highest fuel economy in its class. This was followed in October by the release of the new Acura RL, and in December by the launch of the Accord Hybrid sedan, combining a V6 engine with Honda’s Variable Cylinder Management (VCM) system*2 and Integrated Motor Assist (IMA) system*3. In March 2005, we launched the next-generation Ridgeline truck, the first sold in all 50 states to be compliant with California’s ULEV emission standards*4. Developed in the United States, the Ridgeline comes with ample interior space and plenty of cargo room. In these ways, we boosted sales in both the light truck and passenger car markets with the introduction of appealing new models.

In Europe, overall automobile demand remained almost unchanged in calendar 2004, at 17.57 million units. Nevertheless, Honda’s unit sales in fiscal 2005 jumped 15.6%, to 267,000 units. This was due mainly to an increase in sales of the new Accord, equipped with the Honda-developed i-CTDi diesel engine*5, released in late 2003, as well as continued healthy sales of the Jazz.

We unveiled two new models during fiscal 2005, further enhancing Honda’s competitiveness in the difficult European market. In November 2004, we launched the FR-V, and in January 2005 we released the CR-V equipped with a Hondadeveloped diesel engine. The new CR-V complements the Accord to address growing demand for diesel-powered automobiles in the region.

For fiscal 2006, total unit sales of Honda automobiles is expected to rise 5.3%, to 3,415,000 units.

In Japan, we launched the Airwave, an all-new compact station wagon, in April 2005, followed by the third-generation Step Wagon in May. Featuring a low-floor, low-center-of-gravity platform, the new Step Wagon offers superior comfort and a compact body along with sedan-like handling and maneuverability. This autumn, the Civic will undergo a full model change as part of our strategy to reinforce the Honda brand and boost sales. In sales and services, Honda will continue to maximize lifetime customer satisfaction through a range of initiatives, including active promotion of the “e-Dealer” network linking Honda and its dealers. As a result, we project a 3.9% increase in domestic unit sales in fiscal 2006, to 740,000 units.

In North America, we will continue strengthening sales of the next-generation Ridgeline pickup truck, released in March 2005, and of our existing light truck models. We will further strengthen our lineup through the introduction of an entry SUV for the Acura channel, tentatively named the Acura RD-X, to be introduced in calendar 2006. In the passenger car category, the Civic, which ranks alongside the Accord as one of Honda’s core models in the U.S. market, will undergo its first full model change in five years. In early 2006, we plan to introduce an entry model aimed at the younger generation. Through these and other initiatives, we will further expand sales by offering an appealing range of models in both the light truck and passenger car markets.

On the production side, the second line of the Alabama Plant, which manufactures the Odyssey and Pilot, is scheduled to begin operating at full capacity by the end of 2005. This increased capacity will help meet growing demand for light trucks. We are currently building a new transmission assembly plant in Georgia, which is scheduled to begin operations in fall of 2006. In addition, in spring of 2005 we began expansion of two facilities—the Alabama Plant for local production of new engine parts, and the Ohio transmission plant to accommodate local production of high-precision gears. In these ways, Honda is increasing the ratio of locally procured parts to further strengthen its flexible and highly efficient local manufacturing operation. For fiscal 2006, we project unit sales in North America of 1,675,000 units, up 6.3%.

In Europe, following the launch in January 2005 of the CR-V, equipped with a Honda-developed diesel engine, we plan to release a diesel-powered FR-V, also featuring a Honda-developed engine, in the middle of the year. To further strengthen our product competitiveness in the expanding diesel automobile market, we plan to adopt a Honda-made diesel engine in the new Civic, which will undergo a full model change in early 2006. To accommodate growing sales of locally made diesel-powered Civic and CR-V models, in the latter half of 2005 we will begin assembly of Honda-made diesel engines at Honda of the U.K. Manufacturing, Ltd. As a result, we project a 4.9% increase in unit sales in Europe, to 280,000 units.

In Asia, we project unit sales in fiscal 2006 will increase 5.5%, to 540,000 units. Despite the impact of money-tightening measures implemented by China’s central government, which slowed market growth in 2004, we believe that the Chinese passenger car market will continue to grow, making it the second largest in the world behind the United States.

We will respond to flourishing demand for existing models made by our Chinese affiliate, Guangzhou Honda, such as the Accord and Fit, by further strengthening that company’s sales network and expanding its annual production capacity from 240,000 to 360,000 units in the latter half of calendar 2006.

Similarly, we will expand the sales network of Dongfeng Honda, another Chinese affiliate, and increase its production capacity from 30,000 to 120,000 units by early 2006. These measures are designed to accommodate the significant increase in sales projected for the CR-V, as well as the scheduled introduction of the Civic.

We are expanding production capacity outside of China as well, in order to meet increased demand. In Indonesia, we raised the capacity of P.T. Honda Prospect Motor from 40,000 to 50,000 units. In India, too, we plan to expand the annual production capacity of Honda Siel Cars India Ltd. from 30,000 to 50,000 units by the end of calendar 2005.

In other regions, we project unit sales of 180,000 units, up 2.3% from fiscal 2005. This projected increase takes into account continued sales increases for the Civic and Fit in Brazil, as well as higher sales of the Accord in Australia.