Total automobile demand in Japan in calendar 2006 declined roughly 2%, to approximately 5,740,000 units. Various manufacturers launched new mini-car models, which pushed demand in this segment up 5.2%, to approximately 2,020,000 units. Demand for registered vehicles, however, decreased 5.4%, to approximately 3,720,000 units.

Bolstered by the introduction of the Zest at the end of the preceding fiscal year, Honda's sales of mini-cars grew 16.8% in fiscal 2007, to 283,000 units. Conversely, registered vehicle sales dropped 12.6%, to 408,000 units, impacted negatively by a harsh market environment despite favorable sales of the Stream and CR-V following full model changes.

Given such ongoing issues as an aging population, a declining birthrate and increasingly diverse consumer preferences, as well as the trend toward a longer average period of car ownership, market conditions are expected to remain severe. Against this backdrop, the Fit —Honda's highest-selling mass production model—will undergo a full model change in fall 2007, in the effort to ensure that the vehicle retains its appeal. At the same time, Honda will endeavor to provide services to its 9 million existing customers to ensure that they enjoy the full automobile ownership experience.

Average Vehicle Age* (growing longer annually)

Total demand in the United States in calendar 2006 fell 2.6% from the preceding year, to approximately 16,550,000 units. Soaring gasoline prices in the summer buying season pushed up demand for fuel-efficient cars. This trend enhanced demand for subcompact cars and crossover-utility vehicles (CUVs), which aim for SUV* utility and are based on passenger car platforms.

Demand for Passenger Cars Overall and by Segment	Demand for Light Trucks Overall and by Segment

Honda enjoyed a 2.8% increase in sales in the United States during fiscal 2007, to 1,529,000 units. We benefited from the launch of the Fit , which first went on sale in April, and the introduction of the CR-V , an entry-level CUV, in September following a full model change. In the area of manufacturing, we responded to rising demand for the fuel-efficient Civic by starting production in April 2007 on the second line in Canada. As part of this process, we shifted production of the Pilot from this line to our plant in Alabama.

In calendar 2007, we expect overall U.S. automobile demand to fall slightly below the level of calendar 2006, coming to slightly less than 16,400,000 units. Affecting this demand, the U.S. economic environment should benefit from strong employment and personal consumption, but we expect a deteriorating housing situation to have a negative impact on automobile demand. Although relatively warm winter weather in calendar 2006 brought a temporary respite in gasoline prices, prices have again soared. We expect demand for fuel-efficient cars to rise in response.

On the sales front, in fall 2007 we will implement a full model change of the Accord , which is our core model. Production of the CR-V , which continues to experience brisk demand, is scheduled to begin at our plant in Mexico. With respect to development, in May 2007 we opened the Acura Design Studio in the United States, reflecting the important role that design strategy plays in defining the characteristics of the Acura brand.

The United States is one of the few advanced countries with a clearly growing population, and we expect stable growth in the automobile market there to continue expanding. In response to market growth and to further solidify our operating foundation in North America, we are building a new auto plant in Indiana with an annual capacity of 200,000 units and an engine plant in Canada, both of which are scheduled to begin operations in fall 2008.

In calendar 2006, total demand for passenger cars in Western Europe*2 came to approximately 14,620,000 units, up 1.8% from the previous year. Germany—Europe's largest market—experienced a 4.5% year-on-year rise in demand, to approximately 3,470,000 units, as consumers sought to make purchases ahead of a January 2007 increase in the value-added tax (VAT). Demand increased in Italy and Spain against a background of strong economic performance.

Further, demand for diesel-powered cars remained strong, helped by their impressive fuel and power efficiency. This demand, as well as a growing awareness of their environmental benefits, pushed diesels above 50% as a percentage of registered passenger cars in calendar 2006.

Amid the emerging countries of Eastern Europe, as a producer of abundant crude oil, natural gas and other energy resources, Russia continues its rapid economic growth. In line with its strong economic performance, in fiscal 2006 passenger car demand in the country expanded 25.5%, to approximately 1,870,000 units. Foreign brands increased rapidly in the Russian passenger car market and gained a majority share of the market.

Honda's unit sales in fiscal 2007 came to 327,000 units, up 14.8% from the previous year. In Western Europe, the new Civic enjoyed positive sales, while consumers also responded positively to the CR-V following its launch in January 2007. Sales were also robust in Eastern Europe, propelled by a doubling of sales in Russia, compared with the preceding year.

Since equipping the Accord with the first Honda-developed diesel engine in January 2004, we have expanded our lineup and sales of diesel-powered cars. In fiscal 2007, diesel-powered cars accounted for 27.4% of unit sales in this market, or 89,000 units. In fiscal 2008, we are targeting diesel-powered car sales to exceed 100,000 units.

From a production standpoint, in February 2007 we responded to brisk sales of the locally produced Civic and CR-V by beginning full-scale operations at our second U.K. plant. In addition, we shifted some of the mechanical processes for manufacturing diesel engines from Japan to the United Kingdom as part of our ongoing shift toward local production.

(1) China Growing into the World's Second Largest Automobile Market

In calendar 2006, the Chinese automobile market, including commercial vehicles, grew 25.3%, to approximately 7,220,000 units*, following the United States as the world's second-largest market. Economic expansion is enabling a growing segment of society to purchase automobiles, and the move toward motorization is rippling outward from urban centers into the countryside, enlarging the market.

However, in December 2006 China's National Development and Reform Commission announced policies designed to address a surplus of facilities of small and medium-sized manufacturers in the country by restructuring automobile production and encouraging development of their own brands. Attention continues to focus on the potential impact of this development.
Source: China Association of Automobile Manufacturers

In this climate, Guangzhou Honda Automobile Co., Ltd. (Guangzhou Honda), and Dongfeng Honda Automobile Co., Ltd. (Dongfeng Honda), affiliates accounted for under the equity method, posted strong unit sales, helped by the City and the Civic , which launched in April 2006. As a result, in fiscal 2007 these two companies delivered combined sales of 323,000 units, up 25.9% from the previous year.

From a production standpoint, to meet growing demand, in February 2006 Dongfeng Honda expanded its capacity to 120,000 vehicles per year and, in September 2006 Guangzhou Honda began production at its second plant, which has an annual capacity of 120,000 units. In expanding their capacity, the two plants introduced leading-edge technologies that take into consideration the global and production environments.

In addition to raising capacity for finished cars, Honda Auto Parts Manufacturing Co., Ltd., began operations in March 2007, to provide the advanced automatic transmissions (AT) that require advanced manufacturing technology.

To support the provision of products that meet the needs of customers in China, Guangzhou Honda established a wholly owned R&D subsidiary, Guangzhou Honda Automobile Research & Development Co., Ltd., in April 2007.

(2) The Growing Indian Market

Supported by brisk economic expansion, total automobile demand in India, excluding commercial vehicles, increased to approximately 1,240,000 units in calendar 2006, up 18.2% from the preceding year.

Honda's sales in this market in fiscal 2007, came to 60,000 units, up 40.3%. In addition to the core City model, the Civic , which launched in July 2006, posted favorable sales.

To meet growing demand, at the end of calendar 2007 Honda Ciel Cars India Limited plans to expand its annual capacity from 50,000 units to 100,000 units, and in May 2007 the company acquired a site with the goal of building a second plant.

(3) Political Uncertainty and Natural Disaster Affects Demand in the ASEAN Market

In the key ASEAN countries, such factors as soaring gasoline prices and rising interest rates, as well as political instability in Thailand, caused the automobile market to shrink.

In Indonesia, Honda's sales in fiscal 2007 fell compared with the preceding year affected by its economical situation, but strong sales performance by the new Civic prompted year-on-year increases in Honda's sales in Thailand and Malaysia. Introduced into each of these markets in the second half of fiscal 2007, the new CR-V registered brisk sales. To expand localized production, in April 2007 we began the production in Thailand of camshafts, connecting rods, crankshafts and other engine parts that require sophisticated technologies.

Brazil, the largest market in South America, is experiencing robust economic growth. Buoyed by such factors as rising incomes and falling interest rates, total demand in calendar 2006 (excluding large trucks and buses), reached approximately 1,830,000 units, up 13.1% from the previous year. As market expansion is expected to continue, we anticipate total demand growth in calendar 2007 of more than 15%, to 2,110,000 units.

In fiscal 2007, Honda's unit sales rose 18.0%, to 67,000 units. Sales of the new Civic , which went on sale in April 2006, were extremely favorable.

The Expanding Market for Flexible Fuel Vehicles (FFVs)

Following the first oil shock in the latter 1970s, the Brazilian government began promoting ethanol fuels as an alternative to petroleum fuels. The market for FFVs, which can run on a mixture of ethanol and gasoline—and is less expensive than gasoline—has expanded to the point where as of March 2007, more than 80% of passenger cars were FFVs. In November 2006, Honda introduced the Civic FFV , followed by the Fit FFV in December.

In fiscal 2008, we expect favorable sales of the Civic and the sale of FFVs to raise unit sales approximately 25% from the previous year and are expanding supply capacity in preparation. In January 2007, Honda raised annual production capacity from 50,000 units to 80,000 units. Midway through calendar 2007, we expect to further raise this level to 100,000 units.

Percentage of Vehicles in Brazil that are FFVs