Research and Development
Using the most advanced technologies, Honda Motor Company and its consolidated subsidiaries conduct R&D activities aimed at creating distinctive products that are internationally competitive. The Group's main R&D divisions operate independently as subsidiaries, allowing technicians to pursue their tasks with complete freedom.
Product-related research and development is spearheaded by the Honda Research Institute in Japan, Honda R&D Americas, Inc., in the United States and Honda R&D Europe (Deutschland) GmbH in Germany. Research and development on production technologies centers on Honda Engineering Co., Ltd., in Japan and Honda Engineering North America, Inc. All of these entities work in close association with our other entities and business in their respective regions.
Total consolidated R&D expenditures for the year ended March 31, 2006, amounted to ¥510.3 billion. Main R&D activities conducted by each business segment are outlined below.

Motorcycle Business
Honda is committed to developing motorcycles with new value-added features that meet the individual needs of customers around the world, and to implementing timely local development of regional products at its overseas locations. At the same time, we focus on developing technologies that lead the industry in addressing safety and environmental issues.
In Japan, we made a number of R&D achievements in fiscal 2006. The FORZA Z 250cc scooter underwent a full model change, and was outfitted with the Honda S-Matic seven-speed automatic transmission in place of the previous manual six-speed transmission. This model was also the first in the world to be fitted with an auto-shift mode, creating a riding experience that is finely tuned to road conditions.
In Japan, North America and Europe, the CBR1000RR onroad super sports model underwent a full model change. While the new model inherits the same basic styling and engine specifications of its predecessor, it is four kilograms lighter than the previous model to achieve quicker acceleration and better handling.
In Asia, we launched a new model, Click, the first 110cc scooter to be equipped with a water-cooled engine in Thailand. In China, we produced and released the Storm, a 125cc motorcycle featuring enhanced environmental technologies and acceleration.
Honda has succeeded in developing the world's first production motorcycle airbag system. This new system helps lessen the severity of injuries caused by head-on collisions. In another development, we released the Honda Advanced Safety Vehicle-3 (ASV-3), equipped with the latest safety technologies developed as a result of Honda's participation in the five-year Advanced Safety Vehicle (ASV) Project led by the Ministry of Land, Infrastructure and Transport. Features of the new vehicle include the Intersection Stop & Go Assistance System, which analyzes images from a camera mounted on the front of the motorcycle to detect stop signs and other markings. If the rider does not slow down when approaching an intersection, a warning appears on the motorcycle's display screen, and an audio warning sounds in the rider's helmet, prompting the rider to decelerate. Once the motorcycle has come to a stop, the Inter-Vehicle Communication System detects the position of any approaching vehicles, helping the rider determine whether or not it is safe to proceed through the intersection. In addition, since the shape and size of motorcycles make them less noticeable than automobiles, we have used research on human brain function to develop a new design concept that significantly improves motorcycle visibility.
Research and development expenses in the Motorcycle Business segment in fiscal 2006 totaled ¥83.0 billion.

Automobile Business
In the Automobile Business segment, we strive to develop innovative technologies and products through creativity-oriented development in response to customer needs. We also actively develop technologies that address environmental issues and provide enhanced safety performance.
Major achievements during the year include a full worldwide model change of the Civic. The engines of the new models employ an intelligent VTEC (i-VTEC) system, which switches the valve timing for maximum efficiency during startup and acceleration to achieve powerful, torquey performance, then delays intake valve closure timing during cruising and other low-load conditions for improved fuel economy. In Japan, North America and Europe, the Civic Hybrid underwent a full model change. The new line is equipped with the New Honda Hybrid System, combining a 3-stage i-VTEC engine that regulates the valves to provide three stages of valve timing (low-rpm, high-rpm and cylinder idle mode) with a significantly smaller and more efficient Integrated Motor Assist (IMA) system. We also launched a sporty 5-door model Civic developed exclusively for the European market. This new model is available with a choice of three engines: a 1.4-liter i-DSI (Intelligent Dual and Sequential Ignition) engine, a 1.8-liter i-VTEC engine—both realizing enhanced fuel economy—and a 2.2-liter i-CTDi diesel engine that complies with strict European regulations on gas emissions.
In Japan, we introduced the all-new Airwave compact station wagon, featuring a roomy passenger interior and a luggage compartment with ample storage capacity, as well as an extra-large glass "Sky Roof" that creates open-air feeling. We also introduced the new Step Wagon, following a full model change that lowered the vehicle's floor level and center of gravity, providing enhanced driving performance and comfort. In addition, we commenced sales of the new Zest minicar, incorporating low-floor design technology for greater cabin room, generous storage area and a convenient access bay.
During the year under review, we announced the development of the Honda ASV-3, equipped with several new advanced safety technologies developed as a result of Honda's participation in the five-year Advanced Safety Vehicle (ASV) Project led by the Ministry of Land, Infrastructure and Transport. In addition to using inter-vehicle communication to ascertain the position of automobiles, motorcycles and pedestrians relative to each other, the Honda ADV-3 incorporates a system that uses cameras and radar to provide drivers with information on approaching vehicles and obstacles on the road. There is also a system that offers driver support through steering- and brake-assist technologies, as well as an emergency response system designed to aid in rescue efforts in the event of an accident.
In fuel cell technologies, the FCX, featuring Honda FC STACK next-generation fuel cell technology, became Japan's first fuel cell vehicle to receive motor vehicle type certification from the Japanese Ministry of Land, Infrastructure and Transport.
Research and development expenses in the Automobile Business segment in fiscal 2006 totaled ¥413.9 billion.

Power Product and Other Businesses
In the Power Products Business, we seek to develop products that match customers' lifestyles and needs while strengthening our lineup of offerings that address environmental issues.
In fiscal 2006, we introduced the new iGX440 general-purpose engine in Japan, United States, Europe and elsewhere. Highly friendly to the environment and extremely quiet, the iGX440 is the world's first single-cylinder general-purpose engine to employ electronic governor speed control technology, which eliminates the need for a battery. The electronic governor system allows optimum engine control to suit a wide range of power requirements.
In Japan, we incorporated the iGX440 into the newly launched HSM1590i, a mid-sized hybrid snow plow featuring a gasoline engine for removing snow and an electric motor for travel motion. The combination of the two power units facilitates switching between work modes and enhances user-friendliness. We also unveiled the Monpal ML200, a stylish four-wheel scooter with a comfortable ride and high maneuvering stability.
Research and development expenses in this segment in fiscal 2006 amounted to ¥13.3 billion.

Fundamental Research
In the area of fundamental research, Honda pursues steady and varied research activities into technologies that may lead to innovative applications in the future.
In joint research conducted with Nagoya University, we became the first in the world to discover a gene that dramatically improves rice harvests. Using rice of the Koshihikari variety, we identified a gene that radically enhances the regenerative ability of rice. This will lead the way to more rapid improvements in Koshihikari, the most popular variety of rice in Japan.
Honda's latest ASIMO humanoid robot model is capable of performing tasks in concert with the movement of people, such as freely operating a cart. A newly developed total control system, which controls all of ASIMO's functions, enables the robot to act autonomously—as a receptionist, for instance, or even as a waiter serving drinks on a tray. A drastic improvement in the robot's mobility allows it to run at a speed of 6km/hr, as well as run in a circular pattern.
Expenses incurred in fundamental research are distributed among Honda's business segments.

Patents and Licenses
On March 31, 2006, Honda owned more than 9,600 patents and 160 utility model registrations in Japan and more than 16,100 patents abroad. Honda also had applications pending for more than 19,900 patents in Japan and for more than 18,500 patents abroad. Under Japanese law, a utility model registration is a right granted with respect to inventions of less originality than those which qualify for patents. While the Company considers that, in the aggregate, Honda's patents are important, it does not consider any one of such patents, or any related group of them, to be of such importance that the expiration or termination thereof would materially affect Honda's business.

Segment Information
Business segments

Motorcycles
In fiscal 2006, domestic unit sales of motorcycles fell 2.6%, to 368,000 units. Overseas unit sales fell 2.0%, to 9,903,000 units, mainly due to a decrease in unit sales of parts for local production at affiliates accounted for under the equity method in Asia*.
As a result, total unit sales of motorcycles amounted to 10,271,000 units, down 2.0% compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the motorcycle segment increased 11.7%, to ¥1,225.8 billion, due mainly to the positive impact of the currency translation effects and the change in model mix, offsetting negative impact of decreased unit sales. Operating income increased by 64.4% to ¥113.9 billion, due mainly to the positive impact of currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue, continuing cost reduction effects and gain on "return", offsetting the negative impact of the increase in SG&A and R&D expenses.

	*		Of the net sales of Honda-brand motorcycle products that are manufactured and sold by overseas affiliates accounted for under the equity method, those with respect to which parts for manufacturing were not supplied from Honda or such subsidiaries are not included in net sales and other operating revenue, in conformity with U.S. generally accepted accounting principles.

Automobiles
Domestic unit sales of automobiles in fiscal 2006 fell 2.2%, to 696,000 units and overseas unit sales increased by 6.5%, to 2,695,000 units. Consequently, total unit sales of automobiles grew 4.6%, to 3,391,000 units, compared to the previous fiscal year. Net sales from sales to unaffiliated customers in the automobile segment increased 14.9%, to ¥8,004.6 billion, due to the positive currency translation effects and increased unit sales mainly in North America. Operating income increased by 38.9% to ¥628.3 billion, due mainly to the positive impact of currency effects caused by the depreciation of the Japanese yen, an increase in profit attributable to higher revenue, continuing cost reduction effects and gain on "return", which offset the negative impact of increase in SG&A and R&D expenses.

Financial Services
Revenue from sales to unaffiliated customers in financial services business rose 20.0%, to ¥306.8 billion, compared to the previous fiscal year. Operating income increased 0.8%, to ¥90.5 billion, due primarily to the positive impact of currency effects caused by the depreciation of the Japanese yen, higher revenue due to an increased finance-subsidiaries receivable from growth of business and decreased SG&A expenses which offset increased funding costs.

Power Product and Other Businesses
Domestic unit sales of power products in fiscal 2006 increased 12.7%, to 487,000 units. Overseas unit sales increased 10.7%, to 5,389,000 units. Accordingly, total unit sales of power products rose 10.9%, to 5,876,000 units, compared to the previous fiscal year.
Net sales from power products and other businesses increased 11.3%, to ¥370.6 billion, due mainly to increased unit sales. Operating income increased 86.3% to ¥35.9 billion, due mainly to positive currency effects caused by the depreciation of the Japanese yen, the increased profit attributable to higher revenue and gain on "return", which offset the negative impact of the increase in SG&A expenses.

Geographical segments
Geographical segments are based on the location of the Company and its subsidiaries.

Japan
Net sales in Japan were ¥4,437.8 billion, up by 7.2% from the previous fiscal year, due mainly to increased export sales in the automobile business and increased revenue in the motorcycle, power product and other businesses, which offset the negative impact of decreased unit sales in domestic automobile business. Operating income in Japan was ¥370.9 billion, up by 100.6%, due primarily to the positive impact of the currency effects caused by the depreciation of the yen, increased profit attributable to higher revenue and continuing cost reduction effects and gain on "return" of ¥138.0 billion, which offset the negative impact of the increase in SG&A and R&D expenses.

North America
Net sales in North America increased by 19.4% from the previous fiscal year to ¥5,616.3 billion, due mainly to positive currency translation impact and the increased revenue in all of Honda's business segments. Operating income in North America increased by 10.2% to ¥353.9 billion, due primarily to the positive impact of currency effects caused by the depreciation of the Japanese yen and the increased profit attributable to higher revenue, which offset the negative impact of the increase in SG&A expenses.

Europe
Net sales in Europe increased by 14.0% to ¥1,189.5 billion compared to the previous fiscal year, due mainly to the positive currency translation impact and the increased revenue in all of Honda's business segments. Operating income in Europe decreased by 36.2% to ¥26.3 billion, due mainly to the negative impact of the changes in model mix and increased SG&A expenses, offsetting the positive impact of the currency effects caused by the depreciation of the Japanese yen and the increased profit attributable to higher revenue.

Asia
Net sales in Asia increased by 15.9% to ¥997.3 billion from the previous fiscal year, due mainly to positive currency translation impact and the increased revenue in all of Honda's business segments. Operating income increased by 7.1% to ¥64.9 billion from the same period of the previous year, due mainly to the positive impact of the currency effects caused by the depreciation of the Japanese yen, increased profit attributable to higher revenue and continuing cost reduction, which offset the negative impact of the increase in SG&A expenses.

Other Regions
Net sales in Other Regions increased by 22.7% to ¥571.6 billion compared to the previous fiscal year, due mainly to positive impact of the currency translation effects and the increased revenue in all of Honda's business segments. Operating income increased by 72.2% from the same period of the previous year to ¥57.1 billion, due mainly to the positive currency effects caused by the depreciation of the Japanese yen, the increased profit attributable to higher revenue and continuing cost reduction effects, offsetting the negative impact of the increase in SG&A expenses.