Annual Report 2008 Honda Motor Co., Ltd

Honda Motor Co., Ltd. Annual Report 2008

Honda Motor Co., Ltd. Year Ended March 31, 2008 Annual Report 2008

This annual report is printed on recycled paper using soy ink with no volatile organic content. Furthermore, a waterless printing process was used to prevent toxic emissions. Printed in Japan WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Corporate Profile

Honda Motor Co., Ltd., operates under the basic principles of “Respect for the Individual” and “The Three Joys”—expressed as “The Joy of Buying,” “The Joy of Selling” and “The Joy of Creating.” “Respect for the Individual” reflects our desire to respect the unique character and ability of each individual person, trusting each other as equal partners in order to do our best in every situation. Based on this, “The Three Joys” express our belief and desire that each person working in or coming into contact with our company, directly or through our products, should share a sense of joy through that experience. In line with these basic principles, since its establishment in 1948, Honda has remained on the leading edge by creating new value and providing products of the highest quality at a reasonable price, for worldwide customer satisfaction. In addition, the Company has conducted its activities with a commitment to protecting the environment and enhancing safety in a mobile society. The Company has grown to become the world’s largest motorcycle manufacturer and one of the leading automakers. With a global network of 501* subsidiaries and affiliates accounted for under the equity method, Honda develops, manufactures and markets a wide variety of products, ranging from small general-purpose engines and scooters to specialty sports cars, to earn the Company an outstanding reputation from customers worldwide. *As of March 31, 2008

Reports Published by Honda

CSR Report This report provides an overview of Honda’s position on corporate social responsibility (CSR) activities and an overview of its performance in the areas of quality and safety, the environment, stakeholders, and corporate citizenship during the fiscal year ended March 31, 2008. http://world.honda.com/CSR/

Philanthropy Report This report explains Honda’s position on philanthropy and profiles major performance areas during the fiscal year ended March 31, 2008. http://world.honda.com/community/

Driving Safety Promotion Report This report (available only in Japanese) summarizes Honda’s efforts to promote safe driving and principal activities in this area in 2007.

Annual Report This report outlines Honda’s operating performance for the fiscal year ended March 31, 2008. http://world.honda.com/investors/annualreport/ Honda’s Major Areas of Disclosure—Web Sites Corporate profile http://world.honda.com/profile/ Environmental Report CSR http://world.honda.com/CSR/ Investor relations http://world.honda.com/investors/ This report describes Honda’s position on environmental initia- Environment http://world.honda.com/environment/ tives, its environmental performance for the fiscal year ended Community http://world.honda.com/community/ March 31, 2008, and future environmental targets. Safety http://world.honda.com/safety/ http://world.honda.com/environment/ecology/2008report/ Promoting safer driving http://world.honda.com/safety/safer-driving/

Caution with Respect to Forward-Looking Statements This annual report contains “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based on management’s assumptions and beliefs, taking into account information currently available to it. Therefore, please be advised that Honda’s actual results could differ materially from those described in these forward-looking statements as a result of numerous factors, including general economic conditions in Honda’s principal markets, foreign exchange rates between the Japanese yen and the U.S. dollar, the Euro and other major currencies, and extensive environmental and other governmental regulations, as well as other factors detailed from time to time. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Contents

2 The Power of Dreams

4 Financial Highlights

6 Summary of Operating Results by Business

8 To Our Shareholders

15 Review of Operations Motorcycle Business Automobile Business Power Product and Other Businesses Financial Services Business

34 Preparing for the Future

35 Risk Factors

37 Corporate Governance

44 Board of Directors, Corporate Auditors and Operating Officers

Cover CBR600RR 47 Financial Section A super sport bike well-known for its light, high-performance engine, compact body, and outstanding driving performance, the CBR600RR carries forward the Honda tradition for developing machines that embody 117 Corporate Information cutting-edge technology and styling and are formidable contenders in MotoGP (FIM Road Principal Manufacturing Facilities Racing World Championship Grand Prix). Honda Group Accord A luxury sedan developed with the aims of Honda’s History offering both “dynamism” and “intelligence” in all aspects of design, space, driving Investor Information performance and functions, the Honda Accord seeks to offer ever-higher levels of sporty driving and refinement, while substantially enhancing the basic performance features of driving, cornering, and stopping.

BF50 While carrying forward the Honda tradition of offering lightness and a compact package that is at the top levels in its class, the BF50 is a medium-sized four-stroke outboard engine that achieves substantially improved fuel economy in the cruising range. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 Dreams inspire us to create innovative products that enhance mobility and benefit society. To meet the particular needs of customers in different regions around the world, we base our sales networks, research & development centers and manufacturing facilities in each region. Furthermore, as a socially responsible corporate citizen, we strive to address important environmental and safety issues. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 2 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 3 Financial Highlights Financial Data

Honda Motor Co., Ltd., and Subsidiaries Years ended March 31 Yen U.S. dollars (millions except per share data) (millions except per share data) 2006 2007 2008 2008

Net sales and other operating revenue ¥ 9,907,996 ¥11,087,140 ¥12,002,834 $119,801

Operating income 868,905 851,879 953,109 9,513

Income before income taxes, minority interest 829,904 792,868 895,841 8,941 and equity in income of affiliates Equity in income of affiliates 99,605 103,417 118,942 1,187

Net income 597,033 592,322 600,039 5,989

Cash dividends paid during the period 71,061 140,482 152,590 1,523

Research and development 510,385 551,847 587,959 5,868

Total assets 10,631,400 12,036,500 12,615,543 125,916

Stockholders’ equity 4,125,750 4,482,611 4,544,265 45,356

Capital expenditures 457,841 627,066 654,030 6,528 (excluding purchase of operating lease assets)

Depreciation 262,225 361,747 417,393 4,166 (excluding property on operating leases) Per share data Net income ¥ 324.33 ¥ 324.62 ¥ 330.54 $ 3.30 Dividends paid 38.5 77.0 84.0 0.84 Stockholders’ equity 2,259.26 2,460.28 2,504.36 25.00

Note: The consolidated financial statements as of and for the year ended March 31, 2008 have been translated into U.S. dollars at the rate of ¥100.19=U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on March 31, 2008. Those U.S. dollar amounts presented in the consolidated financial statements and related notes are included solely for the reader. This translation should not be construed as a representation that all the amounts shown could be converted into U.S. dollars.

Net Sales and Other Operating Revenue Operating Income and Operating Margin Equity in Income of Affiliates Unit Sales Motorcycles Automobiles Power Products Yen Yen Yen (billions) (billions) (%) (billions) (Thousands) (Thousands) (Thousands) 12,000 1,000 10.0 120 12,000 4,000 8,000

10,000 100 10,000 750 7.5 3,000 6,000 8,000 80 8,000

6,000 500 5.0 60 6,000 2,000 4,000

4,000 40 4,000 250 2.5 1,000 2,000 2,000 20 2,000

0 0 0 0 0 0 0 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 Operating Income (left scale) Operating Margin (right scale) Japan North America Europe Asia Other Regions

Net Income and Return on Equity (ROE) Total Assets, Stockholders’ Equity, and Capital Expenditures and Depreciation Net Sales Stockholders’ Equity per Common Share (Excluding Property on Operating Leases) Motorcycle Business Automobile Business Financial Services Business Power Product and Other Businesses Yen Yen Yen Yen Yen Yen Yen (billions) (%) (billions) Yen (billions) (billions) (billions) (billions) (billions) 600 20.0 12,500 2,500 600 2,000 10,000 600 500

500 10,000 2,000 8,000 400 450 15.0 1,500 400 400 7,500 1,500 6,000 300 300 10.0 1,000 300 5,000 1,000 4,000 200 200 200 150 5.0 500 2,500 500 2,000 100 100

0 0 0 0 0 0 0 0 0 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 04 05 06 07 08 Net Income (left scale) Total Assets (left scale) Capital expenditures Japan North America Europe Asia Other Regions ROE (right scale) Stockholders’ Equity (left scale) Depreciation Stockholders’ Equity per Common Share (right scale) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 4 Annual Report 2008 Operating Data

Years ended March 31

Unit Sales Motorcycles Automobiles Power Products Breakdown (Thousands) 2007 2008 Change 2007 2008 Change 2007 2008 Change Japan 337 311 (7.7)% 672 615 (8.5)% 527 550 4.4 % North America 503 453 (9.9) 1,788 1,850 3.5 3,103 2,415 (22.2) Europe 329 313 (4.9) 324 391 20.7 1,625 1,693 4.2 Asia 7,895 6,633 (16.0) 620 755 21.8 760 915 20.4 Other Regions 1,305 1,610 23.4 248 314 26.6 406 484 19.2 Total 10,369 9,320 (10.1)% 3,652 3,925 7.5 % 6,421 6,057 (5.7)%

Financial Services Power Product and Other Net Sales Motorcycle Business Automobile Business Business Businesses Breakdown Yen (millions) 2007 2008 Change 2007 2008 Change 2007 2008 Change 2007 2008 Change Japan ¥ 101,753 ¥ 93,592 (8.0)% ¥1,412,726 ¥1,321,005 (6.5)% ¥ 21,497 ¥ 23,405 8.9 % ¥145,214 ¥147,775 1.8 % North America 308,293 265,609 (13.8) 5,179,139 5,209,446 0.6 364,892 483,925 32.6 128,552 109,445 (14.9) Europe 219,773 226,687 3.1 917,199 1,182,666 28.9 12,642 13,234 4.7 87,143 96,847 11.1 Asia 383,389 484,418 26.4 861,612 1,048,463 21.7 3,150 4,936 56.7 35,003 39,449 12.7 Other Regions 357,409 488,390 36.6 518,404 727,811 40.4 7,520 8,053 7.1 21,830 27,678 26.8 Total ¥1,370,617 ¥1,558,696 13.7 % ¥8,889,080 ¥9,489,391 6.8 % ¥409,701 ¥533,553 30.2 % ¥417,742 ¥421,194 0.8 %

10,000 100 10,000 750 7.5 3,000 6,000 8,000 80 8,000

6,000 500 5.0 60 6,000 2,000 4,000

4,000 40 4,000 250 2.5 1,000 2,000 2,000 20 2,000

500 10,000 2,000 8,000 400 450 15.0 1,500 400 400 7,500 1,500 6,000 300 300 10.0 1,000 300 5,000 1,000 4,000 200 200 200 150 5.0 500 2,500 500 2,000 100 100

Business Percentage of Net Sales by Business Net Sales/Operating Income Unit Sales by Region (Thousands)

Motorcycle Business

Years ended March 31 Yen Yen 13.0% (billions) (billions) 1,600 160

1,200 120

800 80

Net Sales 400 40 ¥1,558.6 billion (+13.7%) 0 0 Operating Income 04 070605 08 ¥151.2 billion (+50.4%) Net Sales (left scale) Operating Income (right scale) Automobile Business

Years ended March 31 Yen Yen (billions) (billions) 10,000 1,000

8,000 800

6,000 600 79.1% 4,000 400

Net Sales 2,000 200 ¥9,489.3 billion (+6.8%) 0 0 Operating Income 04 070605 08 ¥661.6 billion (+10.4%) Net Sales (left scale) Operating Income (right scale) Power Product and Other Businesses

3.5% Years ended March 31 Yen Yen (billions) (billions) 500 50

400 40

300 30

200 20

Net Sales 100 10 ¥421.1 billion (+0.8%) 0 0 Operating Income 04 070605 08 ¥22.3 billion (-38.2%) Net Sales (left scale) Operating Income (right scale) Financial Services Business

4.4% Years ended March 31 Yen Yen (billions) (billions) 500 300

400 240

300 180

200 120

Net Sales 100 60 ¥533.5 billion (+30.2%) 0 0 Operating Income 04 070605 08 ¥117.7 billion (+2.0%) Net Sales (left scale) Operating Income (right scale) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 Annual Report 2008 Business Percentage of Net Sales by Business Net Sales/Operating Income Unit Sales by Region (Thousands)

6,633 6,633 6,633 313 6,633 453 313 453 Europe313 311 Europe North453 America CBR600RR 313 311 North America Europe Japan 453 311 North America Europe Japan 1,610 311 North America Japan 1,610 Asia Japan 1,610 Asia Other1,610 Regions CG125FAN Asia Other Regions Asia Other Regions Other Regions BIZ125

1,850 1,850 391 1,850 391 755 1,850 391 755 615 Europe391 755 615 755 Europe 615 Accord Europe 615 Europe Asia Asia Japan 314 Japan Asia 314 North America Japan Asia 314 North America Japan Other314 Regions Other Regions North America North America Other Regions Civic Other Regions

Fit

1,693 2,415 1,693 2,415 1,693 2,415 1,693 915 2,415 915 550 915 550 915 550 Europe Asia Japan550 Europe Japan 484 Europe Asia 484 Japan North America Europe Asia 484 Japan North America Asia Other484 Regions Other Regions North America Other Regions North America Other Regions BF-50 HRG465

U.K. LocationU.K. U.K. U.K. Canada Germany Canada Germany Canada Germany U.S.A. Japan Canada Germany U.S.A. Japan U.S.A. Thailand Japan U.S.A. Thailand Japan Thailand Thailand Brazil Brazil Brazil Brazil WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 To Our Shareholders

Takeo Fukui President and Chief Executive Officer

We would like to express our gratitude to you, our shareholders, for your ongoing understanding and support. We would also like to thank the many people who have supported Honda’s long- term growth, including our customers, business partners, and the societies around the world where we do business. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 Annual Report 2008 The business environment in fiscal 2008, ended March 31, 2008, was marked by severe circumstances such as the increase in crude oil and raw material costs around the world. The U.S. economy showed increasing signs of a slowdown triggered by the subprime mortgage crisis. In Europe, consumer spending was relatively weak, and the pace of economic growth moderated. In Japan, signs of an economic slowdown emerged, as capital spending and consumer spending remained flat compared with the previous year. On the other hand, the economies of Asia, particularly China and India, continued to experience generally high economic growth. Under such business conditions, Honda posted record-high net sales and other operating revenue, mainly as a result of higher unit sales in the Automobile Business and other factors. Profit indicators—including operating income; income before income taxes, minority interest and equity in income of affiliates; and net income—also set record-high results. Fac- tors driving the achievement of new records in profitability included higher revenues and the positive impact of cost reductions, both of which more than offset the increase in raw material costs. We believe that these results were based on the success of the three-year mid-term business plan that we began in spring 2005.

Motorcycle Business Total unit sales of motorcycles declined, despite increases in Brazil and other markets, due to decreased sales in North America. (This decline in total unit sales was due to the exclusion of sales of Honda-brand motorcycles manufactured by affiliates accounted for under the equity method that do not include any parts supplied by Honda and its consolidated subsidiaries, as required under U.S. GAAP. Including these units, sales of Honda-brand motorcycles continued to increase during fiscal 2008.) Reviewing by region, we reported major increases in sales of 125cc-class models in Other Regions, including South America, as a result of the expansion of sales in Brazil. In Asia, sales of scooters and other motorcycles in India increased, and sales in Vietnam were favorable, especially of automatic transmission models, supported by the fast-growing economy. In North America, however, as a result of the deceleration of the U.S. economy, unit sales of medium- to large-sized motorcycle models, sporty all-terrain vehicles (ATVs), and other products declined compared to the previous year. In Japan, we took the initiative to enhance the appeal of Honda products and stimulate market demand by installing fuel- injection systems on scooters and other models and making full model changes for large scooters, as well as adopting other measures. However, unit sales fell compared to the previous year because of a decline in sales of 50cc-class models, including scooters, and 126cc-250cc-class models.

Supra X 125 Shine Today WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 To Our Shareholders

Automobile Business During fiscal 2008, as a result of strong unit sales of Honda’s global models—the Civic, Accord, CR-V, and Fit—unit sales increased in all overseas regions, and total unit sales set a record for the ninth consecutive year. In North America, in the United States, despite the fact that the economy began to show signs of deceleration, Honda reported a steady increase in unit sales for the all-new Accord, the CR-V, and other models. In Europe, sales of diesel-engine models expanded, while Honda posted rapid sales growth in Russia, supported by strong economic conditions, and in Eastern Europe, where markets are continuing to expand. Meanwhile, within Asia, in China, sales of the Civic, CR-V, and other models were favorable. In Japan, although sales of the all-new Fit were strong, industry demand was weak and Honda’s unit sales decreased.

Power Product and Other Businesses Total unit sales of power products declined as a result of weaker demand in North America, despite increases in other markets outside the United States. Reviewing by region, in North America, overall unit sales of power products decreased as the housing market weakened. On the other hand, unit sales increased in Europe, mainly of general-purpose engines for OEM use, along with expansion in the Russian and Eastern European markets. Also, in Western Europe, sales of lawn mowers and other products were favorable. In Asia, sales of general-purpose engines and pumps were favorable.

Results of the 9th Mid-term Business Plan

Fiscal 2008 was the concluding year of Honda’s 9th mid-term business plan, which was launched in fiscal 2005. During the three years covered by the plan, Honda focused on establishing a foothold for the future, concentrating on: • Strengthening the core characteristics that make Honda unique, • Strengthening the foundation for global growth, and • Strengthening Honda’s efforts to reduce its environmental footprint. Over the three years of the business plan, Honda gained a strong foothold for its future growth and development. During the period, Honda achieved tremendous expansion of its business as the economies in North America experienced a generally favorable performance and the economies in Asia and South America continued to grow, while increasing its combined sales of motorcycles, automobiles, and power products 38.8% more than the concluding fiscal year of the previous mid-term business plan (ended March 31, 2005).

Civic Accord Fit WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 10 Annual Report 2008 Strengthening Our Fundamentals in Japan We believe that it is important to strengthen the fundamentals of our product creation capabilities in Japan, both for the home market and as a means to transfer Honda technologies and know-how consistently to our operations in regions outside of Japan. During the 9th mid-term business plan, Honda advanced a flexible manufacturing system that standard- ized manufacturing processes and improved production efficiencies, and transferred this system to our worldwide manufacturing facilities. Through this effort, Honda increased production flexibility and worked to bolster its product development and production systems in order to more easily respond to customer demands and offer high-quality products.

Strengthening Our Foundation for Growth in International Operations In operations in regions outside of Japan, Honda has worked to establish a flexible production system and expand the ability of these operations to quickly respond to changes in demand. Honda has expanded its production capacity for automobiles in response to strong demand in India, China, Brazil and elsewhere, thus making it possible to supply a total of 3,955,000 automobiles worldwide during fiscal 2008. This result represents a 20.8% increase from production in the concluding year of the previous mid-term business plan. Moreover, Honda has expanded its production capacity for motorcycles in Vietnam, Brazil, and other countries, thereby making it possible to supply a total of 14,068,000 units during fiscal 2008. This figure represented a 25.1% increase over the concluding year of the previous mid-term business plan.

Strengthening the Effort to Reduce the Environmental Impact of Our Corporate Activities With the long-range goal of “Commitment for the Future,” Honda has established voluntary targets for making its products and production activities more environmentally responsible and is stepping up its initiatives to reach these targets by an earlier date. Sales are expanding in Europe of Honda automobiles with Honda’s original diesel engines, which offer higher efficiency and better fuel economy, and provide the same driving performance as gasoline-engine cars. Furthermore, Honda expanded its Variable Cylinder Management (VCM) system, which offers improvement in fuel efficiency in conventional gasoline engines, for the all-new Accord V6 models in North America that were launched in September 2007. Regarding hybrid cars, Honda’s cumulative sales of hybrid models through the end of fiscal 2008 exceeded 250,000 units. Sales continue to be strong, as worldwide demand for better fuel efficiency is increasing. Also, Honda’s all-new fuel cell vehicle, the FCX Clarity, was unveiled in November 2007. In the motorcycle business, Honda has completed the installation of programmed fuel-injection systems with higher fuel efficiency on almost all of its business-bike and scooter models sold in Japan. With regard to solar cells, Honda began the marketing of thin-film solar cells through its consolidated subsidiary Honda Soltec Co., Ltd.

Ground breaking ceremony Honda's automobile plant in Vietnam Civic Hybrid (North American model) for new plant in Indiana WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 11 To Our Shareholders

The 10th Mid-term Business Plan

In April 2008, we began our 10th three-year mid-term business plan, with environmental issues continuing to rise in importance and economic uncertainty reflecting a lack of transparency related to future trends in the global economy, including the rapid fluctuation of foreign currency exchange rates. Amid such circumstances, under our 10th mid-term plan, we plan to establish and strengthen the corporate structure that will enable us to grow globally in the medium- to long-term future, with Japan taking the lead to extend these initiatives worldwide. We have set two concrete directions: “To create and launch innovative Honda products with world-leading environmental technologies and offer them to a wider range of customers” and “To develop advanced manufacturing systems for the future that will enable Honda to produce such advanced products.” In order to progress in these directions, we must develop and mature leading-edge environmental technologies and innovative products in Japan, and together with our advanced manufacturing systems, introduce them worldwide. For the new mid-term business plan, many strategic initiatives are planned, but here we will comment on three of these: strengthening the motorcycle business, innovation in automobile manufacturing in Japan, and a strategy to achieve full-scale market penetration for hybrid vehicles.

Strengthening the Motorcycle Business The Motorcycle Business is one of Honda’s strengths. Motorcycles are a basic means of transportation in many parts of the world, and demand for these vehicles is expected to grow in Asia and South America. Among Honda’s motorcycle products, the Super Cub series will mark its 50th anniversary this year, and it is a symbolic model for Honda. The Japanese-born Super Cub has maintained its original creative concept and basic style but has continuously advanced as a model to accommodate the needs and preferences of customers as its use has spread throughout the world. Looking to the future, Honda will continue to create such products as the Super Cub that offer new value and exceed customer expectations. To do this, Honda will make further advances in R&D, expand the application of fuel- efficient programmed fuel-injection technology and proactively apply safety technologies, including a motorcycle airbag system and antilock braking systems. In addition to introducing environmental and safety technologies, Honda will work to improve fuel efficiency through the installation of a VCM system that substantially increases fuel economy and an advanced electronically controlled combined antilock braking system (C-ABS) that further improves stability when braking, while also working to enhance the attractiveness of medium- to large-sized models and give Honda owners greater joy in riding motorcycles. The new motorcycle plant at Honda’s Kumamoto Factory, which began operations in April 2008, will play a key role in strengthening motorcycle production. Honda created highly efficient production lines at this new plant to provide the capability to efficiently produce

CBR1000RR Super Cub 50 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 12 Annual Report 2008 approximately 60 models, from compact commuters to large motorcycles, and accommodate the characteristics unique to each model. The initiatives we have taken at this new motorcycle plant will be applied in our plants in regions outside of Japan, where motorcycle markets are continuing to expand, and we expect that the Kumamoto Factory will be a driving force for producing new products.

Innovation in Automobile Manufacturing in Japan Next-generation manufacturing plants for the production of automobiles will begin operation in Japan over the next three years. They will include a new engine plant in Ogawa and a new automobile plant in Yorii. In addition, a new mini-vehicle production plant is to be built by Honda consolidated subsidiary Yachiyo Industry Co., Ltd. Also, Honda will strengthen automatic transmission production at the Hamamatsu Factory and bolster its role as Hon- da’s global-leader factory in the area of automatic transmissions. The new auto engine plant in Ogawa will be responsible for the production of next- generation environmentally responsible engines that require highly advanced manufacturing technologies. We plan to make the production line flexible to produce engines that require different production processes, including gasoline engines, diesel engines, in-line four-cylinder engines and V-type engines. We are planning to make the Yorii plant a next-generation manufacturing facility that will create new value in many areas as it strives to be a leader in the area of environmental responsibility by introducing cutting-edge systems that minimize the amount of energy used during production and as it works to create more people-friendly assembly lines. Also, in regions outside of Japan, in the latter half of fiscal 2008, we will begin production at a new automobile plant in Indiana, in the United States; a new automobile engine plant in Canada; and a second automobile plant in Thailand.

Hybrid Strategy to Achieve Full-scale Market Penetration Honda believes that the most important environmental issue is the reduction of CO2 emissions, which is key to protecting the natural environment on a global scale. Recognizing this, Honda has proactively announced voluntary global CO2 reduction targets for 2010 for both its products and manufacturing activities. In addition to the Civic Hybrid, which is currently on the market, Honda is planning to introduce a new, more affordable dedicated hybrid vehicle. This five-door, five-passenger sedan will incorporate a compact, lightweight and highly efficient Integrated Motor Assist (IMA) system. The new Honda hybrid will go on sale in Japan, North America and Europe in 2009. As a dedicated hybrid vehicle, in addition to offering superior environmental performance, this new hybrid will offer ease of handling and the joy of driving that Honda owners have come to expect. Looking ahead, we are scheduled to debut a new sporty hybrid based on the CR-Z concept model that we showed at the 40th Tokyo Motor Show. In addition, development work is under way on a hybrid version of the Fit.

Yorii plant (rendering) Ogawa plant (rendering) FCX Clarity WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 13 To Our Shareholders

The FCX Clarity is a fuel cell vehicle that features zero CO2 emissions. Lease sales of this epoch-making vehicle are scheduled to begin in the United States in July 2008 and in Japan in fall 2008.

Returning Profit to Shareholders

Honda strives to conduct its business from a global perspective and to increase its corporate value. We consider the distribution of profits to shareholders to be one of our most important management responsibilities. Our basic policy for dividends is to make distributions after taking into account our long-term consolidated earnings performance. Honda also ac- quires its own shares at the optimal timing, with the goal of improving the efficiency of Hon- da’s capital structure. Under Honda’s Articles of Incorporation, the Board of Directors may pay dividends from retained earnings; however, the dividend for the end of the fiscal year is a matter for approval at the General Meeting of Shareholders. The present goal is to maintain a shareholder return ratio (i.e., the total amount of the dividend payment and the repurchase of Honda’s own shares to consolidated net income) of approximately 30%. Retained earnings will be allocated toward R&D activities that are essential for Honda’s future growth and capital expenditures and investment programs that will expand its operations for the purposes of improving business results and strengthening its financial condition. For fiscal 2008, Honda set a year-end cash dividend of ¥22 per share, bringing total cash dividends for the year to ¥86 per share, ¥19 per share higher than for the previous fiscal year. This dividend comprised ¥20 per share for the first quarter, ¥22 per share for the second quarter, ¥22 per share for the third quarter, and the previously mentioned year-end dividend of ¥22 per share. For the fiscal year ending March 31, 2009, we plan to pay quarterly dividends of ¥22 per share, or ¥88 per share for the full year—¥2 per share higher than in fiscal 2008. We will continue to do our utmost to meet the expectations of our shareholders. Honda is a company where each and every member of management and the organization has challenging objectives, works to realize the dreams of providing joy to Honda customers as well as fulfilling his or her potential, and, while setting a course for a better tomorrow, wants to shape the future through innovation and growth. Our overriding quest is to become a company that society wants to exist throughout the world. In the years to come, as in years past, we will continue to meet the challenges of innovation and creativity and, motivated by “The Power of Dreams,” respond to the expectations of society, offering our customers enjoyment, inspiration, and satisfaction. We look forward to the continued understanding and support of our shareholders and other investors as we embrace the challenges and the opportunities the future may bring.

June 24, 2008

Takeo Fukui President & Chief Executive Officer WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 14 Annual Report 2008 Review of Operations

Motorcycle Business 16

Automobile Business 22

Power Product and Other Businesses 29

Financial Services Business 32 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 15 Motorcycle Business

Thousands 12,000 Japan Unit Sales Net Sales Thousands Yen (millions) North America % % Years ended March 31 2007 2008 change Years8,000 ended March 31 2007 2008 change Europe Japan 337 311 (7.7)% Japan ¥ 101,753 ¥ 93,592 (8.0)% Asia North America 503 453 (9.9) North4,000 America 308,293 265,609 (13.8) Europe 329 313 (4.9) Europe 219,773 226,687 3.1 Other Regions Asia 7,895 6,633 (16.0) Asia 383,389 484,418 26.4 0 Other Regions 1,305 1,610 23.4 Other Regions04 05 06357,409 07 08488,390 36.6

Total 10,369 9,320 (10.1)% Total ¥1,370,617 ¥1,558,696 13.7 %

Unit Sales Net Sales Years ended March 31 Years ended March 31 Thousands Yen (billions) 12,000 Japan 2,000 Japan

North America 1,500 North America 8,000 Europe Europe 1,000 Asia 4,000 Asia 500 Other Regions Other Regions

0 0 04 05 06 07 08 04 05 06 07 08 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 16 Annual Report 2008

Yen (billions) 2,000 Japan

1,500 North America

Europe 1,000

Asia 500 Other Regions

0 04 05 06 07 08 Review of Operations

Motorcycle Business

Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) and personal watercraft (PWC) in fiscal 2008 totaled 9,320,000 units*, a decrease of 10.1% from the previous fiscal year. Although unit sales increased in Other Regions including South America, sales of component parts sets to Honda affiliate companies accounted for under the equity method for their use in local production declined. Revenue increased 13.7% from the previous fiscal year, to ¥1,558.6 billion, as a result of higher sales in Asia and Other Regions and the positive impact of currency translation effects. Op- erating income rose 50.4% over the previous fiscal year, to ¥151.2 billion, mainly because of the positive effect of the appreciation of the Brazilian real and changes in model mix. These positive factors offset the rise in R&D expenses and higher SG&A expenditures. * Please note that motorcycles manufactured by companies licensed by Honda and accounted for under the equity method that do not include any production parts supplied by Honda or its consolidated subsidiaries are not included in the number of units on a consolidated basis. The number of motorcycles classified in this category totaled approximately 4,580,000 units in fiscal 2008.

Japan

In Japan, total industry demand for motorcycles in fiscal 2008 was approximately 710,000 units*, down from the previous fiscal year. Although sales of the over 251cc class were strong––due to structural changes such as the decline in the population of younger people, a decrease in newly licensed drivers in the 50cc or under class, and the shortage of motorcycle parking spaces in urban areas––sales of the 50cc or under and the 126cc-250cc classes declined. Amid these market conditions, Honda’s unit sales of motorcycles declined 7.7% from the previous fiscal year, to 311,000 units, despite an increase in sales of the 51cc-125cc class for business use due to replacement demand, as sales of scooters in the 50cc as well as the 126cc- 250cc class declined. To accelerate initiatives for the reduction of Honda’s environmental footprint, Honda newly applied its programmed fuel-injection system on the Today, Super Cub 50 and other models. In addition, to stimulate new demand, Honda introduced the DN-01, a large sport cruiser equipped with a new automatic transmission. * Source: JAMA (Japan Automobile Manufacturers Association)

DN-01 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 17 Motorcycle Business

North America

In calendar 2007, total industry demand in the United States for motorcycles and ATVs declined. Although sales of on-road bikes remained stable, sales of off-road bikes and sport ATVs, which are recreational products, declined reflecting the economic slowdown as a result of the turmoil in financial markets stemming from the subprime mortgage crisis. Under such circumstances, Honda’s unit sales in this market for fiscal 2008 declined 9.9%, to 453,000 units. In the motorcycle category, although the number of super sport bikes such as the CBR600RR increased, sales of cruiser models and off-road bikes declined. As a result, Honda’s motorcycle sales in North America fell 14.2%, to 242,000 units. In the ATV category, despite favorable sales of models in the utility ATV FourTrax Rancher series, sales of ATVs decreased 4.5%, to 211,000 units, as the number of sport ATV models declined.

CBR600RR Europe

In calendar 2007, total industry demand for motorcycles in Europe* other than Italy increased over the previous year, to approximately 1,320,000 units, as a result of the growth in sales of large scooters, which are the largest segment in Europe. In this operating environment, Honda’s motorcycle sales in this region for fiscal 2008 decreased 4.9% from the previous year, to 313,000 units. Despite flat sales of large scooter models, soft demand for the 125cc class scooters, naked sports models** and dual-purpose*** models undermined total unit sales. * The motorcycle registration market includes10 countries: the United Kingdom, Germany, the Netherlands, Belgium, France, Spain, Italy, Switzerland, Portugal and Austria. ** Naked sports models are not equipped with a cowl. *** Dual-purpose: motorcycles used mainly for off-road riding but also designed to run on paved roads (public roads)

SH300i Asia

In Asia, demand for motorcycles as a primary mode of transportation has continued to grow. Dur- ing calendar 2007, total industry demand in principal Asian countries excluding Japan* rose to approximately 35,500,000 units, as a result of stable economic growth. Amid this business environment, Honda’s consolidated unit sales of motorcycles** declined 16.0%, to 6,633,000 units. Honda has been working to expand as a business with deep roots in this region through more proactive sourcing of local component parts for production. In Asia, particularly in China and India, this strategy has resulted in an increase in sales of Honda-brand motorcycles that are manufactured and sold by affiliate companies accounted for under the equity method. However, because these models do not include any parts supplied by Honda or its consolidated subsidiaries, they are not included in Honda’s consolidated unit sales. Reviewing sales by country, in Thailand, although sales of the Wave series were favorable, sales of existing models weakened. As a result, Honda’s unit sales in Thailand declined 8.2% from the previous fiscal year, to 1,286,000 units. In Vietnam, unit sales in fiscal 2008 climbed 42.9% over the previous fiscal year, to 1,125,000 units. Factors accounting for these increases were the introduction of the first programmed fuel- WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 18 Annual Report 2008 Review of Operations

Air Blade

injection model in April 2007, the Future Neo FI, and the Air Blade, with an automatic transmission. On the production side, to respond to the growing diversity of customer needs and expansion in demand, in July 2007, Honda began construction of its second plant in Vietnam, which will have an annual capacity of 500,000 units. In Indonesia, P.T. Astra Honda Motor, an affiliate accounted for under the equity method, added a new model of the Revo to its lineup of 100cc Cub-type models in April 2007 and introduced a version of the Fit X equipped with disk brakes in August 2007. P.T. Astra Honda Motor also added another new model, the Supra X125, a Cub-type model, to its lineup in September Revo 2007. However, these initiatives were not enough to compensate for the slump in the first half of the year, and unit sales** declined 16.7%, to 2,056,000 units. Indian consolidated subsidiary, Honda Motorcycle and Scooter India Private Limited, reported robust sales of the brand new Shine, a 125cc motorcycle; the Unicorn, a 150cc motorcycle; the Activa scooter, with an automatic transmission; and the Dio motorcycle. In addition, Hero Honda Motors Ltd., an affiliate accounted for under the equity method, reported strong sales of the CD Deluxe 100cc motorcycle; the Splendor NXG, which it introduced in May 2007; and the Glamour, a 125cc motorcycle with cast alloy wheels. For the fiscal year under review, Honda’s total consolidated unit sales** declined 47.5%, to 1,120,000 units. In China, Wuyang-Honda Motors (Guangzhou) Co., Ltd., a Chinese affiliate accounted for un- Glamour der the equity method, experienced favorable sales of its core models, the CGL125 motorcycle, the JOYING scooter and the SCR110 (TUKIN) model with a fuel- injection system. Similarly, another affiliate in China accounted for under the equity method, Sundiro Honda Motorcycle Co., Ltd., recorded robust sales of its key models, the Wave and the M-LIVING, as well as its newly introduced flagship model, the CBF150. Honda’s consolidated unit sales showed a decline of 106,000 units, or 37.7%, from the previous fiscal year.

* Total for eight countries: Thailand, Indonesia, Malaysia, the Philippines, Vietnam, India, Pakistan and China ** Includes unit sales of completed products of Honda and its consolidated subsidiaries and unit sales of parts to Honda’s affiliate companies accounted for under the equity method for use in local production by such companies

Activa WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 19 Motorcycle Business

Other Regions

In Other Regions—including South America, the Middle & Near East, Africa and Oceania—unit sales increased 23.4%, to 1,610,000 units. In Brazil, where strong economic momentum continued, total demand in calendar 2007 increased to 1,690,000 units. Amid this operating environment, Honda posted growth in sales of its core models, the CG150 Titan, the CG125 Fan and the BIZ125 models, and unit sales in Brazil expanded. On the production side, Honda commemorated cumulative production of 10 million units in Brazil in August 2007. In December 2007, annual production capacity in Brazil was expanded by 150,000 units, to 1.5 million units.

Business Plans for Fiscal 2009

BIZ125 Honda has set a target of increasing sales of motorcycles in fiscal 2009, ending March 31, 2009, to 10,620,000 units*, an increase of 13.9%. * In addition to this target, Honda’s affiliate companies in India and China are planning to sell approximately 4,720,000 units under the Honda brand that will not be included in Honda’s consolidated unit sales because these units will not be manufactured with parts supplied by Honda and its consolidated subsidiaries.

In Japan, Honda’s sales in fiscal 2009 are forecast to decline 3.5% from the previous fiscal year, to 300,000 units. CG150 Titan WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 20 Annual Report 2008 Review of Operations

In North America, Honda will begin to market its multi utility vehicle (MUV), Big Red, which is intended for utility and recreational use, in summer 2008. Total sales in fiscal 2009 are forecast to rise 6.0%, to 480,000 units. Unit sales in Europe are expected to decline 1.0%, to 310,000. In Asia, sales are forecast to increase 15.9%, to 7,685,000 units. In Thailand, Honda will also introduce 100cc-class models in the first half of fiscal 2009 equipped with a new engine that has met the emission standard level 6, with a maximum of 15% improvement in fuel efficiency and an increase in power compared with previous engine models, while also featuring a lower price. These new models, equipped with this new engine, will be introduced first in Thailand in summer 2008, and then will be introduced steadily in other countries in Asia beginning from fiscal 2009. These models will be capable of operating on E20 gasoline, which includes a 20% ethanol ratio. Also, in Vietnam, in August 2008, Honda’s second plant in Vietnam will begin operations with an annual capacity of 500,000 units, thus bringing total annual capacity in Vietnam to 1,500,000 units. Third plant of Hero Honda In India, Hero Honda Motors Ltd. began production in April 2008 at its third plant, which has an annual production capacity of 500,000 units. In China, Honda is scheduled to clear new environmental standards in the first half of fiscal 2009 and to steadily introduce new models with improved fuel efficiency. In Other Regions, Honda is expecting sales to increase to 1,845,000 units in fiscal 2009. Expansion of production capacity in Brazil, from 1,350,000 units to 1,500,000 units a year, was completed in December 2007. In addition, plans to increase capacity to 2,000,000 units by early 2009 are also under way. In Japan, the new motorcycle plant at the Kumamoto Factory began production in April 2008. New Kumamoto motorcycle plant With a target of the first half of calendar 2009, Honda is scheduled to gradually transfer motorcycle production from Hamamatsu and the production of large motorcycles from the Ohio plant in the United States and consolidate these activities in the new Kumamoto Factory. Honda has incorporated the most advanced and efficient production technologies into this plant, and it will play the role of the leader plant for Honda’s worldwide motorcycle production.

Big Red WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 21 Automobile Business

Thousands 4,000 Japan Unit Sales Net Sales Thousands 3,000 Yen (millions) North America % % Years ended March 31 2007 2008 change Years ended March 31 2007 2008 change Europe Japan 672 615 (8.5)% Japan2,000 ¥1,412,726 ¥1,321,005 (6.5)% North America 1,788 1,850 3.5 North America 5,179,139 5,209,446 0.6Asia Europe 324 391 20.7 Europe1,000 917,199 1,182,666 28.9 Other Regions Asia 620 755 21.8 Asia 861,612 1,048,463 21.7 0 Other Regions 248 314 26.6 Other Regions04 05 06518,404 07 08727,811 40.4

Total 3,652 3,925 7.5 % Total ¥8,889,080 ¥9,489,391 6.8 %

Unit Sales Net Sales Years ended March 31 Years ended March 31 Thousands Yen (billions) 4,000 Japan 10,000 Japan

8,000 3,000 North America North America

Europe 6,000 Europe 2,000

Asia 4,000 Asia 1,000 Other Regions 2,000 Other Regions

0 0 04 05 06 07 08 04 05 06 07 08 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 22 Annual Report 2008

Yen (billions) 10,000 Japan

8,000 North America

6,000 Europe

4,000 Asia

2,000 Other Regions

0 04 05 06 07 08 Review of Operations

Automobile Business

Honda’s unit sales of automobiles amounted to 3,925,000 units, up 7.5% from the previous fiscal year, primarily because of increased sales in North America, Europe, Asia and Other Regions. Revenue rose 6.8% from the previous fiscal year, to ¥9,489.3 billion, reflecting the rise in the number of units sold and the positive impact of currency translation effects. Operating income posted a gain of 10.4%, to ¥661.6 billion. This was due mainly to the positive effects of higher revenue, cost reductions, price increases and currency effects. These positive factors offset such negative developments as higher sales incentives in North America, the sharp rise in raw material costs, higher SG&A expenses, changes in the model mix as well as increases in R&D costs and depreciation.

Japan Stream

Total automobile demand in Japan* (as measured by the number of registrations of regular vehicles (661cc or higher) and mini-vehicles (660cc or lower)) through December 2007 was below the level of the previous year for 21 consecutive months, thus creating severe market conditions. In fiscal 2008, total demand declined from the previous fiscal year, to approximately 5,320,000 units. Of this total, regular vehicle registrations remained below the level of the previous year throughout the fiscal year and amounted to approximately 3,430,000 units, despite the positive impact on sales of the Tokyo Motor Show in the latter half of fiscal 2008 and the introduction of new models by various automakers. Registrations of mini-vehicles amounted to about 1,890,000 units, also below the level of the previous fiscal year. This was partly because of a decline of the positive impact of the introduction of new types of mini-vehicles, in spite of the continued interest among drivers in owning these vehicles. Amid this operating environment, Honda’s unit sales in Japan during fiscal 2008 declined 8.5%, to 615,000 units. This was partly due to the decline in the sales of the Zest and Life in the mini-vehicle category, despite strong sales in the regular vehicle category where sales of the Stream and CR-V continued to be strong, and sales of the new models such as the Fit and Inspire were robust. The second-generation Fit, which was introduced in October 2007, features advances in packaging, utility, drivability and environmental responsibility. Also, the new Fit was selected as the Car of the Year Japan 2007-2008 by the Japan Car of the Year Executive Committee, as the first-generation Fit had previously achieved. The Fit has been widely acclaimed by a broad range of customers, and cumulative sales from the time of the introduction of the first-generation Fit through November 2007 have exceeded one million units. In terms of the number in domestic car registrations, the Fit placed first in fiscal 2008. * Source: JAMA (Japan Automobile Manufacturers Association)

Fit WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 23 Automobile Business

North America

In calendar 2007, total demand in the United States declined from the previous year, to 16,150,000 units. A decline in new car demand became clear toward the end of the year as consumer interest in purchasing new automobiles declined substantially due to such factors as the increase in oil prices and the turmoil in financial markets stemming from the subprime mortgage crisis. In addition, the market continued to shift from light truck models, such as large sport utility vehicles (SUVs) and pickup trucks, toward more fuel-efficient small-size passenger cars and crossover utility vehicles (CUVs). Amid these operating conditions, unit sales of Honda automobiles in North America during fiscal 2008 rose 3.5%, to 1,850,000 units, despite a decline in sales of the Pilot, as sales of the small-size Fit and the CR-V in the CUV category continued to be strong, and a favorable sales performance was recorded for the core Accord and Civic models. In the production area, in Mexico, where sales are expanding steadily, Honda shifted the model for production at the factory from the Accord to the CR-V, which is in strong demand in its domestic market, while also increasing production capacity from 30,000 units a year to 50,000 units in September 2007.

Europe Civic (North American model)

Total demand in Europe* in calendar 2007 amounted to approximately 15,960,000 units, about the same as in calendar 2006. This was because the total demand in Germany, Europe’s largest market, was below the levels of the previous year for 12 consecutive months, despite the continuing growth of the markets in Central and Eastern European countries. Total demand in Russia in calendar 2007 showed strong growth, to about 2,580,000 units, as a result of strong economic conditions accompanying the rise in prices of crude oil and other resources that Russia possesses as well as the rapid expansion of automobile loan financing in that country. Amid this operating environment, during fiscal 2008, Honda’s automobile sales increased 20.7%, to 391,000 units. Factors accounting for this performance were the expansion in sales of diesel-powered cars as well as favorable sales for the new model CR-V, which was introduced WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 24 Annual Report 2008 Review of Operations

in January 2007, and the three-door Type S as well as Type R models in the Civic series, and strong sales of the sedan-type models, such as Accord and Civic four-door sedans, especially in Russia. In the area of production, Honda of the U.K. Manufacturing Ltd., our consolidated subsidiary, expanded the production shifts from February 2007 to meet the expanding demand for the Civic and CR-V. As a result, the output for fiscal 2008 increased 29.7%, to 247,000 units, and the cumulative production at the plant reached two million units in February 2008. * Source: Association des Constructeurs Européens d’Automobiles (the European automobile association) (Passenger cars, figures include 25 EU countries and 3 European Free Trade Association (EFTA) countries)

Asia

CR-V In Asia, total demand in principal countries* in calendar 2007 increased, to approximately 14,330,000 units, as a result of stable economic expansion. Unit sales of Honda automobiles in Asia** during fiscal 2008 expanded 21.8%, to 755,000 units. By country, sales of the Civic and the new CR-V that were introduced in early 2007 showed favorable expansion in Indonesia, India and other countries. In China, sales were strong for the City and Odyssey by Guangzhou Honda Automobile Co., Ltd., an affiliate accounted for under the equity method, and for the Civic and CR-V which was introduced in April 2007 by Dongfeng Honda Automobile Co., Ltd., also an equity-method affiliate. In production, Honda began construction of a second plant in Thailand in July 2007, which will have a maximum annual production capacity of 120,000 units with an eye to further expansion in demand both in Thailand and other parts of Asia and Oceania. In addition, construction of a second plant in India, which will have an annual capacity of 60,000 units, began in July 2007, and work on expanding the capacity at the existing first plant from 50,000 units to 100,000 units was Cumulative production at the Thai plant completed in January 2008. Through these expansion activities, Honda is preparing to respond to reaches 1 million rising demand for its automobiles. To note, cumulative production in Thailand reached one million units in December 2007. * The total includes Thailand, Indonesia, Malaysia, the Philippines, Vietnam, Singapore, Taiwan, Korea, India, Pakistan and China. ** Total of sales of finished automobiles of Honda and its consolidated subsidiaries, and unit sales of parts to Honda’s affiliate companies accounted for under the equity method for use in local production by such companies WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 25 Automobile Business

Other Regions

In calendar 2007, major markets in the Other Regions geographical segment expanded against a background of increasing crude oil and other raw material prices. Compared with the previous year, the Brazilian automobile market* grew to approximately 2,460,000 units, while the Austra- lian market** expanded to approximately 1,050,000 units. Markets in the Middle East and South American markets other than Brazil also experienced overall expansion. Amid these operating conditions, Honda’s unit sales in the Other Regions during fiscal 2008 expanded 26.6%, to 314,000 units. In Brazil, sales of Civic and Fit flexible fuel vehicle (FFV) models which are able to operate on 100% ethanol or a mixture of gasoline and ethanol were quite robust, while in other countries, sales of the CR-V and Civic were strong. In the production area, to meet expanding demand in Brazil, in July 2007 Honda increased the annual production capacity of its Brazilian plant from 80,000 units to 100,000 units. Also, in Argentina, Honda began construction work in November 2007 on a new plant that is scheduled to go into operation in the latter half of calendar 2009 and will have an annual capacity of 30,000 units. This new plant will respond to expanding domestic demand in Argentina, and, together with Honda’s Brazilian automobile plant, will form the automobile production bases for the South Ground-breaking ceremony for the new automobile plant in Argentina American market. * Source: Associação Nacional dos Fabricantes de Veiculos Automotores (the Brazilian automobile association) ** Source: Federal Chamber of Automotive Industries (the Australian automobile association)

Business Plan for Fiscal 2009

Honda has set a target for fiscal 2009, ending March 31, 2009, of expanding total unit sales of automobiles 5.5%, to 4,140,000 units. In Japan, conditions in the automobile market are expected to remain challenging, but Honda will work to further expand sales of models showing strong sale performances, including the new Fit and the new Inspire, and will also implement measures to strengthen the product lineup and expand sales as we introduce new models, such as the Freed, in May 2008. In addition, in the marketing and service field, Honda is working to accelerate the strengthening of its sales and Freed WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 26 Annual Report 2008 Review of Operations

service structures through the consolidation of sales channels and continues to strive to maximize lifetime customer satisfaction. In fiscal 2009, Honda has set a target of selling 620,000 automobiles in Japan, 0.8% higher than in fiscal 2008. A substantial decline is forecasted for the total demand in the U.S. market in 2008 amid the uncertainty about future trends in the economy, including concern about the effects of the subprime mortgage crisis spreading to the real economy and rising gasoline prices. Under these difficult market conditions, Honda will continue to focus on models that already have favorable sales performances, including the Accord, Civic and CR-V, while also adding four new models, including the all-new Acura TSX and Honda Pilot, which were introduced in spring 2008, as well as the new Honda Fit and Acura TL, which are scheduled for introduction in fall 2008. Through these marketing activities, Honda intends to respond to the needs of its customers in North America by offering them new products featuring industry-leading levels of fuel efficiency, quality and reliability. Although conditions currently facing Honda are challenging, in its production activities it will implement measures to increase local production and strengthen its base in North America. To this end, Honda is moving ahead with construction of its new Indiana plant in the United States with annual capacity of 200,000 units and a new automobile engine plant in Canada. Work on both these plants is proceeding smoothly with a target start-up date in fall 2008. In Europe, continued market growth is expected in Russia, the Ukraine and the countries of Central and Eastern Europe. Honda will work to expand sales of the CR-V and Civic, which are experiencing favorable sales performances, and introduce the new Accord with full model changes in June 2008 and new Jazz with a full model change in September 2008. Through these and other initiatives, Honda will strive to increase the appeal of its products and expand sales in the European region. The new, eighth-generation Accord for the European market will solidly establish Honda’s position in this segment. The new Accord will be available in three types, with 2.0-liter and 2.4-liter i-VTEC gasoline engines and with a newly developed 2.2-liter i-DTEC diesel engine, which Honda is mass- producing for the first time. These Honda automobiles meet the Euro 5 emissions standards, scheduled to go into effect in 2009, ahead of the requirement.

Accord (European model) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 27 Automobile Business

Along with these initiatives to enhance the appeal of Honda products, Honda is taking steps to expand its marketing network, especially in the fast-growing Russian market, and has set a goal of having approximately 70 dealers in operation within a few years. In the production area, to respond to the expansion in sales of diesel engines in the European region, Honda will expand diesel engine production from Japan to Europe step by step and further localize its European operations. Honda is aiming for a 20.2% increase in annual sales in Europe in fiscal 2009, to 470,000 units. In Asia, the Chinese market is expected to experience further growth, and many observers are looking for the total automobile market (passenger vehicles + commercial vehicles) to exceed 10 million units in calendar 2008. In other parts of Asia, especially the countries of Southeast Asia, market expansion is expected to continue. In these markets, Honda will focus on the Civic and CR-V that are experiencing favorable sales performances, while also endeavoring to increase the appeal of its products and increase sales through full model changes on core models, such as

Acura dealer in China the new Accord, introduced in Asia from the end of 2007, and new Jazz, to be introduced during 2008 to 2009. To respond to the market expansion in India, Honda is aiming to continue to expand its sales network to 160 dealers over the next three years. Similarly, in China, Guangzhou Honda and Dongfeng Honda, affiliate companies accounted for under the equity method, are expanding their sales networks. At the same time, the Acura brand marketing network is being expanded along with activities to build the brand. In the Chinese market as a whole, the goal is to have a network of 700 dealers in total for the Honda and Acura brands by the end of 2008. In the production area, to meet growing demand in Southeast Asia, Honda is scheduled to start production at a new plant in Thailand in the latter half of 2008. In fiscal 2009, Honda’s target for unit sales in the Asian region as a whole is 920,000 units, an Rendering of second automobile plant in Thailand increase of 21.9%. In Other Regions, Honda is expecting further market expansion, as economic conditions remain favorable in Brazil, Australia and countries of the Middle East. In addition to continued favorable sales of the Civic and CR-V models, Honda is expecting an additional sales increase of the new Accord. As a result, Honda is aiming for growth in the unit sales in Other Regions in fiscal 2009 of 14.6% over the previous fiscal year, to 360,000 units. On the production side, to respond to strong demand in Brazil, Honda is working to expand annual production capacity of its Brazilian plant from 100,000 units to 120,000 units by August 2008.

VCM engine WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 28 Annual Report 2008 Power Product and Other Businesses

Thousands 8,000 Japan Unit Sales Net Sales Thousands 6,000 Yen (millions) North America % % Years ended March 31 2007 2008 change Years ended March 31 2007 2008 change Europe Japan 527 550 4.4 % Japan4,000 ¥145,214 ¥147,775 1.8 % North America 3,103 2,415 (22.2) North America 128,552 109,445 (14.9)Asia Europe 1,625 1,693 4.2 Europe2,000 87,143 96,847 11.1 Other Regions Asia 760 915 20.4 Asia 35,003 39,449 12.7 0 Other Regions 406 484 19.2 Other Regions04 05 06 21,830 07 08 27,678 26.8

Total 6,421 6,057 (5.7)% Total ¥417,742 ¥421,194 0.8 %

Unit Sales Net Sales Years ended March 31 Years ended March 31 Thousands Yen (billions) 8,000 Japan 500 Japan

400 6,000 North America North America

Europe 300 Europe 4,000

Asia 200 Asia 2,000 Other Regions 100 Other Regions

0 0 04 05 06 07 08 04 05 06 07 08 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 29

Yen (billions) 500 Japan

400 North America

300 Europe

200 Asia

100 Other Regions

0 04 05 06 07 08 Power Product and Other Businesses

Power Product and Other Businesses

Honda’s sales of power products in fiscal 2008 totaled 6,057,000 units, down 5.7% from the previous fiscal year. Revenue increased 0.8%, to ¥421.1 billion, due mainly to the positive impact of foreign currency translation effects. Operating income declined 38.2%, to ¥22.3 billion, from the previous fiscal year, due mainly to the negative impact of the increased SG&A expenses and an increase of R&D expenses in other businesses, which offset the positive impact of the foreign currency effects caused by the appreciation of the European currencies.

Japan

Cogeneration system for household use In Japan, unit sales grew 4.4%, to 550,000 units. These gains were due primarily to higher sales of pumps, sales of GX series engines for electric power generators and other products on an original equipment manufacturer (OEM*) basis and sales of compact, home-use cogeneration systems for household use.** * OEM (original equipment manufacturing): OEM refers to the manufacturing of products and components supplied for sale under a third-party brand. ** Compact, home-use cogeneration systems: Honda has applied its original electromagnetic inverter technologies to create small and light-weight electronic power generation systems built with an efficient layout. These systems are compact and suitable for home use and have an overall energy efficiency of 85%.

North America

Sales in North America declined 22.2%, to 2,415,000 units. Factors accounting for these declines were weakness in sales of engines for OEM use in high-pressure washers and lawn mowers and weakness in sales of lawn mowers, generators and other products, due mainly to the slowdown in the housing market caused by the subprime loan issue mainly in the United States. GCV 191

Europe

In Europe, sales expanded 4.2%, to 1,693,000 units. Sales of GCV series engines for OEM use in lawn mowers and sales of GX series engines for OEM use in generators, construction machinery and other applications expanded.

Asia

Unit sales in Asia, excluding Japan, increased 20.4% from the previous fiscal year, to 915,000 units, as a result of higher sales of general-purpose engines in China, general-purpose engines and pumps in Indonesia and India as well as other factors.

Other Regions

GX 630 In Other Regions, unit sales for fiscal 2008 rose 19.2%, to 484,000 units, mainly as a result of increased sales of general-purpose engines in Brazil and higher sales of electric power generators in Australia and South Africa. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 30 Annual Report 2008 Review of Operations

Business Plans for Fiscal 2009

For fiscal 2009, Honda has set a target of selling 6,155,000 units, 1.6% higher than infiscal 2008. In Japan, Honda will work to expand sales of the GX series general-purpose engines, which are recording strong sales, and develop new sources of demand for its OEM production. In addition, Honda has become the first automaker to enter the solar cell business, and, by manufacturing and selling clean sources of energy that do not make use of fossil fuels, Honda is endeavoring to contribute to the prevention of global warming. In October 2007, consolidated subsidiary Honda Soltec Co., Ltd. began nationwide sales of Honda’s originally developed thin-film solar cells through its network of sales outlets that market and install solar cells. In the United States, Honda believes that challenging market conditions will continue. For this reason, unit sales of general-purpose engines will show a declining trend, but Honda will work to maintain sales at the level of the previous fiscal year by introducing new types of finished products, including generators. In Europe, the outlook is for stable construction demand, and Honda is expecting to sell about the same number of engines for OEM use in construction equipment as in the previous fiscal year. Also, for core products such as lawn mowers and products such as generators that are recording strong sales, Honda will work to increase sales by expanding its marketing network and adopting BF50 other measures, such as aggressively entering Eastern European markets. In Asia, Honda will endeavor to expand sales of the GX series engines and draw on the competitiveness of its products made in Thailand and China. In the field of aviation, subsidiary Honda Aircraft Company, Inc. has begun to take orders for HondaJets from potential customers in the United States, Canada, Mexico and countries in Europe. Going forward, Honda will expand these sales initiatives worldwide. In addition, Honda Aero, Inc., which is the company responsible for aircraft engine business, has begun to build a new headquarters building and engine plant on land adjacent to the airport in Burlington, North Carolina. Production is scheduled to begin in 2010, and thereafter, within about one year, production will be increased to a target level of 200 jet engines a year.

Thin-membrane solar battery arrays

HondaJet WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 31 Financial Services Business

Yen (billions) 600 Japan

Net Sales Finance500 Subsidiaries—Receivables, Net Yen (millions) Yen (millions) North America % 400 % Years ended March 31 2007 2008 change Years ended March 31 2007 2008 change Europe Japan ¥ 21,497 ¥ 23,405 8.9% Non-current300 ¥3,208,778 ¥2,884,264 (10.1)% Asia North America 364,892 483,925 32.6 Current200 1,935,921 1,817,033 (6.1) Europe 12,642 13,234 4.7 Total100 ¥5,144,699 ¥4,701,297Other(8.6)% Regions Asia 3,150 4,936 56.7 Note: The0 finance subsidiaries—receivables category above includes items Other Regions 7,520 8,053 7.1 that have04 been reclassified 05 06 as trade 07 receivables 08 and other assets. For more detailed information, refer to Note 4 to the consolidated Total ¥409,701 ¥533,553 30.2% financial statements, Finance Subsidiaries—Receivables and Securitizations.

Net Sales Finance Subsidiaries—Receivables, Net Years ended March 31 Years ended March 31

Yen (billions) Yen (billions) 600 Japan 6,000

500 North America 4,500 400 Europe Non-current 300 3,000

Asia 200 Current 1,500 100 Other Regions

0 0 04 05 06 07 08 04 05 06 07 08 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 32 Annual Report 2008

Yen (billions) 6,000

4,500

Non-current 3,000

Current 1,500

0 04 05 06 07 08 Review of Operations

Financial Services Business

To support the sale of its products, Honda provides financial services to its customers (including retail lending and leasing) and wholesale financing to its dealers through financial services subsidiaries in Japan, the United States, Canada, the United Kingdom, Germany, Brazil and Thailand. As a result of increased sales of automobiles, mainly in North America, credit assets and property on operating leases of financial subsidiaries rose 3.4% from the previous fiscal year, to ¥4,967.5 billion.

In fiscal 2008, revenue rose 30.2%, to ¥533.5 billion from the previous fiscal year due mainly Motorcycle Business to an increase in operating lease* revenue. Operating income rose 2.0%, to ¥117.7 billion, from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting from a higher loan balance in North America, which offset the negative impact of the increased SG&A expenses caused by an increase of provisions for credit losses.

* Honda’s finance subsidiaries in North America have historically accounted for all leases as direct financing leases. However, starting in the year ended March 31, 2007, some of the leases which do not qualify for direct financing leases accounting treatment are accounted for as operating leases. Generally, direct financing lease revenues and interest income consist of the recognition of finance lease revenue at inception of the lease arrangement and subsequent recognition of the interest income component of total lease payments using the effective interest method. In comparison, operating lease revenues include the recognition of the gross lease payment amounts on a straight-line basis over the term of the lease arrangement, and operating lease vehicles are depreciated to their estimated residual value on a straight-line basis over the term of the lease. It is not anticipated that the differences in accounting for oper- Automobile Business ating leases and direct financing leases will have a material net impact on the Company’s results of operations overall; however, operating lease revenues and associated depreciation of leased assets do result in differing presentation and timing compared to those of direct financing leases.

Business Plan for Fiscal 2009

In fiscal 2009, although the slowdown in the U.S. economy will continue, customer needs for financial services, principally in North America, are expected to increase, leading to a higher balance of credit assets in Honda’s financial services business. Going forward, as in the past, Honda will apply strict credit criteria when considering the approval of financing contracts and strengthen its methods for recovering its credit exposure to maintain a high-quality portfolio of credit assets and will work to substantially further improve its financial services. Power Product and Other Businesses WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 33 Preparing for the Future

In the global economy, there are concerns of economic slowdowns 5. Safety Technologies in the U.S., Europe and Japan. In addition, the pace of economic Honda is working to develop safety technologies that enhance expansion in Asia outside Japan is expected to decline. Moreover, accident prediction and prevention, technologies to help reduce the global business environment in which Honda’s management the risk of injuries to passengers and pedestrians from car acci- operates still remains uncertain because of global political and eco- dents, and technologies that enhance compatibility between large nomic uncertainties, fluctuations in oil and raw material prices, and and small vehicles, as well as expand its lineup of products in- movements in currency, finance and capital markets. As a result, corporating such technologies. Honda will reinforce and continue Honda expects the operating environment to remain difficult. to advance its contribution to traffic safety in motorized societies It is under these circumstances that Honda seeks to strength- in Japan and abroad. Honda also intends to remain active in a en its corporate structure quickly and flexibly to meet the require- variety of traffic safety programs, including advanced driving and ments of its customers and society and the changes in its business motorcycling training schemes provided by local dealerships. environment. Also, in order to improve the competitiveness of its products, Honda will endeavor to enhance its R&D, production 6. The Environment and sales capabilities. Furthermore, Honda will continue striving Honda will step up its efforts to create better, cleaner and more to earn even more trust and understanding from society through fuel-efficient engine technologies and to further improve recycla- companywide activities. Honda recognizes that further enhancing bles throughout its product lines. Honda will also work to advance the following specific areas is essential to its success: fuel cell technology and steadily promote its new solar cell business. In addition, Honda will further its efforts to minimize its envi- 1. Research and Development ronmental impact. To this end, we set global targets to reduce the Along with efforts to develop even more effective safety and en- environmental burden as measured by the Life Cycle Assessment* vironmental technologies, Honda will enhance creativity in its in all areas of business, spanning production, logistics and sales. advanced technology and products, and will create and swiftly *Life Cycle Assessment: A comprehensive system for quantifying the impact Honda’s products have on the environment at the different stages in their life cycles, from introduce new value-added products that meet specific needs in material procurement and energy consumption to waste disposal. various markets around the world. Honda will also continue its efforts to conduct research on future technologies. 7. Continuing to Increase Society’s Trust in and Understanding toward Honda 2. Production Efficiency In addition to continuing to provide products incorporating Hon- Honda will establish and enhance efficient and flexible production da’s advanced safety and environmental technologies, Honda will systems and expand production capacity at its global production continue striving to earn even more trust and understanding from bases, with the aim of increasing its capability of supplying high- society by, among other things, undertaking activities for corpo- quality products. rate governance, compliance, and risk management and contributing to society. 3. Sales Efficiency Through these Companywide activities, Honda will strive to Honda will remain proactive in its efforts to expand product lines materialize Honda’s visions of “Value Creation (Creating New Value through the innovative use of IT and to upgrade the sales and ser- for Our Customers),” “Glocalization (Expanding Regional Opera- vice structure, in order to further satisfy its customers. tions),” and “Commitment to the Future (Developing Safety and Environmental Solutions),” with the aim of sharing joy with Honda’s 4. Product Quality customers, thus becoming a company that society wants to exist. Responding to increasing customer demand, Honda will upgrade its quality control through enhancing the functions of and coordination among the development, purchasing, production, sales and service departments. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 34 Annual Report 2008 Risk Factors 0

Relating to Honda’s Industry 30

1. Honda may be adversely affected by market conditions competition, which is increasing, short-term fluctuations in de- Honda conducts its operations in Japan and throughout the world, mand from underlying economic conditions, changes in tariffs, including North America, Europe and Asia. A continued economic import regulations and other taxes, shortages of certain supplies, slowdown, recession or sustained loss of consumer confidence in high material prices and sales incentives by Honda or other manu- these markets, which may be caused by rising fuel prices or other facturers or dealers. There can be no assurance that such price 0 factors, could trigger a decline in demand for automobiles, mo- volatility will not continue or intensify or that price volatility will not 60 torcycles and power products that may adversely affect Honda’s occur in markets that to date have not experienced such volatil- results of operations. ity. Overcapacity within the industry has increased and will likely continue to increase if the economic downturn continues in Hon- 2. Prices for automobiles, motorcycles and power da’s major markets or worldwide, leading, potentially, to further products can be volatile increased price pressure. Price volatility in any or all of Honda’s Prices for automobiles, motorcycles and power products in cer- markets could adversely affect Honda’s results of operations in a 30 tain markets may experience sharp changes over short periods particular period. 90 of time. This volatility is caused by many factors, including fierce

Risks Relating Honda’s Business Generally 60 120 Currency and Interest Rate Risks expects to continue to enter into, such hedging arrangements. As with all hedging instruments, there are risks associated with 1. Honda’s operations are subject to currency fluctuations the use of such instruments. While limiting to some degree our Honda has manufacturing operations throughout the world, in- risk fluctuations in currency exchange and interest rates by utiliz- cluding Japan, and exports products and components to vari- ing such hedging instruments, Honda potentially forgoes benefits ous countries. Honda purchases materials and sells its products that might result from other fluctuations in currency exchange and 90 in foreign currencies. Therefore, currency fluctuations may affect interest rates. Honda is also exposed to the risk that its counter- 150 Honda’s pricing of products sold and materials purchased. Ac- parties to hedging contracts will default on their obligations. Hon- cordingly, currency fluctuations have an effect on Honda’s results da manages exposure to counterparty credit risk by limiting the of operations and financial condition, as well as Honda’s competi- counterparties to major international banks and financial institu- tiveness, which will over time affect its results. Since Honda ex- tions meeting established credit guidelines. However, any default ports many products and components from Japan and generates by such counterparties might have an adverse effect on Honda. 120 a substantial portion of its revenues in currencies other than the 180 Japanese yen, Honda’s results of operations would be adversely Legal and Regulatory Risks affected by an appreciation of the Japanese yen against other currencies, in particular the U.S. dollar. 1. The automobile, motorcycle and power product industries are subject to extensive environmental 2. Honda’s hedging of currency and interest rate risk exposes and other governmental regulation Honda to other risks Regulations regarding vehicle emission levels, fuel economy, noise 150 Although it is impossible to hedge against all currency or interest and safety and noxious substances, as well as levels of pollut- 210 rate risk, Honda uses derivative financial instruments in order to ants from production plants, are extensive within the automobile, reduce the substantial effects of currency fluctuations and inter- motorcycle and power product industries. These regulations are est rate exposure on our cash flow and financial condition. These subject to change, and are often made more restrictive. The costs instruments include foreign currency forward contracts, cur- to comply with these regulations can be significant to Honda’s rency swap agreements and currency option contracts, as well operations. 180 as interest rate swap agreements. Honda has entered into, and 240 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 35 210 270

240

270 Risk Factors

2. Honda is reliant on the protection and preservation of These factors include the ability of its suppliers to provide a con- its intellectual property tinued source of supply and Honda’s ability to compete with other Honda owns or otherwise has rights in a number of patents and users in obtaining the supplies. Loss of a key supplier in particular trademarks relating to the products it manufactures, which have may affect our production and increase our costs. been obtained over a period of years. These patents and trademarks have been of value in the growth of Honda’s business and 3. Honda conducts its operations in various regions may continue to be of value in the future. Honda does not regard of the world any of its businesses as being dependent upon any single patent Honda conducts its businesses worldwide, and in several coun- or related group of patents. However, an inability to protect this tries, Honda conducts businesses through joint ventures with local intellectual property generally, or the illegal breach of some or a entities, in part due to the legal and other requirements of those large group of Honda’s intellectual property rights, would have an countries. These businesses are subject to various regulations, adverse effect on Honda’s operations. including the legal and other requirements of each country. If these regulations or the business conditions or policies of these local en- 3. Honda is subject to legal proceedings tities change, it may have an adverse affect on Honda’s business, Honda is subject to a number of suits, investigations and/or pro- financial condition or results of operations. ceedings under relevant laws and regulations of various jurisdictions. A negative outcome in one or more of these pending legal 4. Honda may be adversely affected by wars, use of proceedings could adversely affect Honda’s business, financial force by foreign countries, terrorism, multinational conflicts, condition or results of operations. natural disasters, epidemics and labor strikes Honda conducts its businesses worldwide, and its operations may Risks Relating to Honda’s Operations variously be subject to wars, use of force by foreign countries, terrorism, multinational conflicts, natural disasters, epidemics, labor 1. Honda’s financial services business conducts business strikes and other events beyond our control which may delay or under highly competitive conditions in an industry with disrupt Honda’s local operations in the affected regions, including inherent risks the purchase of raw materials and parts, the manufacture, sales Honda’s financial services business offers various financing plans and distribution of products and the provision of services. Delays designed to increase the opportunity for sales of its products or disruptions in one region may in turn affect our global opera- and to generate financing income. However, customers can also tions. If such delay or disruption occurs and continues for a long obtain financing for the lease or purchase of Honda’s products period of time, Honda’s business, financial condition or results of through a variety of other sources that compete with our financ- operations may be adversely affected. ing services, including commercial banks and finance and leasing companies. The financial services offered by us also involve risks 5. Honda may be adversely affected by inadvertent relating to residual value, credit risk and cost of capital. Competi- disclosure of confidential information tion for customers and/or these risks may affect Honda’s results Although Honda maintains internal controls through established of operations in the future. procedures to keep confidential information including personal information of its customers and relating parties, such informa- 2. Honda relies on various suppliers for the provision of tion may be inadvertently disclosed. If this occurs, Honda may be certain raw materials and components subject to, and may be adversely affected by, claims for damages Honda purchases raw materials, and certain components and from the customers or parties affected. Also, inadvertent disclo- parts, from numerous external suppliers, and relies on some key sure of confidential business or technical information to third par- suppliers for some items and the raw materials it uses in the man- ties may result in a loss of Honda’s competitiveness. ufacture of its products. Honda’s ability to continue to obtain these supplies in an efficient and cost-effective manner is subject to a number of factors, some of which are not within Honda’s control. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 36 Annual Report 2008 0

Corporate Governance 60

Basic Position 0 90

Based on its fundamental corporate philosophy, the Company is fundamental corporate philosophy. For example, separate head- working to enhance corporate governance as one of its most im- quarters have been set up for each region, business, and function, portant management issues. Our aim is to have our customers and a general manager from the Board of Directors or an operating and society, as well as our shareholders and investors, place even officer has been assigned to each headquarters and main division. greater trust in us and to ensure that Honda is “a company that In addition, the Executive Council deliberates important matters 30 society wants to exist.” concerning management, and regional operating boards deliber- 120 To ensure objective control of the Company’s management, ate important matters concerning management of their respec- outside directors and outside corporate auditors are appointed to tive regions. The result is a system that functions effectively and the Board of Directors and the Board of Corporate Auditors, which efficiently, and addresses the needs of customers and societies are responsible for the supervision and auditing of the Company. around the world in a swift and appropriate manner. Honda has also introduced an operating officer system, aimed at With respect to internal control, each division within the Com- 60 strengthening both the execution of business operations at the pany is working autonomously to strengthen legal and ethical com- regional and local levels and the supervision by the Board of Di- pliance and risk management. The task of the Audit Office is to carry 150 rectors. The term of office of each director is limited to one year, out effective audits of the performance of each division’s business. and the amount of remuneration payable to them is determined To enhance even further the trust and understanding of share- according to a standard that reflects their performance in the Com- holders and investors, Honda’s basic policy emphasizes the ap- pany. Our goal in doing this is to maximize the flexibility with which propriate disclosure of company information, such as by disclosing our directors respond to changes in the operating environment. financial results on a quarterly basis and timely and accurately giving 90 With respect to business execution, Honda has established public notice of and disclosing its management strategies. Honda 180 a system for operating its organizational units that reflects its will continue raising its level of transparency in the future.

Management Organization of the Company’s Corporate Governance for Decision Making, Execution, Supervision and Others 120 Board of Corporate Auditors 5 auditors Board of Directors 21 directors (Outside Corporate Auditors 3 auditors) (Outside Directors 2 directors) 210

Business Ethics Committee 6 officers Executive Council Business Ethics Improvement President & CEO Proposal Line Compliance Officer Risk Management Officer 9 directors

Honda Driving Safety Promotion Center Regional Sales Regional Operations Regional Operations Regional Operations Regional Operations Regional Operations Corporate Planning Division Operations (Europe, the Middle & (North America) (Latin America) (Asia / Oceania) (China) Corporate Communications Division (Japan) Near East and Africa) 150 New Business Development and Planning Office Aero Engine Business Office 240 Aircraft Operation Office Regional Operating Regional Operating Regional Operating Regional Operating Regional Operating Regional Operating Motorcycle Quality Innovation Division Board Board Board Board Board Board Auto Quality Innovation Division (Europe, the Middle & (Japan) (North America) (Latin America) (Asia / Oceania) (China) Power Product Quality Innovation Division Near East and Africa) Quality Assurance Division Certification & Regulation Compliance Division IT Division Motorcycle Operations 180 Automobile Operations Power Product Operations 270 Customer Service Operations Production Operations Domestic Factories Purchasing Operations Business Support Operations Business Management Operations Corporate Project 210 Quality Audit & Compliance Division Audit Office 28 staff Corporate Auditors Office 3 staff Honda R&D Co., Ltd. Honda Engineering Co., Ltd. (As of June 30, 2008) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 37 240

270 Corporate Governance

Management Organization The Company has appointed outside director Kensaku Ho- gen to receive advice on its corporate activities from an objective, Board of Directors broad-ranging, and advanced viewpoint based on extensive ex- The Board of Directors consists of 21 directors, including two out- perience and a high level of insight in diplomacy. side directors, and determines important items that are related to Outside director Satoru Kishi attended six of the seven Board business execution or that are designated by law and supervises of Directors’ meetings held during the fiscal year and commented business execution. as necessary during the deliberation of proposals. In fiscal 2008, the Board of Directors met seven times. Outside director Kensaku Hogen attended all seven of the Board of Directors’ meetings held during the fiscal year and com- Matters and Requirements for Resolution by the Company’s mented as necessary during the deliberation of proposals. General Meetings of Shareholders There is no particular relationship between the Company and The Articles of Incorporation of the Company currently in effect outside director Satoru Kishi. sets forth, among other matters, the matters for resolution by There is no particular relationship between the Company and the Company’s general meetings of shareholders and the re- outside director Kensaku Hogen. quirements for such resolutions, some of which are described The Board of Directors also provides information on items of as below. business and other topics as necessary to outside directors. The number of Directors of the Company shall be not more than thirty. Board of Corporate Auditors Directors shall be elected by the resolution of a general meet- The Board of Corporate Auditors consists of five corporate au- ing of shareholders. Resolutions for such elections shall be ad- ditors, including three outside corporate auditors. In accordance opted by a majority of the votes of the shareholders present, who with the Company’s auditing standards, auditing policies, appor- must hold one-third or more of the votes of all shareholders who tionment of responsibilities, and other such matters as determined are entitled to exercise their voting rights. Resolutions for the elec- by the Board of Corporate Auditors, each corporate auditor audits tion of Directors shall not be made by cumulative voting. the directors’ execution of duties. Corporate auditors accomplish The Company may determine the matters relating to distribu- these audits through various means, including attending meetings tion of surplus, which are described in each item in Paragraph 1, of the Board of Directors and inspecting the state of the Com- Article 459, of the Company Law by a resolution of the Board of pany’s assets and liabilities. In addition, a Corporate Auditors’ Directors. (The purpose of such provisions of the Articles of Incor- Office was established to provide direct support to the Board of poration is to enable the Company to implement its capital policy Corporate Auditors. and dividend policy in a flexible manner. On the other hand, it is The Company maintains Standards for Reporting to Corporate the Company’s policy that the year-end cash dividends should be Auditors to ensure that relevant matters are reported to corporate determined by a resolution of a general meeting of shareholders.) auditors in a timely and accurate manner. The standards require A special resolution at a general meeting of shareholders shall regular reports to be submitted to corporate auditors on the busi- be adopted by two-thirds or more of the votes of the sharehold- ness conditions of the Company and its subsidiaries, the mainte- ers present, who must hold one-third or more of the votes of all nance and operation of internal control systems, and any other shareholders who are entitled to exercise their voting rights. (The matters that would have a substantial impact on the Company or quorum for a special resolution at a general meeting of sharehold- its subsidiaries. In addition, corporate auditors are required to at- ers has been lowered by the Company’s Articles of Incorporation tend Executive Council and other important meetings. to one-third of the voting rights, which is the minimum requirement In fiscal 2008, the Board of Corporate Auditors met 13 times. provided by the Company Law, in order to ensure obtaining a re- The Board of Corporate Auditors has certified Shinichi Saka- quired quorum for special resolutions.) moto, a corporate auditor of the Company, as an “audit committee financial expert,” as set out in the rules of the Securities Outside Directors and Exchange Commission pursuant to Section 407 of the U.S. The Company has appointed outside director Satoru Kishi to re- Sarbanes-Oxley Act of 2002. As stipulated in Item 8, Article 121, ceive advice on its corporate activities from an objective, broad- of the Company Law Enforcement Regulations, Shinichi Sakamoto ranging, and advanced viewpoint based on extensive experience has substantial knowledge related to finance and accounting. and a high level of insight in corporate management. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 38 Annual Report 2008 In fiscal 2008, meetings between the Company’s corporate Yuji Matsuda serves as president and director of Mitsubishi UFJ auditors and its independent auditor were held on six occasions. Trust Investment Technology Institute Co., Ltd. There is no particu- At those meetings, the independent auditor provided the corpo- lar relationship between this organization and the Company. rate auditors with explanations and reports on accounting audit The Board of Directors also provides information on items plans and results, and opinions were exchanged. of business and other topics as necessary to outside corporate The corporate auditors coordinate closely with the Audit Of- auditors. fice, which is responsible for internal audits, with respect to audit policies and schedules. In fiscal 2008, corporate auditors and the Directors’ Remuneration Audit Office, either independently or in collaboration, conducted The total amount of remuneration and bonuses of directors and business audits of a total of 108 companies among Honda’s do- corporate auditors is determined according to criteria that reflect mestic and overseas subsidiaries and affiliates. their performance in the Company. Remuneration for directors and corporate auditors is paid Outside Corporate Auditors based on criteria approved by the Board of Directors, and it is paid The Company has appointed outside corporate auditor Koukei within the extent of the maximum amount resolved by the Ordinary Higuchi to receive audits of its corporate activities from a broad- General Meeting of Shareholders. ranging and advanced viewpoint based on extensive experience Bonuses for directors and corporate auditors are paid based and a high level of insight in corporate management. on a decision of the Ordinary General Meeting of Shareholders, The Company has appointed outside corporate auditor Fumi- taking into consideration the Company’s profits during the fiscal hiko Saito to receive audits of its corporate activities from a broad- year, past bonuses paid, and various other factors. ranging and advanced viewpoint based on extensive experience The total remuneration paid to directors and corporate audi- and a high level of insight in legal affairs. tors during fiscal 2008 was ¥923 million: ¥817 million to the 23 The Company has appointed outside corporate auditor Yuji directors (including three directors who retired during the year) Matsuda to receive audits of its corporate activities from a broad- and ¥106 million to the seven corporate auditors (including one ranging and advanced viewpoint based on extensive experience corporate auditor who retired during the year). The remuneration and a high level of insight in corporate management. paid to directors includes remuneration paid by subsidiaries of the Outside corporate auditor Koukei Higuchi attended all seven Company to directors who had business execution responsibilities of the Board of Directors’ meetings and all 13 of the Board of for the subsidiaries. Corporate Auditors’ meetings held during the fiscal year and com- Executive bonuses paid during fiscal 2008 totaled ¥578 mil- mented as necessary during the deliberation of proposals. lion: ¥501 million to the 20 directors who were directors at the end Outside corporate auditor Fumihiko Saito attended all seven of fiscal 2007 and ¥77 million to the six corporate auditors who of the Board of Directors’ meetings and all 13 of the Board of were corporate auditors as at the end of fiscal 2007. Corporate Auditors’ meetings held during the fiscal year and com- In fiscal 2008, retirement allowances paid to five directors (in- mented as necessary during the deliberation of proposals. cluding two operating officers who previously served as directors) Outside corporate auditor Yuji Matsuda attended all five of the and one corporate auditor totaled ¥1,100 million, in accordance Board of Directors’ meetings and all eight of the Board of Corpo- with a resolution of the General Meeting of Shareholders. rate Auditors’ meetings held following his assumption of his posi- The total remuneration and other compensation paid to out- tion as outside corporate auditor in June 2007 and commented as side directors and outside corporate auditors during fiscal 2008 necessary during the deliberation of proposals. was ¥75 million to the two outside directors and four outside cor- There is no particular relationship between the Company and porate auditors (including one outside corporate auditor who re- outside corporate auditor Koukei Higuchi. tired during the year). There is no particular relationship between the Company and outside corporate auditor Fumihiko Saito. Decisions Regarding Director Candidates Fumihiko Saito serves as a partner of Saito Law Office. There Candidates for directors are decided by resolution of the Board of is no particular relationship between Saito Law Office and the Directors. Candidates for corporate auditors are decided by reso- Company. lution of the Board of Directors, subject to the agreement of the There is no particular relationship between the Company and Board of Corporate Auditors. outside corporate auditor Yuji Matsuda. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 39 Corporate Governance

Accounting Audits The Company’s three business operations—motorcycles, KPMG AZSA & Co. provided auditing services for Honda under automobiles, and power products—formulate the medium- and the Company Law, the Financial Instruments and Exchange Law, long-term plans for their business development, and each opera- and the U.S. Securities Exchange Act. tion aims to maximize its business performance on a global basis. A total of 52 people from KPMG AZSA & Co. provided auditing Each functional operation—such as Customer Service Opera- services for Honda: three Japanese certified public accountants tions, Production Operations, Purchasing Operations, Business (Masanori Sato, Kensuke Sodegawa, and Hideaki Koyama) and Management Operations, and Business Support Operations— 49 assistants (10 certified public accountants, 17 assistant ac- supports the other functional operations, with the aim of increas- countants, four U.S. certified public accountants, and 18 others). ing Honda’s effectiveness and efficiencies. In fiscal 2008, the Company and its consolidated subsidiaries Research and development activities are conducted princi- paid a total of ¥3,042 million in fees to KPMG AZSA & Co. and pally at the independent subsidiaries of the Company. its affiliated accounting firm, KPMG, for audit certification services Honda R&D Co., Ltd., is responsible for research and devel- under the Company Law, the Financial Instruments and Exchange opment on products, while Honda Engineering Co., Ltd., handles Law, and the U.S. Securities Exchange Act. In fiscal 2008, the research and development in the area of production technology. Company’s overseas consolidated subsidiaries paid a total of The Company actively carries out research and development in ¥137 million in fees to KPMG AZSA & Co. and its affiliated ac- advanced technologies with the aim of creating products that are counting firm, KPMG, for non-auditing services. distinctive and internationally competitive.

Policy and Procedures for Obtaining Board of Corporate Business Execution Officer System Auditors’ Prior Consent The Company has assigned a general manager from the Board of To ensure that the independent auditor and its affiliate involved in Directors or an operating officer to each regional, business, and audit certification services under the U.S. Securities Exchange Act functional division, as well as to each research and development behave in accordance with all applicable laws and regulations and subsidiary. By ensuring swift, optimal decision making in each re- maintain complete independence from the Company, they must gion and workplace, the Company is building a highly effective obtain the prior consent of the Company’s Board of Corporate and efficient business execution system. Auditors before they carry out auditing services, auditing-related services, tax services, and other services for Honda. Executive Council The Company’s initial policy required that each contractual The Company has established the Executive Council, consisting of agreement have a separate prior consent from the Board of Cor- the President, Vice President, and the Senior Managing Directors porate Auditors. In order to make the decision-making process (for a total of nine members). Along with discussing in advance more efficient, however, we are enhancing procedural efficiency by the items to be resolved at meetings of the Board of Directors, establishing categories of matters requiring comprehensive prior the Executive Council discusses important management issues consent. These categories are reviewed regularly by the Board of within the scope of authority conferred upon it by the Board of Corporate Auditors. Directors. Any matter that does not fall under one of these categories still In fiscal 2008, the Executive Council met 29 times. requires separate consent of the Board of Corporate Auditors. Regional Operating Boards Business Execution System To enhance the independence of each regional operation and ensure swift decision making, regional operating boards have been Organization established at each regional operation to discuss important man- As for execution of business, the Company has six regional opera- agement issues in the region within the scope of authority con- tions around the world to develop business based on its funda- ferred upon it by the Executive Council. mental corporate philosophy. These operations adopt long-term perspectives and maintain close ties with local communities. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 40 Annual Report 2008 0

120

Status of Measures Related to Shareholders and Others with Vested Interests 150 Measures to Invigorate Ordinary General Meetings The latest information for investors is available on the Com- of Shareholders and Ensure the Smooth Exercise of pany’s website (http://www.honda.co.jp/investors/ in Japanese; 30 Voting Rights http://world.honda.com/investors/ in English). All new information is uploaded to the site simultaneously in Japanese and English. To invigorate the annual Ordinary General Meeting of Sharehold- The Company issues a regular publication for shareholders, ers, the Company holds the meeting as early as possible. The containing information about its businesses, products, financial 180 Company also presents easy-to-understand reports using video status, and other matters. and slides, and displays its products in the conference room. 60 The Company sends convocation notices before the date re- Respecting the Perspective of Stakeholders quired by law, and also allows shareholders to exercise their voting rights via the Internet, using personal computers or mobile Seeking to earn the unwavering trust of customers and society, phones. Convocation notices are sent in English to overseas in- the Honda Group has formulated a set of behavioral guidelines, vestors. In these and other ways, the Company strives to make which is observed by all individual associates (employees). 210 the exercise of rights as smooth as possible. In addition to supplying products incorporating the most advanced safety and environmental technologies, the Company pur- 90 IR Activities sues environmental protection activities, safe driving campaigns, and social contribution activities covering all aspects of its opera- For analysts and institutional investors, the Company holds meet- tions, including production, logistics, and sales. These initiatives ings to present its results four times a year and meetings with the reflect the Company’s effort to earn the trust and understanding of 240 president twice a year. Company representatives visit and hold society via its corporate activities. information meetings as needed for major Japanese and over- The Company provides information about its corporate activi- 120 seas institutional investors to explain the Honda Group’s future ties via financial reports and other disclosures according to law. We business strategies. Representatives based in North America and also publish yearly reports on environmental protection activities, Europe also hold information meetings for institutional investors as safe driving campaigns, and social contribution activities, which appropriate. In addition, the Company holds information meetings are posted on our website. In addition, we publish a corporate so- for investors at motor shows and other major events, where pre- cial responsibility (CSR) report that comprehensively explains our 270 sentations on such topics as Honda Group strategies are made activities related to the environment, safety, and society. by the president or relevant director. Moreover, the Company con- 150 ducts regular tours of facilities in Japan and overseas for shareholders and other investors.

Internal Control System: Fundamental Position and Implementation Status 180 Basic Position Moreover, effective audits are carried out to monitor the execution status of each division. To earn the trust of customers and society, the Company’s divisions, under the guidance of their respective corporate officers, Group Governance System have systems in place to ensure a systematic approach to compliance and risk management, in accordance with the Basic Policy Behavioral Guidelines 210 concerning the Maintenance of Internal Control Systems adopted The “Honda Conduct Guideline,” formulated to guide the behav- by the Board of Directors. These systems include the formula- ior of all associates, is posted on the Company’s website (http:// tion of behavioral guidelines and procedures for self-assessment. www.honda.co.jp/conductguideline/ in Japanese; http://world. The Company also has a system to support the initiatives of each honda.com/conductguideline/ in English). In addition, each divi- division. sion produces more detailed behavioral guidelines according to its specific attributes. 240 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 41

270 Corporate Governance

Self-Assessment Checklist The Company has appointed a Risk Management Officer, Each division of the Company approaches compliance and risk who is a director in charge of risk management related initiatives. management in a systematic way. For example, each division has It also established the Companywide Response Headquarters to a checklist that clarifies specific laws and risks to consider related address crisis situations. to its particular business, and conducts regular self-assessments. The results of the self-assessments are reported to the corporate Retention and Management of Information on officer in charge of each division, and the overall status of compli- Execution of Business by Directors ance and risk management is evaluated regularly by the Executive Council and is reported to the Board of Directors and Board of Documents and other information related to the execution of busi- Corporate Auditors. ness by directors are retained and managed appropriately, according to the document management policies of Honda and its Compliance System major regional subsidiaries.

The Company has appointed a Compliance Officer, who is a direc- Business Audits tor in charge of compliance-related initiatives. Other key elements of our compliance system include the Business Ethics Committee The Audit Office is an independent supervisory department under and the Business Ethics Improvement Proposal Line. the direct control of the president. This office audits the performance of each department and works to improve the internal au- Business Ethics Committee diting of subsidiaries and affiliates in each region. Honda’s Business Ethics Committee is chaired by the Compli- ance Officer and consists of directors and operating officers. The Disclosure Committee committee deliberates matters related to corporate ethics and compliance. The Disclosure Committee, which consists of relevant directors, It met twice in fiscal 2008. deliberates matters related to the accuracy and appropriateness of corporate information to be disclosed in business results an- Business Ethics Improvement Proposal Line nouncements and financial reports. Honda places high priority on open communications in its divisions. It has also set up the Business Ethics Improvement Pro- Code of Ethics posal Line to receive suggestions related to corporate ethics issues. By devising appropriate responses to suggestions received, The Company has also established a “Code of Ethics” as set Honda is constantly working to enhance corporate ethics. The forth in the rules of the U.S. Securities and Exchange Commis- system is designed to protect informants, who can either reveal sion regulations pursuant to Section 406 of the Sarbanes-Oxley their identity or remain anonymous. Act of 2002. The Business Ethics Committee supervises the operation of the Business Ethics Improvement Proposal Line and submits sta- Basic Policy Regarding Exclusion of Antisocial Elements tus reports to the Board of Corporate Auditors. and Current State of Measures Taken to This End

Risk Management System Honda’s basic policy is to boldly and consistently oppose antisocial elements that present a threat to social order and safety. Each division works to prevent and address its particular set The organizational unit in charge of responding to these elements of risks. In addition, the Honda Crisis Response Rules are de- has been specified, and it works together with the police and other signed to address Companywide crises, such as major natural related outside institutions to mount an appropriate response. disasters. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 42 Annual Report 2008 Companies listed on the New York Stock Exchange (NYSE) must The following table shows the significant differences be- comply with certain standards regarding corporate governance tween the corporate governance practices followed by U.S. listed under Section 303A of the NYSE Listed Company Manual. companies under Section 303A of the NYSE Listed Company However, listed companies that are foreign private issuers, Manual and those followed by Honda. such as Honda, are permitted to follow home-country practice in lieu of certain provisions of Section 303A.

Corporate Governance Practices Followed by NYSE- Corporate Governance Practices Followed by Honda Listed U.S. Companies

An NYSE-listed U.S. company must have a majority of directors meeting For Japanese companies that employ a corporate governance system based the independence requirements under Section 303A of the NYSE Listed on a board of corporate auditors (the “corporate auditor system”), including Company Manual. Honda, Japan’s Company Law has no independence requirement with respect to directors. The task of overseeing management and, together with the accounting audit firm, accounting is assigned to the corporate auditors, who are separate from the company’s management and meet certain independence requirements under Japan’s Company Law. In the case of Japanese companies that employ the board of corporate auditors system, including Honda, at least half of the corporate auditors must be “outside” corporate auditors who must meet additional independence requirements under Japan’s Company Law. An outside corporate auditor is defined as a corporate auditor who has not served as a director, accounting councilor, executive officer, manager, or any other employee of the company or any of its subsidiaries. Currently, Honda has three outside corporate auditors which constitute 60% of Honda’s corporate auditors.

An NYSE-listed U.S. company must have an audit committee composed Like a majority of Japanese listed companies, Honda employs the board entirely of independent directors, and the audit committee must have at least of corporate auditors system as described above. Under this system, the three members. board of corporate auditors is a legally separate and independent body from the board of directors. The main function of the board of corporate auditors is similar to that of independent directors, including those who are members of the audit committee, of a U.S. company: to monitor the performance of the directors, and review and express an opinion on the method of auditing by the company’s accounting audit firm and on such accounting audit firm’s audit reports, for the protection of the company’s shareholders. Japanese companies that employ the board of corporate auditors system, including Honda, are required to have at least three corporate auditors. Currently, Honda has five corporate auditors. Each corporate auditor has a four-year term. In contrast, the term of each director of Honda is one year. With respect to the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 relating to listed company audit committees, Honda relies on an exemption under that rule which is available to foreign private issuers with boards of corporate auditors meeting certain criteria.

An NYSE-listed U.S. company must have a nominating/corporate Honda’s directors are elected at a meeting of shareholders. Its Board governance committee composed entirely of independent directors. of Directors does not have the power to fill vacancies thereon. Honda’s corporate auditors are also elected at a meeting of shareholders. A proposal by Honda’s Board of Directors to elect a corporate auditor must be approved by a resolution of its Board of Corporate Auditors. The Board of Corporate Auditors is empowered to request that Honda’s directors submit a proposal for election of a corporate auditor to a meeting of shareholders. The corporate auditors have the right to state their opinion concerning election of a corporate auditor at the meeting of shareholders.

An NYSE-listed U.S. company must have a compensation committee Maximum total amounts of compensation for Honda directors and corporate composed entirely of independent directors. auditors are proposed to, and voted on, by a meeting of shareholders. Once the proposals for such maximum total amounts of compensation are approved at the meeting of shareholders, each of the Board of Directors and Board of Corporate Auditors determines the compensation amount for each member within the respective maximum total amounts.

An NYSE-listed U.S. company must generally obtain shareholder approval Currently, Honda does not adopt stock option compensation plans. When with respect to any equity compensation plan. Honda adopts it, it must obtain shareholder approval for stock options only if the stock options are issued with specifically favorable conditions or price concerning the issuance and exercise of the stock options. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 43 Board of Directors, Corporate Auditors and Operating Officers

Front row: Chairman and President and Executive Vice President Representative Director Representative Director and Representative Director Satoshi Aoki Takeo Fukui Koichi Kondo

Back row: Senior Managing Senior Managing Senior Managing Senior Managing Senior Managing Senior Managing Senior Managing Director Director Director Director Director Director Director Tetsuo Iwamura Masaaki Kato Mikio Yoshimi Atsuyoshi Hyogo Takanobu Ito Shigeru Takagi Akio Hamada WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 44 Annual Report 2008 Directors

Chairman and Representative Director Satoshi Aoki President and Representative Director Takeo Fukui Executive Vice President and Representative Director Koichi Kondo Chief Operating Officer for Regional Sales Operations (Japan) Senior Managing Director Atsuyoshi Hyogo Chief Operating Officer for Regional Operations (China) President of Honda Motor (China) Investment Corporation, Ltd. Senior Managing Director Mikio Yoshimi Compliance Officer Government & Industrial Affairs Senior Managing Director Takanobu Ito Chief Operating Officer for Automobile Operations Senior Managing Director Masaaki Kato General Supervisor, Quality Purchasing Operations Support President and Director of Honda R&D Co., Ltd. Senior Managing Director Shigeru Takagi Chief Operating Officer for Regional Operations (Europe, the Middle & Near East and Africa) President and Director of Honda Motor Europe Ltd. Senior Managing Director Akio Hamada Chief Operating Officer for Production Operations Risk Management Officer General Supervisor, Information Systems Senior Managing Director Tetsuo Iwamura Chief Operating Officer for Regional Operations (North America) President and Director of Honda North America, Inc. President and Director of American Honda Motor Co., Inc. Managing Director Akira Takano Chief Operating Officer for Customer Service Operations Managing Director Tatsuhiro Oyama Chief Operating Officer for Motorcycle Operations Managing Director Fumihiko Ike Chief Operating Officer for Regional Operations (Asia & Oceania) President and Director of Asian Honda Motor Co., Ltd. Managing Director Masaya Yamashita Chief Operating Officer for Purchasing Operations Director Satoru Kishi Director Kensaku Hogen Director and Advisor Hiroyuki Yoshino Director Sho Minekawa Chief Operating Officer for Regional Operations (Latin America) President and Director of Honda South America Ltda. President and Director of Moto Honda da Amazonia Ltda. President and Director of Honda Automoveis do Brasil Ltda. Director Hiroshi Soda Chief Operating Officer for Business Support Operations Chief Officer of Driving Safety Promotion Center Director Takuji Yamada Chief Operating Officer for Power Product Operations Director Yoichi Hojo Chief Operating Officer for Business Management Operations

Note: Mr. Satoru Kishi and Mr. Kensaku Hogen are outside directors as provided for in Article 2, Paragraph 1, Item 15 of the Company Law.

Corporate Auditors

Corporate Auditor (full-time) Toru Onda Corporate Auditor (full-time) Shinichi Sakamoto Corporate Auditor Koukei Higuchi Advisor of the Board of Tokio Marine & Nichido Fire Insurance Co., Ltd. Corporate Auditor Fumihiko Saito Representative of Saito Law Office Corporate Auditor Yuji Matsuda President and Director of Mitsubishi UFJ Trust Investment Technology Institute Co., Ltd.

Note: Corporate auditors Mr. Koukei Higuchi, Mr. Fumihiko Saito and Mr. Yuji Matsuda are outside corporate auditors as provided for in Article 2, Paragraph 1, Item 16 of the Company Law. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 45 Board of Directors, Corporate Auditors and Operating Officers

Operating Officers

Managing Officer Takashi Yamamoto General Manager of Saitama Factory of Production Operations Managing Officer Suguru Kanazawa Executive Vice President and Director of Honda Motor Europe Ltd. President and Director of Honda of the U.K. Manufacturing Ltd. Managing Officer Hiroshi Oshima Corporate Communications, Motor Sports Managing Officer Hidenobu Iwata General Manager of Suzuka Factory of Production Operations Operating Officer Manabu Nishimae President and Director of Honda Canada Inc. Operating Officer Hiroshi Kobayashi Deputy Chief Operating Officer for Regional Sales Operations (Japan) General Manager of Automobile Sales Operations for Regional Sales Operations (Japan) General Manager of Aftermarket Operations in Regional Sales Operations (Japan) General Manager of Asimo Business Office in Regional Sales Operations (Japan) Operating Officer Gen Tsujii Production for Production Operations General Manager of Automobile Production Planning Office in Production Operations President and Director of Honda Engineering Co., Ltd. Operating Officer Koichi Fukuo Quality, Certification & Regulation Compliance Operating Officer Hideki Okada General Manager of Regional Operation Planning Office in Regional Operations (North America) Executive Vice President and Director of American Honda Motor Co., Inc. Operating Officer Masahiro Takedagawa President and Director of Honda Siel Cars India Ltd. President and Director of Honda Motor India Private Ltd. Operating Officer Tsuneo Tanai President and Director of Honda of America Mfg., Inc. Operating Officer Yoshiyuki Matsumoto Automobile Products for Automobile Operations Operating Officer Eiji Okawara Production in China in Production Operations President of Guangzhou Honda Automobile Co., Ltd. Operating Officer Ko Katayama Manufacturing of Honda Canada Inc. Operating Officer Masahiro Yoshida General Manager of Hamamatsu Factory of Production Operations Operating Officer Seiji Kuraishi President of Dongfeng Honda Automobile Co., Ltd. Operating Officer Takashi Nagai Executive Vice President and Director of Asian Honda Motor Co., Ltd. Operating Officer Katsushi Watanabe General Manager of Kumamoto Factory of Production Operations Operating Officer Toshiaki Mikoshiba East Europe, the Middle & Near East and Africa for Regional Operations (Europe, the Middle & Near East and Africa) Executive Vice President and Director of Honda Motor Europe Ltd. Operating Officer Yohshi Yamane General Manager of Corporate Project of the Company Operating Officer Takashi Sekiguchi Executive Vice President and Director of American Honda Motor Co., Inc. Operating Officer Takahiro Hachigo General Manager of Automobile Purchasing Division 2 in Purchasing Operations

Note: The Company has introduced an operating officer system to facilitate transfer of authority to regions and local workplaces and effectively separate the supervisory and executive roles, while also making the Board of Directors more versatile. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 46 Annual Report 2008 Financial Section

48 Financial Review

62 Consolidated Balance Sheets

64 Consolidated Statements of Income

65 Consolidated Statements of Stockholders’ Equity and Comprehensive Income

67 Consolidated Statements of Cash Flows

68 Notes to Consolidated Financial Statements

108 Management’s Report on Internal Control over Financial Reporting

109 Reports of Independent Registered Public Accounting Firm

111 Selected Quarterly Financial Data (Unaudited and Not Reviewed)

112 Consolidated Balance Sheets Divided into Non-Financial Services Businesses and Finance Subsidiaries (Unaudited)

113 Consolidated Statements of Cash Flows Divided into Non-Financial Services Businesses and Finance Subsidiaries (Unaudited)

114 Financial Summary WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 47 Financial Review

Operating and Financial Review demands towards more fuel efficient (compact) models Net Sales and Other Operating Revenue for automobiles segment because of the higher fuel prices Honda’s consolidated net sales and other operating revenues negatively affected operating income. (hereafter, “net sales”) for the fiscal year ended March 31, Because of the positive impact of continuing cost 2008 grew ¥915.6 billion, or 8.3%, compared with fiscal 2007, reduction effects which offset the negative impacts of surging to ¥12,002.8 billion. Factors behind this increase were higher raw materials prices, such as steel and precious grade metals unit sales in the motorcycle business in Other Regions, higher used as catalyst, as well as an increase in depreciation, cost unit sales in the automobile business in all overseas regions, of sales had a positive impact of ¥11.5 billion. and higher unit sales of power products in Asia, as well as Selling, general and administrative expenses had a the positive impact of foreign currency translation effects. negative impact of ¥81.8 billion due to higher transportation Honda estimates that if the exchange rate of the Japanese and storage costs accompanying the increase in unit sales, yen had remained unchanged against other currencies from an increase of provisions for credit losses mainly in financial the previous fiscal year, consolidated net sales for the period services business in North America, and higher advertising would have increased by approximately ¥743.0 billion, or and sales promotion costs. 6.7%, compared to the increase as reported of ¥915.6 billion, R&D expenses also had a negative impact of ¥36.1 billion, which includes a positive foreign currency effect. as we spent more on safety and environmental technologies Domestic net sales decreased by ¥95.4 billion, or 5.7%, and worked to enhance the attractiveness of our products. to ¥1,585.7 billion, but overseas net sales were up ¥1,011.1 With respect to the discussion above of the change in billion, or 10.7%, to ¥10,417.0 billion. operating income, management has identified the factors set forth below and used what it believes to be a reasonable Operating Income method to analyze the respective changes in such factors. Operating income increased ¥101.2 billion, or 11.9% to Each of these factors is explained below. Management ¥953.1 billion when compared with the preceding year. After has analyzed changes in these factors at the levels of the considering the net effect of the positive impact of foreign Company and its material consolidated subsidiaries. currency effects of ¥37.6 billion, Honda estimates operating (1) “Foreign currency effects” consist of translation income increased ¥63.5 billion, or 7.5%. adjustments, which come from the translation of the Factors contributing to the remaining increase of ¥63.5 currency of foreign subsidiaries’ financial statements into billion in operating income, after consideration of foreign Japanese yen, and foreign currency adjustments, which currency effects can be summarized as follows (i) changes result from foreign-currency-denominated sales. At the in net sales and the model mix, (ii) cost reductions and the levels of the Company and those consolidated subsidiaries effect of raw material cost fluctuations, (iii) changes in selling, which have been analyzed, such foreign currency general and administrative (SG&A) expenses and (iv) R&D adjustments primarily relate to the following currencies: expenses. Details regarding these factors are as follows. U.S. dollar, Canadian dollar, Euro, British pound, Brazilian Changes in net sales and the model mix was a positive real and Japanese yen. impact of ¥170.0 billion due mainly to an increase of income (2) With respect to “cost reduction and effects of raw material because of higher sales and an effect of price increase. On cost fluctuations”, management has analyzed cost the other hand, higher incentives payment in North America reduction and effects of raw material cost fluctuations and change in model mix caused by shift of customers’ at the levels of the Company and its material foreign manufacturing subsidiaries in North America, Europe and Other Regions. Net Sales and Other Operating (3)Net With Income respect and Net to “changesIncome in net sales and model mix”, Revenue permanagement Common Shar ehas analyzed changes in sales volume and Years ended March 31 Yearsin endedthe mix Mar chof 31 product models sold in major markets which Yen (billions) Yenhave(billion sresulted) in increases/decreases(Yen) in profit, as well as 12,000 800certain other reasons for400 increases/decreases in net sales and cost of sales. 10,000 (4) With respect to “selling, general and administrative 600expenses”, management300 has analyzed reasons for an 8,000 increase/decrease in selling, general and administrative expenses from the previous fiscal year excluding currency 6,000 400translation effects. 200

4,000 Income before Income Taxes, Minority Interest and Equity200 in Income of Affiliates100 2,000 Income before income taxes, minority interest and equity in income of affiliates increased ¥102.9 billion, or 13.0%, to 0 ¥895.80 billion. Main factors0 of this increase except factors 04_04 05_05 06_06 07_07 08_08 relating04_04_04 operating05_05_05 06_06_06 07_income07_07 08_08_08 are as follows; LossesNet Income on (left) the valuation of interest rate swaps and other Net Income per Common Share derivatives(right) of our finance subsidiaries had a negative impact WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 4 8 Annual Report 2008 Financial Review

of ¥13.4 billion. The other factors had a net positive impact Business Segments of ¥15.1 billion. Among such other factors, the effects of Motorcycle Business transaction gains and losses had a positive impact, but this Unit sales of Honda motorcycles, all-terrain vehicles (ATVs) was offset by the negative impact of various factors, including and personal watercraft (PWC) in fiscal 2008 totaled the net loss associated with the revaluation of assets and 9,320,000 units, a decrease of 10.1%, from the previous fiscal liabilities denominated in foreign currencies, and the absence year. Unit sales in Japan were 311,000 units, a decrease of of gains on sale of investment securities which were recorded 7.7%. Overseas unit sales in the motorcycle totaled 9,009,000 in the fiscal year ended March 31, 2007. units, a decrease of 10.2%, due mainly to a decrease in unit sales of parts for local production at affiliates accounted Income Tax Expense for under equity method in Asia, which offset the increase Income tax expense increased ¥103.5 billion, or 36.5%, to in unit sales in Other Regions, especially in South America. ¥387.4 billion. The effective tax rate was 43.2%, an increase Revenue from external customers increased ¥188.0 billion, or by 7.4 percentage points from the previous fiscal year. This 13.7%, to ¥1,558.6 billion, from the previous fiscal year, due increase in the effective tax rate was mainly due to the mainly to increased unit sales in Asia and Other Regions, and recognition of liabilities for unrecognized tax benefits as a the positive impact of foreign currency translation effects. result of an ongoing examination of the Company’s tax filings Honda estimates that if the exchange rate of the Japanese by the Tokyo Regional Taxation Bureau with regard to transfer yen had remained unchanged from the previous fiscal year, pricing matters. consolidated net sales for the period would have increased Additional detailed information is described in Note 11 to by approximately ¥94.8 billion, or 6.9%, compared to the the accompanying consolidated financial statements. increase as reported of ¥188.0 billion, which includes a positive foreign currency effect. Minority Interest in Income of Consolidated Subsidiaries Operating income increased ¥50.6 billion, or 50.4%, to The amount deducted for minority interest in income of ¥151.2 billion, from the previous fiscal year, due mainly to a consolidated subsidiaries grew ¥7.1 billion, or 35.7% from the positive foreign currency effects caused by an appreciation of previous year, to ¥27.3 billion. Brazilian real and a positive impact of changes in the model mix, which offset the increased R&D expenses and higher Equity in Income of Affiliates SG&A expenses. Equity in income of affiliates grew ¥15.5 billion, or 15.0%, to ¥118.9 billion, due mainly to an increase of income at equity Automobile Business method affiliates in Asia accompanying an increase in their Honda’s unit sales of automobiles amounted to 3,925,000 sales along with market expansion. units, up 7.5% from the previous fiscal year. In Japan, unit sales decreased 8.5%, to 615,000 units. Overseas unit sales Net Income increased 11.1%, to 3,310,000 units, due mainly to increased Net income rose ¥7.7 billion, or 1.3% from the previous year, unit sales in North America, Europe, Asia and Other Regions. to ¥600.0 billion. Revenue from external customers increased ¥600.3 billion, or 6.8%, to ¥9,489.3 billion, from the previous fiscal year, due to increased unit sales and the positive impact of the foreign currency translation effects. Honda estimates Net Sales and Other Operating Net Income and Net Income Revenue per Common Share that if the exchange rate of the Japanese yen had remained Years ended March 31 Years ended March 31 unchanged from the previous fiscal year, consolidated net sales for the period would have increased by approximately Yen (billions) Yen (billions) (Yen) ¥514.4 billion, or 5.8%, compared to the increase as reported 12,000 800 400 of ¥600.3 billion, which includes a positive foreign currency effect. 10,000 Operating income increased ¥62.1 billion, or 10.4%, to 600 300 ¥661.6 billion, from the previous fiscal year, due mainly to 8,000 the positive impacts of higher revenue attributable to the increased unit sales, continuing cost reduction effects, 6,000 400 200 increased prices, and the positive foreign currency effects, while offsetting the negative impacts of increased sales 4,000 incentives in North America, substantially increased raw 200 100 material costs, increased SG&A expenses, changes in the 2,000 model mix, higher R&D expenses, and increased depreciation expenses. 0 0 0 04_04 05_05 06_06 07_07 08_08 04_04_04 05_05_05 06_06_06 07_07_07 08_08_08

Net Income (left) Power Product and Other Businesses Net Income per Common Share Honda’s unit sales of power products totaled 6,057,000 (right) units, down 5.7% from the previous fiscal year. In Japan, unit sales totaled 550,000 units, an increase of 4.4%. Overseas unit sales came to 5,507,000 units, a decrease of 6.6%, due WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 4 9

mainly to decreased unit sales in North America. Revenue operations overall, however, operating lease revenues and from external customers increased ¥3.4 billion, or 0.8%, to associated depreciation of leased assets do result in differing ¥421.1 billion, from the previous fiscal year, due mainly to presentation and timing compared to those of direct financing the positive impact of foreign currency translation effects. leases. Honda estimates that if the exchange rate of the Japanese yen had remained unchanged from the previous fiscal year, Geographical Information consolidated net sales for the period would have decreased Japan by approximately ¥3.3 billion, or 0.8%, compared to the In Japan, revenue from domestic and export sales was increase as reported of ¥3.4 billion, which includes a positive ¥4,889.0 billion, up ¥114.9 billion, or 2.4% compared to foreign currency effect. the previous fiscal year, due primarily to the increased Operating income was ¥22.3 billion, a decrease of ¥13.8 revenue from exports in automobile business which offset billion, or 38.2% from the previous fiscal year, due mainly to the negative impact of the decreased revenue in domestic the negative impact of the increased SG&A expenses and an automobile business. Operating income was ¥192.5 billion, increase of R&D expenses in other businesses, which offset down ¥35.5 billion, or 15.6%, compared to the previous the positive impact of the foreign currency effects caused by fiscal year, due primarily to the increased R&D expenses, the appreciation of the European currencies. increased depreciation expenses, and substantially increased raw material costs, which offset the positive impact of the Financial Services Business continuing cost reduction effects, increased profit attributable To support the sale of its products, Honda provides to higher revenue, and the decreased SG&A expenses. wholesale financing to dealers and retail lending and leasing to customers through our finance subsidiaries in Japan, the North America United States, Canada, the United Kingdom, Germany, Brazil In North America, which mainly consists of the United and Thailand. States, revenue increased ¥92.6 billion, or 1.5%, to ¥6,265.2 As a result of increased sales of automobiles mainly billion, due mainly to increased revenue in the automobile in North America, credit assets and property on operating business, which offset the negative impact of foreign currency leases of financial subsidiaries rose 3.4% from the previous translation effects. fiscal year, to ¥4,967.5 billion. Operating income decreased ¥24.1 billion, or 5.3%, to In fiscal year 2008, revenue from external customers in a ¥432.6 billion, from the previous fiscal year, due primarily financial services business increased ¥123.8 billion, or 30.2%, to the negative impacts of increased sales incentives in the to ¥533.5 billion from the previous fiscal year due mainly to automobile business, substantially increased raw material an increase in operating lease revenue. Honda estimates costs, the change in the model mix in the automobile that if the exchange rate of the Japanese yen had remained business, increased SG&A expenses caused by an increase unchanged from the previous fiscal year, consolidated net of provisions for credit losses in the financial services sales for the period would have increased by approximately business, increased depreciation expenses, and the negative ¥137.0 billion, or 33.4%, compared to the increase as reported impact of foreign currency effect because of the depreciation of ¥123.8 billion, which includes a negative foreign currency of U.S. dollars, which offset the positive impacts of increased effect. profit attributable to higher revenue, continuing cost reduction Operating income also expanded ¥2.2 billion, or 2.0%, effects, and increased prices. to ¥117.7 billion from the previous fiscal year, due mainly to the increased profit attributable to higher revenue benefiting Europe from a higher loan balance in North America, which offset the In Europe, revenue increased ¥246.4 billion, or 18.3%, to negative impact of the increased SG&A expenses caused by ¥1,594.2 billion, compared to the previous fiscal year, due an increase of provisions for credit losses. primarily to increased revenue in the automobile business and Our finance subsidiaries in North America have historically the positive impact of foreign currency translation effects. accounted for all leases as direct financing leases. However, Operating income increased ¥19.5 billion, or 61.1%, to starting in the year ended March 31, 2007, some of the leases ¥51.5 billion, from the previous fiscal year, due mainly to the which do not qualify for direct financing leases accounting positive impacts of increased profit attributable to higher treatment are accounted for as operating leases. Generally, revenue, continuing cost reduction effects and the foreign direct financing lease revenues and interest income consist currency effects, which offset the negative impacts of the of the recognition of finance lease revenue at inception of increased SG&A expenses. the lease arrangement and subsequent recognition of the interest income component of total lease payments using Asia the effective interest method. In comparison, operating lease In Asia, revenue increased ¥366.8 billion, or 28.9%, to revenues include the recognition of the gross lease payment ¥1,638.2 billion from the previous fiscal year, due primarily amounts on a straight line basis over the term of the lease to increased revenue in the motorcycle and automobile arrangement, and operating lease vehicles are depreciated businesses and the positive impact of foreign currency to their estimated residual value on a straight line basis over translation effects. the term of the lease. It is not anticipated that the differences Operating income increased ¥53.5 billion, or 69.4%, to in accounting for operating leases and direct financing leases ¥130.7 billion, from the previous fiscal year, due mainly to will have a material net impact on the Company’s results of the positive impacts of increased profit attributable to higher WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 5 0 Annual Report 2008

revenue and the foreign currency effects, which offset the including power transmission on a single axle from the negative impact of increased SG&A expenses. start-up mode all the way to infinitely variable gear changing. In North America, we newly introduced the high-powered Other Regions TRX700XX sport all-terrain vehicle (ATV), which is outfitted In Other Regions, revenue increased ¥295.1 billion, or 37.0%, with a newly designed liquid-cooled SOHC engine and an to ¥1,092.8 billion, compared to the previous fiscal year, due electronic fuel injection system (PGM-FI). mainly to increased revenue in all of the business segments R&D expenses in the Motorcycle Business segment in and the positive impact of foreign currency translation effects. fiscal 2008 totaled ¥91.7 billion. Operating income rose ¥44.2 billion, or 61.2%, to ¥116.4 billion, from the previous fiscal year, due mainly to the positive Automobile Business impact of the increased profit attributable to higher revenue, In the Automobile Business segment, we work to develop the foreign currency effects, and continuing cost reduction innovative technologies and products through creativity- effects which offset the negative impact of increased SG&A oriented development in response to customer needs. expenses. We are also actively developing technologies that address environmental issues and provide advanced safety Research and Development performance. Honda and its consolidated subsidiaries use the most Major achievements in Japan during the fiscal year under advanced technologies to conduct R&D activities aimed review included a full model change for the FIT. The new FIT at creating distinctive products that are internationally combines a newly developed maximum 100 horsepower, competitive. The Group’s main R&D divisions operate 1.3-liter intelligent Variable Valve Timing and Lift, Electronic independently as subsidiaries, allowing technicians to Control (i-VTEC) engine and a newly developed Continuously pursue their tasks with significant freedom. Product-related Variable Transmission (CVT) with a torque converter to provide R&D is spearheaded by the Honda R&D Co., Ltd.; Honda excellent driving performance and good fuel economy. Also, R&D Americas, Inc. in the United States; and Honda R&D we implemented a full model change for the INSPIRE in Japan Europe (Deutschland) GmbH in Germany. R&D on production and for the Accord in North America, Asia and Other Regions. technologies centers around Honda Engineering Co., Ltd. in The new versions boast high-level safety features and are Japan and Honda Engineering North America, Inc. All of these equipped with Honda’s newly developed 3.5-liter i-VTEC V6 entities work in close association with our other entities and engine with the new Variable Cylinder Management (VCM) businesses in their respective regions. System that achieves high power and good fuel economy by Total consolidated R&D expenditures for the year ended switching from the most powerful six-cylinder mode to four- March 31, 2008 amounted to ¥587.9 billion. cylinder or three-cylinder mode for efficiency, depending on driving conditions. Motorcycle Business Another technology development milestone in the field of In the motorcycle business, Honda is committed to fuel cell cars was the announcement of the FCX Clarity, which developing products with new value-added features that is based on Honda’s original “V Flow” (vertical gas flow) fuel meet the individual needs of customers around the world, cell platform. By employing Honda’s V Flow fuel cell stack, and to implementing the timely local development of products which incorporates a wave flow separator where hydrogen tailored to specific regions at its overseas locations. At the combines with atmospheric oxygen to generate energy that same time, we are focusing on developing industry-leading is then converted to electric power used to propel the vehicle, technologies that address safety and environmental issues. the new cell structure achieves a higher output of power and Major developments in Japan in fiscal 2008 included considerably lower weight and smaller size. In addition to a full model change for the CBR600RR super sport bike. this breakthrough in fuel cell vehicles, Honda has announced Changes in the new model include a more compact engine the commencement of tests on the fourth-generation and a lighter-weight hollow aerial aluminum die-cast frame Home Energy Station (Home Energy Station IV), which it is that results in a substantial reduction in weight compared developing jointly with Plug Power Inc., of the United States. with previous versions. The new model also features better This unit can function both as a hydrogen supply source environmental performance and drivability owing to (a) for fuel cell cars and as a cogeneration system for electric the introduction of a new electronic fuel injection system power. These units are undergoing pilot testing in Torrance, (Programmed Dual Sequential Fuel Injection System) that California. has two injectors per cylinder to provide a precise fuel R&D expenses in the Automobile Business segment in flow and the optimal air-oil ratio and (b) the installation of fiscal 2008 totaled ¥475.4 billion. a twin catalyzer. In addition, we introduced a new scooter model, Lead, which boasts a newly developed, lighter and Power Product and Other Businesses more compact engine that combines high environmental In the Power Product Business, we are seeking to develop performance with sufficient power for smooth riding in urban products that match customers’ lifestyles and needs settings. Moreover, we fitted out our DN-01 680cc large while strengthening our lineup of offerings that address sports cruiser with Honda’s original, compact and efficient environmental issues. infinitely variable hydraulic mechanical transmission (Human- Important developments in this segment in Japan and Friendly Transmission) complete with a lockup mechanism, other areas during the fiscal year included a full model change which features a diversity of functions within a single unit, in the BF40 and BF50 four-stroke marine outboard motors. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 5 1

The new models boast improved acceleration through a on a continuing basis, such as sharing work tasks among a combination of the PGM-FI electronic fuel injection system number of ASIMO robots when conditions are appropriate with the world’s first ignition timing governed by Honda’s and having other robots perform tasks in place of a robot that original Boosted Low Speed Torque (BLAST) air-fuel ratio is temporarily charging its battery. technology. They also have improved fuel economy as a Expenses incurred in fundamental research are result of the incorporation of a Lean Burn Control system for distributed among Honda’s business segments. cruising. In addition to these developments, in Japan, Honda has begun to market its compound thin-membrane solar cell modules HSPV-125A, HEM115PA, and HEM125PA, which are R&D Expenses and R&D Expenses Capital Expenditures and as a Percentage of Net Sales Depreciation formed around Honda’s originally developed thin membranes. Years ended March 31 Years ended March 31 These modules employ membranes made from a Copper, Indium, Gallium, and Selenium (CIGS) compound, which Yen (billions) (%) Yen (billions) makes it possible to conserve the amount of energy required 600 6 600 in the manufacturing stage. Among other activities, GE Honda Aero Engines LLC, a joint venture of Honda and General Electric Co., has begun the testing of the HF-120 full demonstrator turbofan jet engine, 400 4 400 which is designed for volume production. R&D expenses in this segment in fiscal 2008 totaled to ¥20.7 billion. 200 2 200 Fundamental Research In the area of fundamental research, Honda is pursuing steady and varied research activities into technologies that may lead 0 0 0 to innovative applications. 04_04_04 05_05_05 06_06_06 07_07_07 08_08_08 04_04 05_05 06_06 07_07 08_08 One of Honda’s research initiatives is the development R&D Expenses (left) Capital Expenditures of a technological base for ethanol production from soft R&D Expenses as a Percentage Depreciation biomass, including plant stalks and leaf matters, such as of Net Sales (right) rice straw. Honda has established a pilot plant within its research facilities and is moving forward with R&D to establish volume production technology. In the field of robotics and Capital Expenditures ASIMO technology, Honda researchers are working on new Capital expenditures in fiscal 2008 were applied to the ASIMO intelligence and skill functions, including such motion expansion of manufacturing facilities, streamlining efforts, functions as moving back one step to allow human beings and the replacement of older equipment. Other expenditures to pass and passing to one side of human beings coming included funds used to augment sales and R&D facilities. from the opposite direction as well as work task functions, Total capital expenditures for the year amounted to ¥1,493.2 such as carrying small latrines and pushing wagons. Other billion, up ¥499.4 billion from the previous year. Also, total capital ASIMO functions and systems under development include expenditures excluding property on operating leases for the year proceeding automatically to a charging station when battery amounted to ¥654.0 billion, up ¥26.9 billion from the previous power runs low and learning to perform cooperative functions year. Spending by business segment is shown below.

Fiscal years ended March 31, 2007 2008 Increase (Decrease) Yen (millions) Motorcycle Business ¥ 68,880 ¥ 86,687 ¥ 17,807 Automobile Business 540,859 544,922 4,063 Financial Services Business 367,728 839,888 472,160 Financial Services Business (Excluding Property on Operating Leases) 933 627 (306) Power Product and Other Businesses 16,394 21,794 5,400 Total ¥993,861 ¥1,493,291 ¥499,430 Total (Excluding Property on Operating Leases) ¥627,066 ¥ 654,030 ¥ 26,964

In the motorcycle business, we made capital expenditures of In the automobile business, we made capital expenditures ¥86,687 million in the fiscal year ended March 31, 2008. Funds of ¥544,922 million in the fiscal year ended March 31, 2008. were allocated to the introduction of new models, as well as the Funds were allocated to the introduction of new models, as improvement, streamlining and modernization of production well as the improvement, streamlining and modernization facilities, and improvement of Sales and R&D facilities. of production facilities, and improvement of Sales and R&D WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 5 2 Annual Report 2008

facilities. As one of our plans to increase the local production Honda Automobile (Thailand) Co., Ltd., which is one of of automobile powertrain components in North America, the Company’s consolidated subsidiaries, plans to build a Honda Transmission Mfg. of America, Inc. completed new auto plant in Ayutthaya, Thailand with an investment of construction of its facilities for the production of high precision approximately 6,200 million bahts. The annual production gears in July 2007. capacity of this new plant will be expandable up to In the financial services business segment, capital approximately 120,000 units. This new auto plant plans to expenditures excluding property on operating leases start operation in the latter half of 2008. amounted to ¥627 million in the fiscal year ended March 31, Honda Motor de Argentina S.A., which is one of the 2008, while capital expenditures for property on operating Company’s consolidated subsidiaries, plans to build a new leases were ¥839,261 million. Capital expenditures in power auto plant in Buenos Aires, Argentina with an investment of products and other businesses in the fiscal year ended March approximately $100 million. The annual production capacity 31, 2008, totaling ¥21,794 million, were deployed to upgrade, of this new plant will be approximately 30,000 units. This new streamline, and modernize manufacturing facilities for power auto plant plans to start operation in the latter half of 2009. products, and to improve R&D facilities for power products. Yachiyo Industry Co., Ltd., which is one of the Company’s Our finance subsidiaries in North America have historically consolidated subsidiaries, plans to build a new auto plant accounted for all leases as direct financing leases. However, capable of synchronous auto production—from the engine starting in the year ended March 31, 2007, some of the leases to the entire automobile—in Yokkaichi City, Mie, Japan with which do not qualify for direct financing leases accounting an investment of approximately ¥50,000 million, to further treatment because of the termination of insurance contract strengthen the mini-vehicle business. The annual production covering the estimated residual value of vehicles leased to capacity of this new plant and the current operating plant will customers are accounted for as operating leases. Therefore, be approximately 240,000 units, which is the same as the because of the transfer from direct financing leases to current production capacity. This new auto plant plans to start operating leases, capital expenditures of the Company have operation in the latter half of 2010. increased from the year ended March 31, 2007. The estimated amounts of capital expenditures in fiscal year ending March 31, 2009 are shown below. Plans after fiscal 2008 Fiscal year ending We set out our original capital expenditure plans for the March 31, 2009 period from the fiscal year ended March 31, 2008 during the Yen (millions) preceding fiscal year. We have subsequently modified these Motorcycle Business ¥136,600 plans as follows: Automobile Business 549,800 The investment amount of the new R&D center in Sakura Financial Services Business 1,300 City, Tochigi, Japan has changed from approximately ¥17,000 Power Product and Other Businesses 22,300 million to ¥48,000 million because of the expansion of the building. The planned timing of the commencement of the Total ¥710,000 center’s operations has not changed. The estimated amount of capital expenditures for Financial Services The investment amount of the new auto plant in Yorii- Business in the above table does not include property on operating leases. machi Oosato-gun, and the new engine plant in Ogawa-machi Hiki-gun, Saitama, Japan has changed from approximately ¥70,000 million to ¥158,000 million because of the change of operations to strengthen the businessR&D competitiveness, Expenses and R&D Expenses Capital Expenditures and as a Percentage of Net Sales Depreciation strengthening of measures to environment,Years acquisition ended March 31of land, Years ended March 31 inclusion of land development expenses, and a substantially Yen (billions) (%) Yen (billions) increased building materials prices. The planned timing of the start of operation has not changed. 600 6 600 We have set out our capital expenditure plans for the period from the fiscal year ending March 31, 2009 as follows: In order to respond efficiently to increases in global motorcycle demand as well as to advancements400 in products 4 400 and improvements in production engineering, Honda plans to consolidate all motorcycle production in Japan at its Kumamoto Factory with an investment of approximately 200 2 200 ¥33,000 million. This new motorcycle plant plans to start operation in 2008. The annual production capacity of Kumamoto Factory will be approximately 600,000 units. Honda Siel Cars India Limited, which is one of the 0 0 0 Company’s consolidated subsidiaries, plans04_ 04_to04 build05_05_05 a06_06_06 07_07_07 08_08_08 04_04 05_05 06_06 07_07 08_08 new auto plant in Rajasthan, India with an investmentR&D Expenses of (left) Capital Expenditures approximately $230 million. The annual productionR&D Expenses capacity as a Percentage Depreciation of this new plant will be approximately 60,000of units. Net Sales This (right) new auto plant plans to start operation in the end of 2009. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 5 3

Liquidity and Capital Resources long-term debt and increase in short-term debt (which Overview of Capital Requirements, Sources and Uses exceeded repayment of long-term debt), cash dividends paid The policy of Honda is to support its business activities by and payment for purchase of the Company’s own stock. Cash maintaining sufficient capital resources, a sufficient level of inflows from financing activities increased by ¥264.5 billion liquidity and a sound balance sheet. compared with the previous fiscal year. Honda’s main business is the manufacturing and sale of motorcycles, automobiles and power products. To support Liquidity this business, it also provides retail financing and automobile The ¥1,050.9 billion in cash and cash equivalents at end of leasing services for customers, as well as wholesale financing year corresponds to approximately 1.1 month of net sales, services for dealers. and Honda believes it has sufficient liquidity for its business In its manufacturing and sales business, Honda requires operations. operating capital mainly to purchase parts and materials At the same time, Honda is aware of the possibility required for production, as well as to maintain inventory that various factors, such as recession-induced market of finished products and cover receivables from dealers. contraction and financial and foreign exchange market Honda also requires funds for capital expenditures, mainly volatility, may adversely affect liquidity. For this reason, finance to introduce new models, upgrade, rationalize and renew subsidiaries that carry total short-term borrowings of ¥2,128.4 production facilities, as well as to expand and reinforce Sales billion have committed lines of credit equivalent to ¥923.3 and R&D facilities. billion that serve as alternative liquidity for the commercial Honda meets its operating capital requirements primarily paper issued regularly to replace debt. Honda believes it through cash generated by operations. Honda funds its currently has sufficient credit limits, extended by prominent financial programs for customers and dealers primarily from international banks. Honda believes it has sufficient liquidity corporate bonds, medium-term notes, commercial paper, and to meet its cash obligations for the near future, at least for the securitization of finance receivables. The year-end balance of year ending March 31, 2009. liabilities associated with fund-raising by finance subsidiaries Honda’s short- and long-term debt securities are rated was ¥4,778.9 billion as of March 31, 2008. by credit rating agencies, such as Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services. Based on major Cash Flows current ratings, which are shown below, Honda will be able Consolidated cash and cash equivalents for the year ended to raise funds even if it requires more capital than its present March 31, 2008 increased by ¥105.3 billion from March 31, level of liquidity would allow. 2007, to ¥1,050.9 billion. The reasons for the increases or The following table shows the ratings of Honda’s decreases for each cash flow activity are as follows. unsecured debt securities by Moody’s and Standard & Poor’s Net cash provided by operating activities amounted to as of the date of the filing of Honda’s Form 20-F. ¥1,126.9 billion of cash inflows for the fiscal year ended March Credit Ratings for 31, 2008. Cash flow from operating activities consists of the Short-term Long-term following main components: the major component of the unsecured unsecured debt securities debt securities Company’s cash inflows is cash received from customers, while the major components of the Company’s cash outflows Moody’s Investors Service P-1 Aa3 are payments for parts and raw materials, SG&A expenses, Standard & Poor’s Rating Services A-1 A+ and income taxes. The above ratings are based on information provided by Compared with the prior fiscal year, cash inflows from Honda and other information deemed credible by the rating cash received from customers increased, due to the continued agencies. They are also based on the agencies’ assessment growth in net sales because of higher unit sales in motorcycle of credit risk associated with designated securities issued business in Other Regions and higher overseas unit sales in by Honda. Each rating agency may use different standards automobile business. On the other hand, cash outflows for for calculating Honda’s credit rating, and also makes its own payments for parts and raw materials increased, as a result assessment. Ratings can be revised or nullified by agencies of an increase in sales units. The other reasons for increases at any time. These ratings are not meant to serve as a in cash outflows are an increase of payments for operating recommendation for trading in or holding Honda’s unsecured expenses. However, these increases were within the range debt securities. of the growth in net sales, and because of stable operating margins, net cash provided by operating activities increased by Off-Balance Sheet Arrangements ¥222.3 billion compared with the previous fiscal year. Special Purpose Entity Net cash used in investing activities amounted to For the purpose of accelerating the receipt of cash related ¥1,686.3 billion, due mainly to capital expenditures, the to our finance receivables, we periodically securitize and sell acquisitions of finance subsidiaries—receivables, which pools of these receivables. In these securitizations, we sell a exceeded collections of and proceeds from sales of finance portfolio of finance receivables to a special purpose entity, which subsidiaries—receivables and the purchase of operating lease is established for the limited purpose of buying and reselling assets. Cash outflows from investing activities increased by finance receivables. We remain as a servicer of the finance ¥555.6 billion compared with the previous fiscal year. receivables and are paid a servicing fee for our services. The Net cash provided by financing activities amounted special purpose entity transfers the receivables to a trust or bank to ¥688.0 billion, which was attributable to proceeds from conduit, which issues interest-bearing asset-backed securities WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 5 4 Annual Report 2008

or commercial paper, respectively, to investors. We retain certain accompanying consolidated financial statements. subordinated interests in the sold receivables in the form of subordinated certificates, servicing assets and residual interests Guarantee in certain cash reserves provided as credit enhancements At March 31, 2008, we guaranteed ¥36.4 billion of employee for investors. We apply significant assumptions regarding bank loans for their housing costs. If an employee defaults prepayments, credit losses and average interest rates in on his/her loan payments, we are required to perform under estimating expected cash flows from the trust or bank conduit, the guarantee. The undiscounted maximum amount of our which affect the recoverability of our retained interests in the sold obligation to make future payments in the event of defaults is finance receivables. We periodically evaluate these assumptions ¥36.4 billion. As of March 31, 2008, no amount was accrued for and adjust them, if appropriate, to reflect the performance of the any estimated losses under the obligations, as it was probable finance receivables. Information about finance subsidiaries— that the employees would be able to make all scheduled receivables and securitizations is described in Note 4 to the payments.

Tabular Disclosure of Contractual Obligations The following table shows our contractual obligations at March 31, 2008: Yen (millions) Payments due by period At March 31, 2008 Total Less than 1 year 1-3 years 3-5 years After 5 years Long-term debt ¥2,707,702 ¥871,050 ¥1,240,604 ¥564,916 ¥31,132 Operating leases 139,332 26,144 37,006 23,833 52,349 Purchase commitments*1 122,073 122,073 — — — Interest payments*2 300,266 179,149 97,708 22,732 677 *1 Honda had commitments for purchases of property, plant and equipment at March 31, 2008. *2 To estimate the schedule of interest payments, the company utilized the balances and average interest rates of borrowings and debts and derivative instruments as of March 31, 2008.

Honda expects to contribute ¥28,843 million to its domestic Application of Critical Accounting Policies pension plans and ¥18,170 million to its foreign pension plans Critical accounting policies are those which require us to apply in the year ending March 31, 2009. The Pension Protection the most difficult, subjective or complex judgments, often Act of 2006 (PPA) is effective for plan years beginning after requiring us to make estimates about the effect of matters that December 31, 2007. Certain of the Company’s subsidiaries are inherently uncertain and which may change in subsequent in the United States are unable to determine the amounts periods, or for which the use of different estimates that could of contribution for fiscal year 2009 because the procedures have reasonably been used in the current period would have required by the PPA have not been completed. The had a material impact on the presentation of our financial contribution amounts to foreign pension plan described above condition and results of operations. do not include the contributions of these subsidiaries. The following is not intended to be a comprehensive list of If our estimates of unrecognized tax benefits and potential all our accounting policies. Our significant accounting policies tax benefits are not representative of actual outcomes, our are more fully described in Note 1 to the accompanying consolidated financial statements could be materially affected consolidated financial statements. in the period of settlement or when the statutes of limitations We have identified the following critical accounting policies expire, as we treat these events as discrete items in the period with respect to our financial presentation. of resolution. Since it is difficult to estimate actual payment in the future related to our uncertain tax positions, unrecognized (Product Warranty) tax benefit totaled ¥99,527 million is not represented in the We warrant our products for specific periods of time. table above. Honda is currently being examined by the Tokyo Product warranties vary depending upon the nature of the Regional Taxation Bureau (“Bureau”) on matters related to a product, the geographic location of their sales and other factors. transfer pricing issue. In the examination, the Bureau claims We recognize costs for general warranties on products that the allocation of the total profit Honda and its Chinese we sell and product recalls. We provide for estimated warranty joint venture companies earned from their automobile business costs at the time products are sold to customers or the time in China was not an “arms’ length” allocation but rather that new warranty programs are initiated. Estimated warranty costs too much of this total profit was realized by the Chinese joint are provided based on historical warranty claim experience with venture companies over the five-year period ended March 31, consideration given to the expected level of future warranty costs, 2006. Honda has recognized the liability for unrecognized tax including current sales trends, the expected number of units to benefits, including those related to this examination. be affected and the estimated average repair cost per unit for At March 31, 2008, we had no material capital lease warranty claims. Our products contain certain parts manufactured obligations or long-term liabilities reflected on our balance by third party suppliers. Since suppliers typically warrant these sheet under U.S. GAAP other than those set forth in the table parts, the expected receivables from warranties of these suppliers above. are deducted from our estimates of accrued warranty obligations. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 5 5

We believe our accrued warranty liability is a “critical adequate to cover estimated warranty expenses. accounting estimate” because changes in the calculation can Actual claims incurred in the future may differ from the materially affect net income, and require us to estimate the original estimates, which may result in material revisions to the frequency and amounts of future claims, which are inherently warranty expense accruals. uncertain. The changes in provisions for those product warranties Our policy is to continuously monitor warranty cost accruals and net sales and other operating revenue for each business to determine their adequacy of the accrual. Therefore, warranty segment for each of the years in the three-year period ended expense accruals are maintained at an amount we deem March 31, 2008 are as follow:

Yen (millions) 2006 2007 2008 Provisions for product warranties Balance at beginning of year ¥ 268,429 ¥ 283,947 ¥ 317,103 Warranty claims paid during the period (126,834) (113,454) (137,591) Liabilities accrued for warranties issued during the period 125,732 143,280 136,355 Changes in liabilities for pre-existing warranties during the period 332 605 (1,476) Foreign currency translation 16,288 2,725 (20,631) Balance at end of year 283,947 317,103 293,760 Net sales and other operating revenue ¥9,907,996 ¥11,087,140 ¥12,002,834

(Credit Losses) operating leases. Our finance subsidiaries provide wholesale financing to dealers We believe our allowance for credit losses is a “critical and retail lending and leasing to customers mainly in order to accounting estimate” because it requires us to make support sales of our products, principally in North America. assumptions about inherently uncertain items such as future We classify retail and direct financing lease receivables derived economic trends, quality of finance subsidiaries receivables from those services as finance subsidiaries—receivables. and other factors. We review the adequacy of the allowance for Operating leases are classified as property on operating credit losses, and the allowance for credit losses is maintained leases. Certain finance receivables related to sales of inventory at an amount that we deem sufficient to cover the estimated are included in trade receivables and other assets in the credit losses incurred on our owned portfolio of finance consolidated balance sheets. receivables. However, actual losses may differ from the original The majority of the credit risk is with consumer financing estimates as a result of actual results varying from those and to a lesser extent with dealer financing. To determine assumed in our estimates. the overall allowance for credit loss amount, receivables are As an example of the sensitivity of the allowance segmented into pools with common characteristics such as calculation, the following scenario demonstrates the impact product and collateral types, credit grades, and original loan that a deviation in one of the primary factors estimated as a terms. For each of these pools, we estimate losses primarily part of our allowance calculation would have on the provision based on our historic loss experiences, delinquency rates, and allowance for credit losses. If we had experienced a 10% recovery rates and scale and composition of the portfolio, increase in net credit losses during fiscal 2008 in our North taking factors into consideration such as changing economic America portfolio, the provision for fiscal 2008 and the allowance conditions and changes in operational policies and procedures. balance at the end of fiscal 2008 would have increased by Estimated losses due to customer defaults on operating leases approximately ¥7.2 billion and ¥2.8 billion, respectively. Note that are not recognized in the allowance for credit losses. These this sensitivity analysis may be asymmetric, and are specific to losses are recognized as a component of impairment losses on the base conditions in fiscal 2008.

Additional Narrative of the Change in Credit Loss as Below The following table shows information related to our credit loss experience in our North American portfolio: Yen (billions) Fiscal years ended March 31 2006 2007 2008 Charge-offs (net of recoveries) ¥ 22.8 ¥ 26.2 ¥ 39.9 Provision for credit losses 27.4 25.5 44.8 Allowance for credit losses 30.1 28.7 28.4 Ending receivable balance 4,166.5 4,351.8 3,890.4 Average receivable balance, net 3,938.2 4,330.8 4,317.0 Charge-offs as a % of average receivable balance 0.58% 0.61% 0.93% Allowance as a % of ending receivable balance 0.72% 0.66% 0.73% WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 5 6 Annual Report 2008

Fiscal Year 2008 Compared with Fiscal Year 2007 We believe that our estimated losses on lease residual The provision for credit losses increased by ¥19.3 billion, or 75% values is a “critical accounting estimate” because it is highly primarily as a result of the weakening U.S. economy brought susceptible to market volatility and requires us to make upon by the subprime mortgage crisis. The weakening economy assumptions about future economic trends and lease residual has negatively affected certain customers’ ability to pay their values, which are inherently uncertain. We believe that the contractual obligations. Net charge-offs in our North American assumptions used are appropriate. However actual losses portfolio increased by ¥13.7 billion, or 52%. The increase in incurred may differ from original estimates. charge-offs was experienced primarily in the lower range of If future auction values for all Honda and Acura vehicles in credit quality customers. The Company has focused collection our North American direct financing lease portfolio as of March efforts to minimize the losses on delinquent and defaulted 31, 2008, were to decrease by approximately ¥10,000 per contracts. unit from our present estimates, the total impact would be an The allowance for credit losses decreased by ¥0.3 billion, increase in losses on lease residual values by approximately or 1%, despite the reflection of the higher estimated losses ¥0.7 billion. Similarly, if future return rates for our existing incurred as of March 31, 2008 in the North American portfolio. portfolio of all Honda and Acura vehicles were to increase by The decrease was primarily due to the effect of exchange rate one percentage point from our present estimates, the total changes on the allowance for credit losses. impact would be an increase in losses on lease residual values by approximately ¥0.1 billion. With the same prerequisites (Losses on Lease Residual Values) shown above, the impacts to the operating lease portfolio would End-customers of leased vehicles typically have an option be approximately ¥0.5 billion and ¥0.07 billion, which would to buy the leased vehicle for the contractual residual value of be recognized over the remaining lease terms. Note that this the vehicle or to return the vehicle to our finance subsidiaries sensitivity analysis may be asymmetric, and are specific to the through the dealer at the end of the lease term. Likewise, dealers base conditions in fiscal 2008. have the option to buy the vehicle returned by the customer or to return the vehicle to our finance subsidiaries. The likelihood (Pension and Other Postretirement Benefits) that the leased vehicle will be purchased varies depending on We have various pension plans covering substantially all of the difference between the actual market value of the vehicle at our employees in Japan and certain employees in foreign the end of the lease term and the contractual value determined countries. Benefit obligations and pension costs are based on at the inception of the lease. Our finance subsidiaries in North assumptions of many factors, including the discount rate, the America have historically accounted for all leases as direct rate of salary increase and the expected long-term rate of return financing leases. However, starting in the year ended March on plan assets. The discount rate is determined mainly based 31, 2007, some of the leases which do not qualify for direct on the rates of high quality corporate bonds or governmental financing leases accounting treatment are accounted for as bonds currently available and expected to be available during operating leases. the period to maturity of the defined benefit pension plans. We initially determine the contract residual values by The salary increase assumptions reflect our actual experience using our estimate of future used vehicle values, taking into as well as near-term outlook. The expected long-term rate of consideration data obtained from third parties. We are exposed return is determined based on the expected long-term return to risk of loss on the disposition of returned lease vehicles when of the various asset categories. Honda considers the current the proceeds from the sale of the vehicles are less than the expectations for future returns and the actual historical returns of contractual residual values at the end of the lease term. We each plan asset category. Our assumed discount rate and rate periodically review the estimate of residual values. Downward of salary increase as of March 31, 2008 were 2.0% and 2.3%, adjustments are made for declines in estimated residual respectively, and our assumed expected long-term rate of return values that are deemed to be other-than-temporary. For direct for the year ended March 31, 2008 was 4.0% for Japanese financing leases, our finance subsidiaries in North America plans. Our assumed discount rate and rate of salary increase as purchase insurance to cover a portion of the estimated residual of March 31, 2008 were 5.5-6.8% and 2.9-6.4%, respectively, value. The adjustments on the uninsured portion of the vehicle’ and our assumed expected long-term rate of return for fiscal residual value are recognized as a loss in the period in which the 2008 was 6.5-8.3% for foreign plans. estimate changed. We believe that the accounting estimates related to our For vehicle leases accounted for as operating leases, the pension plans is “critical accounting estimate” because changes adjustments to estimated residual values result in changes to the in these estimates can materially affect our financial condition remaining depreciation expense to be recognized prospectively and results of operations. on a straight-line basis over the remaining term of the lease. Actual results may differ from our assumptions, and the The primary components in estimating losses on lease difference is accumulated and amortized over future periods. residual values are the expected frequency of returns, or the Therefore, the difference will be generally reflected as our percentage of leased vehicles we expect to be returned by recognized expenses and recorded obligations in future customers at the end of the lease term, and the expected loss period. We believe that the assumptions currently used are severity, or the expected difference between the residual value appropriate, however, differences in actual expenses or changes and the amount we receive through sales of returned vehicles in assumptions could affect our pension costs and obligations, plus proceeds from insurance, if any. We estimate losses on including our cash requirements to fund such obligations. lease residual values by evaluating several different factors, The following table shows the effect of a 0.5% change in the including trends in historical and projected used vehicle values assumed discount rate and the expected long term rate of return and general economic measures. on our funded status, equity, and pension expense. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 5 7

Japanese Plans Yen (billions) Assumptions Percentage point change (%) Funded status Equity Pension expense Discount rate +0.5/–0.5 –89.5/+100.8 +45.2/–57.6 –4.7/+5.9 Expected long-term rate of return +0.5/–0.5 — — –3.6/+3.6

Foreign Plans Yen (billions) Assumptions Percentage point change (%) Funded status Equity Pension expense Discount rate +0.5/–0.5 –36.2/+41.0 +27.7/–31.7 –5.6/+7.5 Expected long-term rate of return +0.5/–0.5 — — –2.2/+2.2 *1 Note that this sensitivity analysis may be asymmetric, and are specific to the base conditions at March 31, 2008. *2 Funded status for fiscal 2008 is affected by March 31, 2008 assumptions. Pension expense for fiscal 2008 is affected by March 31, 2007 assumptions.

(Income Taxes) We believe that our estimates and assumptions of Honda adopted the provision of FASB Interpretation No. 48 unrecognized tax benefits are reasonable, however, if our “Accounting for Uncertainty in Income Taxes” (FIN No. 48) on estimates of unrecognized tax benefits and potential tax benefits April 1, 2007. Honda is subject to income tax examinations are not representative of actual outcomes, our consolidated in many tax jurisdictions. We recognize the tax benefit from financial statements could be materially affected in the period of an uncertain tax position based on the technical merits of settlement or when the statutes of limitations expire, as we treat the position when the position is more likely than not to be these events as discrete items in the period of resolution. sustained upon examination. Benefits from tax positions that meet the more likely than not recognition threshold are Quantitative and Qualitative Disclosure About Market measured at the largest amount of benefit that is greater than Risk 50% likelihood of being realized upon ultimate resolution. Honda is exposed to market risks, which are changes in We performed a comprehensive review of any uncertain tax foreign currency exchanges rates, in interest rates and in prices positions in accordance with FIN No. 48. of marketable equity securities. Honda is a party to derivative We believe our accounting for tax uncertainties is a “critical financial instruments in the normal course of business in order accounting estimate” because it requires us to evaluate and to manage risks associated with changes in foreign currency assess the probability of the outcome that could be realized exchange rates and in interest rates. Honda does not hold any upon ultimate resolution. Our estimates may change in the derivative financial instruments for trading purposes. future due to new developments.

(Foreign Currency Exchange Rate Risk) Foreign Exchange Risk 2007 2008 Yen (millions) Average Yen (millions) Average Contract contractual Contract contractual amounts Fair value rate (Yen) amounts Fair value rate (Yen) Forward Exchange Contract To sell US$ ¥336,005 1,299 117.84 ¥214,797 9,199 104.25 To sell EUR 60,305 (963) 154.35 40,963 64 157.99 To sell CA$ 16,548 (67 ) 100.88 14,146 560 101.72 To sell GBP 173,894 (1,352 ) 228.48 70,227 2,739 207.07 To sell other foreign currencies 36,344 (670 ) — 12,147 362 — To buy US$ 9,864 (122 ) 114.93 7,104 (196) 102.92 To buy other foreign currencies 11,358 (85 ) — 2,272 (29) — Cross-currencies 334,676 (1,533 ) — 254,189 (517) — Total ¥978,994 (3,493 ) ¥615,845 12,182

Currency Option Contracts Option purchased to sell US$ ¥ — — — ¥ 96,720 877 — Option written to sell US$ — — — 136,005 (502) — Option purchased to sell other currencies 2,317 24 — 17,378 409 — Option written to sell other currencies 3,476 (42 ) — 22,101 (457) — Total ¥5,793 (18 ) ¥272,204 327 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 5 8 Annual Report 2008

Foreign currency forward exchange contracts and purchased Honda has long-term debt with both fixed and floating rates. Our option contracts are normally used to hedge sale commitments finance receivables are primarily fixed rate. Interest rate swap denominated in foreign currencies (principally U.S. dollars). agreements are mainly used to convert floating rate financing Foreign currency written option contracts are entered into in (normally three-five years) to fixed rate financing in order to match combination with purchased option contracts to offset premium financing costs with income from finance receivables. Foreign amounts to be paid for purchased option contracts. currency and interest rate swap agreements used among different The tables on the previous page provide information about currencies, also serve to hedge foreign currency exchange risk as our derivatives related to foreign currency exchange rate risk as of well as interest rate risk. March 31, 2007 and 2008. For forward exchange contracts and The following tables provide information about Honda’s currency options, the table presents the contract amounts and fair financial instruments that were sensitive to changes in interest value. All forward exchange contracts and currency contracts to rates at March 31, 2007 and 2008. For finance receivables and which we are a party have original maturities of less than one year. long-term debt, these tables present principal cash flows, fair value and related weighted average interest rates. For interest rate (Interest Rate Risks) swaps and currency and interest rate swaps, the table presents Honda is exposed to market risk for changes in interest rates notional amounts, fair value and weighted average interest rates. related primarily to its debt obligations and finance receivables. Variable interest rates are determined using formulas such as In addition to short-term financing such as commercial paper, LIBOR+α and an index.

Finance Subsidiaries—Receivables 2007 2008 Yen (millions) Yen (millions) Expected maturity date Average interest Total Fair value Total Within 1 year 1-2 year 2-3 year 3-4 year 4-5 year Thereafter Fair value rate Direct financing leases*1 JP¥ ¥ 26,894 — ¥ 23,580 13,259 5,090 2,946 1,528 755 2 — 4.62% US$ 1,426,173 — 657,278 402,007 241,201 14,062 8 — — — 5.40% Other 439,499 — 531,776 133,930 142,577 149,202 92,570 13,485 12 — 4.17% Total—Direct Financing Leases ¥1,892,566 — ¥1,212,634 549,196 388,868 166,210 94,106 14,240 14 —

Other Finance Receivables: JP¥ ¥ 402,970 398,869 ¥ 441,695 145,881 113,143 82,716 53,570 40,091 6,294 437,032 4.62% US$ 2,485,210 2,545,210 2,515,518 862,084 558,698 475,684 370,941 198,020 50,091 2,645,690 7.66% Other 487,922 411,955 610,201 297,618 131,520 95,673 57,772 22,614 5,004 524,144 6.87% Total—Other Finance Receivables ¥3,376,102 3,356,034 ¥3,567,414 1,305,583 803,361 654,073 482,283 260,725 61,389 3,606,866 Retained interest in the sold pools of finance receivables*2 88,110 88,110 54,636 54,636 Total*3 ¥5,356,778 ¥4,834,684

*1 : Under U.S. generally accepted accounting principles, disclosure of fair values of direct financing leases is not required. *2 : The retained interest in the sold pools of finance receivables is accounted for as “trading” securities and is reported at fair value. *3 : The finance subsidiaries—receivables include finance subsidiaries—receivables included in trade receivables and other assets in the consolidated balance sheets. Additional detailed information is described in Note 4 to the accompanying consolidated financial statements. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 5 9

Long-Term Debt (including current portion) 2007 2008 Yen (millions) Yen (millions) Expected maturity date Average interest Total Fair value Total Within 1 year 1-2 year 2-3 year 3-4 year 4-5 year Thereafter Fair value rate Japanese yen bonds ¥ 230,129 229,379 ¥ 250,080 30,049 60,049 59,995 69,992 29,995 — 251,166 1.11% Japanese yen medium-term notes (Fixed rate) 367,900 368,425 321,600 111,400 73,000 76,000 32,900 25,300 3,000 324,504 1.03% Japanese yen medium-term notes (Floating rate) 85,200 85,525 165,000 38,000 23,000 28,900 16,500 58,600 — 166,308 1.17% U.S. dollar medium-term notes (Fixed rate) 354,500 357,121 274,346 91,783 75,232 52,161 35,108 — 20,062 286,869 4.55% U.S. dollar medium-term notes (Floating rate) 1,171,527 1,183,041 1,005,456 482,189 416,938 50,155 56,174 — — 1,010,974 3.36% Loans and others—primarily fixed rate 471,896 471,384 691,220 117,629 121,566 203,608 58,307 182,040 8,070 701,228 4.29% Total ¥2,681,152 2,694,875 ¥ 2,707,702 871,050 769,785 470,819 268,981 295,935 31,132 2,741,049

Interest Rate Swaps 2007 2008 Yen (millions) Yen (millions) Expected maturity date Notional Average Average principal Contract Contract Within receive pay currency Receive/Pay amounts Fair value amounts 1 year 1-2 year 2-3 year 3-4 year 4-5 year Thereafter Fair value rate rate JP¥ Float/Fix ¥ 5,858 — ¥ 2,330 1,512 218 600 — — — (4 ) 1.23% 1.42% US$ Float/Fix 2,933,563 8,661 2,885,355 1,185,667 932,304 603,944 138,637 24,803 — (81,730) 3.35% 4.65% Fix/Float 355,921 (1,878) 403,333 95,376 113,271 49,410 35,067 — 110,209 13,135 4.63% 3.34% Float/Float 90,899 (205) 67,127 42,079 25,048 — — — — (36) 2.98% 3.14% CA$ Float/Fix 490,691 2,186 658,179 210,821 187,138 144,604 87,055 24,379 4,182 (9,924) 3.88% 4.16% Fix/Float 75,961 (346) 154,287 17,380 10,114 48,436 19,589 58,768 — 4,418 5.05% 4.40% Float/Float 195,325 (302) 100,876 60,564 27,940 12,372 — — — (325) 3.61% 4.01% GBP Float/Fix 48,314 333 23,469 12,133 6,123 5,213 — — — 83 5.99% 4.96% Fix/Float 1,931 — — — — — — — — — — — Total ¥4,198,463 8,449 ¥ 4,294,956 1,625,532 1,302,156 864,579 280,348 107,950 114,391 (74,383)

Currency & Interest Rate Swaps 2007 2008 Yen (millions) Yen (millions) Expected maturity date Receiving Paying Average Average side side Contract Contract Within receive pay currency currency Receive/Pay amounts Fair value amounts 1 year 1-2 year 2-3 year 3-4 year 4-5 year Thereafter Fair value rate rate JP¥ US$ Fix/Float ¥386,064 (21,728) ¥ 286,141 100,705 66,733 66,976 27,749 21,162 2,816 37,036 1.03% 3.38% Float/Float 87,414 (4,940) 153,023 44,006 18,621 24,997 14,374 51,025 — 19,641 1.15% 3.28% JP¥ CA$ Fix/Float 2,790 (628) 2,685 — 2,685 — — — — (480) 0.95% 4.75% Other Other Fix/Float 70,387 6,425 165,885 — — 59,738 — 106,147 — 34,731 4.58% 4.47% Float/Float 61,879 3,334 55,279 19,071 36,208 — — — — 13,161 4.60% 2.73% Total ¥608,534 (17,537) ¥ 663,013 163,782 124,247 151,711 42,123 178,334 2,816 104,089

(Equity Price Risk) included in accumulated other comprehensive income (loss) in Honda is exposed to equity price risk as a result of its the stockholders’ equity section of the consolidated balance holdings of marketable equity securities. Marketable equity sheets. At March 31, 2007 and 2008, the estimated fair value securities included in Honda’s investment portfolio are held of marketable equity securities was ¥169.2 billion and ¥120.0 for purposes other than trading, and are reported at fair billion, respectively. value, with unrealized gains or losses, net of deferred taxes WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 0 Annual Report 2008

Legal Proceedings can be reasonably estimated. Honda reviews these pending Various legal proceedings are pending against us. We lawsuits and claims periodically and adjusts the amounts believe that such proceedings constitute ordinary routine recorded for these contingent liabilities, if necessary, by litigation incidental to our business. With respect to product considering the nature of lawsuits and claims, the progress liability, personal injury claims or lawsuits, we believe that any of the case and the opinions of legal counsel. Honda does judgment that may be recovered by any plaintiff for general not record liabilities for lawsuits or potential claims that it and special damages and court costs will be adequately believes will not result in an unfavorable outcome or when a covered by our insurance and accrued liabilities. Punitive reasonable estimate of the amount of probable loss cannot be damages are claimed in certain of these lawsuits. We are determined. After consultation with legal counsel, and taking also subject to potential liability under other various lawsuits into account all known factors pertaining to existing lawsuits and claims including 74 purported class actions in the United and claims, Honda believes that the ultimate outcome of such States. lawsuits and pending claims including 74 purported class In accordance with Statement of Financial Accounting actions in the United States should not result in liability to Standards (SFAS) No. 5, “Accounting for Contingencies”, Honda that would be likely to have an adverse material effect Honda has recorded a contingent liability when it is probable on its consolidated financial position, results of operations or that an obligation has been incurred and the amount of loss cash flows. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 6 1 Consolidated Balance Sheets

Honda Motor Co., Ltd. and Subsidiaries U.S. dollars March 31, 2007 and 2008 Yen (millions) (millions) (note 2) Assets 2007* 2008 2008 Current assets: Cash and cash equivalents ¥ 945,546 ¥ 1,050,902 $ 10,489 Trade accounts and notes receivable, net of allowance for doubtful accounts of ¥8,199 million in 2007 and ¥8,181 million ($82 million) in 2008 (notes 4 and 20) 1,055,470 1,021,743 10,198 Finance subsidiaries—receivables, net (notes 4, 9 and 20) 1,426,224 1,340,728 13,382 Inventories (note 5) 1,183,116 1,199,260 11,970 Deferred income taxes (note 11) 155,390 158,825 1,585 Other current assets (notes 7, 9 and 16) 426,863 460,110 4,592 Total current assets 5,192,609 5,231,568 52,216

Finance subsidiaries—receivables, net (notes 4, 9 and 20) 3,039,826 2,707,820 27,027

Investments and advances: Investments in and advances to affiliates (note 6) 497,337 549,812 5,488 Other, including marketable equity securities (note 7) 254,610 222,110 2,217 Total investments and advances 751,947 771,922 7,705

Property on operating leases (note 8): Vehicles 345,909 1,014,412 10,125 Less accumulated depriciation 9,700 95,440 953 Net property on operating leases 336,209 918,972 9,172

Property, plant and equipment, at cost (note 9): Land 429,373 457,352 4,565 Buildings 1,322,394 1,396,934 13,943 Machinery and equipment 2,988,064 3,135,513 31,296 Construction in progress 204,318 227,479 2,270 4,944,149 5,217,278 52,074 Less accumulated depreciation and amortization 2,865,421 3,015,979 30,103 Net property, plant and equipment 2,078,728 2,201,299 21,971

Other assets (notes 4, 9, 11, 13 and 16) 637,181 783,962 7,825 Total assets ¥12,036,500 ¥12,615,543 $125,916

See accompanying notes to consolidated financial statements. *See note 3. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 2 Annual Report 2008 Consolidated Balance Sheets

U.S. dollars Yen (millions) (millions) (note 2) Liabilities, Minority Interests and Stockholders’ Equity 2007* 2008 2008 Current liabilities: Short-term debt (note 9) ¥ 1,265,868 ¥ 1,687,115 $ 16,839 Current portion of long-term debt (note 9) 775,409 871,050 8,694 Trade payables: Notes 33,276 39,006 389 Accounts 1,133,280 1,015,130 10,132 Accrued expenses (note 13) 807,341 730,615 7,292 Income taxes payable (note 11) 76,031 71,354 712 Other current liabilities (notes 9, 11 and 16) 196,322 264,280 2,638 Total current liabilities 4,287,527 4,678,550 46,696

Long-term debt, excluding current portion (note 9) 1,905,743 1,836,652 18,332

Other liabilities (notes 10, 11 and 13) 1,237,712 1,414,270 14,116 Total liabilities 7,430,982 7,929,472 79,144

Minority interests in consolidated subsidiaries 122,907 141,806 1,416

Stockholders’ equity: Common stock, authorized 7,086,000,000 shares in 2007 and in 2008; issued 1,834,828,430 shares in 2007 and in 2008 86,067 86,067 859 Capital surplus 172,529 172,529 1,722 Legal reserves (note 12) 37,730 39,811 397 Retained earnings (note 12) 4,654,890 5,099,983 50,903 Accumulated other comprehensive income (loss), net (notes 7, 11, 13, 15 and 17) (427,166) (782,198) (7,807) Treasury stock, at cost 12,835,522 shares in 2007 and 20,290,531 shares in 2008 (41,439) (71,927) (718) Total stockholders’ equity 4,482,611 4,544,265 45,356

Commitments and contingent liabilities (notes 18 and 19) Total liabilities, minority interests and stockholders’ equity ¥12,036,500 ¥ 12,615,543 $125,916 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 6 3 Consolidated Statements of Income

Honda Motor Co., Ltd. and Subsidiaries U.S. dollars Years ended March 31, 2006, 2007 and 2008 Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Net sales and other operating revenue (note 4) ¥9,907,996 ¥11,087,140 ¥12,002,834 $119,801

Operating costs and expenses: Cost of sales (note 4) 7,010,357 7,865,142 8,543,170 85,270 Selling, general and administrative 1,656,365 1,818,272 1,918,596 19,150 Research and development 510,385 551,847 587,959 5,868 9,177,107 10,235,261 11,049,725 110,288 Gain on transfer of the substitutional portion of the Employees’ Pension Funds (note 13) 138,016 — — — Operating income 868,905 851,879 953,109 9,513

Other income (notes 1 (q) and 7): Interest 27,363 42,364 50,144 500 Other 2,214 13,243 5,384 54 29,577 55,607 55,528 554

Other expenses (notes 1 (q) and 7): Interest 11,902 12,912 16,623 166 Other 56,676 101,706 96,173 960 68,578 114,618 112,796 1,126 Income before income taxes, minority interest and equity in income of affiliates 829,904 792,868 895,841 8,941

Income tax (benefit) expense (note 11): Current 319,945 300,294 356,095 3,554 Deferred (2,756) (16,448) 31,341 313 317,189 283,846 387,436 3,867 Income before minority interest and equity in income of affiliates 512,715 509,022 508,405 5,074

Minority interest in income of consolidated subsidiaries (15,287) (20,117) (27,308) (272) Equity in income of affiliates (note 6) 99,605 103,417 118,942 1,187 Net income ¥ 597,033 ¥ 592,322 ¥ 600,039 $ 5,989

U.S. dollars Yen (note 2) 2006 2007 2008 2008 Basic net income per common share (note 1 (o)) ¥ 324.33 ¥ 324.62 ¥ 330.54 $ 3.30 See accompanying notes to consolidated financial statements. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 4 Annual Report 2008 Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Honda Motor Co., Ltd. and Subsidiaries Years ended March 31, 2006, 2007 and 2008 Yen (millions) Accumulated other Total Common Capital Legal Retained comprehensive Treasury stockholders’ stock surplus reserves earnings income (loss), net stock equity Balance at March 31, 2005 ¥86,067 ¥172,531 ¥34,688 ¥3,809,383 ¥(793,934) ¥(19,441) ¥3,289,294 Transfer to legal reserves 1,123 (1,123) — Cash dividends (71,061) (71,061) Comprehensive income (loss): Net income 597,033 597,033 Other comprehensive income (loss), net of tax (note 15) Adjustments from foreign currency translation 249,160 249,160 Unrealized gains (losses) on marketable securities, net 28,966 28,966 Unrealized gains (losses) on derivative instruments, net (64) (64) Minimum pension liabilities adjustment 108,685 108,685 Total comprehensive income 983,780 Purchase of treasury stock (77,067) (77,067) Reissuance of treasury stock (125) 928 803 Retirement of treasury stock (2) (66,221) 66,224 1 Balance at March 31, 2006 86,067 172,529 35,811 4,267,886 (407,187) (29,356) 4,125,750 Cumulative effect of adjustments resulting from the adoption of SAB No. 108, net of tax (note 1 (u)) — — — (62,640) 18,149 — (44,491) Adjusted balances as of March 31, 2006 86,067 172,529 35,811 4,205,246 (389,038) (29,356) 4,081,259 Transfer to legal reserves 1,919 (1,919) — Cash dividends (140,482) (140,482) Comprehensive income (loss): Net income 592,322 592,322 Other comprehensive income (loss), net of tax (note 15) Adjustments from foreign currency translation 96,775 96,775 Unrealized gains (losses) on marketable securities, net (4,571) (4,571) Unrealized gains (losses) on derivative instruments, net 84 84 Minimum pension liabilities adjustment 8,908 8,908 Total comprehensive income 693,518 Adjustment for initially applying SFAS No. 158, net of tax (note 13) (139,324) (139,324) Purchase of treasury stock (30,974) (30,974) Reissuance of treasury stock (277) 18,891 18,614 Retirement of treasury stock — Balance at March 31, 2007 ¥86,067 ¥172,529 ¥37,730 ¥4,654,890 ¥(427,166) ¥(41,439) ¥4,482,611 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 6 5 Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Yen (millions) Accumulated other comprehensive Total Common Capital Legal Retained income (loss), Treasury stockholders’ stock surplus reserves earnings net stock equity Balance at March 31, 2007 ¥86,067 ¥172,529 ¥37,730 ¥4,654,890 ¥(427,166) ¥(41,439) ¥4,482,611 Transfer to legal reserves 2,081 (2,081) — Cash dividends (152,590) (152,590) Comprehensive income (loss): Net income 600,039 600,039 Other comprehensive income (loss), net of tax (note 15) Adjustments from foreign currency translation (312,267) (312,267) Unrealized gains (losses) on marketable securities, net (26,459) (26,459) Unrealized gains (losses) on derivative instruments, net 440 440 Pension and other postretirement benefits adjustments (16,746) (16,746) Total comprehensive income 245,007 Purchase of treasury stock (34,404) (34,404) Reissuance of treasury stock (275) 3,916 3,641 Retirement of treasury stock — Balance at March 31, 2008 ¥86,067 ¥172,529 ¥39,811 ¥5,099,983 ¥(782,198) ¥(71,927) ¥4,544,265

U.S. dollars (millions) (note 2) Accumulated other comprehensive Total Common Capital Legal Retained income (loss), Treasury stockholders’ stock surplus reserves earnings net stock equity Balance at March 31, 2007 $859 $1,722 $376 $46,461 $(4,263) $(414) $44,741

Transfer to legal reserves 21 (21) — Cash dividends (1,523) (1,523) Comprehensive income (loss): Net income 5,989 5,989 Other comprehensive income (loss), net of tax (note 15) Adjustments from foreign currency translation (3,117) (3,117) Unrealized gains (losses) on marketable securities, net (264) (264) Unrealized gains (losses) on derivative instruments, net 4 4 Pension and other postretirement benefits adjustments (167) (167) Total comprehensive income 2,445 Purchase of treasury stock (343) (343) Reissuance of treasury stock (3) 39 36 Retirement of treasury stock — Balance at March 31, 2008 $859 $1,722 $397 $50,903 $(7,807) $(718) $45,356 See accompanying notes to consolidated financial statements. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 6 Annual Report 2008 Consolidated Statements of Cash Flows

Honda Motor Co., Ltd. and Subsidiaries U.S. dollars Years ended March 31, 2006, 2007 and 2008 Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Cash flows from operating activities(note 14): Net income ¥ 597,033 ¥ 592,322 ¥ 600,039 $ 5,989 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation excluding property on operating leases 262,225 361,747 417,393 4,166 Depreciation of property on operating leases — 9,741 101,032 1,008 Deferred income taxes (2,756) (16,448) 31,341 313 Minority interest in income 15,287 20,117 27,308 272 Equity in income of affiliates (99,605) (103,417) (118,942) (1,187) Dividends from affiliates 64,055 54,849 67,764 676 Provision for credit and lease residual losses on finance subsidiaries—receivables 36,153 44,128 58,011 579 Loss (gain) on derivative instruments, net 10,351 56,836 70,251 701 Gain on transfer of the substitutional portion of the Employees’ Pension Funds (note 13) (138,016) — — — Decrease (increase) in assets: Trade accounts and notes receivable (113,259) (49,529) (67,696) (676) Inventories (109,661) (96,839) (100,622) (1,004) Other current assets (59,484) (15,206) (2,609) (26) Other assets (81,796) (5,523) (130,666) (1,304) Increase (decrease) in liabilities: Trade accounts and notes payable 21,420 38,186 32,327 323 Accrued expenses 51,653 41,898 (24,768) (247) Income taxes payable 39,900 (37,282) 20 0 Other current liabilities 6,126 1,103 2,301 23 Other liabilities 80,410 14,274 179,537 1,792 Other, net 604 (6,432) (15,103) (150) Net cash provided by operating activities 580,640 904,525 1,126,918 11,248 Cash flows from investing activities: Increase in investments and advances (17,314) (9,874) (6,417) (64) Decrease in investments and advances 3,711 3,829 1,270 13 Payments for purchases of available-for-sale securities (158,011) (141,902) (158,426) (1,581) Proceeds from sales of available-for-sale securities 129,496 172,806 179,911 1,796 Payments for purchases of held-to-maturity securities (63,395) (13,614) (39,482) (394) Proceeds from redemptions of held-to-maturity securities 55,990 41,109 32,557 325 Capital expenditures (460,021) (597,958) (668,228) (6,670) Proceeds from sales of property, plant and equipment 39,951 20,641 26,868 268 Acquisitions of finance subsidiaries—receivables (3,031,644) (2,857,024) (2,712,775) (27,076) Collections of finance subsidiaries—receivables 1,870,675 2,138,875 2,312,311 23,079 Proceeds from sales of finance subsidiaries—receivables 930,595 477,927 158,497 1,582 Purchases of operating lease assets — (366,795) (839,261) (8,377) Proceeds from sales of operating lease assets — 1,276 26,776 267 Net cash used in investing activities (699,967) (1,130,704) (1,686,399) (16,832) Cash flows from financing activities: Increase (decrease) in short-term debt, net (124,941) 306,063 601,957 6,008 Proceeds from long-term debt 865,677 969,491 1,061,792 10,598 Repayments of long-term debt (568,605) (677,539) (782,749) (7,813) Cash dividends paid (note 12) (71,061) (140,482) (152,590) (1,523) Cash dividends paid to minority interests (4,083) (7,434) (9,663) (96) Payments for purchases of treasury stock, net (77,064) (26,689) (30,746) (307) Net cash provided by financing activities 19,923 423,410 688,001 6,867 Effect of exchange rate changes on cash and cash equivalents 43,406 31,527 (23,164) (231) Net change in cash and cash equivalents (55,998) 228,758 105,356 1,052 Cash and cash equivalents at beginning of year 772,786 716,788 945,546 9,437 Cash and cash equivalents at end of year ¥ 716,788 ¥ 945,546 ¥ 1,050,902 $ 10,489 See accompanying notes to consolidated financial statements. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 6 7 Notes to Consolidated Financial Statements Honda Motor Co., Ltd. and Subsidiaries

1. General and Summary of Significant Accounting Policies

(a) Description of Business realizable values of inventories, realization of deferred tax Honda Motor Co., Ltd. (the “Company”) and its subsidiaries assets, impairment of long-lived assets, unrecognized tax (collectively “Honda”) mainly develop, manufacture and benefits, product warranty obligations, the fair values of distribute motorcycles, automobiles, power products, assets and obligations related to employee benefits, and the and also provide financing for the sale of those products. fair value of derivative financial instruments. Actual results Honda’s manufacturing operations are principally conducted could differ from those estimates. in 33 separate factories, four of which are located in Japan. Principal overseas manufacturing facilities are located in (e) Revenue Recognition the United States of America, Canada, Mexico, the United Sales of manufactured products are recognized when Kingdom, France, Italy, Spain, China, India, Indonesia, persuasive evidence of an arrangement exists, delivery has Malaysia, Pakistan, the Philippines, Taiwan, Thailand, occurred, title and risk of loss have passed to the customers, Vietnam, Argentina, Brazil and Turkey. the sales price is fixed or determinable, and collectibility is probable. (b) Basis of Presenting Consolidated Financial Statements Honda provides dealer incentives passed on to the end The Company and its domestic subsidiaries maintain their customers generally in the form of below-market interest books of account in conformity with financial accounting rate loans or lease programs. The amount of interest or standards of Japan, and its foreign subsidiaries generally lease subsidies paid is the difference between the amount maintain their books of account in conformity with those of offered to retail customers and the amount stemmed from the countries of their domicile. a market-based interest or lease rate. Honda also provides The consolidated financial statements presented herein dealer incentives retained by the dealer, which generally have been prepared in a manner and reflect the adjustments represent discounts provided from Honda to the dealers. which are necessary to conform them with U.S. generally These incentives are classified as a reduction of sales accepted accounting principles. revenue as the consideration is paid in cash, because Honda does not receive an identifiable benefit in exchange for this (c) Consolidation Policy consideration. The incentives are estimated and accrued at The consolidated financial statements include the accounts the time the product is sold to the dealer. of the Company, its subsidiaries and those variable interest Operating lease revenues are recorded on a straight-line entities where Honda is the primary beneficiary under the basis over the term of the lease. Financial Accounting Standards Board (FASB) Interpretation Interest income from finance receivables is recognized (FIN) No. 46 (revised December 2003), “Consolidation of using the interest method. Finance receivable origination Variable Interest Entities”. All significant intercompany fees and certain direct origination costs are deferred, and balances and transactions have been eliminated in the net fee or cost is amortized using the interest method consolidation. over the contractual life of the finance receivables. Investments in affiliates in which Honda has the ability Finance subsidiaries of the Company periodically sell to exercise significant influence over their operating and finance receivables. Gain or loss is recognized equal to financial policies, but where Honda does not have a the difference between the cash proceeds received and controlling financial interest are accounted for using the the carrying value of the receivables sold and is recorded equity method. in the period in which the sale occurs. Honda allocates the recorded investment in finance receivables between the (d) Use of Estimates portion(s) of the receivables sold and portion(s) retained, Management of Honda has made a number of estimates and based on the relative fair values of those portions on the assumptions relating to the reporting of assets, liabilities, date the receivables are sold. Honda recognizes gains revenues and expenses, and the disclosure of contingent or losses attributable to the change in the fair value of the assets and liabilities to prepare its consolidated financial retained interests, which are recorded at estimated fair statements in conformity with U.S. generally accepted value and accounted for as “trading” securities. Honda accounting principles. Significant items subject to such determines the fair value of the retained interests by estimates and assumptions include, but are not limited to, discounting the future cash flows. Those cash flows are allowance for credit losses, losses on lease residual values, estimated based on prepayments, credit losses and other retained interests in the sold pools of finance receivables, information as available and are discounted at a rate which WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 6 8 Annual Report 2008 Notes to Consolidated Financial Statements

Honda believes is commensurate with the risk free rate following categories: available-for-sale, trading, or held-to- plus a risk premium. Finance subsidiaries of the Company maturity. Debt securities classified as “held-to-maturity” have historically amortized servicing assets or servicing securities are reported at amortized cost. Debt and equity liabilities in proportion to and over the period of estimated securities classified as “trading” securities are reported net servicing income. Effective April 1, 2007, the finance at fair value, with unrealized gains and losses included in subsidiaries of the Company adopted Statement of Financial earnings. Other marketable debt and equity securities are Accounting Standards (SFAS) No. 156, “Accounting for classified as “available-for-sale” securities and are reported Servicing of Financial Assets” which requires the finance at fair value, with unrealized gains or losses, net of deferred subsidiaries of the Company to measure servicing assets taxes included in accumulated other comprehensive income or servicing liabilities at fair value at each reporting date (loss) in the stockholders’ equity section of the consolidated and report changes in fair value in earnings in the period in balance sheets. The costs of available-for-sale securities which the changes occur. The adoption of SFAS No. 156 did sold are accounted for using the moving-average method. not have a material impact on the Company’s consolidated Honda did not hold any “trading” securities at March 31, financial position as of April 1, 2007. Servicing assets and 2007 and 2008, except for retained interests in the sold servicing liabilities at March 31, 2007 and 2008 were not pools of finance receivables, which are accounted for as significant. “trading” securities and included in finance subsidiaries— Taxes collected from customers and remitted to receivables. governmental authorities on revenue-producing transactions Honda periodically compares the fair value of investment are accounted for on a net basis and therefore are excluded securities with their cost basis. If the fair value of investment from revenues in consolidated statements of income. securities has declined below our cost basis and such decline is judged to be other-than-temporary, Honda (f) Cash Equivalents recognizes the impairment of the investment securities Honda considers all highly liquid debt instruments with and the carrying value is reduced to its fair value through an original maturity of three months or less to be cash a charge to income. The determination of other-than- equivalents. Cash equivalents consist of money market temporary impairment is based upon an assessment of the funds and commercial paper, and amount to ¥117,182 million facts and circumstances related to each investment security. and ¥110,336 million ($1,101 million) as of March 31, 2007 In determining the nature and extent of impairment, Honda and 2008, respectively. considers such factors as financial and operating conditions of the issuer, the industry in which the issuer operates, (g) Inventories degree and period of the decline in fair value and other Inventories are stated at the lower of cost, determined relevant factors. principally by the first-in, first-out method, or market. Non-marketable equity securities are carried at cost, and are examined the possibility of impairment periodically. (h) Investments in Securities Investments in securities consist of investment to affiliates (i) Goodwill and debt and equity securities. Investments in affiliates in Goodwill, all of which is allocated to Honda’s reporting which Honda has the ability to exercise significant influence units, is not amortized but is tested for impairment at least over their operating and financial policies, but where Honda annually. Honda completed its annual tests for March 31, does not have a controlling financial interest are accounted 2006, 2007, and 2008 and concluded no impairment needed for using the equity method. Differences between the cost to be recognized. The carrying amount of goodwill at March of investments in affiliates and the amount of underlying 31, 2007 and 2008 was ¥20,791 million and ¥20,498 million equity in net assets of the affiliates principally represent ($205 million), respectively (see note 3). investor level goodwill. Honda considers whether the fair value of any of its (j) Property on Operating Leases equity method investments have declined below their Property on operating leases is reported at cost, less carrying value whenever adverse events or changes in accumulated depreciation. Depreciation of the vehicles is circumstances indicate that recorded values may not be generally provided on a straight-line basis to an estimated recoverable. If Honda considers any such decline to be residual value over the lease term. The residual values of other-than-temporary based on various factors, then a the vehicles related to the operating leases are estimated by write-down will be recorded to estimated fair value. using our estimate of future used vehicle values, taking into Honda classifies its debt and equity securities into the consideration data obtained from third parties. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 6 9

(k) Depreciation and Amortization likely than not recognition threshold are measured at the Depreciation of property, plant and equipment is calculated largest amount of benefit that is a greater than 50 percent principally by the declining-balance method based on likely of being realized upon settlement. FIN No. 48 also estimated useful lives and salvage values of the respective provides guidance on derecognition, classification, interest assets. and penalties, accounting in interim periods, disclosure The estimated useful lives used in computing and transition. The initial adoption of this interpretation did depreciation and amortization of property, plant and not have a material impact on the Company’s consolidated equipment are as follows: financial position. Honda accounts for interest and penalties Asset Life related to the liability for unrecognized tax benefits as a Buildings 3 to 50 years component of income tax expense in the consolidated Machinery and equipment 2 to 20 years statement of income.

(l) Impairment of Long-Lived Assets to Be Held and (n) Product-Related Expenses Used and Long-Lived Assets to Be Disposed Of Advertising and sales promotion costs are expensed as Honda’s long-lived assets and identifiable intangible assets incurred. Advertising expenses for each of the years in the other than goodwill having finite useful lives are reviewed for three-year period ended March 31, 2008 were ¥287,901 impairment whenever events or changes in circumstances million, ¥308,409 million and ¥315,656 million ($3,151 million), indicate that the carrying amount of an asset may not be respectively. Provisions for estimated costs related to recoverable. Recoverability of assets to be held and used product warranty are made at the time the products are is measured by a comparison of the carrying amount of an sold to customers or new warranty programs are initiated. asset to future net cash flows (undiscounted and without Estimated warranty expenses are provided based on interest charges) expected to be generated by the asset. If historical warranty claim experience with consideration such assets are considered to be impaired, the impairment given to the expected level of future warranty costs as well to be recognized is measured by the amount by which the as current information on repair costs. Included in warranty carrying amount of the assets exceeds the estimated fair expenses accruals are costs for general warranties on value of the assets. Assets to be disposed of by sale are vehicles Honda sells and product recalls. reported at the lower of the carrying amount or estimated fair value less costs to sell. (o) Basic Net Income per Common Share Basic net income per common share has been computed (m) Income Taxes by dividing net income available to common stockholders Income taxes are accounted for under the asset and liability by the weighted average number of common shares method. Deferred tax assets and liabilities are recognized outstanding during each year. The weighted average for the future tax consequences attributable to differences number of common shares outstanding for the years between the financial statement carrying amounts of existing ended March 31, 2006, 2007 and 2008 was 1,840,799,671 assets and liabilities and their respective tax bases and shares, 1,824,675,228 shares and 1,815,356,440 shares operating loss and tax credit carryforwards. Deferred tax respectively. There were no potentially dilutive shares assets and liabilities are measured using enacted tax rates outstanding during the years ended March 31, 2006, 2007 expected to apply to taxable income in the years in which or 2008. those temporary differences are expected to be recovered The Company executed a two-for-one stock split for the or settled. The effect on deferred tax assets and liabilities of Company’s common stock effective July 1, 2006. All per a change in tax rates is recognized in earnings in the period share information has been adjusted retroactively for the that includes the enactment date. year ended March 31, 2006 to reflect this stock split. The Company and its consolidated subsidiaries adopted the provision of Financial Accounting Standards (p) Foreign Currency Translation Board (FASB) Interpretation (FIN) No. 48 “Accounting for Foreign currency financial statement amounts are translated Uncertainty in Income Taxes” on April 1, 2007. FIN No. into Japanese yen on the basis of the year-end exchange rate 48 requires that an entity recognizes in the consolidated for all assets and liabilities and the weighted average rate for financial statements the impact of a tax position, if any, the year for all income and expense amounts. The resulting based on the technical merits of the position, when that translation adjustments are included in accumulated other position is more likely than not to be sustained upon comprehensive income (loss) in the stockholders’ equity examination. Benefits from tax positions that meet the more section of the consolidated balance sheets. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 7 0 Annual Report 2008

Foreign currency receivables and payables are translated in other comprehensive income (loss). The amounts are at the applicable current rates on the balance sheet date. All reclassified into earnings in the period when forecasted revenues and expenses associated with foreign currencies hedged transactions affect earnings. When these cash flow are converted at the rates of exchange prevailing when such hedges prove to be ineffective, changes in the fair value of transactions occur. The resulting exchange gains or losses the derivatives are immediately recognized in earnings. are reflected in other income (expense) in the consolidated Changes in the fair value of derivative financial statements of income. instruments not designated as accounting hedges are Foreign currency transaction gains (losses) included in recognized in earnings in the period of the change. other income (expenses)—other for each of the years in the The amount recognized in earnings included in three-year period ended March 31, 2008 are as follows: other income (expenses)—other during the years ended U.S. dollars March 31, 2006, 2007 and 2008 are ¥55,516 million loss, Yen (millions) (millions) (note 2) ¥48,485 million loss and ¥48,746 million ($487 million) gain, 2006 2007 2008 2008 respectively. In relation to this, the Company included gains ¥(38,880) ¥(48,261) ¥2,895 $29 and losses on translation of debts of finance subsidiaries denominated in foreign currencies intended to be hedged (q) Derivative Financial Instruments of ¥45,046 million gain, ¥8,351 million loss and ¥118,997 Honda has entered into foreign exchange agreements and million ($1,188 million) loss in other income (expenses)—other interest rate agreements to manage currency and interest during the years ended March 31, 2006, 2007 and 2008, rate exposures. These instruments include foreign currency respectively. In addition, net realized gains and losses on forward contracts, currency swap agreements, currency interest rate swap contracts not designated as accounting option contracts and interest rate swap agreements. hedges by mainly finance subsidiaries of ¥827 million gain, Honda recognizes at fair value all derivative financial ¥3,309 million gain and ¥10,550 million ($105 million) loss are instruments in its consolidated balance sheets. Derivative included in other income (expenses)—other during the years asset and liability positions are presented net by ended March 31, 2006, 2007 and 2008, respectively. These counterparty on the consolidated balance sheets when valid gains and losses are presented on a net basis. master netting agreement exists and the other conditions Honda doesn’t hold any derivative financial instruments set out in Financial Accounting Standards Board (FASB) for trading purposes. Interpretation (FIN) No. 39, “Offsetting of Amounts Related to Certain Contracts” are met. (r) Shipping and Handling Costs The Company applies hedge accounting for certain Shipping and handling costs included in selling, general and foreign currency forward contracts related to forecasted administrative expenses for each of the years in the three- foreign currency transactions between the Company and its year period ended March 31, 2008 are as follows: subsidiaries. These are designated as cash flow hedges on U.S. dollars Yen (millions) the date derivative contracts are entered into. The Company (millions) (note 2) has a documented currency rate risk management policy. 2006 2007 2008 2008 In addition, it documents all relationships between derivative ¥181,675 ¥219,361 ¥239,737 $2,393 financial instruments designated as cash flow hedges and the relevant hedged items to identify the relationship (s) Asset Retirement Liability between them. The Company assesses, both at the hedge’s Honda recognizes an asset retirement liability if the fair inception and on an ongoing basis, whether the derivative value of the obligation can be reasonably estimated. Asset financial instruments designated as cash flow hedge are retirement obligations include those for which an entity has highly effective to offset changes in cash flows of hedged a legal obligation to perform an asset retirement activity, items. however, the timing and (or) method of settling the obligation When it is determined that a derivative financial are conditional on a future event that may or may not be instrument is not highly effective as a cash flow hedge, when within the control of the entity. the hedged item matures, is sold or is terminated, or when it is identified that the forecasted transaction is no longer (t) New Accounting Pronouncements probable, the Company discontinues hedge accounting. In September 2006, the Financial Accounting Standards To the extent derivative financial instruments are designated Board (FASB) issued Statement of Financial Accounting as cash flow hedges and have been assessed as being Standards (SFAS) No. 157, “Fair Value Measurements”. highly effective, changes in their fair value are recognized This statement defines fair value, establishes a framework WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 1

for measuring fair value in generally accepted accounting an acquirer to recognize the assets acquired, liabilities principles, and expands disclosures about fair value assumed, and any noncontrolling interest in the acquiree at measurements. This statement applies under other the acquisition date measured at that date. The statement accounting pronouncements that require or permit fair shall be applied prospectively to business combinations for value measurements and does not require any new fair which the acquisition date is on and after an entity’s first value measurements. This statement is effective as of an fiscal year that begins after December 15, 2008, with early entity’s first fiscal year that begins after November 15, adoption not permitted. It is not anticipated that adoption 2007. In February 2008, FASB issued FASB staff position will have a material impact on the Company’s consolidated (FSP) No. FAS 157-2 “Effective date of FASB statement No. financial position or results of operations. 157”. This FSP delays the effective date for SFAS No. 157, In December 2007, the Financial Accounting Standards for nonfinancial assets and nonfinancial liabilities, except for Board (FASB) issued Statement of Financial Accounting items that are recognized or disclosed at fair value in the Standards (SFAS) No. 160, “Noncontrolling Interests in financial statements on a recurring basis (at least annually). Consolidated Financial Statements”. This statement It is not anticipated that adoption will have a material impact requires that a noncontrolling interest in a subsidiary is an on the Company’s consolidated financial position or results ownership interest in the consolidated entity that should be of operations. reported as equity in the consolidated financial statements, The Company and its subsidiaries adopted the and requires that changes in a parent’s ownership interest recognition and disclosure provisions of Statement of while the parent retains its controlling financial interest in its Financial Accounting Standards (SFAS) No. 158, “Employers’ subsidiary shall be accounted for as equity transactions. Accounting for Defined Benefit Pension and Other This statement is effective as of an entity’s first fiscal year Postretirement Plans – an amendment of FASB Statements that begins after December 15, 2008, with early adoption No. 87, 88, 106, and 132(R)” on March 31, 2007. not permitted. It is not anticipated that the initial adoption This statement also changes the date at which benefit will have a material impact on the Company’s consolidated obligations are to be measured to the date of the year-end financial position or results of operations. statement of financial position. Certain foreign subsidiaries of the Company use a December 31 measurement date for (u) Cumulative Effect of Prior Year Adjustments their plans. The measurement provisions of this statement In September 2006, the Securities and Exchange are effective for fiscal years ending after December 15, 2008. Commission (SEC) issued Staff Accounting Bulletin No. It is not anticipated that adoption will have a material impact 108, “Considering the Effects of Prior Year Misstatements on the Company’s consolidated financial position or results when Quantifying Misstatements in Current Year Financial of operations. Statements” (“SAB No. 108”). SAB No. 108 provides In February 2007, the Financial Accounting Standards interpretive guidance on how the effects of the carryover or Board (FASB) issued Statement of Financial Accounting reversal of prior year misstatements should be considered Standards (SFAS) No. 159, “The Fair Value Option for in quantifying current year misstatements for the purpose of Financial Assets and Financial Liabilities – including an materiality assessment. SAB No. 108 requires that registrants amendment of SFAS No. 115”. This statement permits quantify a current year misstatement using an approach that entities to choose to measure at fair value many financial considers both the impact of prior year misstatements that instruments and certain other items that are not currently remain on the balance sheet and those that were recorded in required to be measured at fair value. Subsequent changes the current year income statement. The Company historically in fair value for designated items will be required to be quantified misstatements and assessed materiality based on reported in earnings in the current period. The statement a current year income statement approach. The transition also establishes presentation and disclosure requirements provisions of SAB No. 108 permit the Company to adjust for for similar types of assets and liabilities measured at fair the cumulative effect on retained earnings of immaterial errors value. The statement is effective for financial statements related to prior years. issued for fiscal years beginning after November 15, 2007. The Company adopted SAB No. 108 effective Honda is currently in the process of assessing the financial beginning of the fiscal year ended March 31, 2007, and impact of adoption. adjusted the items described below in the accompanying In December 2007, the Financial Accounting Standards consolidated financial statements as of the beginning of the Board (FASB) issued Statement of Financial Accounting fiscal year ended March 31, 2007 to correct the prior year Standards (SFAS) No. 141(R), “Business Combinations”. This misstatements, which were considered to be immaterial to statement replaces SFAS No. 141. This statement requires the consolidated statements of income and consolidated WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 7 2 Annual Report 2008

balance sheets in prior years under the income statement the parent-only financial statements of the affiliates, as the approach. The net impact of these adjustments decreased Company assessed that the difference between the total Honda’s beginning retained earnings and beginning amounts of equity in income on the consolidation basis and accumulated other comprehensive loss for 2007 by ¥62,640 those on the parent-only basis had been immaterial to the million, net of tax effect of ¥31,235 million, and ¥18,149 Company’s consolidated financial statements under the million, respectively, for the items described below: income statement approach. This misstatement resulted 1. The Company and its certain domestic subsidiaries in in an accumulated understatement of equity in income of Japan historically calculated depreciation of property, plant affiliates and the carrying value of the investments in affiliates and equipment, using a salvage value determined as 5% in the consolidated financial statements. of the acquisition cost. However, since the sales proceeds 3. The Company reclassified the residual tax effect of received for the liquidated assets and their economical value minimum pension liabilities included in accumulated other at the end of its useful life historically have been nominal, the comprehensive income during the year ended March 31, Company and its certain domestic subsidiaries assessed 2006, which related to corporate tax rate changes in the the adequacy of the salvage value and concluded that past based on the proportional allocation over the expiration they should have calculated depreciation using the salvage of unrecognized obligation. However, the residual tax effect value of ¥1 for its property, plant and equipment. The should have been reclassified only when the pension plan Company and its certain domestic subsidiaries recalculated is liquidated or dissolved under the portfolio approach. This depreciation expenses retrospectively considering the misstatement resulted in an understatement of accumulated corrected salvage value. The reassessment indicated that other comprehensive loss and corresponding overstatement an accumulated overstatement of property, plant and in income tax benefit. equipment in the consolidated financial statements had occured. (v) Reclassifications and Revisions of Classifications 2. Equity in income of affiliates should be recognized based Certain revisions for misclassifications and reclassifications on affiliates’ consolidated financial statements in accordance have been made to the prior years’ consolidated financial with U.S. generally accepted accounting principles. statements to conform to the presentation used for the However, the Company historically recognized equity in fiscal year ended March 31, 2008. Detailed information is income of affiliates based on the results of operations of provided in note 3.

2. Basis of Translating Financial Statements

The consolidated financial statements are expressed in Those U.S. dollar amounts presented in the consolidated Japanese yen. However, the consolidated financial financial statements and related notes are included solely statements as of and for the year ended March 31, 2008 for the reader. This translation should not be construed have been translated into United States dollars at the rate of as a representation that all the amounts shown could be ¥100.19 = U.S.$1, the approximate exchange rate prevailing converted into U.S. dollars. on the Tokyo Foreign Exchange Market on March 31, 2008.

3. Revisions of Classifications

Certain revisions for misclassifications have been made to ¥9,799 million at March 31, 2007. the prior years’ consolidated financial statements. (b) The long-term portion of deferred tax assets related to (a) Investor level goodwill in affiliates, which was classified pension benefit plans, which was classified as deferred as other assets, has been revised to be classified as income taxes at March 31, 2007, has been revised to be investments in and advances to affiliates. The impact of classified as other assets. The impact of this revision in the this revision in the consolidated balance sheets resulted in consolidated balance sheet resulted in an increase in other an increase in investments in and advances to affiliates and assets and a corresponding decrease in deferred income a corresponding decrease in other assets in the amount of taxes in the amount of ¥59,782 million at March 31, 2007. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 3

4. Finance Subsidiaries—Receivables and Securitizations

Finance subsidiaries—receivables represent finance portfolio and the borrower’s ability to pay. receivables generated by finance subsidiaries. Certain Finance subsidiaries of the Company purchase finance receivables related to sales of inventory are included insurance to cover a substantial amount of the estimated in trade receivables and other assets in the consolidated residual value of vehicles leased as direct financing leases balance sheets. Finance receivables include wholesale to customers. The allowance for losses on lease residual financing to dealers and retail financing and direct financing values is maintained at an amount management deems leases to consumers. adequate to cover estimated losses on the uninsured portion The allowance for credit losses is maintained at an of the vehicles’ lease residual values. The allowance is amount management deems adequate to cover estimated also based on management’s evaluation of many factors, losses on finance receivables. The allowance is based on including current economic conditions, industry experience management’s evaluation of many factors, including current and the finance subsidiaries’ historical experience with economic trends, industry experience, inherent risks in the residual value losses.

Finance subsidiaries—receivables, net, consisted of the following at March 31, 2007 and 2008: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Direct financing leases ¥1,892,566 ¥1,212,634 $12,103 Retail 2,923,944 3,143,376 31,374 Wholesale 437,242 404,433 4,037 Term loans to dealers 14,916 19,605 196 Total finance receivables 5,268,668 4,780,048 47,710 Retained interests in the sold pools of finance receivables 88,110 54,636 545 5,356,778 4,834,684 48,255 Less: Allowance for credit losses 35,020 34,805 347 Allowance for losses on lease residual values 33,928 24,887 248 Unearned interest income and fees 143,131 73,695 736 5,144,699 4,701,297 46,924 Less: Finance receivables included in trade receivables, net 509,697 476,305 4,754 Finance receivables included in other assets, net 168,952 176,444 1,761 Finance subsidiaries—receivables, net 4,466,050 4,048,548 40,409

Less current portion 1,426,224 1,340,728 13,382 Noncurrent finance subsidiaries—receivables, net ¥3,039,826 ¥2,707,820 $27,027

The following schedule shows the contractual maturities of finance receivables for each of the five years following March 31, 2008 and thereafter: Yen Years ending March 31 (millions) 2009 ¥1,854,779 2010 1,192,229 2011 820,283 2012 576,389 2013 274,965 After five years 61,403 2,925,269 Total ¥4,780,048 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 7 4 Annual Report 2008

Net sales and other operating revenue and cost of sales include finance income and related cost of finance subsidiaries for each of the years in the three-year period ended March 31, 2008 as follows: U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Finance income ¥310,937 ¥413,334 ¥549,052 $5,480 Finance cost 115,636 188,844 303,890 3,033

Finance subsidiaries of the Company periodically sell Finance subsidiaries sold direct financing lease finance receivables. Finance subsidiaries sold retail finance receivables subject to limited recourse provisions totaling receivables subject to limited recourse provisions totaling approximately ¥100,374 million in fiscal year 2006. Pre-tax approximately ¥930,629 million, ¥562,488 million and net gain on such sales resulted in a net gain of ¥483 million ¥232,474 million ($2,320 million) to investors in fiscal years is included in a gain on sale of receivables for fiscal year 2006, 2007 and 2008, respectively. Pre-tax net gains or 2006. The leases sold during fiscal year 2006 had 100% losses on such sales resulted in loss of ¥11,849 million, a insurance coverage of the residual value of the vehicles gain of ¥1,175 million, and a gain of ¥9 million ($0.1 million) collateralizing those leases. Finance subsidiaries did not sell in fiscal years 2006, 2007 and 2008, respectively, which are any direct financing lease receivable in fiscal year 2007 and included in gain or loss on sale of receivables. 2008.

Retained interests in securitizations were comprised of the following at March 31, 2007 and 2008: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Subordinated certificates ¥44,198 ¥28,846 $288 Residual interests 43,912 25,790 257 Total ¥88,110 ¥54,636 $545

Key economic assumptions used in initially estimating the fair values at the date of the securitizations during each of the years in the three-year period ended March 31, 2008 are as follows: 2006 2007 2008 Weighted average life (years) 1.60 to 1.75 1.66 to 1.77 1.66 to 1.73 Prepayment speed 1.00% to 1.30% 1.25% to 1.30% 1.25% Expected credit losses 0.35% to 0.55% 0.23% to 0.27% 0.21% to 0.30% Residual cash flows discount rate 6.53% to 12.00% 5.43% to 12.00% 5.82% to 12.00%

At March 31, 2008, the significant assumptions used in estimating the retained interest in the sold pools of finance receivables are as follows: Weighted average assumption Prepayment speed 1.27% Expected credit losses 0.19% Residual cash flows discount rate 11.44%

The sensitivity of the current fair value to immediate 10% and 20% adverse changes from expected levels for each significant assumption above mentioned were immaterial. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 5

The following illustration presents quantitative information about balances of outstanding securitized portfolios as of March 31, 2007 and 2008. U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Securitized receivables Retail ¥1,208,409 ¥ 664,879 $6,636 Direct financing leases 67,758 33,470 334 Total securitized receivables ¥1,276,167 ¥ 698,349 $6,970

5. Inventories

Inventories at March 31, 2007 and 2008 are summarized as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Finished goods ¥ 772,917 ¥ 755,122 $ 7,537 Work in process 34,970 38,756 387 Raw materials 375,229 405,382 4,046 ¥1,183,116 ¥1,199,260 $11,970

6. Investments and Advances—Affiliates

Significant investments in affiliates accounted for under Certain adjustments were recorded to investments and the equity method at March 31, 2007 and 2008 are Showa advances to affiliates as of April 1, 2006, please refer to note Corporation (33.5%), Keihin Corporation (42.2%), Guangzhou 1(u) for further information. Honda Automobile Co., Ltd. (50.0%), Dongfeng Honda The difference between the carrying amount of Engine Co., Ltd. (50.0%), and P.T. Astra Honda Motor investment in affiliates and the amount of underlying equity in (50.0%). net assets is not material as of March 31, 2007 and 2008.

Investments in affiliates include equity securities which have quoted market values at March 31, 2007 and 2008 compared with related carrying amounts as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007* 2008 2008 Carrying amount ¥185,914 ¥ 210,532 $2,101 Market value 412,892 263,946 2,634 * See note 3. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 7 6 Annual Report 2008

Certain combined financial information in respect of affiliates accounted for under the equity method at March 31, 2007 and 2008, and for each of the years in the three-year period ended March 31, 2008 is shown below: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Current assets ¥1,434,855 ¥1,576,260 $15,732 Other assets, principally property, plant and equipment 1,317,057 1,409,729 14,071 Total assets 2,751,912 2,985,989 29,803 Current liabilities 1,038,968 1,139,403 11,372 Other liabilities 306,418 333,601 3,330 Total liabilities 1,345,386 1,473,004 14,702 Stockholders’ equity ¥1,406,526 ¥1,512,985 $15,101

U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Net sales ¥3,426,348 ¥4,598,573 ¥5,275,548 $52,655 Net income 229,640 268,577 283,927 2,834 Cash dividends received by Honda during the year 64,055 54,849 67,764 676

Sales to affiliates by the Company and its subsidiaries and Honda’s equity in undistributed income of affiliates at March sales among such affiliates are made on the same basis as 31, 2007 and 2008 included in retained earnings was ¥354,552 sales to unaffiliated parties. million and ¥400,703 million ($3,999 million), respectively.

Trade receivables and trade payables include the following balances with affiliates at March 31, 2007 and 2008, and purchases and sales include the following transactions with affiliates for each of the years in the three-year period ended March 31, 2008. Honda mainly purchases materials, supplies and services from affiliates, and sells parts used in its products, equipment and services to affiliates. U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Trade receivables from ¥ 77,317 ¥104,232 $1,040 Trade payables to 155,603 159,848 1,595

U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Purchases from ¥611,711 ¥1,083,686 ¥ 1,066,342 $10,643 Sales to 155,195 329,398 366,832 3,661

WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 7

7. Investments and Advances—Other

Investments and advances at March 31, 2007 and 2008 consisted of the following: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Current Auction rate securities ¥41,318 ¥ — $ — Corporate debt securities 311 641 6 U.S. government and agency debt securities 2,993 — — Advances 581 1,913 19 ¥45,203 ¥2,554 $25

Investments and advances due within one year are included in other current assets.

U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Noncurrent Auction rate securities (non-marketable) ¥ — ¥ 13,661 $ 136 Marketable equity securities 169,280 120,085 1,199 Government bonds 2,999 2,999 30 U.S. government and agency debt securities 10,034 17,032 170 Non-marketable equity securities accounted for under the cost method Non-marketable preferred stocks 2,000 2,000 20 Other 11,639 13,725 137 Guaranty deposits 30,847 29,446 294 Advances 2,481 1,896 19 Other 25,330 21,266 212 ¥254,610 ¥222,110 $2,217

Certain information with respect to marketable securities at March 31, 2007 and 2008 is summarized below: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Available-for-sale Cost ¥107,573 ¥ 61,104 $ 610 Fair value 210,598 120,085 1,199 Gross unrealized gains 103,113 64,084 640 Gross unrealized losses 88 5,103 51

Held-to-maturity Amortized cost ¥ 16,337 ¥ 20,672 $ 206 Fair value 16,348 20,851 208 Gross unrealized gains 26 179 2 Gross unrealized losses 15 — — WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 7 8 Annual Report 2008

Maturities of debt securities classified as held-to-maturity at March 31, 2008 were as follows: U.S. dollars Yen (millions) (millions) (note 2) Due within one year ¥ 641 $ 6 Due after one year through five years 18,033 180 Due after five years through ten years 1,998 20 Total ¥20,672 $ 206

Realized gains and losses from available-for-sale securities ¥462 million net losses, ¥10,463 million net gains and ¥232 included in other expenses (income)—other for each of the million ($2 million) net losses, respectively. years in the three-year period ended March 31, 2008, were,

Gross unrealized losses on marketable securities and fair value of the related securities, aggregated by length of time that individual securities have been in a continuous unrealized loss position at March 31, 2008 were as follows: U.S. dollars Yen (millions) (millions) (note 2) Unrealized Unrealized Fair value losses Fair value losses Available-for-sale Less than 12 months ¥12,242 ¥(4,910) $ 122 $(49) 12 months or longer 215 (193) 2 (2) ¥12,457 ¥(5,103) $ 124 $(51) Held-to-maturity Less than 12 months ¥ — ¥ — $ — $ — 12 months or longer — — — — ¥ — ¥ — $ — $ —

Honda judged this decline in fair value of investment securities to be temporary, with considering such factors as financial and operating conditions of the issuer, the industry in which the issuer operates, degree and period of the decline in fair value and other relevant factors.

8. Property on Operating Leases

Future minimum lease rentals expected to be received from property on operating leases at March 31, 2008 are as follows: Yen Years ending March 31: (millions) 2009 ¥177,679 2010 164,938 2011 73,503 2012 10,095 2013 412 Total future minimum lease rentals ¥426,627

Future minimum rentals as shown above should not necessarily be considered indicative of future cash collections. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 7 9

9. Short-term and Long-term Debt

Short-term debt at March 31, 2007 and 2008 is as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Short-term bank loans ¥ 311,117 ¥ 415,605 $ 4,148 Medium-term notes 182,355 436,731 4,359 Commercial paper 772,396 834,779 8,332 ¥1,265,868 ¥ 1,687,115 $16,839

The weighted average interest rates on short-term debt outstanding at March 31, 2007 and 2008 were 4.00% and 4.36%, respectively.

Long-term debt at March 31, 2007 and 2008 is as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Honda Motor Co., Ltd.: Loans, maturing through 2031: Unsecured, principally from banks ¥ 516 ¥ 435 $ 4 516 435 4 Subsidiaries: Loans, maturing through 2030 Secured, principally from banks 18,581 13,614 136 Unsecured, principally from banks 134,949 164,887 1,647 0.47% Japanese yen unsecured bond due 2007 50,000 — — 0.79% Japanese yen unsecured bond due 2008 30,000 30,000 299 0.99% Japanese yen unsecured bond due 2009 30,000 30,000 299 1.14% Japanese yen unsecured bond due 2009 30,000 30,000 299 0.31% Japanese yen unsecured bond due 2010 150 100 1 0.66% Japanese yen unsecured bond due 2010 30,000 30,000 299 0.94% Japanese yen unsecured bond due 2010 30,000 30,000 299 1.30% Japanese yen unsecured bond due 2011 — 40,000 399 1.51% Japanese yen unsecured bond due 2011 30,000 30,000 299 1.48% Japanese yen unsecured bond due 2012 — 30,000 299 3.65% Thai baht unsecured bond due 2007 7,340 — — 5.32% Thai baht unsecured bond due 2008 3,670 3,180 32 3.82% Thai baht unsecured bond due 2009 — 3,180 32 5.46% Thai baht unsecured bond due 2009 5,505 4,770 48 4.20% Thai baht unsecured bond due 2010 — 9,540 96 Medium-term notes, maturing through 2023 2,282,138 2,259,434 22,552 Less unamortized discount, net 1,697 1,438 14 2,680,636 2,707,267 27,022 Total long-term debt 2,681,152 2,707,702 27,026 Less current portion 775,409 871,050 8,694 ¥1,905,743 ¥ 1,836,652 $18,332 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 0 Annual Report 2008

The loans maturing through 2031 and through 2030 are were subject to specific mortgages securing indebtedness. either secured by property, plant and equipment or subject Furthermore, finance subsidiaries—receivables of to collateralization upon request, and their interest rates approximately ¥1,931 million at March 31, 2007 were range from 0.69% to 12.54% per annum at March 31, 2008 pledged as collateral by a financial subsidiary for certain and weighted average interest rate on total outstanding long- loans. There is no collateral pledged at March 31, 2008. term debt at March 31, 2007 and 2008 is 3.96% and 4.11%, Medium-term notes are unsecured, and their interest respectively. Property, plant and equipment with a net book rates range from 0.77% to 5.38% at March 31, 2007 and value of approximately ¥23,654 million and ¥26,564 million from 1.03% to 5.39% at March 31, 2008. ($265 million) at March 31, 2007 and 2008, respectively,

The following schedule shows the maturities of long-term debt for each of the five years following March 31, 2008 and thereafter: Yen Years ending March 31: (millions) 2009 ¥ 871,050 2010 769,785 2011 470,819 2012 268,981 2013 295,935 After five years 31,132 1,836,652 Total ¥ 2,707,702

Certain of the Company’s subsidiaries have entered At March 31, 2008, Honda also had committed lines of into currency swap and interest rate swap agreements for credit amounting to ¥923,379 million ($9,216 million), none of hedging currency and interest rate exposures resulting from which was in use. The committed lines are used to back up the issuance of long-term debt. Fair value of contracts the commercial paper programs. Borrowings under those related to currency swaps and interest rate swaps is committed lines of credit generally are available at the prime included in other assets and other current assets and/or interest rate. liabilities in the consolidated balance sheets, as appropriate As is customary in Japan, both short-term and long-term (see note 16). Unless a right of setoff exists, the offsetting of bank loans are made under general agreements which assets and liabilities is not made in the consolidated balance provide that security and guarantees for present and future sheets. indebtedness will be given upon request of the bank, and At March 31, 2008, Honda had unused line of credit that the bank shall have the right to offset cash deposits facilities amounting to ¥938,591 million ($9,368 million), of against obligations that have become due or, in the event which ¥409,971 million ($4,092 million) related to commercial of default, against all obligations due to the bank. Certain paper programs and ¥528,620 million ($5,276 million) related to debenture trust agreements provide that Honda must give medium-term notes programs. Honda is authorized to obtain additional security upon request of the trustee. financing at prevailing interest rates under these programs. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 8 1

10. Other Liabilities

Other liabilities at March 31, 2007 and 2008 consist of the following: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Accrued liabilities for product warranty, excluding current portion ¥ 153,409 ¥ 152,733 $ 1,524 Pension and other postretirement benefits (note 13) 524,457 593,771 5,926 Deferred income taxes 316,048 304,933 3,044 Other 243,798 362,833 3,622 ¥1,237,712 ¥1,414,270 $14,116

11. Income Taxes

Total income tax expense/(benefit) for each of the years in the three-year period ended March 31, 2008 were allocated as follows: U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Income from continuing operations ¥317,189 ¥283,846 ¥387,436 $3,867

Other comprehensive income (note 15) 154,370 935 (89,519) (893) ¥471,559 ¥284,781 ¥297,917 $2,974

Income before income taxes, minority interest and equity in income of affiliates by domestic and foreign source and income tax expense (benefit) for each of the years in the three-year period ended March 31, 2008 consisted of the following: Yen (millions) Income taxes Income before income taxes Current Deferred Total 2006: Japanese ¥317,997 ¥103,697 ¥ 38,225 ¥ 141,922 Foreign 511,907 216,248 (40,981) 175,267 ¥829,904 ¥319,945 ¥ (2,756) ¥ 317,189 2007: Japanese ¥182,433 ¥ 89,155 ¥(13,798) ¥ 75,357 Foreign 610,435 211,139 (2,650) 208,489 ¥792,868 ¥300,294 ¥(16,448) ¥ 283,846 2008: Japanese ¥228,868 ¥181,010 ¥ (4,064) ¥ 176,946 Foreign 666,973 175,085 35,405 210,490 ¥895,841 ¥356,095 ¥ 31,341 ¥ 387,436 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 2 Annual Report 2008

U.S. dollars (millions) (note 2) Income taxes Income before income taxes Current Deferred Total 2008: Japanese $2,284 $1,807 $ (41) $1,766 Foreign 6,657 1,747 354 2,101 $8,941 $3,554 $313 $3,867

The statutory income tax rate is approximately 40% for each of the years in the three-year period ended March 31, 2008. The foreign subsidiaries are subject to taxes based on income at rates ranging from 16% to 40%. The effective tax rate for Honda for each of the years in the three-year period ended March 31, 2008 differs from the Japanese statutory income tax rate for the following reasons: 2006 2007 2008 Statutory income tax rate 40.0% 40.0% 40.0% Valuation allowance provided for current year operating losses of subsidiaries 0.3 0.4 0.5 Difference in statutory tax rates of foreign subsidiaries (2.3) (3.7) (4.9) Reversal of valuation allowance due to utilization of operating loss carryforwards (0.8) (0.2) (0.9) Research and development credit (3.0) (3.3) (3.2) Other adjustments relating to prior years 3.1 — — Adjustments for unrecognized tax benefits — — 9.0 Other 0.9 2.6 2.7 Effective tax rate 38.2% 35.8% 43.2%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2007 and 2008 are presented below: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Deferred tax assets: Inventories ¥ 35,114 ¥ 33,441 $ 334 Allowance for dealers and customers 153,328 136,155 1,359 Accrued bonus 40,628 40,803 407 Property, plant and equipment 61,409 67,387 673 Foreign tax credit 10,427 11,367 113 Operating loss carryforwards 39,781 36,625 366 Pension and other postretirement benefits 210,378 230,819 2,304 Other 141,104 164,258 1,639 Total gross deferred tax assets 692,169 720,855 7,195 Less valuation allowance 35,447 34,434 344 Net deferred tax assets 656,722 686,421 6,851 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 8 3

U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Deferred tax liabilities: Inventories (13,650) (8,877) (89) Prepaid pension expenses (34,422) (37,115) (370) Property, plant and equipment, excluding lease transactions (59,680) (49,293) (492) Direct financing lease transactions (388,194) (320,742) (3,201) Operating lease transactions (17,322) (72,138) (720) Undistributed earnings of subsidiaries and affiliates (106,273) (120,744) (1,205) Net unrealized gains on marketable securities (41,039) (23,940) (239) Other (27,262) (26,514) (266) Total gross deferred tax liabilities (687,842) (659,363) (6,582) Net deferred tax (liability) asset ¥ (31,120) ¥ 27,058 $ 269

Deferred income tax assets and liabilities at March 31, 2007 and 2008 are reflected in the consolidated balance sheets under the following captions: U.S. dollars Yen (millions) (millions) (note 2) 2007* 2008 2008 Current assets—Deferred income taxes ¥ 155,390 ¥ 158,825 $ 1,585 Other assets 131,365 175,933 1,756 Other current liabilities (1,827) (2,767) (28) Other liabilities (316,048) (304,933) (3,044) Net deferred tax (liability) asset ¥ (31,120) ¥ 27,058 $ 269 *See note 3.

In assessing the realizability of deferred tax assets, which the deferred tax assets are deductible, management management considers whether it is more likely than not believes it is more likely than not that Honda will realize that some portion or all of the deferred tax assets will not the benefits of these deductible differences and operating be realized. The ultimate realization of deferred tax assets loss carryforwards, net of the existing valuation allowances is dependent upon the generation of future taxable income at March 31, 2007 and 2008. The net change in the total over the periods in which those temporary differences valuation allowance for the year ended March 31, 2006 was become deductible and operating loss carryforwards an increase of ¥10,502 million, for the year ended March 31, utilized. Management considers the scheduled reversal 2007 was a decrease of ¥34,792 million, and for the year of deferred tax liabilities, projected future taxable income ended March 31, 2008 was a decrease of ¥1,013 million and tax planning strategies in making this assessment. ($10 million). The valuation allowance primarily relates to Based upon the level of historical taxable income and deferred tax assets associated with net operating loss projections for future taxable income over the periods carryforwards incurred by certain foreign subsidiaries. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 4 Annual Report 2008

At March 31, 2008, certain of the Company’s subsidiaries have operating loss carryforwards for income tax purposes of ¥112,182 million ($1,120 million), which are available to offset future taxable income, if any. Periods available to offset future taxable income vary in each tax jurisdiction and range from one year to an indefinite period as follows: U.S. dollars Yen (millions) (millions) (note 2) Within 1 year ¥ 3,180 $ 32 1 to 5 years 14,846 148 5 to 15 years 21,993 220 Indefinite periods 72,163 720 ¥112,182 $1,120

At March 31, 2007 and 2008, Honda did not recognize million). As of March 31, 2008, Honda’s gross unrecognized deferred tax liabilities of ¥78,252 million and ¥105,848 million tax benefits totaled ¥99,527 million ($993 million). Of this ($1,056 million), respectively, for certain portions of the amount, the amount that would impact Honda’s effective tax undistributed earnings of the Company’s foreign subsidiaries rate, if recognized, is ¥85,403 million ($852 million). because such portions were considered indefinitely Honda recognized interest and penalty of ¥3,011 million reinvested. At March 31, 2007 and 2008, the undistributed ($30 million) for the year ended March 31, 2008. As of earnings not subject to deferred tax liabilities were ¥2,995,170 March 31, 2008, Honda had recorded approximately ¥5,960 million and ¥3,327,339 million ($33,210 million), respectively. million ($59 million) for accrued interest and accrued penalty. Honda adopted the provision of FIN No. 48 on April A reconciliation of the beginning and ending amount of 1, 2007. As of the date of adoption of FIN No. 48, Honda unrecognized tax benefits is as follows: identified unrecognized tax benefits of ¥36,330 million ($363

U.S. dollars Yen (millions) (millions) (note 2) Balance at beginning of year ¥ 36,330 $ 363 Additions for tax positions related to the current year 9,213 92 Additions for tax positions of prior years 74,674 745 Reductions for tax positions of prior years (14,769) (147) Settlements (51) (1) Reductions for statute of limitations (555) (6) Effect of exchange rate changes (5,315) (53) Balance at end of year ¥ 99,527 $ 993

Tax liabilities associated with uncertain tax positions are In addition, Honda has open tax years from primarily 2001 primarily classified as other (noncurrent) liabilities, as we do to 2008 with various significant taxing jurisdictions including not expect to pay cash or settle on these positions within the the United States (fiscal years 2001-2008), Japan (fiscal years next twelve months. 2002-2008), Canada, the United Kingdom, Germany, France, Honda is subject to income tax examinations in many Belgium, Thailand, India, Brazil, and Australia. tax jurisdictions, mainly related to transfer pricing issues. If our estimates of unrecognized tax benefits and potential Tax examinations can involve complex issues and the tax benefits are not representative of actual outcomes, our resolution of issues may span multiple years, particularly if consolidated financial statements could be materially affected subject to negotiation or litigation. Although Honda believes in the period of settlement or when the statutes of limitations its estimates of the total unrecognized tax benefits are expire, as we treat these events as discrete items in the period reasonable, uncertainties regarding the final determination of of resolution. It is difficult to estimate the timing and range income tax audit settlements and any related litigation could of possible change related to our uncertain tax positions, affect the amount of total unrecognized tax benefits in the as finalizing audits with the relevant income tax authorities future periods. may involve formal administrative and legal proceedings. The Company has been examined by the Tokyo Regional Accordingly, it is not possible to reasonably estimate the Taxation Bureau regarding transfer pricing matters for the expected changes to the total unrecognized tax benefits period from the year ended March 31, 2002 to the year over next twelve months, although any settlements or statute ended March 31, 2007. Honda has recognized the liability expirations may result in a significant increase or decrease in for unrecognized tax benefits, including those related to this our total unrecognized tax benefits, including those positions examination. related to tax examinations being currently conducted. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 8 5

12. Dividends and Legal Reserves

The Company Law of Japan provides that earnings in an to the legal reserves. Dividends per share for each of the amount equal to 10% of dividends of retained earnings shall years in the three-year period ended March 31, 2008 were be appropriated as a capital surplus or a legal reserve on the ¥38.5, ¥77 and ¥84 ($0.84), respectively. The accompanying date of distribution of retained earnings until an aggregated consolidated financial statements do not include any provision amount of capital surplus and a legal reserve equals 25% of for the dividend of ¥22 ($0.22) per share aggregating ¥39,921 stated capital. Certain foreign subsidiaries are also required million ($398 million) proposed and resolved in the general to appropriate their earnings to legal reserves under the laws stockholders’ meeting held in June 2008. of the respective countries. The Company executed a two-for-one stock split for the Dividends and appropriations to the legal reserves Company’s common stock effective July 1, 2006. Information charged to retained earnings during the years in the three- pertaining to dividends per share has been adjusted year period ended March 31, 2008 represent dividends retroactively for the year ended March 31, 2006 to reflect this paid out during those years and the related appropriations stock split.

13. Pension and Other Postretirement Benefits

The Company and its subsidiaries have various pension the fair value of the obligation and the assets required to be plans covering substantially all of their employees in Japan transferred to the government should be accounted for and and certain employees in foreign countries. Benefits under separately disclosed as a subsidy. the plans are primarily based on the combination of years of As stipulated in the Japanese Welfare Pension service and compensation. The funding policy is to make Insurance Law, the “Honda Employees’ Pension Fund (a periodic contributions as required by applicable regulations. confederated welfare pension fund, the “Fund”)”, of which Plan assets consist primarily of listed equity securities and the Company and a part of its domestic subsidiaries and bonds. affiliates accounted for under the equity method were Retirement benefits for directors, excluding certain members, has obtained approval from the Japanese Minister benefits, are provided in accordance with management of Health, Labor and Welfare for exemption from benefits policy. There are occasions where officers other than obligations related to past employee service with respect to directors receive special lump-sum payments at retirement. the substitutional portion of the Fund on July 1, 2005 and Such payments are charged to income as paid since completed its transfer on March 9, 2006. Previously on amounts vary with circumstances and it is impractical to April 1, 2004, the Company received approval of exemption compute a liability for future payments. from the obligation for benefits related to future employee In January 2003, the Emerging Issues Task Force (EITF) services with respect to the fund. As a result, the Company reached a final consensus on Issue No. 03-2 “Accounting recognized a gain of ¥228,681 million, which is the difference for the Transfer to the Japanese Government of the between the settled accumulated benefit obligation and the Substitutional Portion of Employee Pension Fund Liabilities” assets transferred to the government; a gain of ¥56,448 (“EITF 03-2”). EITF 03-2 addresses accounting for a transfer million for the derecognizing of previous accrued salary to the Japanese government of a substitutional portion of an progression; and settlement loss of ¥147,113 million for Employees’ Pension Fund (“EPF”) plan, which is a defined the related unrecognized loss. Collectively, the Company benefit pension plan established under the Welfare Pension recognized a net gain of ¥138,016 million for the fiscal year Insurance Law. EITF 03-2 requires employers to account ended March 31, 2006. for the separation process of the substitutional portion The Company and its consolidated subsidiaries adopted from the entire EPF plan (which includes a corporation SFAS No. 158, “Employers’ Accounting for Defined Benefit portion) upon completion of the transfer to the government Pension and Other Postretirement Plans – an amendment of of the substitutional portion of the benefit obligation and FASB Statements No. 87, 88, 106, and 132(R)” on March 31, related plan assets. The separation process is considered 2007, recognized its overfunded or underfunded status as the culmination of a series of steps in a single settlement an asset or liability in its consolidated balance sheets. transaction. Under this approach, the difference between WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 6 Annual Report 2008

The incremental effect of applying SFAS No. 158 at March 31, 2007, on balance sheet items is as follows: Yen (millions) Before After Application of Application of SFAS 158 Adjustments SFAS 158 Other assets*1 ¥ 625,834 ¥ 11,347 ¥ 637,181 Total assets 12,025,153 11,347 12,036,500 Accrued expenses 847,008 (39,667) 807,341 Total current liabilities 4,327,194 (39,667) 4,287,527 Other liabilities 1,047,374 190,338 1,237,712 Total liabilities 7,280,311 150,671 7,430,982 Accumulated other comprehensive loss, net*2 (287,842) (139,324) (427,166) Total stockholder’s equity 4,621,935 (139,324) 4,482,611 *1 See note 3. *2 The incremental effect of applying SFAS No. 158 on Accumulated other comprehensive loss, net, includes tax effect of ¥72,881 million.

Reconciliations of beginning and ending balances of the pension benefit obligations and the fair value of the plan assets are as follows: Yen (millions) Japanese plans Foreign plans 2007 2008 2007 2008 Change in benefit obligations: Benefit obligations at beginning of year ¥(1,133,325) ¥(1,206,419) ¥(395,416) ¥(434,757) Service cost (42,115) (41,133) (30,492) (30,259) Interest cost (23,809) (24,128) (22,373) (24,661) Plan participants’ contributions — — (129) (146) Actuarial gain (loss) (4,165) (785) 21,746 44,695 Benefits paid 31,638 39,106 3,731 4,596 Amendment — — (10) (42) Business combination (34,643) — (906) — Foreign exchange translation — — (10,908) 62,220 Benefit obligations at end of year ¥(1,206,419) ¥(1,233,359) ¥(434,757) ¥(378,354) Change in plan assets: Fair value of plan assets at beginning of year 712,331 782,835 358,075 449,467 Actual return on plan assets 36,223 (62,277) 46,161 23,780 Employer contributions 33,649 35,513 40,163 36,715 Plan participants’ contributions — — 129 146 Benefits paid (31,638) (39,106) (3,731) (4,596) Business combination 32,270 — 875 — Foreign exchange translation — — 7,795 (66,410) Fair value of plan assets at end of year ¥ 782,835 ¥ 716,965 ¥ 449,467 ¥ 439,102

Funded status ¥ (423,584) ¥ (516,394) ¥ 14,710 ¥ 60,748 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 8 7

Amounts recognized in the consolidated balance sheets consist of: Yen (millions) Japanese plans Foreign plans 2007 2008 2007 2008 Noncurrent assets ¥ 3,283 ¥ 1,573 ¥ 51,000 ¥ 88,603 Current liabilities (5,272) (5,524) (6) (2) Noncurrent liabilities (421,595) (512,443) (36,284) (27,853) Total ¥(423,584) ¥(516,394) ¥ 14,710 ¥ 60,748

Amounts recognized in accumulated other comprehensive income consist of: Yen (millions) Japanese plans Foreign plans 2007 2008 2007 2008 Actuarial loss (gain) ¥331,485 ¥406,128 ¥ 57,578 ¥ 19,710 Net transition obligation 1,741 — 279 234 Prior service cost (benefit) (68,507) (61,218) 8,064 7,389 Total ¥264,719 ¥344,910 ¥ 65,921 ¥ 27,333

Pension plans with accumulated benefit obligations in excess of plan assets: Yen (millions) Japanese plans Foreign plans 2007 2008 2007 2008 Projected benefit obligations ¥(1,164,971) ¥(1,217,213) ¥(4,403) ¥(2,892) Accumulated benefit obligations (1,054,331) (1,104,923) (3,888) (2,686) Fair value of plan assets 740,407 699,848 2,476 1,346

Reconciliations of beginning and ending balances of the pension benefits obligations and the fair value of the plan assets are as follows: U.S. dollars (millions) (note 2) Japanese plans Foreign plans 2008 2008 Change in benefit obligations: Benefit obligations at beginning of year $(12,041) $(4,339) Service cost (411) (302) Interest cost (241) (246) Plan participants’ contributions — (1) Actuarial gain (loss) (7) 445 Benefits paid 390 46 Amendment — (0) Business combination — — Foreign exchange translation — 621 Benefit obligations at end of year $(12,310) $(3,776) Change in plan assets: Fair value of plan assets at beginning of year 7,814 4,486 Actual return on plan assets (622) 239 Employer contributions 354 366 Plan participants’ contributions — 1 Benefits paid (390) (46) Business combination — — Foreign exchange translation — (663) Fair value of plan assets at end of year $ 7,156 $ 4,383

Funded status $ (5,154) $ 607 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 8 8 Annual Report 2008

Amounts recognized in the consolidated balance sheets consist of: U.S. dollars (millions) (note 2) Japanese plans Foreign plans 2008 2008 Noncurrent assets $ 16 $ 884 Current liabilities (55) (0) Noncurrent liabilities (5,115) (277) Total $ (5,154) $ 607

Amounts recognized in accumulated other comprehensive income consist of: U.S. dollars (millions) (note 2) Japanese plans Foreign plans 2008 2008 Actuarial loss (gain) $4,054 $197 Net transition obligation — 2 Prior service cost (benefit) (611) 74 Total $3,443 $273

Pension plans with accumulated benefit obligations in excess of plan assets: U.S. dollars (millions) (note 2) Japanese plans Foreign plans 2008 2008 Projected benefit obligations $(12,149) $(29) Accumulated benefit obligations (11,028) (27) Fair value of plan assets 6,985 13 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 8 9

Pension expense and Other amounts recognized in other comprehensive income for each of the years in the three-year period ended March 31, 2008 included the following: U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Japanese plans: Pension Cost Service cost-benefits earned during the year ¥ 41,271 ¥ 42,115 ¥ 41,133 $ 411 Interest cost on projected benefit obligations 31,788 23,809 24,128 241 Expected return on plan assets (33,102) (27,580) (28,625) (286) Amortization of actuarial loss (gain) 28,394 16,326 14,348 143 Amortization of net transition obligation 1,992 1,992 1,741 17 Amortization of prior service cost (benefit) (6,945) (7,289) (7,289) (73) Total ¥ 63,398 ¥ 49,373 ¥ 45,436 $ 453

Other amounts recognized in other comprehensive income Actuarial loss (gain) — — 88,991 887 Amortization of actuarial loss (gain) — — (14,348) (143) Amortization of net transition obligation — — (1,741) (17) Amortization of prior service cost (benefit) — — 7,289 73 Total — — ¥ 80,191 $ 800 Total recognized in Pension cost and Other comprehensive income ¥ 63,398 ¥ 49,373 ¥125,627 $1,253

Foreign plans: Pension Cost Service cost-benefits earned during the year ¥ 25,121 ¥ 30,492 ¥ 30,259 $ 302 Interest cost on projected benefit obligations 18,838 22,373 24,661 246 Expected return on plan assets (21,013) (27,597) (33,700) (336) Amortization of actuarial loss (gain) 4,192 5,041 2,046 20 Amortization of net transition obligation 62 41 45 0 Amortization of prior service cost (benefit) 577 752 759 8 Total ¥ 27,777 ¥ 31,102 ¥ 24,070 $ 240

Other amounts recognized in other comprehensive income Actuarial loss (gain) — — (35,822) (358) Amortization of actuarial loss (gain) — — (2,046) (20) Amortization of net transition obligation — — (45) (0) Prior service cost (benefit) — — 84 1 Amortization of prior service cost (benefit) — — (759) (8) Total — — ¥ (38,588) $ (385) Total recognized in Pension cost and Other comprehensive income ¥ 27,777 ¥ 31,102 ¥ (14,518) $ (145)

The estimated actuarial loss and prior service benefit for all domestic defined pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are ¥18,730 million and ¥7,289 million, respectively. And the estimated actuarial loss, net transition obligation and prior service cost for all foreign defined pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are ¥524 million, ¥37 million and ¥672 million, respectively. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 9 0 Annual Report 2008

Weighted-average assumptions used to determine benefit obligation at March 31, 2007 and 2008 were as follows: 2007 2008 Japanese plans: Discount rate 2.0% 2.0% Rate of salary increase 2.3% 2.3% Foreign plans: Discount rate 5.2–6.0% 5.5–6.8% Rate of salary increase 2.9–6.4% 2.9–6.4%

Weighted-average assumptions used to determine net periodic benefit cost for each of the years in the three-year period ended March 31, 2008 were as follows: 2006 2007 2008 Japanese plans: Discount rate 2.0% 2.0% 2.0% Rate of salary increase 2.3% 2.2% 2.3% Expected long-term rate of return 4.0% 4.0% 4.0% Foreign plans: Discount rate 5.4–6.3% 4.9–5.8% 5.2–6.0% Rate of salary increase 3.5–6.7% 3.5–5.2% 2.9–6.4% Expected long-term rate of return 6.8–8.0% 6.8–8.0% 6.5–8.3%

Honda determines the expected long-term rate of return based on the expected long-term return of the various asset categories. Honda considers the current expectations for future returns and the actual historical returns of each plan asset category.

Measurement date Honda uses a March 31 measurement date for their plans excluding certain foreign subsidiaries which use a December 31 measurement date for their plans.

Plan assets Honda’s domestic and foreign pension plan weighted-average asset allocations at March 31, 2007 and 2008, by asset category are as follows: 2007 2008 Japanese plans: Equity securities 43% 36% Debt securities 36% 43% Other 21% 21% 100% 100% Foreign plans: Equity securities 70% 68% Debt securities 27% 26% Other 3% 6% 100% 100%

Honda investment policies for the domestic and foreign pension benefit are designed to maximize total returns that are available to provide future payments of pension benefits to eligible participants under accepted risks. Honda sets target assets allocations for the individual asset categories based on the estimated returns and risks in the long future. Plan assets are invested in individual equity and debt securities using the target assets allocation. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 1

Obligations The accumulated benefit obligations for all domestic defined benefit plans at March 31, 2007 and 2008 were ¥1,088,890 million and ¥1,117,817 million ($11,157 million), respectively. The accumulated benefit obligations for all foreign defined benefit plans at March 31, 2007 and 2008 were ¥340,527 million and ¥299,948 million ($2,994 million), respectively.

Cash flows Honda expects to contribute ¥28,843 million to its domestic pension plans and ¥18,170 million to its foreign pension plans in the year ending March 31, 2009. The Pension Protection Act of 2006 (PPA) is effective for plan years beginning after December 31, 2007. Certain of the Company’s subsidiaries in the United States are unable to determine the amounts of contribution for fiscal year 2009 because the procedures required by the PPA have not completed. The contribution amounts to foreign pension plan described above do not include the contributions of these subsidiaries.

Estimated future benefit payment The following table presents estimated future gross benefit payments: Yen (millions) Years ending March 31: Japanese plans Foreign plans 2009 ¥ 42,942 ¥ 4,912 2010 45,492 5,716 2011 43,338 6,588 2012 45,073 7,782 2013 45,842 9,110 2014 – 2018 261,300 77,741

Certain of the Company’s subsidiaries in North America provide certain health care and life insurance benefits to retired employees. Such benefits have no material effect on Honda’s financial position and results of operations.

14. Supplemental Disclosures of Cash Flow Information

U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Cash paid during the year for: Interest ¥134,609 ¥187,268 ¥227,024 $2,266 Income taxes 282,986 351,225 301,286 3,007

During the fiscal year ended March 31, 2006, the Company reissued certain of its treasury stock at fair value of ¥802 million to a minority shareholder of its subsidiary, when the Company made the subsidiary a wholly owned subsidiary. During the fiscal year ended March 31, 2006, the Company retired 11,000,000 shares of treasury stock at a cost of ¥66,224 million by offsetting it against capital surplus of ¥2 million and unappropriated retained earnings of ¥66,221 million, as a result of the resolution of board of directors. During the year ended March 31, 2007, the Company reissued certain of its treasury stock at fair value of ¥18,521 million to the outside shareholder of affiliates to obtain 100% share of these companies. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 9 2 Annual Report 2008

15. Accumulated Other Comprehensive Income (Loss)

The components and related changes in accumulated other comprehensive income (loss) for each of the years in the three- year period ended March 31, 2008 are as follows: U.S. dollars Yen (millions) (millions) (note 2) 2006 2007 2008 2008 Adjustments from foreign currency translation: Balance at beginning of year ¥(624,937) ¥(375,777) ¥(279,002) $(2,785) Adjustments for the year 249,160 96,775 (312,267) (3,117) Balance at end of year (375,777) (279,002) (591,269) (5,902)

Net unrealized gains on marketable securities: Balance at beginning of year 33,744 62,710 58,139 580 Reclassification adjustments for realized (gain) loss on marketable securities (841) (5,575) (73) (1) Increase (decrease) in net unrealized gains on marketable securities 29,807 1,004 (26,386) (263) Balance at end of year 62,710 58,139 31,680 316

Net unrealized gains (losses) on derivative instruments: Balance at beginning of year — (64) 20 1 Reclassification adjustments for realized (gain) loss on derivative instruments (38) 421 18 0 Increase (decrease) in net unrealized gains on derivative instruments (26) (337) 422 4 Balance at end of year (64) 20 460 5

Minimum pension liabilities adjustment: Balance at beginning of year (202,741) (94,056) — — Cumulative effect of adjustments resulting from the adoption of SAB No. 108, net of tax (note 1 (u)) — 18,149 — — Adjusted balances at beginning of year (202,741) (75,907) — — Adjustments for the year 108,685 8,908 — — Adjustment for initially applying SFAS No. 158, net of tax (note 13) — 66,999 — — Balance at end of year (94,056) — — —

Pension and other postretirement benefits adjustment* Balance at beginning of year — — (206,323) (2,059) Adjustment for initially applying SFAS No. 158, net of tax (note 13) — (206,323) — — Reclassification adjustments for realized (gain) loss on pension and other postretirement benefits adjustment — — 8,697 87 Increase (decrease) in net unrealized gains on pension and other postretirement benefits adjustment — — (25,443) (254) Balance at end of year — (206,323) (223,069) (2,226)

Total accumulated other comprehensive income (loss): Balance at beginning of year (793,934) (407,187) (427,166) (4,263) Cumulative effect of adjustments resulting from the adoption of SAB No. 108, net of tax (note 1 (u)) — 18,149 — — Adjusted balances at beginning of year (793,934) (389,038) (427,166) (4,263) Adjustments for the year 386,747 101,196 (355,032) (3,544) Adjustment for initially applying SFAS No. 158, net of tax (note 13) — (139,324) — — Balance at end of year ¥(407,187) ¥(427,166) ¥(782,198) $(7,807) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 3

The tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments are as follows: Yen (millions) Tax (expense) Before-tax or benefit Net-of-tax amount (note 11) amount 2006: Adjustments from foreign currency translation ¥ 301,737 ¥ (52,577) ¥ 249,160 Unrealized gains (losses) on marketable securities: Unrealized holding gains (losses) arising during the year 49,675 (19,868) 29,807 Reclassification adjustments for losses (gains) realized in net income (1,395) 554 (841) Net unrealized gains (losses) 48,280 (19,314) 28,966 Unrealized gains (losses) on derivative instruments Unrealized holding gains (losses) arising during the year (43) 17 (26) Reclassification adjustments for losses (gains) realized in net income (64) 26 (38) Net unrealized gains (losses) (107) 43 (64) Minimum pension liabilities adjustment 191,207 (82,522) 108,685 Other comprehensive income (loss) ¥ 541,117 ¥(154,370) ¥ 386,747

2007: Adjustments from foreign currency translation ¥ 95,275 ¥ 1,500 ¥ 96,775 Unrealized gains (losses) on marketable securities: Unrealized holding gains (losses) arising during the year 1,408 (404) 1,004 Reclassification adjustments for losses (gains) realized in net income (9,520) 3,945 (5,575) Net unrealized gains (losses) (8,112) 3,541 (4,571) Unrealized gains (losses) on derivative instruments Unrealized holding gains (losses) arising during the year (562) 225 (337) Reclassification adjustments for losses (gains) realized in net income 703 (282) 421 Net unrealized gains (losses) 141 (57) 84 Minimum pension liabilities adjustment 14,827 (5,919) 8,908 Other comprehensive income (loss) ¥ 102,131 ¥ (935) ¥ 101,196

2008: Adjustments from foreign currency translation ¥(370,075) ¥ 57,808 ¥(312,267) Unrealized gains (losses) on marketable securities: Unrealized holding gains (losses) arising during the year (43,138) 16,752 (26,386) Reclassification adjustments for losses (gains) realized in net income (122) 49 (73) Net unrealized gains (losses) (43,260) 16,801 (26,459) Unrealized gains (losses) on derivative instruments Unrealized holding gains (losses) arising during the year 704 (282) 422 Reclassification adjustments for losses (gains) realized in net income 30 (12) 18 Net unrealized gains (losses) 734 (294) 440 Pension and other postretirement benefits adjustment* Unrealized gains (losses) arising during the year (45,466) 20,023 (25,443) Reclassification adjustments for losses (gains) realized in net income 13,516 (4,819) 8,697 Net unrealized gains (losses) (31,950) 15,204 (16,746) Other comprehensive income (loss) ¥(444,551) ¥ 89,519 ¥(355,032) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 9 4 Annual Report 2008

U.S. dollars (millions) (note 2) Tax (expense) Before-tax or benefit Net-of-tax amount (note 11) amount 2008: Adjustments from foreign currency translation $(3,693) $576 $(3,117) Unrealized gains (losses) on marketable securities: Unrealized holding gains (losses) arising during the year (431) 168 (263) Reclassification adjustments for losses (gains) realized in net income (1) 0 (1) Net unrealized gains (losses) (432) 168 (264) Unrealized gains (losses) on derivative instruments Unrealized holding gains (losses) arising during the year 7 (3) 4 Reclassification adjustments for losses (gains) realized in net income 0 (0) 0 Net unrealized gains (losses) 7 (3) 4 Pension and other postretirement benefits adjustment* Unrealized gains (losses) arising during the year (454) 200 (254) Reclassification adjustments for losses (gains) realized in net income 135 (48) 87 Net unrealized gains (losses) (319) 152 (167) Other comprehensive income (loss) $(4,437) $893 $(3,544) * The primary component of other comprehensive income (loss) for Pension and other postretirement benefits adjustment is actuarial gains or losses.

16. Fair Value of Financial Instruments

The estimated fair values of significant financial instruments at March 31, 2007 and 2008 are as follows (see note 1 (q)): U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Carrying Estimated Carrying Estimated Carrying Estimated amount fair value amount fair value amount fair value Finance subsidiaries—receivables (a) ¥ 3,434,721 ¥ 3,444,144 ¥ 3,590,110 ¥ 3,661,502 $ 35,833 $ 36,546 Marketable securities 210,598 210,598 120,085 120,085 1,199 1,199 Held-to-maturity securities 16,337 16,348 20,672 20,851 206 208

Debt (3,947,020) (3,960,743) (4,394,817) (4,428,164) (43,865) (44,198)

Foreign exchange instruments (b) Asset position 3,735 3,735 116,169 116,169 1,160 1,160 Liability position (24,783) (24,783) 429 429 4 4 Net (21,048) (21,048) 116,598 116,598 1,164 1,164

Interest rate instruments (c) Asset position 10,866 10,866 (19,662) (19,662) (196) (196) Liability position (2,417) (2,417) (54,721) (54,721) (546) (546) Net 8,449 8,449 (74,383) (74,383) (742) (742)

(a) The carrying amounts of finance subsidiaries—receivables at March 31, 2007 and 2008 in the table exclude ¥1,709,978 million and ¥1,111,187 million ($11,091 million) of direct financing leases, net, classified as finance subsidiaries—receivables in the consolidated balance sheets, respectively. The carrying amounts of finance subsidiaries—receivables at March 31, 2007 and 2008 in the table also include ¥678,649 million and ¥652,749 million ($6,515 million) of finance receivables classified as trade receivables and other assets in the consolidated balance sheets, respectively. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 5

(b) The fair values of foreign currency forward exchange contracts, foreign currency option contracts and foreign currency swap agreements are included in other assets and other current assets and/or liabilities in the consolidated balance sheets as follows (see note 9): U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Other current assets ¥ 3,735 ¥ 36,488 $ 364 Other assets — 79,681 796 Other current liabilities (24,783) 429 4 ¥(21,048) ¥116,598 $1,164

(c) The fair values of interest rate swap agreements are included in other assets and other current assets and/or liabilities in the consolidated balance sheets as follows (see note 9): U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Other current assets ¥ 3,890 ¥ 753 $ 8 Other assets 6,976 (20,415) (204) Other current liabilities (2,417) (54,721) (546) ¥ 8,449 ¥(74,383) $(742)

The estimated fair values have been determined using Marketable securities relevant market information and appropriate valuation The fair value of marketable securities was estimated using methodologies. However, these estimates are subjective in quoted market prices. nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with Held-to-maturity securities precision. The effect of using different assumptions The fair value of held-to-maturity securities was estimated and/or estimation methodologies may be significant to the using quoted market prices. estimated fair values. The methodologies and assumptions used to estimate Debt the fair values of financial instruments are as follows: The fair values of bonds and notes were estimated based on the quoted market prices for the same or similar issues. The Cash and cash equivalents, trade receivables and trade fair value of long-term loans was estimated by discounting payables future cash flows using rates currently available for loans The carrying amounts approximate fair values because of of similar terms and remaining maturities. The carrying the short maturity of these instruments. amounts of short-term bank loans and commercial paper approximate fair values because of the short maturity of Finance subsidiaries—receivables these instruments. The fair values of retail receivables and term loans to dealers were estimated by discounting future cash flows using the Foreign exchange and interest rate instruments current rates for these instruments of similar remaining The fair values of foreign currency forward exchange maturities. Given the short maturities of wholesale contracts and foreign currency option contracts were receivables, the carrying amount of those receivables estimated by obtaining quotes from banks. The fair values approximates fair value. The fair value of the retained of currency swap agreements and interest rate swap interest in the sold pools of finance receivables were agreements were estimated by discounting future cash flows estimated by calculating the present value of the future cash using rates currently available for these instruments of similar flows using a discount rate commensurate with the risks terms and remaining maturities. involved. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 9 6 Annual Report 2008

17. Risk Management Activities and Derivative Financial Instruments

Honda is a party to derivative financial instruments in the normal course of business to reduce their exposure to fluctuations in foreign exchange rates and interest rates. Currency swap agreements are used to convert long-term debt denominated in a certain currency to long-term debt denominated in other currencies. Foreign currency forward exchange contracts and purchased option contracts are normally used to hedge sale commitments denominated in foreign currencies (principally U.S. dollars). Foreign currency written option contracts are entered into in combination with purchased option contracts to offset premium amounts to be paid for purchased option contracts. Interest rate swap agreements are mainly used to convert floating rate financing, such as commercial paper, to (normally three-five years) fixed rate financing in order to match financing costs with income from finance receivables. These instruments involve, to varying degrees, elements of credit, exchange rate and interest rate risks in excess of the amount recognized in the consolidated balance sheets. The aforementioned instruments contain an element of risk in the event the counterparties are unable to meet the terms of the agreements. However, Honda minimizes the risk exposure by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. Management of Honda does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any losses due to counterparty default. Honda generally does not require or place collateral for these financial instruments. Foreign currency forward contracts and currency swap agreements are agreements to exchange different currencies at a specified rate on a specific future date. Foreign currency option contracts are contracts that allow the holder of the option the right but not the obligation to exchange different currencies at a specified rate on a specific future date.

Contract amounts outstanding for foreign currency forward exchange contracts, foreign currency option contracts and currency swap agreements at March 31, 2007 and 2008 are as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Foreign currency forward exchange contracts ¥ 978,994 ¥ 615,845 $ 6,147 Foreign currency option contracts 5,793 272,204 2,717 Currency swap agreements 608,534 663,013 6,617 ¥ 1,593,321 ¥ 1,551,062 $15,481

Cash flow hedge Company excludes financial instruments’ time value The Company applies hedge accounting for certain foreign component from the assessment of hedge effectiveness, currency forward exchange contracts related to forecasted of which amount was ¥1,187 million loss for the year ended foreign currency transactions between the Company and March 31, 2007, and ¥256 million ($3 million) loss for the year its subsidiaries. Changes in the fair value of derivative ended March 31, 2008, respectively. There is no portion financial instruments designated as cash flow hedges are of hedging instruments that has been assessed as hedge recognized in other comprehensive income (loss). The ineffectiveness. amounts are reclassified into earnings in the same period when forecasted hedged transactions affect earnings. The Derivative financial instruments not designated as amount recognized in accumulated other comprehensive accounting hedges income (loss) was ¥20 million gain in the fiscal year ended Changes in the fair value of derivative financial instruments March 31, 2007 and ¥460 million ($5 million) gain in the not designated as accounting hedges are recognized in fiscal year ended March 31, 2008, respectively. All amounts earnings in the period of the change. recorded in accumulated other comprehensive income Interest rate swap agreements generally involve the (loss) as year-end are expected to be recognized in earnings exchange of fixed and floating rate interest payment within the next twelve months. The period that hedges the obligations without the exchange of the underlying principal changes in cash flows related to the risk of foreign currency amount. rate is at most around two months. At March 31, 2007 and 2008, the notional principal There are no derivative financial instruments where amounts of interest rate swap agreements were ¥4,198,463 hedge accounting has been discontinued due to the million and ¥4,294,956 million ($42,868 million), respectively. forecasted transaction no longer being probable. The WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 7

18. Commitments and Contingent Liabilities

At March 31, 2008, Honda had commitments for purchases of property, plant and equipment of approximately ¥122,073 million ($1,218 million). Honda has entered into various guarantee and indemnification agreements. At March 31, 2007 and 2008, Honda has guaranteed ¥41,151 million and ¥36,456 million ($364 million) of bank loan of employees for their housing costs, respectively. If an employee defaults on his/her loan payments, Honda is required to perform under the guarantee. The undiscounted maximum amount of Honda’s obligation to make future payments in the event of defaults is ¥41,151 million and ¥36,456 million ($364 million), respectively, at March 31, 2007 and 2008. At March 31, 2008, no amount has been accrued for any estimated losses under the obligations, as it is probable that the employees will be able to make all scheduled payments. Honda warrants its products for specific periods of time. Product warranties vary depending upon the nature of the product, the geographic location of its sale and other factors.

The changes in provisions for those product warranties for each of the years in the two-year period ended March 31, 2008 are as follows: U.S. dollars Yen (millions) (millions) (note 2) 2007 2008 2008 Balance at beginning of year ¥ 283,947 ¥ 317,103 $ 3,165 Warranty claims paid during the period (113,454) (137,591) (1,373) Liabilities accrued for warranties issued during the period 143,280 136,355 1,361 Changes in liabilities for pre-existing warranties during the period 605 (1,476) (15) Foreign currency translation 2,725 (20,631) (206) Balance at end of year ¥ 317,103 ¥ 293,760 $ 2,932

With respect to product liability, personal injury claims or lawsuits, Honda believes that any judgment that may be recovered by any plaintiff for general and special damages and court costs will be adequately covered by Honda’s insurance and accrued liabilities. Punitive damages are claimed in certain of these lawsuits. Honda is also subject to potential liability under other various lawsuits and claims including 74 purported class actions in the United States. In accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, Honda has recorded a contingent liability when it is probable that an obligation has been incurred and the amount of loss can be reasonably estimated. Honda reviews these pending lawsuits and claims periodically and adjusts the amounts recorded for these contingent liabilities, if necessary, by considering the nature of lawsuits and claims, the progress of the case and the opinions of legal counsel. Honda does not record liabilities for lawsuits or potential claims that it believes will not result in an unfavorable outcome or when a reasonable estimate of the amount of probable loss cannot be determined. After consultation with legal counsel, and taking into account all known factors pertaining to existing lawsuits and claims, Honda believes that the ultimate outcome of such lawsuits and pending claims including 74 purported class actions in the United States should not result in liability to Honda that would be likely to have an adverse material effect on its consolidated financial position, results of operations or cash flows. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 9 8 Annual Report 2008

19. Leases

Honda is the lessee under several operating leases, primarily for office and other facilities, and certain office equipment. Future minimum lease payments under noncancelable operating leases that have initial or remaining lease terms in excess of one year at March 31, 2008 are as follows: Yen Years ending March 31: (millions) 2009 ¥ 26,144 2010 20,273 2011 16,733 2012 12,989 2013 10,844 After five years 52,349 Total minimum lease payments ¥139,332

Rental expenses under operating leases for each of the years in the three-year period ended March 31, 2008 were ¥46,102 million, ¥46,910 million and ¥49,442 million ($493 million), respectively.

20. Allowances for Trade Receivable and Finance Subsidiaries—receivables

The allowances for trade receivable and finance subsidiaries—receivables for the years ended March 31, 2006, 2007 and 2008 are set forth in the following table: Yen (millions) Additions Deductions Balance at Charged to Foreign Balance beginning costs and Bad debts currency at end of of period expenses written off translation period March 31, 2006: Trade accounts and notes receivable Allowance for doubtful accounts ¥ 9,710 ¥ 3,825 ¥ 3,320 ¥ 474 ¥10,689 Finance subsidiaries—receivables Allowance for credit losses ¥30,926 ¥28,155 ¥29,373 ¥3,242 ¥32,950 Allowance for losses on lease residual values 34,025 7,998 7,974 3,725 37,774 ¥64,951 ¥36,153 ¥37,347 ¥6,967 ¥70,724

March 31, 2007: Trade accounts and notes receivable Allowance for doubtful accounts ¥10,689 ¥ 2,918 ¥ 5,850 ¥ 442 ¥ 8,199 Finance subsidiaries—receivables Allowance for credit losses ¥32,950 ¥27,286 ¥27,273 ¥ 549 ¥33,512 Allowance for losses on lease residual values 37,774 16,842 20,807 119 33,928 ¥70,724 ¥44,128 ¥48,080 ¥ 668 ¥67,440 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 9 9

Yen (millions) Additions Deductions Balance at Charged to Foreign Balance beginning costs and Bad debts currency at end of of period expenses written off translation period March 31, 2008: Trade accounts and notes receivable Allowance for doubtful accounts ¥ 8,199 ¥ 2,879 ¥ 2,785 ¥ (112) ¥ 8,181 Finance subsidiaries—receivables Allowance for credit losses ¥33,512 ¥46,121 ¥41,177 ¥ (5,102) ¥ 33,354 Allowance for losses on lease residual values 33,928 11,890 17,410 (3,521) 24,887 ¥67,440 ¥58,011 ¥58,587 ¥ (8,623) ¥ 58,241

U.S. dollars (millions) (note 2) Additions Deductions Balance at Charged to Foreign Balance beginning costs and Bad debts currency at end of of period expenses written off translation period March 31, 2008: Trade accounts and notes receivable Allowance for doubtful accounts $ 82 $ 29 $ 28 $ (1) $ 82 Finance subsidiaries—receivables Allowance for credit losses $335 $460 $411 $(51) $333 Allowance for losses on lease residual values 338 119 174 (35) 248 $673 $579 $585 $(86) $581

21. Segment Information

Honda has four reportable segments: the Motorcycle which separate financial information is available that is business, the Automobile business, the Financial services evaluated regularly by management in deciding how to business and the Power product and other businesses, allocate resources and in assessing performance. The which are based on Honda’s organizational structure accounting policies used for these reportable segments and characteristics of products and services. Operating are consistent with the accounting policies used in Honda’s segments are defined as components of Honda’s about consolidated financial statements. (See note 3.)

Principal products and services, and functions of each segment are as follows: Segment Principal products and services Functions Motorcycle business Motorcycles, all-terrain vehicles (ATVs), Research & Development personal watercrafts and relevant parts Manufacturing Sales and related services Automobile business Automobiles and relevant parts Research & Development Manufacturing Sales and related services Financial services business Financial, insurance services Retail loan and lease related to Honda products Others Power product and Power products and relevant Research & Development other businesses parts, and others Manufacturing Sales and related services Others WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 0 0 Annual Report 2008

Segment Information

As of and for the year ended March 31, 2006 Yen (millions) Financial Power Product Motorcycle Automobile Services and Other Segment Reconciling Business Business Business Businesses Total Items Consolidated Net sales and other operating revenue: External customers ¥1,225,812 ¥8,004,694 ¥ 306,869 ¥370,621 ¥ 9,907,996 ¥ — ¥ 9,907,996 Intersegment — — 4,068 11,941 16,009 (16,009) — Total 1,225,812 8,004,694 310,937 382,562 9,924,005 (16,009) 9,907,996 Cost of sales, SG&A and R&D expenses 1,127,157 7,492,257 220,352 353,350 9,193,116 (16,009) 9,177,107 Gain on transfer of the substitutional portion of the Employee’s Pension Funds 15,319 115,935 — 6,762 138,016 — 138,016 Segment income 113,974 628,372 90,585 35,974 868,905 — 868,905 Equity in income of affiliates 30,700 67,439 — 1,466 99,605 — 99,605 Assets 1,006,308 4,843,148 5,008,718 294,170 11,152,344 (520,944) 10,631,400 Investments in affiliates 95,978 305,339 — 13,194 414,511 — 414,511 Depreciation and amortization 30,232 222,165 771 9,057 262,225 — 262,225 Capital expenditures 52,246 392,934 1,316 11,345 457,841 — 457,841 Provision for credit and lease residual losses on finance subsidiaries—receivables ¥ — ¥ — ¥ 36,153 ¥ — ¥ 36,153 ¥ — ¥ 36,153

As of and for the year ended March 31, 2007 Yen (millions) Financial Power Product Motorcycle Automobile Services and Other Segment Reconciling Business Business Business Businesses Total Items Consolidated Net sales and other operating revenue: External customers ¥1,370,617 ¥8,889,080 ¥ 409,701 ¥417,742 ¥11,087,140 ¥ — ¥11,087,140 Intersegment — — 3,633 21,168 24,801 (24,801) — Total 1,370,617 8,889,080 413,334 438,910 11,111,941 (24,801) 11,087,140 Cost of sales, SG&A and R&D expenses 1,270,009 8,289,537 297,792 402,724 10,260,062 (24,801) 10,235,261 Gain on transfer of the substitutional portion of the Employee’s Pension Funds — — — — — — — Segment income 100,608 599,543 115,542 36,186 851,879 — 851,879 Equity in income of affiliates 23,380 78,537 — 1,500 103,417 — 103,417 Assets 1,161,707 5,437,709 5,694,204 338,671 12,632,291 (595,791) 12,036,500 Investments in affiliates 118,475 360,673 — 15,065 494,213 — 494,213 Depreciation and amortization 40,576 309,877 10,676 10,359 371,488 — 371,488 Capital expenditures 68,880 540,859 367,728 16,394 993,861 — 993,861 Provision for credit and lease residual losses on finance subsidiaries—receivables ¥ — ¥ — ¥ 44,128 ¥ — ¥ 44,128 ¥ — ¥ 44,128 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 0 1

As of and for the year ended March 31, 2008 Yen (millions) Financial Power Product Motorcycle Automobile Services and Other Segment Reconciling Business Business Business Businesses Total Items Consolidated Net sales and other operating revenue: External customers ¥1,558,696 ¥ 9,489,391 ¥ 533,553 ¥ 421,194 ¥12,002,834 ¥ — ¥12,002,834 Intersegment — — 15,499 21,571 37,070 (37,070) — Total 1,558,696 9,489,391 549,052 442,765 12,039,904 (37,070) 12,002,834 Cost of sales, SG&A and R&D expenses 1,407,409 8,827,726 431,254 420,406 11,086,795 (37,070) 11,049,725 Gain on transfer of the substitutional portion of the Employee’s Pension Funds — — — — — — — Segment income 151,287 661,665 117,798 22,359 953,109 — 953,109 Equity in income of affiliates 28,035 89,521 — 1,386 118,942 — 118,942 Assets 1,240,527 5,591,311 5,907,839 330,604 13,070,281 (454,738) 12,615,543 Investments in affiliates 118,219 411,001 — 16,976 546,196 — 546,196 Depreciation and amortization 48,000 356,003 101,987 12,435 518,425 — 518,425 Capital expenditures 86,687 544,922 839,888 21,794 1,493,291 — 1,493,291 Provision for credit and lease residual losses on finance subsidiaries—receivables ¥ — ¥ — ¥ 58,011 ¥ — ¥ 58,011 ¥ — ¥ 58,011

As of and for the year ended March 31, 2008 U.S. dollars (millions) (note 2) Financial Power Product Motorcycle Automobile Services and Other Segment Reconciling Business Business Business Businesses Total Items Consolidated Net sales and other operating revenue: External customers $15,557 $94,715 $ 5,325 $4,204 $119,801 $ — $119,801 Intersegment — — 155 215 370 (370) — Total 15,557 94,715 5,480 4,419 120,171 (370) 119,801 Cost of sales, SG&A and R&D expenses 14,047 88,111 4,304 4,196 110,658 (370) 110,288 Gain on transfer of the substitutional portion of the Employee’s Pension Funds — — — — — — — Segment income 1,510 6,604 1,176 223 9,513 — 9,513 Equity in income of affiliates 280 893 — 14 1,187 — 1,187 Assets 12,382 55,807 58,966 3,300 130,455 (4,539) 125,916 Investments in affiliates 1,180 4,103 — 169 5,452 — 5,452 Depreciation and amortization 479 3,553 1,018 124 5,174 — 5,174 Capital expenditures 865 5,439 8,383 218 14,905 — 14,905 Provision for credit and lease residual losses on finance subsidiaries—receivables $ — $ — $ 579 $ — $ 579 $ — $ 579

Explanatory notes: 1. Segment income is measured in a consistent manner with consolidated operating income, which is net income before other income, other expenses, income tax (benefit) expense, minority interest in income, and equity in income of affiliates. Expenses not directly associated with specific segments are allocated based on the most reasonable measures applicable. 2. Assets of each segment are defined as total assets, including derivative financial instruments, investments in affiliates, and deferred tax assets. Segment assets are based on those directly associated with each segment and those not directly associated with specific segments are allocated based on the most reasonable measures applicable except for the corporate assets described below. 3. Intersegment sales and revenues are generally made at values that approximate arm’s-length prices. 4. Unallocated corporate assets, included in reconciling items, amounted to ¥354,903 million as of March 31, 2006, ¥377,873 million as of March 31, 2007, and ¥385,442 million ($3,847 million) as of March 31, 2008 respectively, which consist WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 0 2 Annual Report 2008

primarily of cash and cash equivalents and marketable securities held by the Company. Reconciling items also include elimination of intersegment transactions. 5. Depreciation and amortization of the Financial Services Business include ¥9,741 million for the year ended March 31, 2007 and ¥101,032 million ($1,008 million) for the year ended March 31, 2008 respectively, of depreciation of property on operating leases. 6. Capital expenditures of the Financial Services Business includes ¥366,795 million for the year ended March 31, 2007 and ¥839,261 million ($8,377 million) for the year ended March 31, 2008 respectively, of purchase of operating lease assets.

External Sales and Other Operating Revenue by Product or Service Groups U.S. dollars Yen (millions) (millions) (note 2) Years ended March 31: 2006 2007 2008 2008 Motorcycles and relevant parts ¥ 1,051,855 ¥ 1,221,638 ¥ 1,418,028 $ 14,153 All-terrain vehicles (ATVs), personal watercraft and relevant parts 173,957 148,979 140,668 1,404 Automobiles and relevant parts 8,004,694 8,889,080 9,489,391 94,715 Financial, insurance services 306,869 409,701 533,553 5,325 Power products and relevant parts 263,651 287,302 288,243 2,877 Others 106,970 130,440 132,951 1,327 Total ¥ 9,907,996 ¥11,087,140 ¥12,002,834 $119,801

Geographical Information As of and for the year ended March 31, 2006 Yen (millions) Japan United States Other Countries Total Sales to external customers ¥2,021,999 ¥4,876,436 ¥3,009,561 ¥9,907,996 Long-lived assets 949,358 499,599 477,764 1,926,721

As of and for the year ended March 31, 2007 Yen (millions) Japan United States Other Countries Total Sales to external customers ¥2,061,720 ¥5,291,683 ¥3,733,737 ¥11,087,140 Long-lived assets 992,723 929,107 610,100 2,531,930

As of and for the year ended March 31, 2008 Yen (millions) Japan United States Other Countries Total Sales to external customers ¥2,053,401 ¥5,313,858 ¥4,635,575 ¥12,002,834 Long-lived assets 1,084,163 1,479,137 669,546 3,232,846

As of and for the year ended March 31, 2008 U.S. dollars (millions) (note 2) Japan United States Other Countries Total Sales to external customers $20,495 $53,038 $46,268 $119,801 Long-lived assets 10,821 14,763 6,683 32,267

The above information is based on the location of the Company and its subsidiaries. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 0 3

Supplemental Geographical Information In addition to the disclosure required by U.S. GAAP, Honda provides the following supplemental information as required by Financial Instruments and Exchange Law:

(1) Overseas sales and revenues based on the location of the customer U.S dollars Yen (millions) (millions) (note 2) Years ended March 31: 2006 2007 2008 2008 North America ¥5,463,359 ¥5,980,876 ¥6,068,425 $60,569 Europe 1,009,421 1,236,757 1,519,434 15,165 Asia 1,085,451 1,283,154 1,577,266 15,743 Other regions 655,721 905,163 1,251,932 12,496

Explanatory notes: Major countries or regions in each geographic area: North America United States, Canada, Mexico Europe United Kingdom, Germany, France, Italy, Belgium Asia Thailand, Indonesia, China, India Other Regions Brazil, Australia

(2) Supplemental geographical information based on the location of the Company and its subsidiaries

As of and for the year ended March 31, 2006 Yen (millions) North Other Reconciling Japan America Europe Asia Regions Total Items Consolidated Net sales and other operating revenue: External customers ¥2,021,999 ¥5,475,261 ¥1,001,177 ¥856,892 ¥552,667 ¥ 9,907,996 ¥ — ¥ 9,907,996 Transfers between geographic areas 2,415,874 141,064 188,341 140,501 19,023 2,904,803 (2,904,803) — Total 4,437,873 5,616,325 1,189,518 997,393 571,690 12,812,799 (2,904,803) 9,907,996

Cost of sales, SG&A and R&D expenses 4,204,939 5,262,382 1,163,213 932,394 514,527 12,077,455 (2,900,348) 9,177,107 Gain on transfer of the substitutional portion of the Employees’ Pension Funds 138,016 — — — — 138,016 — 138,016 Operating income 370,950 353,943 26,305 64,999 57,163 873,360 (4,455) 868,905 Assets 2,695,212 6,128,303 800,786 717,933 309,209 10,651,443 (20,043) 10,631,400 Long-lived assets ¥ 949,358 ¥ 589,596 ¥ 157,819 ¥157,704 ¥ 72,244 ¥ 1,926,721 ¥ — ¥ 1,926,721 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 0 4 Annual Report 2008

As of and for the year ended March 31, 2007 Yen (millions) North Other Reconciling Japan America Europe Asia Regions Total Items Consolidated Net sales and other operating revenue: External customers ¥2,061,720 ¥6,002,797 ¥1,228,564 ¥1,024,680 ¥769,379 ¥11,087,140 ¥ — ¥11,087,140 Transfers between geographic areas 2,712,403 169,847 119,161 246,723 28,259 3,276,393 (3,276,393) — Total 4,774,123 6,172,644 1,347,725 1,271,403 797,638 14,363,533 (3,276,393) 11,087,140

Cost of sales, SG&A and R&D expenses 4,545,988 5,715,817 1,315,736 1,194,250 725,377 13,497,168 (3,261,907) 10,235,261 Gain on transfer of the substitutional portion of the Employees’ Pension Funds — — — — — — — — Operating income 228,135 456,827 31,989 77,153 72,261 866,365 (14,486) 851,879 Assets 2,985,123 6,834,409 948,922 935,963 414,147 12,118,564 (82,064) 12,036,500 Long-lived assets ¥ 992,723 ¥1,028,132 ¥ 198,232 ¥ 219,358 ¥ 93,485 ¥ 2,531,930 ¥ — ¥ 2,531,930

As of and for the year ended March 31, 2008 Yen (millions) North Other Reconciling Japan America Europe Asia Regions Total Items Consolidated Net sales and other operating revenue: External customers ¥2,053,401 ¥6,091,512 ¥1,502,240 ¥1,307,117 ¥1,048,564 ¥12,002,834 ¥ — ¥12,002,834 Transfers between geographic areas 2,835,639 173,751 91,983 331,173 44,253 3,476,799 (3,476,799) — Total 4,889,040 6,265,263 1,594,223 1,638,290 1,092,817 15,479,633 (3,476,799) 12,002,834

Cost of sales, SG&A and R&D expenses 4,696,482 5,832,635 1,542,676 1,507,566 976,335 14,555,694 (3,505,969) 11,049,725 Gain on transfer of the substitutional portion of the Employees’ Pension Funds — — — — — — — — Operating income 192,558 432,628 51,547 130,724 116,482 923,939 29,170 953,109 Assets 3,127,143 6,863,970 948,544 1,080,439 574,890 12,594,986 20,557 12,615,543 Long-lived assets ¥1,084,163 ¥1,589,356 ¥ 171,030 ¥ 260,141 ¥ 128,156 ¥ 3,232,846 ¥ — ¥ 3,232,846 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 0 5

As of and for the year ended March 31, 2008 U.S dollars (millions) (note 2) North Other Reconciling Japan America Europe Asia Regions Total Items Consolidated Net sales and other operating revenue: External customers $20,495 $60,800 $14,994 $13,047 $10,465 $119,801 $ — $119,801 Transfers between geographic areas 28,303 1,734 918 3,305 442 34,702 (34,702) — Total 48,798 62,534 15,912 16,352 10,907 154,503 (34,702) 119,801

Cost of sales, SG&A and R&D expenses 46,876 58,216 15,398 15,047 9,744 145,281 (34,993) 110,288 Gain on transfer of the substitutional portion of the Employees’ Pension Funds to the government — — — — — — — — Operating income 1,922 4,318 514 1,305 1,163 9,222 291 9,513 Assets 31,212 68,510 9,467 10,784 5,738 125,711 205 125,916 Long-lived assets $10,821 $15,864 $ 1,707 $ 2,596 $ 1,279 $ 32,267 $ — $ 32,267

Explanatory notes: 1. Major countries or regions in each geographic area: North America United States, Canada, Mexico Europe United Kingdom, Germany, France, Italy, Belgium Asia Thailand, Indonesia, China, India Other Regions Brazil, Australia 2. Operating income of each geographical region is measured in a consistent manner with consolidated operating income, which is net income before other income, other expenses, income tax (benefit) expense, minority interest in income, and equity in income of affiliates. 3. Assets of each geographical region are defined as total assets, including derivative financial instruments, investments in affiliates, and deferred tax assets. 4. Sales and revenues between geographic areas are generally made at values that approximate arm’s-length prices. 5. Unallocated corporate assets, included in reconciling items, amounted to ¥354,903 million as of March 31, 2006, ¥377,873 million as of March 31, 2007, and ¥385,442 million ($3,847 million) as of March 31, 2008 respectively, which consist primarily of cash and cash equivalents and marketable securities held by the Company. Reconciling items also include elimination of transactions between geographic areas. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 0 6 Annual Report 2008 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 0 7

Management’s Report on Internal Control over Financial Reporting

The management of Honda is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the U.S. Securities Exchange Act of 1934). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate.

Our management, including our Chief Executive Officer and Chief Operating Officer for Business Management Operations (who is our principal financial officer), assessed the effectiveness of internal control over financial reporting as of March 31, 2008 based on the criteria established in “Internal Control-Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, our management concluded that our internal control over financial reporting was effective as of March 31, 2008.

The Company’s independent registered public accounting firm, KPMG AZSA & Co., has audited the effectiveness of the Company’s internal control over financial reporting, as stated in their report which is included herein.

Takeo Fukui Chief Executive Officer

Yoichi Hojo Chief Operating Officer for Business Management Operations

June 30, 2008 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 0 8 Annual Report 2008 Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders Honda Motor Co., Ltd.:

We have audited the accompanying consolidated balance sheets of Honda Motor Co., Ltd. and subsidiaries (“Honda”) as of March 31, 2007 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008. These consolidated financial statements are the responsibility of Honda’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Honda Motor Co., Ltd. and subsidiaries as of March 31, 2007 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2008 in conformity with U.S. generally accepted accounting principles.

As described in Note 1(m) to the accompanying consolidated financial statements, Honda adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes as of April 1, 2007. As described in Note 13 to the consolidated financial statements, Honda adopted the provisions of Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements of No. 87, 88, 106 and 132(R) as of March 31, 2007. As described in Note 1(u) to the consolidated financial statements, Honda changed its method of quantifying errors as of March 31, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Honda’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated June 30, 2008 expressed an unqualified opinion on the effectiveness of Honda’s internal control over financial reporting.

The accompanying consolidated financial statements as of and for the year ended March 31, 2008 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements expressed in yen have been translated into dollars on the basis set forth in Note 2 to the consolidated financial statements.

Tokyo, Japan June 30, 2008 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 0 9

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders Honda Motor Co., Ltd.:

We have audited Honda Motor Co., Ltd. and subsidiaries’ (“Honda”) internal controls over financial reporting as of March 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Honda’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Honda’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Honda Motor Co., Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Honda Motor Co., Ltd. and subsidiaries as of March 31, 2007 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended March 31, 2008, and our report dated June 30, 2008 expressed an unqualified opinion on those consolidated financial statements.

Tokyo, Japan June 30, 2008 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 1 0 Annual Report 2008 Selected Quarterly Financial Data (Unaudited and Not Reviewed)

Yen (millions except per share amounts) Year ended March 31, 2007 Year ended March 31, 2008 I II III IV I II III IV Net sales and other operating revenue ¥2,599,724 ¥2,630,874 ¥2,768,652 ¥3,087,890 ¥2,931,123 ¥2,971,346 ¥3,044,814 ¥3,055,551 Operating income 203,521 193,024 205,110 250,224 221,684 286,338 276,243 168,844 Income before income taxes 191,365 163,643 198,785 239,075 218,258 269,992 260,745 146,846 Net income 143,402 127,909 144,827 176,184 166,117 208,483 200,009 25,430 Basic net income per American depositary share ¥78.46 ¥70.05 ¥79.45 ¥96.70 ¥91.38 ¥114.94 ¥110.25 ¥14.01 Tokyo Stock Exchange: (TSE) (in yen) High ¥4,285 ¥4,030 ¥4,740 ¥4,940 ¥4,520 ¥4,600 ¥4,400 ¥3,660 Low 3,270 3,410 3,910 4,050 3,950 3,430 3,530 2,610 New York Stock Exchange: (NYSE) (in U.S. dollars) High $37.95 $35.00 $39.87 $40.82 $36.59 $37.80 $37.64 $33.61 Low 29.13 29.43 33.49 34.64 33.30 31.29 32.14 27.01 Notes: 1. All quarterly financial data is unaudited and has not been reviewed by the independent registered public accounting firm (KPMG AZSA & Co.). 2. The Company executed a two-for-one stock split for the Company’s common stock effective July 1, 2006. All per share information has been adjusted retroactively for all periods presented to reflect this stock split. The prices of shares on the Tokyo Stock Exchange prior to the split have been adjusted retroactively for consistency. Consequently, the prices shown here are not the actual prices of shares on the Tokyo Stock Exchange. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 1 1

Consolidated Balance Sheets Divided into Non-Financial Services Businesses and Finance Subsidiaries (Unaudited)

Yen (millions) At March 31, 2007 and 2008 2007 2008 Assets Non-financial services businesses Current assets: ¥ 4,049,885 ¥ 4,091,060 Cash and cash equivalents 921,309 1,022,466 Trade accounts and notes receivable, net 546,790 552,442 Inventories 1,183,116 1,199,260 Other current assets 1,398,670 1,316,892 Investments and advances 1,023,014 1,023,113 Property, plant and equipment, net 2,059,514 2,183,220 Other assets 417,325 530,156 Total assets 7,549,738 7,827,549

Finance Subsidiaries Cash and cash equivalents 24,237 28,436 Finance subsidiaries—short-term receivables, net 1,451,606 1,351,867 Finance subsidiaries—long-term receivables, net 3,040,572 2,708,367 Net property on operating leases 336,209 918,972 Other assets 841,580 900,197 Total assets 5,694,204 5,907,839 Reconciling items (1,207,442) (1,119,845) Total assets ¥12,036,500 ¥12,615,543

Liabilities, Minority Interests and Stockholders’ Equity Non-financial services businesses Current liabilities: ¥ 2,359,648 ¥ 2,307,339 Short-term debt 243,487 324,507 Current portion of long-term debt 19,713 20,486 Trade payables 1,182,894 1,057,446 Accrued expenses 671,467 632,506 Other current liabilities 242,087 272,394 Long-term debt, excluding current portion 55,468 56,225 Other liabilities 910,966 1,121,208 Total liabilities 3,326,082 3,484,772

Finance Subsidiaries Short-term debt 1,842,119 2,128,442 Current portion of long-term debt 758,855 863,797 Accrued expenses 178,236 148,276 Long-term debt, excluding current portion 1,869,470 1,786,744 Other liabilities 421,673 408,803 Total liabilities 5,070,353 5,336,062 Reconciling items (965,453) (891,362) Total liabilities 7,430,982 7,929,472 Minority interests in consolidated subsidiaries 122,907 141,806 Common stock 86,067 86,067 Capital surplus 172,529 172,529 Legal reserves 37,730 39,811 Retained earnings 4,654,890 5,099,983 Accumulated other comprehensive income (loss), net (427,166) (782,198) Treasury stock (41,439) (71,927) Total stockholders’ equity 4,482,611 4,544,265 Total liabilities, minority interests and stockholders’ equity ¥12,036,500 ¥12,615,543

Note: See note 3 to the consolidated financial statements. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 1 2 Annual Report 2008 Consolidated Statements of Cash Flows Divided into Non-Financial Services Businesses and Finance Subsidiaries (Unaudited)

Yen (millions) 2007 2008 Non-financial Non-financial services Finance Reconciling services Finance Reconciling Years ended March 31, 2007 and 2008 businesses subsidiaries items Consolidated businesses subsidiaries items Consolidated Cash flows from operating activities: Net income ¥ 537,186 ¥ 55,149 ¥ (13) ¥ 592,322 ¥ 580,728 ¥ 19,323 ¥ (12) ¥ 600,039 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 360,812 10,676 — 371,488 416,438 101,987 — 518,425 Deferred income taxes (35,483) 19,035 — (16,448) 7,612 23,729 — 31,341 Minority interests in income 20,102 15 — 20,117 27,280 28 — 27,308 Equity in income of affiliates (103,417) — — (103,417) (118,942) — — (118,942) Dividends from affiliates 54,849 — — 54,849 67,764 — — 67,764 Loss (gain) on derivative instruments, net 28,370 28,466 — 56,836 (14,020) 84,271 — 70,251 Decrease (increase) in trade accounts and notes receivable (5,445) (34,318) (9,766) (49,529) (57,164) (9,996) (536) (67,696) Decrease (increase) in inventories (96,839) — — (96,839) (100,622) — — (100,622) Increase (decrease) in trade accounts and notes payable 41,965 — (3,779) 38,186 19,299 — 13,028 32,327 Other, net 8,613 14,185 14,162 36,960 107,626 1,342 (42,245) 66,723 Net cash provided by operating activities 810,713 93,208 604 904,525 935,999 220,684 (29,765) 1,126,918

Cash flows from investing activities: Decrease (increase) in investments and advances 93,311 — (40,957) 52,354 (87,073) — 96,486 9,413 Capital expenditures (597,025) (933) — (597,958) (667,601) (627) — (668,228) Proceeds from sales of property, plant and equipment 20,364 277 — 20,641 26,476 392 — 26,868 Decrease (increase) in finance subsidiaries—receivables — (256,274) 16,052 (240,222) — (227,525) (14,442) (241,967) Purchase of operating lease assets — (366,795) — (366,795) — (839,261) — (839,261) Proceeds from sales of operating lease assets — 1,276 — 1,276 — 26,776 — 26,776 Net cash used in investing activities (483,350) (622,449) (24,905) (1,130,704) (728,198) (1,040,245) 82,044 (1,686,399)

Cash flows from financing activities: Increase (decrease) in short-term debt, net 32,964 241,349 31,750 306,063 98,926 548,993 (45,962) 601,957 Proceeds from long-term debt 25,424 949,360 (5,293) 969,491 32,387 1,032,504 (3,099) 1,061,792 Repayment of long-term debt (18,077) (664,906) 5,444 (677,539) (24,918) (760,750) 2,919 (782,749) Proceeds from issuance of common stock — 7,613 (7,613) — — 6,149 (6,149) — Cash dividends paid (140,495) — 13 (140,482) (152,602) — 12 (152,590) Cash dividends paid to minority interests (7,434) — — (7,434) (9,663) — — (9,663) Payment for purchase of treasury stock, net (26,689) — — (26,689) (30,746) — — (30,746) Net cash provided by (used in) financing activities (134,307) 533,416 24,301 423,410 (86,616) 826,896 (52,279) 688,001 Effect of exchange rate changes on cash and cash equivalents 31,057 470 — 31,527 (20,028) (3,136) — (23,164) Net change in cash and cash equivalents 224,113 4,645 — 228,758 101,157 4,199 — 105,356 Cash and cash equivalents at beginning of period 697,196 19,592 — 716,788 921,309 24,237 — 945,546 Cash and cash equivalents at end of period ¥ 921,309 ¥ 24,237 ¥ — ¥ 945,546 ¥1,022,466 ¥ 28,436 ¥ — ¥ 1,050,902

Notes: 1. Non-financial services businesses lend to finance subsidiaries. These cash flows are included in the decrease (increase) in investments and advances, increase (decrease) in short-term debt, proceeds from long-term debt, and repayment of long-term debt. The amount of the loans to finance subsidiaries is a ¥48,570 million decrease for the fiscal year ended March 31, 2007, and a ¥90,337 million increase for the fiscal year ended March 31, 2008, respectively. 2. Decrease (increase) in trade accounts and notes receivable for finance subsidiaries is due to the reclassification of finance subsidiaries—receivables which relate to sales of inventory in the unaudited consolidated statements of cash flows presented above. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 1 3

Financial Summary

Honda Motor Co., Ltd. and Subsidiaries Yen U.S. dollars Years ended or at March 31 (millions) (millions) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 Sales, income, and dividends Net sales and other operating revenue ¥5,999,738 ¥6,231,041 ¥6,098,840 ¥6,463,830 ¥7,362,438 ¥7,971,499 ¥8,162,600 ¥8,650,105 ¥ 9,907,996 ¥11,087,140 ¥12,002,834 $119,801 Operating income 456,852 540,978 418,639 401,438 661,202 724,527 600,144 630,920 868,905 851,879 953,109 9,513 Income before income taxes, minority interest and equity in income of affiliates 445,583 523,168 419,658 388,419 555,854 619,413 653,680 668,364 829,904 792,868 895,841 8,941 Income taxes 201,278 229,624 170,434 178,439 231,150 245,065 252,740 266,665 317,189 283,846 387,436 3,867 Minority interest in income (2,232) (2,657) (3,595) (3,443) (4,512) (9,658) (11,753) (11,559) (15,287) (20,117) (27,308) (272) Equity in income of affiliates 18,552 14,158 16,786 25,704 42,515 61,972 75,151 96,057 99,605 103,417 118,942 1,187 Net income 260,625 305,045 262,415 232,241 362,707 426,662 464,338 486,197 597,033 592,322 600,039 5,989 As percentage of sales 4.3% 4.9% 4.3% 3.6% 4.9% 5.4% 5.7% 5.6% 6.0% 5.3% 5.0% Cash dividends paid during the period 16,563 20,463 20,463 22,412 24,360 30,176 33,541 47,797 71,061 140,482 152,590 1,523 Research and development 285,863 311,632 334,036 352,829 395,176 436,863 448,967 467,754 510,385 551,847 587,959 5,868 Interest expense 27,655 27,890 18,920 21,400 16,769 12,207 10,194 11,655 11,902 12,912 16,623 166

Assets, long-term debt, and stockholders’ equity Total assets ¥4,870,128 ¥5,073,660 ¥4,935,976 ¥5,719,020 ¥7,064,787 ¥7,821,403 ¥8,380,549 ¥9,368,236 ¥10,631,400 ¥12,036,500 ¥12,615,543 $125,916 Long-term debt 677,750 673,084 574,566 368,173 716,614 1,140,182 1,394,612 1,559,500 1,879,000 1,905,743 1,836,652 18,332 Total stockholders’ equity 1,607,914 1,763,855 1,930,373 2,230,291 2,573,941 2,629,720 2,874,400 3,289,294 4,125,750 4,482,611 4,544,265 45,356

Capital expenditures (excluding purchase of operating lease assets) 309,517 237,080 222,891 285,687 303,424 316,991 287,741 373,980 457,841 627,066 654,030 6,528 Purchase of operating lease assets 366,795 839,261 8,377 Depreciation (excluding property on operating leases) 153,337 177,666 172,139 170,342 194,944 220,874 213,445 225,752 262,225 361,747 417,393 4,166 Depreciation of property on operating leases 9,741 101,032 1,008

Yen U.S. dollars Per common share Net income: Basic ¥ 133.74 ¥ 156.52 ¥ 134.65 ¥ 119.17 ¥ 186.11 ¥ 219.71 ¥ 243.45 ¥ 260.34 ¥ 324.33 ¥ 324.62 ¥ 330.54 $ 3.30 Diluted 133.72 156.52 134.65 119.17 186.11 219.71 243.45 260.34 324.33 324.62 330.54 3.30 Cash dividends paid during the period 8.5 10.5 10.5 11.5 12.5 15.5 17.5 25.5 38.5 77 84 0.84 Stockholders’ equity 825.07 905.10 990.53 1,144.43 1,320.77 1,367.34 1,527.45 1,778.24 2,259.26 2,460.28 2,504.36 25.00

Yen U.S. dollars (millions) (millions) Sales progress Sales amounts:* Japan ¥1,710,813 ¥1,556,333 ¥1,612,191 ¥1,740,340 ¥1,868,746 ¥1,748,706 ¥1,628,493 ¥1,699,205 ¥ 1,694,044 ¥ 1,681,190 ¥ 1,585,777 $ 15,828 29% 25% 26% 27% 25% 22% 20% 20% 17% 15% 13% Overseas 4,288,925 4,674,708 4,486,649 4,723,490 5,493,692 6,222,793 6,534,107 6,950,900 8,213,952 9,405,950 10,417,057 103,973 71% 75% 74% 73% 75% 78% 80% 80% 83% 85% 87% Total ¥5,999,738 ¥6,231,041 ¥6,098,840 ¥6,463,830 ¥7,362,438 ¥7,971,499 ¥8,162,600 ¥8,650,105 ¥ 9,907,996 ¥11,087,140 ¥12,002,834 $119,801 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Thousands Unit sales: Motorcycles 5,257 4,295 4,436 5,118 6,095 8,080 9,206 10,482 10,271 10,369 9,320 Automobiles 2,343 2,333 2,473 2,580 2,666 2,888 2,983 3,242 3,391 3,652 3,925 Power Products 2,857 3,412 4,057 3,884 3,926 4,584 5,047 5,300 5,876 6,421 6,057

Number of employees 109,400 112,200 112,400 114,300 120,600 126,900 131,600 137,827 144,785 167,231 178,960

Exchange rate (yen amounts per U.S. dollar) Rates for the period-end ¥ 132 ¥ 121 ¥ 106 ¥ 124 ¥ 133 ¥ 120 ¥ 106 ¥ 107 ¥ 117 ¥ 118 ¥ 100 Average rates for the period 123 128 112 111 125 122 113 108 113 117 114

*The geographic breakdown of sales amounts is based on the location of customers. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 1 4 Annual Report 2008

Number of employees 109,400 112,200 112,400 114,300 120,600 126,900 131,600 137,827 144,785 167,231 178,960

*The geographic breakdown of sales amounts is based on the location of customers. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 1 1 5

Notes: (7) The Company executed a two-for-one stock split for the (1) The consolidated financial statements as of and for the Company’s common stock effective July 1, 2006. All per year ended March 31, 2008 have been translated into share information has been adjusted retroactively for all United States dollars at the rate of ¥100.19 = U.S.$1, periods presented to reflect this stock split. the approximate exchange rate prevailing on the Tokyo (8) Certain revisions for misclassifications and Foreign Exchange Market on March 31, 2008. Those U.S. reclassifications have been made to the prior years’ dollar amounts presented in the consolidated financial consolidated financial statements to conform to the statements and related notes are included solely for presentation used for the fiscal year ended March 31, the reader. This translation should not be construed as 2007. a representation that all the amounts shown could be (a) Minority interest in income, which were included in converted into U.S. dollars. other expenses—other, has been revised to be disclosed (2) Net income per common (or American depositary) share independently in consolidated statements of income. amounts are computed based on Statement of Financial (b) The long-term portion of deferred tax liabilities and Accounting Standards (SFAS) No. 128, “Earnings per deferred tax assets related to the lease transactions Share.” All net income per common (or American depositary) of finance subsidiaries, which were classified in other share data presented prior to fiscal 1998 has been restated current liabilities and deferred income taxes, have been to conform with the provisions of SFAS No. 128. revised to be classified in other liabilities and other assets, (3) Effective fiscal 2000, due to the change in method of respectively. business segment categorization, all prior years’ unit (c) The long-term portion of accrued expenses and sales under Sales progress have been restated to reflect prepaid expenses related to pension benefit plans, which the change: i.e., unit sales of all-terrain vehicles (ATVs) were included in accrued expenses and other current are now included in Motorcycles, but were previously assets have been revised to be classified in other liabilities included in Power Products. and other assets, respectively. The long-term portion (4) Previously, revenue from domestic sales of general- of deferred tax liabilities, which were included in other purpose engines to customers who install them in current liabilities, and deferred tax assets, have also been products that are subsequently exported were recorded revised to classified in other liabilities and other assets. as overseas sales. However, owing to various factors (d) The long-term portion of prepaid expenses, deferred including changes in transaction formats and contract income and accrued expenses related to extended terms, as of fiscal 2002, such sales are now recorded as vehicle service contracts of the subsidiaries in the United domestic sales. The sales amount from such sales for States, which were included in other current assets, trade fiscal 2002 amounted to ¥5,468 million. payables accounts and accrued expenses, respectively, (5) Certain gains and losses on sale and disposal of have been revised to be classified in other liabilities and property, plant and equipment, which were previously other assets. The long-term portion of related deferred tax recorded in other income (expenses), have been liabilities, which were included in other current liabilities, reclassified to selling, general and administrative and deferred income taxes have also been revised to be expenses in the year ended March 31, 2004. In addition, classified in other liabilities and other assets. net realized gains and losses on interest rate swap contracts not designated as accounting hedges by finance subsidiaries, which were previously recorded in cost of sales, have been reclassified to and included in other income (expenses)—other. Operating income prior to fiscal 2003 has been presented to conform with the reclassifications mentioned above. (6) On April 26, 2006, the Board of Directors declared a two- for-one stock split of the Company’s common stock. All shareholders of record on June 30, 2006 will receive one additional share of common stock for each share on July 1, 2006. Information pertaining to shares and earnings per share has been restated in the accompanying consolidated financial statements and notes to the consolidated financial statements to reflect this split. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 1 1 6 Annual Report 2008 Corporate Information

118 Principal Manufacturing Facilities

120 Honda Group

122 Honda’s History

124 Investor Information WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 117 Principal Manufacturing Facilities

Location Start of Operations Number of Employees Principal Products Manufactured

Japan Sayama, Saitama Motorcycles Automobiles Engines 1964 5,334 All-terrain vehicles Power products Transmissions Japan Hamamatsu, Shizuoka 1954 3,295

Japan Ohzu-machi, Kikuchi-gun, Kumamoto 1976 3,032

U.K. Swindon, Wiltshire 1992 4,924 Japan Suzuka, Mie 1960 6,981 France Ormes 1986 159

Italy Atessa 1976 798

India Greater Noida U.S.A. Marysville, Ohio 1997 1,797 1979 7,214 India Gurgaon China Chongqing 2001 2,627 1994 962 U.S.A. Anna, Ohio 1985 2,598 Canada Alliston, Ontario Turkey Gebze China Guangzhou 1986 4,506 1997 862 2005 1,131 U.S.A. East Liberty, Ohio 1989 2,324 Taiwan Pingtung U.S.A. Russells Point, Ohio 1996 2003 730

U.S.A. Swepsonville, North Carolina U.S.A. Lincoln, Alabama 1984 573 2001 4,513 Pakistan Lahore 1994 609 U.S.A. Timmonsville, South Carolina 1998 1,484

Thailand Ayutthaya Mexico El Salto U.S.A. Tallapoosa, Georgia 2000 2,935 Philippines Laguna 1995 1,913 2006 1992 687 Malaysia Alor Gajah 2003 1,152 Philippines Manila 1973 739 Spain Barcelona Indonesia Jakarta 1986 299 2002 Brazil Manaus Thailand Bangkok Indonesia Karawang 1976 7,654 1967 2,708 2003 1,295 Brazil Sumare Vietnam Vinhphuc 1997 2,956 1997 1,880

Argentina Buenos Aires 2006 211 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 118 Annual Report 2008 Principal Manufacturing Facilities

Location Start of Operations Number of Employees Principal Products Manufactured

Japan Sayama, Saitama Motorcycles Automobiles Engines 1964 5,334 All-terrain vehicles Power products Transmissions Japan Hamamatsu, Shizuoka 1954 3,295

Japan Ohzu-machi, Kikuchi-gun, Kumamoto 1976 3,032

U.K. Swindon, Wiltshire 1992 4,924 Japan Suzuka, Mie 1960 6,981 France Ormes 1986 159

Italy Atessa 1976 798

U.S.A. Swepsonville, North Carolina U.S.A. Lincoln, Alabama 1984 573 2001 4,513 Pakistan Lahore 1994 609 U.S.A. Timmonsville, South Carolina 1998 1,484

Argentina Buenos Aires 2006 211 WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 119 Honda Group

Company Name Honda Motor Co., Ltd. Established September 24, 1948 Lines of Business Motorcycles, Automobiles, Financial Services and Power Products and Others Head Office 1-1, 2-chome, Minami-Aoyama, Minato-ku, Tokyo, Japan

Principal Subsidiaries

Percentage Main Lines of Business Country of Ownership Region Incorpora- Company Motor- Auto- Financial Power Prod- and Voting tion cycle mobile Services uct & Other Function Interest Business Business Business Businesses Japan Saitama Honda R&D Co., Ltd. 100.0 ○ ○ ○ Research & development Manufacturing and sales of equipment and Tochigi Honda Engineering Co., Ltd. 100.0 ○ ○ ○ development of production technology Saitama Yachiyo Industry Co., Ltd. 50.5 ○ ○ Manufacturing Miyazaki Honda Lock Mfg. Co., Ltd. 100.0 ○ ○ ○ Manufacturing Shizuoka Yutaka Giken Co., Ltd. 70.1 ○ ○ ○ Manufacturing Nagano Asama Giken Co., Ltd. 81.7 ○ ○ ○ Manufacturing Saitama Honda Foundry Co., Ltd. 82.1 ○ ○ ○ Manufacturing Tokyo Honda Motorcycle Japan Co., Ltd. 100.0 ○ Sales Tokyo Honda Finance Co., Ltd. 100.0 ○ Finance Mie Mobilityland Corporation 100.0 ○ Others (Leisure) Tokyo Honda Trading Corporation 100.0 ○ ○ ○ Others (Trading) Mie Honda Logistics Inc. 100.0 ○ ○ ○ Others (Physical distribution) North U.S.A. American Honda Motor Co., Inc. 100.0 ○ ○ ○ Sales America Honda North America, Inc. 100.0 ○ ○ ○ ○ Coordination of subsidiaries’ operation Honda of America Mfg., Inc. 100.0 ○ ○ Manufacturing American Honda Finance Corporation 100.0 ○ Finance Honda Manufacturing of Alabama, LLC 100.0 ○ Manufacturing Honda of South Carolina Mfg., Inc. 100.0 ○ Manufacturing Yachiyo of America Inc. 100.0 ○ Holding company Honda Transmission Mfg. of America, Inc. 100.0 ○ Manufacturing Honda Precision Parts of Georgia, LLC 100.0 ○ Manufacturing Honda Power Equipment Mfg., Inc. 100.0 ○ Manufacturing Honda R&D Americas, Inc. 100.0 ○ ○ ○ Research & development Cardington Yutaka Technologies Inc. 100.0 ○ ○ Manufacturing Celina Aluminum Precision Technology Inc. 100.0 ○ Manufacturing Honda Trading America Corporation 100.0 ○ ○ ○ Others (Trading) Manufacturing and sales of equipment and Honda Engineering North America, Inc. 100.0 ○ ○ ○ development of production technology Canada Honda Canada Inc. 100.0 ○ ○ ○ Manufacturing and sales Honda Canada Finance Inc. 100.0 ○ Finance Mexico Honda de Mexico, S.A. de C.V. 100.0 ○ ○ ○ Manufacturing and sales Europe Belgium Honda Europe NV 100.0 ○ ○ ○ Sales U.K. Honda Motor Europe Limited 100.0 ○ ○ ○ ○ Coordination of subsidiaries’ operation and sales Honda of the U.K. Manufacturing Ltd. 100.0 ○ Manufacturing Honda Finance Europe plc 100.0 ○ Finance France Honda Motor Europe (South) S.A. 100.0 ○ ○ Sales Honda Europe Power Equipment, S.A. 100.0 ○ Manufacturing and sales Germany Honda Bank GmbH 100.0 ○ Finance Honda Motor Europe (North) GmbH 100.0 ○ ○ ○ Sales Honda R&D Europe (Deutschland) GmbH 100.0 ○ ○ ○ Research & development Italy Honda Italia Industriale S.p.A. 100.0 ○ ○ Manufacturing and sales Spain Montesa Honda S.A. 100.0 ○ Manufacturing and sales WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 120 Annual Report 2008 Honda Group

Percentage Main Lines of Business Country of Ownership Region Incorpora- Company Motor- Auto- Financial Power Prod- and Voting tion cycle mobile Services uct & Other Function Interest Business Business Business Businesses Honda Motor (China) Investment Co., Ltd. 100.0 ○ ○ ○ Holding company and sales Asia China Jialing-Honda Motors Co., Ltd. 70.0 ○ Manufacturing and sales Honda Automobile (China) Co., Ltd. 65.0 ○ Manufacturing Honda Auto Parts Manufacturing Co., Ltd. 100.0 ○ Manufacturing India Honda Motorcycle and Scooter India Private Limited 100.0 ○ Manufacturing and sales Honda Siel Cars India Limited 97.4 ○ Manufacturing and sales Indonesia P.T. Honda Precision Parts Manufacturing 100.0 ○ ○ Manufacturing P.T. Honda Prospect Motor 51.0 ○ Manufacturing and sales Malaysia Honda Malaysia SDN. BHD. 51.0 ○ Manufacturing and sales Pakistan Honda Atlas Cars (Pakistan) Limited 51.0 ○ Manufacturing and sales Philippines Honda Philippines, Inc. 99.6 ○ ○ Manufacturing and sales Honda Cars Philippines, Inc. 74.2 ○ Manufacturing and sales Taiwan Honda Taiwan Co., Ltd. 100.0 ○ Sales Asian Honda Motor Co., Ltd. 100.0 ○ ○ ○ ○ Coordination of subsidiaries’ operation and sales Thailand Honda Leasing (Thailand) Company Limited 100.0 ○ Finance Honda Automobile (Thailand) Co., Ltd. 89.0 ○ Manufacturing and sales Thai Honda Manufacturing Co., Ltd. 60.0 ○ ○ Manufacturing Vietnam Honda Vietnam Co., Ltd. 70.0 ○ ○ Manufacturing and sales Others Argentina Honda Motor de Argentina S.A. 100.0 ○ ○ ○ Manufacturing and sales Coordination of subsidiaries’ operation and holding Honda South America Ltda. 100.0 ○ ○ ○ ○ Brazil company Honda Automoveis do Brasil Ltda. 100.0 ○ Manufacturing and sales Moto Honda da Amazonia Ltda. 100.0 ○ ○ Manufacturing and sales Honda Componentes da Amazonia Ltda. 100.0 ○ Manufacturing Turkey Honda Turkiye A.S. 100.0 ○ ○ Manufacturing and sales Australia Honda Australia Pty. Ltd. 100.0 ○ Sales New Zealand Honda New Zealand Limited 100.0 ○ Sales

Note: Percentage Ownership and Voting Interest include ownership through consolidated subsidiaries.

Major Affiliated Companies Accounted for under the Equity Method

Percentage Main Lines of Business Country of Ownership Region Incorpora- Company Motor- Auto- Financial Power Prod- and Voting tion cycle mobile Services uct & Other Function Interest Business Business Business Businesses Japan Saitama Showa Corporation 33.5 ○ ○ ○ Manufacturing Tokyo Keihin Corporation 42.2 ○ ○ ○ Manufacturing Saitama TS Tech Co., Ltd. 22.7 ○ ○ Manufacturing Shizuoka F.C.C. Co., Ltd. 20.7 ○ ○ ○ Manufacturing Nagano Nissin Kogyo Co., Ltd. 34.7 ○ ○ Manufacturing Saitama H-one Co., Ltd. 23.5 ○ ○ ○ Manufacturing Aichi Musashi Seimitsu Industry Co., Ltd. 26.2 ○ ○ ○ Manufacturing Saitama F-Tech Inc. 20.6 ○ Manufacturing Toyama Tanaka Seimitsu Kogyo Co., Ltd. 24.3 ○ ○ ○ Manufacturing North U.S.A. KTH Parts Industries, Inc. 39.3 ○ Manufacturing America Jefferson Industries Corp. 29.4 ○ Manufacturing Kehin Indiana Precision Technology, Inc. 25.9 ○ Manufacturing Nissin Brake Ohio, Inc. 25.9 ○ ○ Manufacturing Canada F&P Mfg., Inc. 35.0 ○ Manufacturing Asia China Guangzhou Honda Automobile Co., Ltd. 50.0 ○ Manufacturing and sales Dongfeng Honda Automobile Co., Ltd. 50.0 ○ Manufacturing and sales Sundiro Honda Motorcycle Co., Ltd. 50.0 ○ Manufacturing and sales Dongfeng Honda Engine Co., Ltd. 50.0 ○ Manufacturing Wuyang-Honda Motors (Guangzhou) Co., Ltd. 50.0 ○ Manufacturing and sales India Hero Honda Motors Ltd. 26.0 ○ Manufacturing and sales Indonesia P.T. Astra Honda Motor 50.0 ○ Manufacturing and sales Malaysia Armstrong Auto Parts SDN. BHD. 23.6 ○ ○ Manufacturing Other Brazil Musashi do Brasil Ltda. 25.1 ○ ○ Manufacturing

Note: Percentage Ownership and Voting Interest include ownership through consolidated subsidiaries. WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 121 Honda’s History

Major Products Year Noteworthy Events and Technologies 1946 Soichiro Honda establishes Honda Technical Research Institute 1947 Honda’s first product, the A-type bicycle engine, produced 1948 Honda Motor Co., Ltd. incorporated (capital: ¥1 million, employees: 34) 1949 Dream D-type, Honda’s first motorcycle, produced 1953 H-type engine, Honda’s first power product, produced 1957 Listed on the Tokyo Stock Exchange 1958 Super Cub motorcycle released 1959 American Honda Motor Co., Inc. established (Honda’s first overseas subsidiary) 1960 Motorcycle production begins at Suzuka Factory Dream D-type (1949) Honda R&D Co., Ltd. established 1961 Honda racing team sweeps first 5 places in Isle of Man TT Race (125cc, 250cc) 1962 American Depositary Receipts (ADRs) issued at market price. Adopts consolidated accounting using U.S. Securities and Exchange Commission (SEC) standards Construction of Suzuka Circuit completed 1963 Honda Benelux N.V. (Belgium) begins production of motorcycles (Honda’s first overseas production. The first Japanese company to open a manufacturing facility in the EEC) Honda’s first sports car (S500) and light truck (T360) released 1964 Asian Honda Motor Co., Ltd. (Thailand) established Super Cub (1958) Automobile production begins at Sayama Factory (presently Saitama Factory) 1965 Thai Honda Manufacturing Co., Ltd. (Bangkok) established Honda (U.K.) Limited established in London Honda wins its first F1 victory, in Mexico 1967 Automobile production begins at Suzuka Factory Motorcycle production begins in Thailand 1969 Canadian Honda Motor Ltd. established in Toronto (presently Honda Canada Inc.) Automobile (N360) and motorcycle production begins in Malaysia 1971 Honda Motor do Brazil Ltda. established in Sao Paulo (presently Honda South America Ltda.) T360 (1963) Knockdown motorcycle production begins in Mexico 1972 CVCC engine, world’s first to comply with the U.S. Clean Air Act of 1975, released 1973 Motorcycle production begins in the Philippines Civic CVCC introduced 1974 Motorcycle production begins in Indonesia 1975 Automobile production begins in Indonesia (TN Truck, Life, Civic) 1976 Kumamoto Factory begins operation Motorcycle production begins at Honda Italia Industriale S.p.A. S500 (1963) Accord introduced 1977 ADRs listed on the New York Stock Exchange (NYSE) Consolidated financial disclosure begins 1979 Quarterly financial disclosure begins Honda of America Mfg., Inc. begins motorcycle production 1981 Listed on the London Stock Exchange 1982 Honda of America Mfg., Inc. begins automobile production (The first Japanese automaker to open a manufacturing facility in the U.S.) 1983 Listed on the Zurich, Geneva and Basel stock exchanges Dream CB750FOUR (1969) 1984 Automobile production begins in Thailand (Accord) 1985 Listed on the Paris Stock Exchange Motorcycle engine production begins in the U.S. Motorcycle production begins in India Motorcycle engine production begins in Malaysia 1986 Automobile production begins at Honda Canada Inc. (Accord) Motorcycle production begins in Spain Power product production begins in France Civic CVCC (1973) 1987 Cumulative motorcycle production reaches 50 million units, a world first 1988 Automobile production begins in Mexico High-performance VTEC engine announced

Accord (1976) WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb 122 Annual Report 2008 Honda’s History

Major Products Year Noteworthy Events and Technologies 1989 Common stock-to-ADR exchange ratio changed from 10 shares of common stock to 1 ADR to 2 shares of common stock to 1 ADR Second automobile plant in the U.S. begins production in East Liberty, Ohio Honda Motor Europe Ltd. (U.K.) established 1991 Honda posts its 60th Grand Prix victory in the Brazil GP 1992 Automobile production begins in the U.K. (Accord) Automobile production begins in the Philippines 1994 Automobile production begins in Pakistan (Civic) 1995 Honda introduces first gasoline-powered vehicle to meet ULEV (Ultra Low Emission Vehicle) NSX (1990) standards in California, the U.S. Cumulative automobile production reaches 30 million units 1996 Motorcycle production begins in Turkey 1997 Construction of Twin Ring Motegi completed (Tochigi Prefecture) Automobile production begins in Brazil (Civic) Automobile production begins in Turkey (Civic) Cumulative motorcycle production reaches 100 million units Motorcycle production begins in Vietnam Automobile production begins in India (City) Odyssey (1994) 1998 The 50th anniversary of the founding of Honda 1999 Automobile production begins at Guangzhou Honda Automobile Co., Ltd. in China (Accord) Fuel cell vehicles FCX-V1 and FCX-V2 announced 2000 ASIMO humanoid robot announced 2001 Motorcycle production begins at new production company in India Second automobile plant in the U.K. begins operations Minimum investment unit lowered to 100 shares from 1,000 Honda Manufacturing of Alabama, LLC in the U.S. begins operations 2002 Common stock-to-ADR exchange ratio changed from 2 shares of common stock to 1 ADR CR-V (1995) to 1 share of common stock to 2 ADRs New automobile plant in Taiwan begins operations Honda FCX fuel cell vehicle the first to receive certification for commercial use in the U.S. Lease marketing started in Japan and the U.S. 2003 New automobile plant in Malaysia begins operations New automobile plant in Indonesia begins operations Cumulative automobile production reaches 50 million units Honda FC STACK, a next-generation fuel cell stack capable of starting in sub-zero temperatures, Fit (2001) announced 2004 Honda Motor (China) Investment Co., Ltd. established Honda Motor RUS LLC (Russia) established Dongfeng Honda Automobile Co., Ltd. in China begins automobile production (CR-V) Honda enters cooperative agreement with General Electric to jointly market its independently developed HF118 jet engine 2005 Cumulative motorcycle production reaches 150 million units Cumulative worldwide production of the Super Cub series reaches 50 million units 2006 Honda Philippines begins mass production at new motorcycle plant FCX (2002) Three dealer channels integrated into one Honda brand Cumulative production of power products reaches 70 million units Honda establishes subsidiary in Ukraine Implementation of two-for-one stock split for common shares Common stock-to-ADR exchange ratio changed from 0.5 share of common stock to 1 ADR to 1 share of common stock to 1 ADR New automobile plant in Vietnam begins operations (Civic) Launched the Gold Wing Airbag, the first mass-market motorcycle with an airbag system Gold Wing Airbag (2006) Commercialized HondaJet operations and began accepting orders Resolved to implement quarterly dividends New company to conduct solar cell business established Flexible fuel vehicle introduced in Brazil (Civic FFV, Fit FFV) 2007 New plant for powertrain components in China begins operations New Acura Design Studio opens in the U.S. Nationwide marketing of next-generation thin-film solar batteries begun Honda celebrates its 25th year of automobile production in the U.S. HondaJet WorldReginfo - bc9832be-05b4-4eaa-80a4-f78d1968d3bb Annual Report 2008 123 Investor Information

Honda Motor Co., Ltd.