During fiscal 2007, ended March 31, 2007, Honda set in place a number of measures aimed at global growth and advancement. To propel ourselves forward over the medium to long term, we outlined specific measures for our three initiatives that are; developing advanced systems at our production facilities in Japan, solidifying the foundation for growth in our overseas business and working to reduce our CO2 emissions on a global level by promoting innovative products and production facilities. We also accelerated efforts to strengthen the core characteristics that make Honda unique in order to continue creating new value for our customers, such as by commercializing the HondaJet and solar cell businesses, bringing these projects a step closer to reality.

Environment

As to the economic conditions surrounding Honda during fiscal 2007, although crude oil prices became relatively more stable other raw materials prices continued to significantly increase. In the United States, despite slowing growth in personal consumption and capital investment, strong economic growth continued, albeit at a slightly slower rate, and the economies of Europe sustained a gradual recovery. Rapid economic growth also persisted in Asian countries, particularly China and India. In Japan, increases in capital investments and other factors supported a gradual economic recovery, although personal consumption was lackluster.

Overview of Fiscal 2007 Operating Performance

Tumultuous change characterized the business environment in key world markets. Amid increasingly stringent competition, we remained proactive in our efforts to launch products that create new value. These undertakings paid off in the form of higher unit sales in each of our businesses—motorcycles, automobiles and power products—and revenues grew for the seventh consecutive year as each of our businesses expanded.

Despite a demanding competitive environment, increased overseas unit sales and the currency effects caused by the depreciation of the Japanese yen rose profits, but income fell for a variety of reasons. We experienced the negative impact of changes in our model mix, as significantly increasing gasoline prices prompted a shift in demand toward compact cars. The cost of steel, aluminium and precious metals substantially increased, and selling, general and administrative expenses accompanied the rise in unit sales. R&D expenses also rose, as we spent more on safety and environmental technologies and worked to improve the attractiveness of our products. Furthermore, the gain that we posted in fiscal 2006 on the return of the substitutional portion of the Employees' Pension Funds to the Japanese government was absent in fiscal 2007.

Motorcycle Business

In key Asian markets, demand for motorcycles as an essential mode of transportation continued to grow. Sales in Latin America remained strong, mainly in Brazil, where economic performance was stable.

Since mid-2005, Indonesia, which is a major market for our products in Asia, has been affected by substantially increasing gasoline prices, coupled with substantially high inflation and interest rates, which depressed overall demand. However, a turnaround in this situation from mid-2006 allowed our equity-method affiliate there to stage a recovery in sales.

Automobile Business

On a global basis, a sharp rise in gasoline prices spurred demand for automobiles featuring good fuel economy, leading to steady increases in sales of Honda vehicles in North America and Europe. Sales remained strong in China, India, Brazil and other emerging economies. In particular, strong worldwide sales of the new Civic , introduced in September 2005, continued in fiscal 2007. Sales of the new CR-V , which we launched in September 2006, also recorded strong worldwide sales results and contributed to the steady expansion of unit sales.

Power Product and Other Businesses

Unit sales in the power product business increased in all regions in fiscal 2007, mainly in North America and Europe. This rise was supported by products that play a role in customer lifestyles, such as lawn mowers and generators, as well as engines for OEM*1 use in construction equipment and generators.

In December 2006, we established a subsidiary in Japan to manufacture and sell next-generation thin-film solar cells that we developed using proprietary technologies. Sales began in Japan on a limited regional basis in June 2007, and by fall 2007 we expect to commence mass production on an annual capacity of 27.5 megawatts and full-fledged sales.

Fulfilling an objective that Honda has set through R&D since the time of its establishment, in October 2004 we formed a joint venture with General Electric Company, and in 2006, that venture secured orders to supply compact turbofan engines to two aircraft manufacturers. Furthering these efforts, in August 2006 we established a subsidiary in the United States to construct R&D, manufacturing and sales of compact jets. In October 2006, we began accepting orders for HondaJet , a compact business jet. Deliveries and associated revenue are scheduled to begin in 2010.

The environment in which Honda operates is likely to grow increasingly challenging. Honda will address this situation by accelerating efforts to strengthen the core characteristics that make Honda unique as we create new value and continue to deliver products and services that exceed the expectations of our customers. In May 2006, I discussed three themes for achieving this vision—"Establishing advanced manufacturing systems and capabilities, " "Strengthening the foundation for global growth" and "Strengthening our commitment to reducing our environmental footprint"—and we continue to move forward along these lines.

I would now like to introduce our recent initiatives under these themes, and talk about the measures we have implemented.

Establishing Advanced Manufacturing Systems and Capabilities

First, let me outline our initiatives to create advanced systems in the realm of manufacturing and R&D, as these areas support the ongoing global expansion of Honda's businesses.

In terms of strengthening our manufacturing systems, the new Yorii plant—scheduled to begin operations in 2010—will feature high-quality and highly efficient production and logistics systems, allowing us to make state-of-the-art automobiles quickly and in response to diverse customer demands. Also taking the environment into consideration, each of the cars produced at this plant will produce 20% lower CO2 emissions, compared with vehicles produced in 2000. As demand in various regions around the world for fuel-efficient vehicles is rising more quickly than we had anticipated, we have decided to build a new engine plant nearby, in Ogawa, Saitama. This plant is scheduled to begin production in mid-2009.

Amid expanding global demand for our motorcycles, both small and large, we have elected to strengthen our manufacturing system by concentrating motorcycle production at our Kumamoto plant by the end of 2009, incorporating functions that will make it one of the world's leading factories. This move will enable us to enhance production technologies and expertise, which we can subsequently share with our plants worldwide.

Moving to the topic of strengthening our R&D system from a manufacturing standpoint, for motorcycles we will work to respond to increasingly diverse consumer needs and provide products that are attractive and highly competitive by pursuing ease of use, improving riding performance, adding features and making them more fun to ride. We have reorganized our R&D structure to meet these objectives. In automobiles as well, we have reorganized our R&D structure into Honda and Acura brand areas, prompted by the expansion of our premium Acura brand, which has gained a strong foothold in North America. We have created a product development system to clearly emphasize individual brand characteristics. In May 2007, we opened the Acura Design Studio in the United States to emphasize the important role that design strategy plays in defining the characteristics of the Acura brand.

Strengthening the Foundation for Global Growth

Addressing the topic of strengthening the foundation for global growth, this fall we will undertake a full model change for the Accord , a core model in North America. We are reconfiguring our production system in response to the rising demand for fuel-efficient cars, stemming from significantly increasing gasoline prices. In April 2007, we began manufacturing the Civic , which we have already produced at our East Liberty plant and at line one of our plant in Canada, at line two of our plant in Canada. In line with strong ongoing sales of the CR-V , from fall 2007 we will begin manufacturing this model at our plant in Mexico. We are also planning to begin production in a new plant in Indiana, in the United States, and a new engine factory in Canada in 2008. Honda is reinforcing its North American business foundations by putting in place a manufacturing system that can respond flexibly, both to increasing demand and to market shifts.

In Europe, we have experienced an increase in sales of locally manufactured models with diesel engines, mainly the new Civic and the new CR-V . In response, we plan to raise production at our U.K. plant to its annual capacity of 250,000 units in late 2007.

In China, Guangzhou Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, began operating a second factory in September 2006. Together with the annual production capacity of this plant, which specializes in producing automobiles for export, our total annual production capacity in China has reached 530,000 units. In March 2007, operations began at a new plant in China that manufactures transmissions and engine parts, raising our local content and cost performance. In April 2007, Guangzhou Honda established Guanzghou Honda Automobile Research & Development Co., Ltd. The purposes of this company are to promote local autonomy, enhance product development and enhance our ability to deliver products that meet the needs of clients in this market.

In the rapidly growing Indian market, in addition to raising annual production from 50,000 units to 100,000 units in 2007, we have begun building a second factory with an annual capacity of 60,000 units that will begin operations at the end of 2009.

Demand for motorcycles and automobiles in South America continues to grow, spurred by strong economic performance. In Brazil, in January 2007 we raised annual capacity at our motorcycle plant from 1 million units to 1.35 million units, and this level is scheduled to rise to 1.5 million units by the end of 2007. At our automobile plant, we also plan to double annual capacity to 100,000 units in mid-2007.

Strengthening Our Efforts to Reduce Our Environmental Footprint

Concluding on the theme of strengthening our efforts to reduce our environmental footprint, Honda currently puts the highest priority on its efforts to address global environmental issues. We have announced targets for reducing CO2 emission levels for all products and manufacturing activities throughout the world, and we are progressing diligently toward these goals.

In terms of products, we are introducing new technologies to raise the fuel efficiency of gasoline-powered automobiles, showcased in the advanced VTEC*2 engine and the Variable Cylinder Management System*3. We are enthusiastically integrating advanced environmental technologies into our products. For example, in 2009 we plan to introduce a new dedicated hybrid vehicle, a clean diesel engine that will achieve tailpipe emissions on par with gasoline-powered automobiles, and a new fuel cell vehicle.

In manufacturing, we are stepping up efforts to reduce the environmental impact of each of our factories. We are also conducting broad-ranging research and development on a variety of energy-related production topics, such as using biotechnology to produce ethanol and solar power to generate hydrogen.

Honda strives to carry out its operations from a global perspective and to increase its corporate value. With respect to the redistribution of profits to its shareholders, which we consider to be one of the most important management issues, Honda's basic policy for dividends is to make distributions after taking into account its long-term consolidated earnings performance. Honda will also acquire its own shares at the optimal timing with the goals of improving efficiency of the Company's capital structure and facilitating efforts to enhance capital agility.

The present goal is to maintain a shareholder return ratio (i.e., the ratio of the total of the dividend payment and the repurchase of Company shares to consolidated net income) of approximately 30%.

Retained earnings will be allocated toward financing R&D activities that are essential for the future growth of Honda and capital expenditures and investment programs that will expand operations for the purpose of improving business results and strengthening Honda's financial condition.

For fiscal 2007, Honda set a year-end cash dividend of ¥20 per share, bringing total cash dividends for the year to ¥67 per share, when adding in the interim dividend of ¥30 and a third-quarter dividend of ¥17 per share. Honda also implemented a two-for-one stock split on July 1, 2006. Had this stock split not been carried out, dividends would have been equal to ¥134 per share, a ¥34 increase over the previous year.

For the fiscal year ending March 31, 2008, we plan to pay quarterly dividends of ¥20 per share, amounting to annual dividends of ¥80 per share, up ¥13.

We will continue doing our utmost to meet the expectations of our shareholders.

Honda's overriding quest is to become a company that society wants to exist throughout the world. To this end, we will strive to provide greater levels of enjoyment and inspiration to our customers and emphasize the characteristics that make Honda unique.

We look forward to the continued understanding and support of shareholders and other investors as we embrace the challenges of the future.