Annual Report For the year ended March 31, 2006  

... Feel the Potential
Fuji Heavy Industries Ltd. (FHI) is a global manufacturer of transportationand aerospace-related products and the maker of Subaru automobiles.
FHI’s roots go back to 1917, when Japan’s first Aircraft Research Laboratory (later Nakajima Aircraft Co., Ltd.) was established, 14 years after the
Wright Brothers’ first successful flight of the Kitty Hawk flyer in 1903.
While some of the world’s automakers have their roots in the aircraft industry,
FHI is the only automaker who continues to build aircraft today.
On July 15, 2003, the 50th anniversary of the Company’s founding in
1953, FHI introduced the six-star (“mutsuraboshi”) Subaru automobile
emblem design as its new corporate symbol. The Company has been using
this symbol to further fortify its brand image and awareness on a global basis.


1

Performance Overview

2

To the Stakeholders of Fuji Heavy Industries Ltd.

5Six Crucial Questions

6

Brand and Marketing

10

Technology and Cost Control

14

Business Alliance and Next Generation

18

Management

20

Corporate Social Responsibility (CSR)

23

Financial Section

65

Consolidated Subsidiaries and Affiliates

66

Investor Information

Disclaimer Regarding Forward-Looking Statements

Statements herein concerning plans and strategies, expectations or projections about the future, FHI’s efforts
with regard to various management issues, and other statements, except for historical facts, are forwardlooking statements. These forward-looking statements are subject to uncertainties that could cause actual
results to differ materially from those anticipated. These uncertainties include, but are not limited to, general
economic conditions, demand for and prices of FHI’s products, FHI’s ability to continue to develop and market
advanced products, raw material prices, and currency exchange rates. FHI disclaims any obligation to update
any forward-looking statements, whether as a result of new information, future events, or otherwise.

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Performance Overview

Automotive Sales Volume (thousand units, non-consolidated)
Net Sales
Operating Income
Ordinary Income
Net Income
Capital Expenditures
Depreciation Expenses
R&D Expenses
Interest-bearing Debt
Exchange Rate (¥/$, non-consolidated)
ROE
ROA*
Total Assets
Shareholders’ Equity

FY2003

FY2004

FY2005

FY2006

Billions of yen(Forecast)
FY2007555
1,372.3
67.5
58.5
33.4
64.6
48.8
60.1
389.1
124
8.3
5.3
1,344.1553
1,439.5
50.3
56.6
38.6
74.6
53.2
57.5
379.0
116
8.9
3.9
1,349.7

601
1,446.5
42.0
43.6
18.2
85.3
51.1
53.0
412.2
108
3.9
3.3
1,357.5589
1,476.4
58.3
46.8
15.6
56.2
57.5
46.9
374.1
112
3.3
4.6
1,348.4598
1,550.0
50.0
50.0
30.0
93.0
60.5
54.0
370.0
110
—
—
—

411.3

453.7

471.1

465.5

—

*ROA was calculated as “(operating income + interest and dividend income) / (average of assets at the beginning and end of term)”

PAGE
PAGE 1

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

To the Stakeholders of Fuji Heavy Industries Ltd.

Ikuo Mori Representative Director of the Board, President and CEO

Taking the Helm as President

Having become president and CEO of FHI following approval at the annual meeting of shareholders and by the
Board of Directors Meeting on June 27, 2006, I would like to take this opportunity to say a few words to ourstakeholders. The year to March 2006, or fiscal 2006, was a major period of transition for FHI. We reviewed our
five-year medium-term business plan, Fuji Dynamic Revolution-1 (FDR-1), unveiled a revised version, and strove
to restore profitability by implementing urgent total cost reductions and other measures. At the same time, we
terminated our alliance with General Motors Corporation (GM) and agreed to a new partnership with Toyota
Motor Corporation. Presently, in the final year of the revised FDR-1 plan, we are putting the finishing touches on
the work we have engaged in under the plan. Our previous president, Kyoji Takenaka, played a central role informulating and carrying out the FDR-1 plan. Picking up where he left off, I intend to devote myself to charting a
new course, transitioning from the establishment of an operating foundation to a focus on growth into the future.
Fiscal 2006 Review and Effects of the Revised FDR-1 Plan

Consolidated net sales in the year under review increased 2.1% over the previous year, to ¥1,476.4 billion, owing
to an increase in overseas sales volume, sales from the Aerospace company and additional businesses other thanAutomobiles exceeding the previous year, and favorable exchange rates. We reported operating income of ¥58.3
billion, which represents an increase of 38.8% over the previous year. This was due in part to reducing material
costs and administrative expenses and streamlining research and development (R&D). While we did register bothincreased sales and income, this outcome is nevertheless bittersweet since our core Subaru Automotive business did
not really contribute to this result.
Under the revised FDR-1 plan, we worked to achieve five strategic goals aimed at rebuilding our operating
foundation, while at the same time downwardly revising our performance targets for fiscal 2007. The first strategic
goal was to implement urgent total cost reductions, and in fiscal 2006 we made respectable progress as evidenced
by our operating income. With respect to restructuring product planning, we launched a new minicar model,
Stella, on the market in June 2006, and will attempt to invigorate the Japanese market with new model entries.
PAGE 2

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

And, starting in 2007, we plan to introduce Full Model Changed (FMC) vehicles (completely redesigned models)on an annual basis. For restructuring sales processes and networks, we did make steady progress in network
development, but are only halfway there in terms of improving customer satisfaction. Finally, with respect tostreamlining the corporate structure, we made substantial progress in shifting to structure supporting higher
earnings in our three internal companies. Doing so, however, required us to make the agonizing decision of hastening
the retirement of over 700 employees.
On the whole, our efforts under the revised FDR-1 plan delivered a certain level of results. With our goals
going forward clear, we intend to accelerate initiatives under the new regime to propel us to our next stage of growth.
Issues and Initiatives Ahead of Our Next Medium-Term Business Plan

I will first explain the major issues that Subaru is currently facing.
The first involves our orientation to customers, which is a perpetual issue for Subaru. Over the past five years,
the entire company engaged in work related to this issue, but looking back, I am forced to conclude that our efforts
did not deliver adequate results. I have the sense that our FDR-1 plan did not fully change our corporate culturethat for many has believed that if we make a good product it will certainly sell. For Subaru, making good products
is not enough; we must be oriented more to our customers, and unfortunately, as of the present, we are still not
where we should be. We must first raise customer satisfaction in every phase—product development, manufacturing,sales and services—which will consequently lead to sales of new cars. It is essential for us to build a customercentered value chain, so it is incumbent upon all of Subaru, including executives, to change its way of thinking.
We started by identifying three issues. The first is to achieve the targets of the revised FDR-1 plan. The second
is to clarify the substance of our alliance with Toyota and make it a success. And the third is to formulate a new
medium-term business plan for our growth in the next fiscal year and beyond.
Finishing Up the Final Year of the FDR-1 Plan

Our most important agendas for the final year of the FDR-1 plan are to continue to strengthen our Total Cost
Structure Revolution (TSR), work to improve the efficiency of R&D costs and administrative expenditures, andraise our overall cost competitiveness. On the sales side, we will further rationalize dealer management in Japan by
merging some dealerships starting April 2006 and allocate the resulting resources to bolstering our sales force inorder to improve sales productivity. In the U.S., we are working to strengthen our dealerships by launching theSite Control program involving direct investment in dealer facilities by Subaru of America, Inc. (SOA), our U.S.
marketing & distributing subsidiary. Through these initiatives, we plan to reform our sales structure into a highquality operation directed at customer satisfaction.

OVERVIEW OF FDR-1 (Billions of yen)
555,421 (units)

1,372.3

2003

67.5
553,013 (units)

1,439.5

2004

50.3
1,446.5

600,577 (units)

1,476.4

589,237 (units)

2005

42.0

2006

58.3
1,550.0

598,000 (units)

2007

50.0

(Forecast)

Actual Unit Sales

Net Sales

Operating Income

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FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Alliance with Toyota

Next, through our alliance with Toyota Motor Corporation, we intend to absorb Toyota’s sophisticated expertise,
improve Subaru’s productivity and enhance our product strength by producing Toyota vehicles, and share technologies at Subaru of Indiana Automotive, Inc. (SIA), our U.S. production subsidiary. We hope to build a robust, longstanding relationship with Toyota by enhancing synergies in areas other than production and development as well,and continuing to deepen the trust between the two companies.
Formulating Our Next Medium-Term Business Plan

Along with steadily carrying out the aforementioned two major agendas to shore up the company’s management
base, we will also formulate our next medium-term business plan for FHI going forward, a task that I personallyconsider a major undertaking. FHI urgently needs to develop a system for aggressively developing unique Subaru
products that reflect the wishes of customers and for delivering high-quality, cost-competitive products to themarket in a timely manner. Bolstering our overall sales capabilities both in Japan and overseas is also a pressing
issue. So along with raising efficiency, we intend to create a plan for making necessary investment in dealer infrastructure and devote effort to personnel-related issues, including improving the quality of customer service. In
doing so, we will seek to realize a high-quality brand of sales and service that engenders true customer satisfaction.
Conclusion

Along with engaging in the business activities outlined above, we will proactively carry out activities to fulfill oursocial responsibilities as a corporation, including environmental conservation and compliance-related initiatives,
and will seek to be an attractive company with a strong market presence—a company that is trusted by shareholders, customers, and all other stakeholders. By focusing our efforts on brand development and marketing rooted inorientation to our customers, we will take our first steps toward a new stage of growth. I hope that you share in
our expectations for the potential of Subaru going forward.

Ikuo Mori
Representative Director of the Board, President and CEO

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FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006  

Ikuo Mori
Representative Director of the Board,
President and CEO

Feel the Potential
Takao Tsuchiya
Representative Director of the Board,
Senior Executive Vice President

FHI will move forward under a new management team to formulate a new medium-term business plan that will maximize
potential and usher in a new stage of growth for Subaru. The
company’s new president, Ikuo Mori, will leverage experience
gained from being in charge of sales divisions both in Japan andoverseas to establish a competitive brand and enhance marketing as well as affluent experiences in production control both inJapan and the USA. Takao Tsuchiya, who is responsible forengineering and quality, and Hiroshi Komatsu, who heads up
procurement and manufacturing, will assist President Mori as
specialists in their respective areas. Kyoji Takenaka, in his role
as a director of the board and senior corporate advisor to thecompany, will function like an outside director and provide
support for the new management from a stakeholder’s point ofview. With this management team in place, FHI intends tocome out ahead of the competition around the world.

Hiroshi Komatsu
Representative Director of the Board,
Senior Executive Vice President

PAGE 5FUJI HEAVY INDUSTRIES LTD.

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ANNUAL REPORT 2006

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Feel the Potential  

PAGE 7

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[]What are the strengths of the Subaru brandthat are capable of generating value for customers and the company?
PRODUCT PORTFOLIO

2007~

2006
StellaFMC

B9 Tribeca (Europe, Australia)

B9 Tribeca (Japan)

FMC
New model

Legacy (United States)
Legacy (Japan, Europe, Australia)

FMC/New Model

PAGE 8Major Face-Lift

Subaru has products capable of earning the strong support of customers—namely, the Legacy, Impreza andForester. However, when looked at from a long-term perspective, the Subaru brand as it currently stands does
not always adequately deliver high levels of customer satisfaction. In the pursuit of high quality, we have been
scrupulous about manufacturing and have made repeated efforts over many years to raise our technicalcapabilities. Our efforts, though, have not incorporated the customer’s perspective as robustly as they should.
In order to draw up a new growth strategy for Subaru, we have to re-establish the brand from thecustomer’s perspective. This means we have to start with imagining the type of customer who wants to buy ourcars, then offer products, prices, quality and service that are suited to that customer. We will make thisperspective the basis of the Subaru brand.
In addition, due to the lackluster recognition of our brand in markets overseas, it is important that we havea strategy for raising recognition in each region. In the U.S., a key market, we will work to convert to a brandimage that suggests a highly refined balance of environmental considerations and performance. We have alreadystarted to carry out a strategy leveraging high-value-added models, introducing the turbo-charged Legacy, forexample. With regard to raising brand recognition, competing at the World Rally Championship has been
extremely helpful to promote the strength of our brand in Europe in particular and regions where we’re newmarket entrants. What is important is that we grasp the orientation of customers in each region and devise astrategy for each market.
Brand building is the never-ending task for a company. Raising the value of our brand involves steadfastly
improving certain functional and design characteristics of our cars. Subaru has the ability to create appealing
products. We just have to know where to aim—what features to improve for what type of customer. Goingforward, we will attempt to understand the needs of our customers, first by actually listening to their opinions,then by quantitatively assessing that information and incorporating it into our products. Stella, which was
unveiled this year, truly represents a step in this direction. A car that is fun for both the driver and passengers—
this is one of the new images we want to become associated with Subaru cars.
Furthermore, another important agenda will be to fuse values connected with the environment and fueleconomy. Once this value has been established, we will add an intrinsic appeal, meet customer expectations anddeliver excitement—this is our ideal for Subaru cars and the direction of the next incarnation of the Subaru brand.

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[]What are your strategies and agendas for marketing,which holds the key to growth and profitability?


Under the FDR-1 medium-term business plan, FHI has worked to shore up its sales capabilities for each region,
raising the quality of the sales network and upping the number of dealers in the U.S., and improving the profitability of dealers in Japan. However, while our major aim was a substantial increase in sales volume, this was
not associated with improved sales quality, and as a result we were not able to achieve our volume targets andhad to make a series of downward revisions.
The issue remains then of what to do in order to improve the quality of sales. A hint can be found in our
success in the Australian market. Marketing activities have been developed around an appeal to the quality of
our crossover models and high-performance models. Subaru is perceived as a premium Japanese brand and has
captured a fixed share of the market. Moreover, we have not resorted to gimmicks to further raise our market
share, but rather have limited the number of dealers and carefully managed the volume of inventory madeavailable to them. This has proven successful in maintaining the premium image associated with the brand. In
Japan and the U.S., on the other hand, the fact that we were not able to fully implement this strategy is asource of regret, but going forward we plan to thoroughly carry out a strategy of improving not only volume
but also sales quality.
Looking at our plans on a region-by-region basis, in the U.S. market, the key location for Subaru’s turnaround, there is still considerable potential that has yet to be tapped. Our strategy for the U.S. market differs
depending on the state. In northern states, where the brand is recognized, we will work to shift the image
associated with the brand from practical to performance. Also, in major urban areas where brand awareness is
not adequately developed, including in the West, Midwest, and South, U.S. subsidiary Subaru of America will
promote our Site Control program, which invests in dealerships and consigns operations to publicly recruitedmanagers, in an effort to upgrade the quality of our sales network. For the Japanese market, which is in theprocess of maturation, we will emphasize customer relationships and carry out activities that prioritize profitability by developing more detail-oriented services.
In the European market, which stands as the third pillar of our operations, we are currently enjoying
volume growth. We plan to further increase sales volume by introducing models equipped with horizontally
opposed diesel engines, as well as develop new markets. In Russia and China, where Subaru’s high brand value
is recognized, we will implement a marketing strategy that leverages the features of Subaru cars, namely,
driving pleasure and safety.
We firmly believe that we can return the company to profitability by fully understanding the expectations
customers have for the brand in each market and by building a value chain around their needs.

AUTOMOBILE SALES BY REGION (Thousands of units)
2002
2003
2004
2005
2006
0

100
Japan

U.S.

200

300

400

EuropeAustralia

Others500

PAGE 9FUJI HEAVY INDUSTRIES LTD.

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ANNUAL REPORT 2006

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Feel the Potential   

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FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[]How does Subaru’s technology development currently stand andwhat will its direction be going forward?


PAGE 12

There are basically two directions available for producing automobiles. The first is a product-oriented approachin which the manufacturer proposes products to the customer; the second is a market-oriented approach
whereby products the customer wants are produced. Truly outstanding products fuse these two approaches at avery high level. Subaru needs to side more with the market-centered approach than it has in the past to produce
highly unique cars—with Boxer engines and symmetrical all-wheel drive as their core technologies—that are
based on a customer-first approach, but does not sacrifice Subaru’s distinctive characteristics.
With regard to technology, there will be several important issues related to car development going forward.
Envisioning a flagship model for the future that will support the company’s growth, there are major changes indemand currently taking place in the U.S., the model’s would-be target market. An SUV, for example, would
have good fuel economy and a spacious cabin while maintaining appropriate exterior dimensions. As evidenced
by demand for good fuel economy, the road ahead for technology development will be characterized byconsiderable focus being placed on the environment. FHI will also develop its technologies in this direction.
With respect to the development of new environmental technologies, we will put priority on developmentthat further cleans the exhaust gases of Boxer turbo-charged engines and work to accommodate mounting
demand for clean exhaust in European, American and Japanese markets. In Europe, diesel engines are themainstream, so Subaru is also developing a Boxer diesel engine. Already, we have completed the R&D phaseand have entered the final stages before moving to commercial production. A general weak point of diesel
engines is their substantial vibration, but this vibration is ameliorated by the superior balance and rigidity inherent
in Boxer engine configuration. The engine is expected to successfully harness such advantage. We think that the
U.S. is a potential market for the engine in the future, not only Europe.
In the area of eco-cars, we have worked for some time on the development of hybrid vehicle systems, but
the large costs involved in mass production have proved problematic. We plan to stake out a positive direction
for these efforts through our alliance with Toyota. Electric cars, the most extreme type of eco-cars, require thedevelopment of efficient batteries that can be recharged in a short period of time. Using dozens of the R1e that
we developed ourselves, we are currently involved in testing an electric car system for commercial use in theTokyo area, in partnership with Tokyo Electric Power Co., Inc (TEPCO).
In this way Subaru will leverage the technological capacities it has accumulated over many years, startingwith Boxer engines, to work to develop new technologies, while firmly rooted in the customer’s perspective
and values and with an eye on the future of the automobile.
At the same time, our Aerospace company, the early heritage of FHI, will work toward a full-fledged
recovery in profitability and further polish its technological capabilities to try to raise its sales to over ¥100.0
billion and operating margin to over 8%. With respect to commercial-sector customers, we have added a new
project to our existing Boeing business, the Boeing 787, for which we have succeeded in developing center
wing made of carbon fiber reinforced plastics and started on structural assembly ahead of the rest of theworldwide suppliers. In the business jet segment, we will soon start production on the wings for the Eclipse
500 jet by incorporating production technologies from our Automotive Business Unit. The jet as a whole will bemass-produced in groundbreaking fashion in the aircraft industry. For the Japan Defense Agency, we starteddeliveries of the wings for the next-generation Maritime Patrol Aircraft and Cargo Transport Aircraft (PX/
CX). The wings represent the largest wings ever developed in Japan. In addition, in March 2006 we havesuccessfully made first delivery of the AH-64D Apache Longbow, which will serve as the next generation of air
power for the Japan Ground Self-Defense Force. The Aerospace company will strive for further growth bytaking on the challenge of new businesses such as these.

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[ ]What progress have you made in your total cost reduction policy andin otherwise controlling costs?
TSR (Reduction Ratio %)United States (SIA*)

Japan
0

0

-5

-5

-10
-15

Target : -16.0%

Target : -3.0%
Actual : -3.17%

-15

-20

-20
-25

-25
-30
(FY)

Target : -13.5%-10Target : -10.0%
Actual : -10.56%

CSR-1

2003
CSR-1* Target

-30

TSR

2004

2005

CSR-1 Actual

TSR** Target

Post TSR2006
TSR Actual*CSR-1—Cost Structure Revolution-1 **TSR—Total Cost Structure Revolution

2007

(CY)

CSR-1

TSR

Post TSR

2004

2005

2006

2007

CSR-1 Target

CSR-1 Actual

TSR Target

TSR Actual*SIA—Subaru of Indiana Automotive, Inc.

The Total Cost Structure Revolution (TSR) program, which is laid out in the revised FDR-1 plan, is proceeding
almost exactly according to schedule. Specifically, we have made progress in the initial year of the program
toward achieving our targets of reducing direct materials costs by 16% in Japan and by 13.5% in the U.S. overa period of two years. We have already reduced manufacturing costs more than targeted, so on the whole wethink we will be able to achieve our profit estimates.
However, the high prices of raw materials have been beyond our expectations. Prices for precious metals
in particular have spiked incredibly high, prices for oil and nonferrous metals have also surged, and these increases
are starting to have a major impact. The business climate is such that it is difficult to pass on the costs by raisingproduct prices, and the current price spikes for raw materials have approached a level that makes them impossible to fully absorb through cost-cutting initiatives. In terms of countermeasures, we are doing everything wepossibly can, including expediting development aimed at extricating ourselves from dependence on precious
metals and initiatives to reduce amounts used. We intend to progressively implement these changes with thedevelopment of new car models.
In developing new models, it will be essential for us to totally revolutionize our cost structure. We havespent too much on development in the past and from the customer’s vantage point, some of those costs were
not necessary. We must first make changes at this stage. Efforts to reduce costs after implementing production
are extremely inefficient, so we will make achieving cost targets before production begins a fundamental goal.
Another issue as a manufacturer is that no matter how inexpensive the car, we must proceed with development
in a way that is commensurate with its cost structure. This is actually the biggest challenge facing Subaru. We
must devise a cost structure that allows technologies to be developed in line with costs and finished products tobe provided at appropriate prices. We believe that once we accomplish this it will be possible to develop a
flagship model to shoulder the company’s next generation.
Another issue is the overall excessive capital investment made by suppliers with a connection to Subaru.
Up until now, new model development has involved Subaru taking the lead without any regard for the facilities
of suppliers. Moving forward, though, we must further strengthen collaboration with suppliers and carry out
total cost reductions not merely by pushing for low prices but by increasing common parts among the models,
striking a balance between existing and new product development, and taking other actions together.
Automobile development is now entering a transition period. We must limit the areas we invest in andrethink the relationship between development and cost from a long-term perspective, which will guide us in
making decisions regarding which suppliers to use and what type of group to form.
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FUJI HEAVY INDUSTRIES LTD.

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ANNUAL REPORT 2006

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Feel the Potential    

PAGE 15

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[ ]What role does the alliance with Toyota play in Subaru’s
growth strategy?


The auto industry must face both global markets and individual customers. Naturally, competition is fierce.
A number of challenges are also emerging in the industry that are too difficult for a single company to handle,
like environmental performance, fuel economy and safety. It is indispensable for Subaru to have a strategy foralliances with other companies. Our tie-up with GM was based on this policy. After ending this partnership thepolicy did not change, and we entered an alliance with Toyota. Subaru and Toyota are quite similar in terms of
our orientation toward manufacturing products with value and the passion with which we do it. We are convinced that we can learn a great deal from Toyota that can be used to bolster our business while further advancing our own technologies.
Preparations are under way for starting production in the spring of 2007 of the Camry at SIA, our North
American production site. This consignment production is an extremely bold undertaking for both companies.
Plans call for launching production at an unprecedented pace for both companies and installing Toyota’s cutting-edge
manufacturing technologies. This holds significant meaning for Subaru in that it will serve to upgrade our production
technologies. Technical collaboration in various fields is also under way, such as engineering cooperation indeveloping Toyota vehicles by FHI and leveraging Toyota’s system in developing Subaru’s hybrid system.
Receiving access to Toyota’s state-of-the-art technology, which has a strong reputation around the world, will
generate substantial value for us. From 2008, the benefits of this alliance should begin to take shape.
Of course this opportunity also presents Subaru with issues that we must overcome. The alliance with
Toyota will surely play a major part in changing the corporate culture of Subaru. Most importantly, we should
not only build a solid operating foundation through this alliance, but better clarify Subaru’s identity and try harder
to meet the needs of our customers.
Looking at the alliance from a medium- to long-term perspective, cooperation with Toyota will invigorate
the corporate culture of FHI. Secondly, in terms of concrete synergies, the alliance will lead to the construction of efficient development systems, maximize our cost competitiveness, strengthen sales and otherwise
improve corporate activities across the board. These improvements will in turn enhance our brand strength,
pivoting on Subaru, helping maximize the corporate value of FHI.

157,262,925 shares(20.1%)

Sell FHI Shares

Tokyo Stock Exchange

Sell FHI Shares
68,000,000 shares (8.7%)
Dissolve
strategic alliance

Share buyback

Business
Collaboration

62,504,000 shares(8.0%)

Progress in Alliance with Toyota■ SIA production of Toyota Camry for North America

・ Commencement around spring of 2007
・ Annual production capacity of approx. 100,000 units
・ Capital investment of approx. $230 million

PAGE 16■ FHI development of Toyota vehicles

・ Secondment of around 100 FHI engineers to Toyota
・ Possibility of joint product development and mutual
improvement of technological development
capabilities over the medium and long terms■ Hybrid System

・ Development of FHI hybrid cars basedon Toyota Hybrid System

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006[ ]How do you plan to develop human resources capable of shouldering
the next generation and winning on the global market?

Left : Ikuo Mori
Representative Director of the Board,
President and CEO
Right : Kyoji Takenaka
Director of the Board,
Senior Corporate Advisor

The personnel required by the automobile market, where change and competition will only increase, aretalented individuals with a global outlook. Our management team is already staffed with some fairly young
talent and many are gaining experience overseas. One of the issues we face is how to harness the strengths ofour personnel to meet the challenge of global competition.
Another important consideration is the extent to which our various staff members have a viewpoint andawareness that is oriented toward the customer’s needs. We actually think that our awareness is lacking in thisregard, in development, sales and everywhere else. To put it another way, it seems as though Subaru’s
traditional corporate culture, which is marked by a belief that if we make a good car it will definitely sell, still
has an impact on development, marketing, sales and every other aspect of the company. A change in awarenessis essential.
Accumulating experience is another important issue. We have made the experience we have gained since
the inception of the auto industry the sustenance of our growth. While we have the high level of expertise andexperience for development necessities, when considering today’s cars and society, frontline skills and experiencethat draw on these capacities become even more meaningful. In order to solve the problems we face one at atime and usher the company into the future, we need personnel who have the ability to frame problems accurately
and the practical skill to come up with real solutions. Our basic, concrete method for developing human resources
to this end is on-the-job training. We must also consider an approach that returns to fundamentals in order toprovide a variety of experiences that serve to foster an incisive intuitive sense grounded in experience.
Our human resources development now stands at a turning point. The present marks a period of transition
from a seniority-based to a more performance-based system. FHI too must selectively foster talented employees
who demonstrate ability. Developing personnel in a way that leverages the respective orientations of administrative positions and specialized positions is an urgent requirement, as is the development of specialists whowill manage the company for the coming generation. These are important issues directly tied to Subaru’s
chances of coming out ahead on the global marketplace.

PAGE 17

FUJI HEAVY INDUSTRIES LTD.

Management(As of June 27, 2006)

PAGE 18

ANNUAL REPORT 2006

FUJI HEAVY INDUSTRIES LTD.

6.

7.

8.

2.

4.

ANNUAL REPORT 2006

Representative Directorof the Board,
President and CEO
Ikuo Mori

5.

3.

1.

Representative Directorsof the Board,
Senior Executive Vice Presidents
Takao Tsuchiya
Hiroshi Komatsu

Vice Presidents
Yoichi Serizawa
Kazuyoshi Shimizu
Yoshio Hasunuma
Naoto Muto
Yasuyuki Yoshinaga
Tamaki Kamogawa
Masakazu Kimura
Akira Mabuchi
Tomohiko Ikeda
Takeshi Tachimori
Hisashi Nagano
Mitsuru Takahashi

Ikuo Mori __________________ 1
Representative Director of the Board,
President and CEO

Takao Tsuchiya ______________ 2
Representative Director of the Board,
Senior Executive Vice President

Hiroshi Komatsu _____________ 3
Representative Director of the Board,
Senior Executive Vice President

Shunsuke Takagi _____________ 4

Representative Directorof the Board,
Executive Vice President

Standing Corporate Auditors

Shunsuke Takagi

Takeo Tsumuji
Masatake Yashiro
Yoji Ishimaru

Directors of the Board,
Executive Vice Presidents
Hiroyuki Oikawa
Norihisa Matsuo
Kazushige Okuhara

Corporate Auditor
Morihiko Tashiro

Representative Director of the Board,
Executive Vice President

Norihisa Matsuo _____________ 5

Director of the Board,
Senior Corporate Advisor

Director of the Board,
Executive Vice President

Kyoji Takenaka

Hiroyuki Oikawa ____________ 6
Director of the Board,
Executive Vice President

Kazushige Okuhara ___________ 7
Director of the Board,
Executive Vice President

Kyoji Takenaka ______________ 8
Director of the Board,
Senior Corporate Advisor

Executive Vice Presidents
Shoichi Washizu
Masatsugu Nagato

Senior Vice Presidents
Kunio Ishigami
Jun Kondo
Takashi Ishihara
Shizuhiro Okazaki
Tsunenori Hoshi
Ichiro Kudo

PAGE 19

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Corporate Social Responsibility (CSR)
THE FHI CSR POLICYCSR is a corporate responsibility for promoting business activities as members of society. FHI believes that
the Corporate Philosophy is the CSR Policy, or in other words, acknowledging that CSR is a reflection of ourcorporate philosophy and fundamental to our business activities.
FHI thinks that the economic and social/human aspects of corporate activities cannot be separated, andthus taking social responsibility should be fundamental to our operations. So we would like to be a better
corporate citizen who continuously contributes to the sound, sustainable development of our society including our stakeholders.
CORPORATE PHILOSOPHY AND CSR POLICY
1. We will strive to create advanced technology on an ongoing basis and provide consumers with distinctive
products with the highest level of quality and customer satisfaction.
2. We will aim to continuously promote harmony among people, society, and the environment while contributing to the prosperity of society.
3. We will look to the future with a global perspective and aim to foster a vibrant, progressive company.

Shareholders andInvestors

Customers

Local
Communities

NPO and NGO

CUSTOMERS AND PRODUCTS

CORPORATE GOVERNANCE

Customer satisfaction is our first priority; weprovide the highest quality products andservices, as well as contribute to improvementin the economy and social life.

We strive to continue to be a company that istrustworthy and meets the expectations ofsociety by clarifying the functions of management
and executing a transparent, effective, andrespectable business.

ENVIRONMENTCOMPLIANCE

We acknowledge the deep relationship between
the environment and business activities andstrive to create products that are friendly tosociety, its people, and the earth.

We carry out open and fair corporate activities
in compliance with societal norms, as well as
all laws and regulations; FHI behaves as arespected member of society, not only as acorporation but also as individual officials andemployees.

SOCIAL CONTRIBUTION
We strive to disseminate and develop scienceand technology, traffic safety, and a vehicle
culture, and contribute to nurturing those
responsible for manufacturing. We contribute to
the development of communities and support
each employee’s contribution to society.

Media

Corporate Philosophy
CORPORATE CODE
OF CONDUCTInformation is disclosed promptly, appropriately,
impartially, and faithfully to all stakeholders.

EMPLOYEESWe provide a broad range of opportunities tomany companies domestically and overseas,
establish win-win relationships with suppliers
based on mutual trust, and conduct business
impartially and fairly.

FHI promotes the creation of a satisfying work
environment, respecting each employee’s
human rights and individuality, and maintains ahealthy, safe workplace.

Employees

Stakeholders
PAGE 20

INFORMATION DISCLOSURE

PROCUREMENTBusiness Partners

Government

Financial
Institutions

Education andResearch
Institutions

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

CORPORATE GOVERNANCE
In line with the Corporate Philosophy, FHI views the strengthening of corporate governance as one ofmanagement’s highest priorities, to ensure that it can measure up to the trust and confidence placed in the
Company by all its shareholders, customers and other stakeholders. In the pursuit of more efficient management,
FHI is working to clarify management and execution functions to enhance decision-making speed. The
Company is also ensuring proper management and business execution through a well-developed auditing
system that includes the presence of outside corporate auditors. In this way, FHI is working to augment bothits compliance and risk management frameworks. Fair and timely information disclosure is also leading tomore transparent management.

General Meeting of Shareholders
Elect/
Dismiss

Elect/
Dismiss

Elect/
Dismiss
ReportAudit

Executive Nomination
Meeting

Board of Corporate Auditors Meeting
Four Corporate Auditors(including two outside corporate auditors)

Board of Directors Meeting
Eight Directors

Executive Compensation
Meeting

Independent Auditor

ReportElect/Dismiss/Supervise

Audit

President
Representative Director of the Board

CSR Committee
Recommend/Propose

Compliance Committee

Elect/
Dismiss
ReportExecutive Management Board
Instruct/Supervise

Corporate Environment Committee

Submit important issues/Report

Executive Officers(Business execution)
Twenty Executive Officers

Recall Committee

Export Compliance Committee

Propose plans,
report, etc.

Present policies,
approve plans,
etc.

Staff Department, Subaru Automotive Business Unit, Three Internal Companies, Affiliated Companies

PAGE 21

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

INTERNAL CONTROL SYSTEMSOn May 9, 2006, the Board of Directors, pursuant to Article 362 of Japanese Corporate Law, establishedfundamental guidelines regarding systems of internal control. Among other points, these guidelines stipulate
systems for ensuring that directors execute their duties in accordance with the law and the Company’s own
Articles of Incorporation, as well as systems required to ensure all of the Company’s operations are properly
conducted as a joint-stock company (kabushiki kaisha). FHI further contributes to the readiness of these systems
of internal control through an active compliance system and organization—the most fundamental element ofrisk management. In terms of compliance, the Company has announced a compliance policy and set up aCompliance Committee dedicated to promoting compliance company-wide. To enhance Group compliance,
FHI has also extended the “Compliance Hotline System” to some Group subsidiaries in Japan since April 2006.

ENVIRONMENTAL MANAGEMENT
Based on its Voluntary Plan for the Environment, the “FHI Environmental Conservation Program,” FHI isundertaking activities aimed at reducing the burden on the environment at every stage of business—from
product development to procurement, production, use and disposal.
With the most recent five-year plan ending in fiscal 2007, FHI has formulated its fourth New VoluntaryPlan for the Environment that will run from fiscal 2008 through fiscal 2012. Along with the pursuit ofconsistently higher environmental conservation targets, the plan incorporates steps for a more precise environmental response with respect to relevant laws and regulations and industry affiliations. For FHI, the goal
is to make contributions to society on this front that surpasses its previous efforts to date. Moreover, this newvoluntary plan will guide the environmental actions not only of FHI, but also of all Group companies. As the
Subaru Group, these companies will strive to achieve continuous improvements as they positively address ahost of environmental challenges. Details of the Group’s environmental activities can be found in its “2006
Environmental and Social Reports”.

PAGE 22

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Financial Section

24

Consolidated Five-Year Financial Summary

25

Management’s Discussion and Analysis of Results of Operations and Financial Position

34

Consolidated Balance Sheets

36

Consolidated Statements of Income

37

Consolidated Statements of Shareholders’ Equity

38

Consolidated Statements of Cash Flows

39

Notes to Consolidated Financial Statements

64

Independent Auditors’ Report

PAGE 23

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Five-Year Financial Summary
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31

For the Year:Net sales
Cost of sales
Gross profit
Selling, general andadministrative expenses
Operating income
Income before income taxes
and minority interest
Net income
At Year-End:
Shareholders’ equity
Total assets
Ratio of shareholders’ equity
to total assets (%)
Per Share (in yen and U.S. dollars):
Net income:
Basic
DilutedShareholders’ equity
Other Information:
Depreciation/amortization expenses
Capital expenditures(addition to fixed assets)
R&D expenses
Number of shares issued(thousands of shares)*
Number of shareholders*Number of employees*:
Parent only
Consolidated

Thousands of
U.S. dollars
2006

2006

2005

2004

2003

Millions of yen
2002¥1,476,368
1,125,293
351,075¥1,446,491
1,107,718
338,773¥1,439,451
1,085,716
353,735¥1,372,337
1,011,582
360,755¥1,362,493
992,950
369,543$12,568,043
9,579,408
2,988,635

292,736
58,339296,756
42,017

303,41150,324

293,234
67,521

281,063
88,4802,492,006
496,629

28,674
15,61121,066
18,23856,266
38,64946,97033,48456,13630,283244,096
132,894¥ 465,522
1,348,400¥ 471,149
1,357,459¥ 453,708
1,349,727¥ 411,252
1,344,072¥ 396,112
1,269,558$ 3,962,901
11,478,675

34.5%

34.7%

33.6%

30.6%

31.2%

¥

20.66
20.66
649.41

¥

23.27
23.27
604.51

¥

50.62
49.66
582.60

¥

44.84
42.91
553.90

¥

40.74
38.83
532.88

$

0.18
0.18
5.53

¥

80,073¥71,010¥71,112¥

67,896¥

63,964$

681,646

119,289
46,893

147,759
52,962

128,026
57,541

119,423
60,110118,376
54,903782,866
46,367

782,866
34,558782,866
34,704

746,52135,584

746,506
33,094

11,998
26,115

12,703
26,98912,92827,296

13,06427,47813,374
26,483

1,015,485
399,191

Note: U.S. dollar figures have been translated from yen, for convenience only, at the rate of ¥117.47 to US$1.00, the approximate rate of exchange at March 31, 2006.
* As of March 31

Net Sales (Billions of yen)

Operating Income/Net Income (Billions of yen)

1,500

100

75
1,000

50

500

25

0

Total
Automobiles

PAGE 24

0
2002

2003

2004

2005

2006

1,362.5

1,372.3

1,439.5

1,446.5

1,476.4

AerospaceIndustrial Products

Other

2002

2003

2004

2005

2006

Operating Income

88.5

67.5

50.3

42.0

58.3

Net Income

30.3

33.5

38.6

18.2

15.6

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Management’s Discussion and Analysis of Resultsof Operations and Financial Position
Overview

partly as a consequence of stating impairment loss on fixed assets and loss

Operating conditions surrounding FHI in the fiscal year 2006, ended

on termination of development projects of new vehicle models due to the

March 31, 2006, were marked by a recovery in the Japanese economy

dissolution of FHI’s alliance with General Motors Corporation (GM).

on the back of stably increased consumer spending and capital investment. In the U.S., consumer spending and capital investment held

Automobiles Divisionstrong despite the impact of hurricane damage and high oil prices, andSales of the Automobile division grew ¥9.6 billion, or 0.7% compared

the economy continued to expand. Europe also witnessed a gradualto the previous fiscal year, to ¥1,329.2 billion. Sales were negatively

recovery in business conditions. Currency markets generally kept the

impacted by the decrease in sales volume in Japan and the end ofvalue of the yen lower, but prices for steel and other raw materials

consignment production of Isuzu vehicles at SIA, but were positively

have risen substantially.

affected by the improved overseas sales volume and mix and a weak

Under these conditions, FHI’s mainstay Automobiles division recorded
an overall consolidated sales volume of 571.4 thousand units (excluding

yen that served to boost revenue.
Global sales volume amounted to 571.4 thousand units, which

consignment production in the U.S.), a decrease of 10.3 thousand

represents a decrease of 10.3 thousand units, or 1.8%, compared tounits, or 1.8%, compared to the previous fiscal year. This decline was

the previous fiscal year. The decrease was largely a result of sales

primarily caused by sales volume in Japan decreasing year-on-year byvolume in Japan declining 23.9 thousand units, or 9.4%, year on year,

23.9 thousand units, or 9.4%, to 230.2 thousand units. The number ofto 230.2 thousand units. The number of passenger cars sold in Japan

passenger cars sold declined due to a drop off in sales of the flagshipdipped 6.3 thousand units, or 6.1%, compared to the previous fiscal

Legacy and the termination of sales of the Traviq. Minicar sales in Japan

year, to 97.7 thousand units. While the Impreza, which received major

decreased owing to a slowdown in sales of the R2 and Sambar.

face lift in June 2005, remained solid and recorded its second consecutive

In overseas markets, however, sales volume increased compared toyear of sales volume growth, it was not enough to offset decreased sales

the previous fiscal year by 13.6 thousand units, or 4.2%, to 341.2

volume for the flagship Legacy and withdrawing the Traviq from thethousand units. This was largely the result of a net increase in sales ofmarket. The number of minicars sold in Japan was also down, fallingthe new B9 Tribeca in North America as well as buoyant sales of the17.5 thousand units, or 11.7% compared to the previous fiscal year, toImpreza and Forester. On a region-by-region basis, sales volume expe-

132.5 thousand units. While the R1 and Pleo notched gains, they wererienced growth in Europe, Australia and other regions in particular.

more than offset by declines in the R2, which saw the new car effectIn addition to these factors, sales were negatively impacted by thediminish, and the Sambar.

termination of consignment production of Isuzu vehicles in Subaru of

In overseas markets, total sales volume increased 13.6 thousand units,

Indiana Automotive, Inc. (SIA). In spite of this, sales of the Automobiles

or 4.2% compared to the previous fiscal year, to 341.2 thousand units.

division increased ¥9.6 billion, or 0.7%, compared to the previous

North America endured a decline in sales volume for the Legacy as

fiscal year, to ¥1,329.2 billion owing to an improved overseas sales

well as a significant decrease in OEM sales to GM affiliate Saab Automobile

volume and mix and the weakness of the yen on currency markets.

AB, but a net increase for the B9 Tribeca, which was fully launched

Consolidated net sales, which combine sales figures from the Automobiles,

onto the market in June 2005, and an increase for the Impreza resulted

Industrial Products, Aerospace and Other divisions, totaled ¥1,476.4

in sales volume maintaining nearly the same level as the previous fiscalbillion for the year, representing a year-on-year gain of ¥29.9 billion,

year, totaling 209.9 thousand units.

or 2.1%.

Sales volume in Europe totaled 64.7 thousand units, which repre-

With respect to profitability, FHI faced extremely tough conditions

sents a year-on-year rise of 4.2 thousand units, or 7.0%. The Forestercaused by deterioration in the sales mix on the Japanese market, increased

continued to sell well and experienced additional growth in emerging

costs from complying with safety and environmental regulations overseas,

markets, particularly Russia and China.

and surges in raw material prices. Efforts were made to further reduce

In Australia, while unit sales of the Legacy declined, the Impreza andthe cost of materials, rein in selling, general and administrative expenses

Forester surpassed the previous fiscal year, which led sales volume to(SG&A) and other expenses and efficiently utilize funds for research &edge up 1.1 thousand units, or 3.1%, to 36.5 thousand units.

development (R&D), which resulted in operating income increasing

Automobile inventory in Japan totaled 18.5 thousand units, a decrease¥16.3 billion, or 38.8% compared to the previous fiscal year, to ¥58.3

of 6.0 thousand units compared to the previous fiscal year. This wasbillion. Net income declined ¥2.6 billion, or 14.4%, to ¥15.6 billion,

primarily due to lower inventory of the Legacy before major face lift
PAGE 25

FUJI HEAVY INDUSTRIES LTD.

and minicars, for which the introduction of new models is scheduled.

ANNUAL REPORT 2006

Automobile Inventory (1,000 units)

Inventory in the U.S., however, increased 8.7 thousand units year on
year to 59.6 thousand units largely as a result of greater inventory of60

the B9 Tribeca and the Forester.
FHI reported operating income of ¥51.6 billion, which constitutes
an increase of ¥10.6 billion, or 25.9%, over the previous fiscal year.

40

The increase was the result of reducing the cost of materials, cutting
SG&A and other expenses, and efficiently streamlining R&D cost,among other factors.

20

0
2002

2003

2004

2005

2006

Japan

33.5

22.9

28.4

24.5

18.5

United States

41.2

44.7

48.1

51.2

59.6

Consolidated Automobile Sales (Number of units)
2006

2005

2004

2003

2002

50,61956,97765,907

47,13055,850Japan
LegacyImpreza

26,911

25,194

21,20024,077

23,416

Forester

17,40517,70918,98824,426

21,745

Others

2,747

4,138

5,000

7,031

6,627

Minicars

132,483

150,021

134,446

142,861

156,619

230,165

254,039

245,541

245,525

264,257

United States

193,562

193,917

189,633

192,389

191,381

Canada16,384

16,506

16,154

17,69915,632

Subtotal
Export Units

Europe64,72460,51753,57841,32532,373Australia

36,50635,41430,68529,45526,923

Others30,034

21,241

15,652

14,051

12,675341,210

327,595

305,702

294,919

278,984

Legacy132,236

150,987

128,994——

Impreza

72,79066,67072,729——Forester

104,059

95,173

98,941——B9 Tribeca

24,187————

Others

7,938

14,765

5,038

—

—

0

0

2,800

1,500

3,288

571,375

581,634

554,043

541,944546,5290

13,15025,239——Subtotal

CKD* Overseas
Total
SIA Consignment Production* CKD: Complete Knocked Down

PAGE 26

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Non-Consolidated Automobile Sales by Model (Number of units)
2006

2005

2004

2003

2002

59,209Domestic Units:
Legacy57,013

59,84373,67649,179Impreza

30,06327,43722,26325,471

24,899Forester

19,256

19,457

20,09725,38922,922Others

0

1,397

2,479

4,174

4,244

Subtotal

106,332

108,134

118,515

104,213111,274

Minicars

138,398

164,624

143,502

147,712167,265

Total

244,730

272,758

262,017

251,925

278,539

42,80944,10133,865

21,421

24,727

Export Units:
LegacyImpreza

75,93569,946

67,34975,35475,700Forester

104,425

90,131

99,46399,14572,629Others

1,538

8,324

161

—

—

Subtotal

224,707

212,502200,838

195,920

173,056

Minicars

16

—

—

—

22

224,723

212,502200,838

195,920

173,078CKD Overseas

Total

119,784

115,317

90,158

107,576

104,234(SIA Portion)

119,784

115,31787,358106,076

100,946

U.S. Retail Sales*:Legacy87,78889,45379,83985,35995,291

Impreza

33,63732,20936,52538,22635,61255,041

Forester

53,54158,424

59,761

53,922

Baja

6,239

7,316

10,6942,513—

B9 Tribeca

14,797

—

—

—

—

Total

196,002

187,402

186,819

180,020

185,944

Legacy91,510105,550

96,993102,813103,010B9 Tribeca

27,481————

U.S. Production Units*:* U.S. Retail Sales and U.S. Production Units are the aggregate figures for the calendar year from January through December.

Domestic Sales Units by Model (Number of units)

Export Units by Model (Number of units)

300,000

300,000

200,000

200,000

100,000

100,000

0

Total
Legacy

0
2002

2003

2004

2005

2006

278,539251,925

262,017

272,758

244,730

Impreza

ForesterOthersMinicars

Total
LegacyImpreza

2002

2003

2004

2005

2006

173,078

195,920

200,838

212,502

224,723

OthersMinicars

ForesterCKD Overseas

PAGE 27

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Change in Units Sold by Model (Comparison of units sold in fiscal 2006 and fiscal 2005)
Domestic (Non-consolidated) (Number of units)

Export Units (Non-consolidated) (Number of units)

15,00010,00010,0000
5,000–10,0000–20,000–5,000–30,000

Change–10,000
Total

LegacyImpreza

ForesterTraviq

Minicars-28,028-2,830

2,626

-201

-1,397-26,226

ChangeTotal

LegacyImpreza

ForesterOthers12,221-1,292

5,989

14,294-6,786

U.S. Retail Sales (Number of units)
15,00010,0005,000

0–5,000–10,000

ChangeTotal

LegacyImpreza

ForesterBaja

B9 Tribeca

8,600-1,665

1,428-4,883-1,077

14,797

Consolidated Automobile Sales (1,000 units)
2002

2003

2004

2005

2006

543.2

540.4

551.2

581.6

571.4

Industrial Products Division

Aerospace Division

Total sales of the Industrial Products division increased ¥5.6 billion, or

Total sales of the Aerospace division jumped ¥22.4 billion, or 37.6%,

12.0% over the previous fiscal year, to set a record high at ¥52.4

over the previous year to notch a record high at ¥81.8 billion, owing inbillion. Sales in Japan rose compared to the previous fiscal year thankslarge part to the contribution of major new projects. Specifically, FHI

to increased sales volume for pump engines and generator engines,delivered the AH-64D attack helicopter to the Japan Defense Agency

while overseas the mainstay EX series of gasoline engines, whichalong with a prototype of the next-generation, fixed-wing Maritime

feature environmentally-conscious high performance, garnered a

Patrol Aircraft and Cargo Transport Aircraft (PX/CX), and alsostrong reception.

commenced shipment of new unmanned Flying Forward ReconnaissanceOperating income was up ¥1.2 billion, or 140.0%, to ¥2.0 billion.

System. For the commercial sector, there was an increase in deliveriesof existing products to Boeing; production began on the main wing of

PAGE 28

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

the Eclipse 500, a light business jet; and sales started in conjunction

the previous fiscal year, to ¥13.0 billion. Sales dropped substantiallywith the development of the 787 next-generation passenger aircraft.

in connection with domestic subsidiary Yusoki Kogyo K.K. terminat-

Operating income, which came in at ¥0.2 billion the previous

ing certain business operations, which more than offset higher year-on-

fiscal year, recorded a substantial increase, rising by ¥2.6 billion, toyear unit sales of the Fuji Mighty sanitation trucks in the Eco¥2.8 billion.

Technologies Company.

Other Businesses

improvement of ¥1.8 billion compared to the previous term’s ¥0.6

Sales in this segment decreased ¥7.7 billion, or 37.1% compared tobillion operating loss.

The division posted operating income of ¥1.2 billion for the year, an

Net Sales by Division (Excluding intersegment sales)
2006

2005

2004

2003

Billions of yen
2002¥1,329.2¥1,319.6¥1,316.9¥1,229.8¥1,219.7

Industrial Products

52.4

46.8

42.2

41.5

39.4

Aerospace

81.8

59.4

56.6

63.0

66.2

Automobiles

Other

13.0

20.6

23.6

37.9

37.0

Total

¥1,476.4¥1,446.5¥1,439.4¥1,372.3¥1,362.4

2006

2005

2004

2003

Billions of yen
2002

¥51.6

¥40.9

¥52.1

¥67.3

¥85.6

2.0

0.8

(0.2)

(0.8)

(0.2)

Operating Income (Loss) by Division
Automobiles
Industrial Products
Aerospace

2.8

0.2

(0.3)

3.3

7.4

Other

1.2

(0.6)

(1.4)

(3.1)

(4.2)

Corporate and Elimination

0.7

0.6

0.3

0.8

(0.0)

¥58.3

¥42.0

¥50.3

¥67.5

¥88.4

Total

Operating Income (Loss) by Division (Billions of yen)

100

80

60

40

20

0

–20

Total
Automobiles

2002

2003

2004

2005

88.4

67.5

50.3

42.0

Industrial Products

Aerospace

2006
58.3
Other

PAGE 29

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Cost of Sales, Expenses and Operating Income

lower sales volume and deterioration in the model mix in JapanThe cost of sales rose ¥17.6 billion, or 1.6% compared to the previous

combined with increased costs for complying with environment andfiscal year, to ¥1,125.3 billion, and the cost of sales ratio improved 0.4

safety regulations overseas to put downward pressure on operating

percentage point to 76.2%. Improvement in the cost of sales ratio forincome in the amount of ¥24.4 billion.

the term was the result of reducing the net cost of materials by ¥12.8

Net other income (expenses) decreased ¥8.7 billion, or 41.6%

billion, as cost-cutting initiatives more than made up for the surge incompared to the previous year, to a loss of ¥29.7 billion. While FHI

parts prices (caused by sharp increases in raw material prices), whichstated a ¥3.0 billion gain on sale of securities, net, it was more thanadversely affected income by some ¥11 billion. Operating income

offset by foreign exchange losses, loss on revaluation of derivatives, andincreased ¥16.3 billion, or 38.8%, to ¥58.3 billion. Positive factors¥8.0 billion in additional retirement payments associated with conducting

included a ¥6.1 billion reduction in R&D expenditure from utilizing

a voluntary retirement program. Other factors included a loss of ¥7.1

common platforms and otherwise improving efficiency; an ¥8.6 billion

billion from loss on termination of development projects with Saabdecline in SG&A and other expenses from cutting fixed manufacturing

Automobile as a result of dissolution of the strategic alliance with GM

costs; and currency gains of ¥13.2 billion resulting from the weakand discontinuing development of Supply Chain Management systems

value of the yen against the U.S. dollar, Canadian dollar and Euro. A

for internal business processes, and an impairment loss on property,

Analysis of Increases and Decreases in Operating Income (Consolidated) (Billions of yen)

13.2

Amortization of
consolidation
adjustments
3.3

8.6
6.1
12.8
–24.4

58.3

Deterioration of sales
volume & mixture and others

Operating income
FYE March 2006

42.0

Operating income
FYE March 2005

Gain on currency
exchange

Decrease of SG&A
expenses and others

Decrease of
R&D Expenses

Reduction in costof materials

Total assets, Shareholders’ equity and Equity ratio (Billions of yen)

ROE and ROA (%)

1,600

40

1,200

30

10

8

6

800

20
4

400

10
2

0

PAGE 30

0
2002

2003

2004

2005

2006

Total assets [ left scale ] 1,270

1,344

1,350

1,357

1,348

Shareholders’ equity[ left scale ]396

Ratio of shareholders’equity to total assets (%)[ right scale ]

31.2

411

454

471

466

0
2002

2003

2004

2005

2006

ROE

8.0

8.3

8.9

3.9

3.3

ROA

7.5

5.3

3.9

3.3

4.6

ROA was calculated as “(operating income + interest and dividend income) / (average of assets at the beginning and end of term)”

30.6

33.6

34.7

34.5

FUJI HEAVY INDUSTRIES LTD.

plant and equipment of ¥4.1 billion. Income before income taxes and

ANNUAL REPORT 2006

Total shareholders’ equity declined ¥5.6 billion, or 1.2%, tominority interest rose ¥7.6 billion, or 36.1%, to ¥28.7 billion.

¥465.5 billion. This change is primarily attributable to FHI share

Because of an increase in income taxes, however, net income for thebuyback when dissolving the alliance with GM, which resulted interm declined ¥2.6 billion, or 14.4%, to ¥15.6 billion.

treasury stock increasing ¥39.3 billion over the previous fiscal year, to¥41.5 billion. FHI plans to hold the acquired treasury stock and not to

Liquidity and Financing

cancel it for the immediate future in order to provide for the flexible

Securing Liquidity

implementation of its capital policy.

FHI manages cash and cash equivalents with a view to maintaining alevel equivalent to average monthly sales.
Cash and cash equivalents at the end of the year totaled ¥112.4 billion.

As a result of the above, return on equity (ROE) at the end of year
was 3.3%, a 0.6 percentage point decrease compared to the previous
fiscal year. Return on assets (ROA), which factors in operating income

While this amount is less than average monthly sales for the term

and interest and dividend income, improved by a substantial 1.3 per-(¥123.0 billion), the difference is due to limiting assets in order tocentage points, to 4.6%.

improve asset turnover and using cash to fund for the FHI share buybackin October 2005. Liquidity is covered by a commitment line of credit.

Cash Flows

Cash and cash equivalents, combined with the amount of credit available,

Cash flows from operating activities increased ¥80.2 billion, to ¥137.5

is sufficient to secure liquidity at the level of average monthly sales.

billion, which resulted from an increase in income before income taxes

FHI targets a debt/equity ratio of one or less when managing its

and minority interest, a rise in depreciation and amortization expenses,

interest-bearing debts. Interest-bearing debts at the end of the year

and improved working capital owing to a decrease in notes and accounts

totaled ¥374.1 billion, a year-on-year decrease of ¥38.1 billion. The

receivable, trade and an increase in notes and accounts payable, trade.

debt/equity ratio improved 0.07 point to 0.80, as FHI maintained a

Cash flows from investing activities declined ¥14.0 billion year on

sound financial position.
FHI plans to reduce interest-bearing debts 20% by the end of fiscal
2008, from fiscal 2005’s total of ¥412.2 billion.

year, to ¥75.8 billion. There was ¥29.4 billion in proceeds from thewithdrawal of restricted collateral cash recorded in the previous
fiscal year included in Other, net item that was not stated in the year
under review, which had a negative impact on cash flow, but these

Financial Position

were outweighed by positive factors that included a decline in purchases

Total assets decreased ¥9.1 billion, or 0.7% compared to the previousof property, plant and equipment and an increase in collection of

fiscal year, to ¥1,348.4 billion. An increase caused by the weak valueloans receivable.

of the yen on currency markets is factored into the change in total
assets for the term, but when excluding the impact of exchange rates,
assets were effectively reduced by around ¥50 billion. Total current

Interest-Bearing Debt Balance and D/E Ratio (Billions of yen)assets were ¥619.2 billion, down ¥29.9 billion, or 4.6%, from theprevious year. Major factors causing this change included using market-

500

1.0

400

0.8

300

0.6

200

0.4

100

0.2

able securities to fund the FHI share buyback.
Property, plant and equipment rose ¥12.2 billion, or 2.3%, to ¥556.0
billion, a change primarily attributable to currency gains due to a weak yen.
Investments and other assets totaled ¥173.2 billion, an increase of¥8.6 billion, or 5.2%, over the previous year that was largely due toapplication of the equity method for some existed affiliates and anincrease in investment securities.
Total liabilities edged down ¥2.2 billion, or 0.3%, to ¥880.6 billion.
While there was an increase from exchange rate differences, interestbearing debts dropped ¥38.1 billion, or 9.2%, to ¥374.1 billion as aresult of redeeming corporate bonds and repaying commercial paper.

0

0.0
2002

2003

2004

2005

2006

Interest-bearing debt
396.7
[ left scale ]

389.1

379.0

412.2

374.1

D/E ratio [ right scale ]

0.95

0.84

0.87

0.80

1.00

PAGE 31

FUJI HEAVY INDUSTRIES LTD.

As a result, free cash flow, which was negative ¥32.4 billion in fiscal
2005, improved by ¥94.1 billion, to positive ¥61.7 billion.

ANNUAL REPORT 2006

Outlook
While the Japanese economy is likely to remain strong owing to recov-

Cash flows from financing activities totaled negative ¥88.9 billion,

eries in consumer spending and capital investment, it is unlikely thatwhich represents an increase in outlays of ¥115.1 billion due to free

there will be substantial growth in domestic automobile demand. The

cash flow being allocated to reducing interest-bearing debts and share

U.S. economy also has much cause for concern, in terms of exchangebuyback in conjunction with ending the capital alliance with GM.

rates and interest rates going forward and because oil and raw material

In addition to the above, exchange rate changes produced a positive

prices are predicted to continue to rise. Accordingly, operating condi-

impact of ¥7.9 billion. Cash and cash equivalents decreased ¥19.3

tions surrounding FHI in the fiscal year 2007, ending March 31, 2007,

billion during the term, to total ¥112.4 billion at the end of the year.

are difficult to forecast.
Given this situation, FHI anticipates global sales volume for automobiles

Capital Expendituresin fiscal 2007 to be 610.8 thousand units, which would represent an

Capital expenditures declined ¥29.1 billion, or 34.1% over the previ-

increase of 39.4 thousand units, or 6.9%, over the fiscal year underous fiscal year, to ¥56.2 billion owing to the fact that there were no

review. The increase will be driven largely by higher sales volume inoutlays associated with SIA’s leased facilities as were stated last year.

Japan. Although increases are projected for the Legacy, for which a

Depreciation increased ¥6.4 billion, or 12.5%, to ¥57.5 billion largely

major face lift is scheduled, and the Forester, the number of passenger

because depreciation began on facilities involved in the launch of thevehicles sold in Japan is expected to edge down by 0.8 thousand in

Legacy and B9 Tribeca at SIA.

reaction to the strong performance of the Impreza through the previous
fiscal year. Unit sales of minicars in Japan are forecast to rise by 34.1

Research and Development Expenses

thousand, however, as the new car effect of introduction of the brand-

Research and development expenses at FHI as a whole decreased ¥6.1

new Stella overcomes decreases in the Pleo, R2 and R1. As a result,billion, or 11.5%, to ¥46.9 billion, mainly as a result of promoting thesales volume in Japan is projected to increase 33.4 thousand units, ordigitalization of automobile development and improving the efficiency

14.5%, to 263.5 thousand units. Overseas sales volume is expected toof crash testing by utilizing common platforms.

increase 6.1 thousand units, or 1.8%, to 347.3 thousand units on theback of a strong performance by the Impreza in the U.S.

Capital Expenditures/Depreciation Expenses (Billions of yen)

Research and Development Expenses (Billions of yen)

60

100

75
40

50

20

25

0

0
2002

2003

2004

2005

2006

70.6

64.6

74.6

85.3

56.2

Depreciation Expenses 45.0

48.8

53.2

51.1

57.5

Capital Expenditures

PAGE 32

R&D Expenses

2002

2003

2004

2005

2006

54.9

60.1

57.5

53.0

46.9

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Net sales in fiscal 2007 are forecast to increase ¥73.6 billion, or

will help generate income, fixed manufacturing costs, SG&A expenses,

5.0%, to ¥1,550.0 billion as a result of increased sales volume andand R&D expenditure are projected to rise along with the price of raw

other factors. Operating income is projected to finish at ¥50.0 billion,

materials. Net income is forecast to increase ¥14.4 billion, or 92.2%,

which would constitute a decline of ¥8.3 billion, or 14.2%, over fiscal

to ¥30.0 billion. These forecasts are premised on an exchange rate for2006. While an improved sales mixture and cost reduction of materials

sales (non-consolidated) of ¥110 to the U.S. dollar.

Forecast for Global Automobile Sales (1,000 units)
2007

2006

Change

96.9

97.7

-0.8

Japan
Passenger cars
Minicars

166.6

132.5

34.1

Subtotal

263.5

230.2

33.4

U.S.

202.6

193.6

9.0

Canada

17.6

16.4

1.3

Europe

65.3

64.7

0.6

Australia

36.9

36.5

0.3

Other

24.8

30.0

-5.2

Subtotal

347.3

341.2

6.1

610.8

571.4

39.4

Overseas

Total

Principal Risks

In order to minimize currency exchange risk, FHI performs hedge

Business risks faced by FHI with the potential to have a significant

operations with forward exchange contracts depending on the condi-

impact on investor decisions are as follows. These are not an exhaustive

tions prevailing. However, extreme currency fluctuations at the end oflist, so for more details please see FHI’s website at

the term may impact gains or losses on the revaluation of derivatives

http://ir.fhi.co.jp/english/finance/fr.html.

and may substantially affect other income (expenses).

Currency Fluctuations

Purchase of Specific Raw Materials and Parts

FHI’s operating income for the year increased compared to the previous

FHI procures raw materials, parts and other products from a large

fiscal year, but one factor was the substantial impact of currency

number of suppliers, and is at times dependent on certain suppliers. If

fluctuations. Overseas sales account for a majority (59.1%) of FHI’s

supply and demand conditions tighten and FHI is unable to procure

net sales, and some items associated with net sales, operating income,these goods at stable costs, delivery and quality, it could substantiallyassets, etc. are denominated in local currencies, primarily the U.S.

affect the FHI Group’s operating results and financial position.

dollar. These items are converted to the Japanese yen for preparationof the consolidated financial statements. Accordingly, if there is a

Legal Regulations Pertaining to the Environment anddiscrepancy between the exchange rate assumed for forecasts for the

Other Areas

coming year and the actual exchange rate at closing, there is a chance

FHI is subject to a variety of legal regulations both in Japan and overseasthat it will have a negative impact on FHI’s results and financial

on emissions, energy conservation, noise, recycling, levels of discharge

position if the yen is relatively strong, or a positive impact if the yen isof pollutants from manufacturing plants, and automobile safety, etc.

relatively weak.

Cost increases resulting from more stringent regulations in the future
have the potential to affect the FHI Group’s financial results.

PAGE 33

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Balance Sheets
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIESAs of March 31, 2006 and 2005ASSETS
Current assets:
Cash and time deposits (Note 4)
Marketable securities (Notes 4 and 5)
Notes and accounts receivable, trade (Note 9)
Allowance for doubtful accounts
Inventories (Note 6)
Short-term loans (Note 4)
Deferred tax assets (Note 12)
Other current assets
Total current assets

2006

¥

65,52437,444
104,972(2,163)
216,396
118,41432,99245,604
619,183

Thousands of
U.S. dollars(Note 1)
2006

Millions of yen
2005¥

40,74287,003
116,278(1,259)175,087
128,20234,85968,158649,070$

557,793318,754893,607(18,413)
1,842,138
1,008,036
280,855
388,218
5,270,988

Property, plant and equipment (Notes 7, 8 and 9)
Less — accumulated depreciation
Net property, plant and equipment

1,245,642(689,669)
555,973

1,174,358(630,632)
543,726

10,603,916(5,871,022)
4,732,894

Investments and other assets:
Investment securities (Note 5)
Investments in non-consolidated subsidiaries and affiliated companies
Long-term loans
Goodwill
Intangibles, net
Deferred tax assets (Note 12)
Other assets (Note 9)
Allowance for devaluation of investments
Allowance for doubtful accounts
Total investments and other assets
Total assets

69,963
11,532
8,141
18,92819,283
23,612
24,133—(2,348)173,244¥1,348,400

65,323
6,970
5,976
16,961
26,25024,481
21,453(41)(2,710)164,663¥1,357,459

595,582
98,17069,303
161,130
164,153
201,004
205,439—(19,988)1,474,793$11,478,675

PAGE 34

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Thousands of
U.S. dollars(Note 1)2006

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities:
Short-term borrowings (Note 9)
Current portion of long-term debts (Note 9)
Notes and accounts payable, trade
Accrued expenses (Note 2)
Accrued income taxes (Note 12)
Other current liabilities (Note 12)
Total current liabilities

2006

Millions of yen
2005¥ 199,784
24,223
211,412
100,667
11,47280,555628,113¥ 217,928
34,667
190,790
110,093
8,872
47,961
610,311$ 1,700,723
206,206
1,799,711
856,959
97,659685,750
5,347,008

Long-term liabilities:
Long-term debts (Note 9)
Accrued pension and severance liability (Note 11)
Consolidation adjustments (Note 3)
Other long-term liabilities (Notes 8 and 12)
Total long-term liabilities

150,072
52,322
2,995
47,112
252,501

159,595
59,002
12,352
41,583
272,532

1,277,535
445,407
25,496401,055
2,149,493

2,264

3,467

19,273

153,795
160,071290
189,996
21,145(18,230)(41,545)—465,522

153,795
160,071421
178,022
16,945(35,874)—(2,231)
471,149

1,309,228
1,362,654
2,469
1,617,400
180,004(155,189)(353,665)¥1,348,400¥1,357,459$11,478,675

Minority interest in consolidated subsidiaries
Contingent liabilities (Note 21)
Shareholders’ equity (Note 13):
Common stock
Authorized — 1,500,000,000 shares
Issued — 782,865,873 shares
Capital surplus
Revaluation reserve for land (Notes 8 and 12)
Retained earnings
Net unrealized holding gain on securities
Translation adjustments
Less — treasury stock, at cost, 2006 — 66,193,286 shares2005 — 3,761,991 shares
Total shareholders’ equity
Total liabilities and shareholders’ equity

3,962,901

The accompanying notes are an integral part of these balance sheets.

PAGE 35FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Statements of Income
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2006, 2005 and 2004

Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses (Note 14)
Operating income
Other income (expenses):
Interest and dividend income
Interest expenses
Gain on sale of securities, net
Foreign exchange gains (losses)
Loss on devaluation of securities
Loss on sale and disposal of property, plant and equipment, net
Loss on revaluation of derivatives
Impairment loss on property, plant and equipment (Note 15)
Additional retirement payments (Note 11)
Loss on termination of development projects (Note 16)
Loss on devaluation of inventories at
Aerospace Division (Note 17)
Loss on discontinued operations (Note 18)
Amortization of consolidation adjustments (Note 3)
Loss on compensation to suppliers (Note 19)
Prior period adjustment
Pension and severance cost (Note 11)
Other, net

2006

2005

¥1,476,368
1,125,293
351,075
292,736
58,339¥1,446,491
1,107,718
338,773296,756
42,017¥1,439,451
1,085,716
353,735
303,41150,324$12,568,043
9,579,408
2,988,635
2,492,006
496,629

3,421(3,181)
3,021(10,597)(16)(401)(2,470)(4,064)(7,991)(7,094)2,393(2,437)
541
915
(23)
(4,752)(3,129)
—
—
—

2,081
(2,416)
4,153
7,348
(221)
(3,089)————29,123(27,079)
25,717(90,210)(136)(3,414)(21,027)(34,596)(68,026)(60,390)

—
—
3,296
—
—
—
(3,589)(29,665)
28,674(8,122)(3,467)
6,868(4,174)——(5,564)(20,951)
21,066

—
—
4,912
—
1,049
(1,268)(6,607)
5,942
56,266——28,058———(30,553)(252,533)
244,096

13,231(303)
12,92815,746

5,913(3,264)
2,649
18,417

12,030
5,603
17,63338,633112,633(2,580)110,053
134,043(135)
15,611(179)
18,23816
38,649(1,149)132,894

Income before income taxes and minority interest
Income taxes (Note 12):Current
DeferredIncome before minority interest
Minority interest in (earnings) lossof consolidated subsidiaries
Net income

Per share data (Note 2) :Net income — Basic— Diluted
Cash dividends (Note 13)
The accompanying notes are an integral part of these statements.
PAGE 36

Thousands of
U.S. dollars(Note 1)
2006

Millions of yen
2004¥¥20.66
20.66
9.00

¥

¥23.27
23.27
9.00

¥

$

Yen

U.S. dollars(Note 1)¥50.62
49.66
9.00

$0.18
0.18
0.08

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Statements of Shareholders’ Equity
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2006, 2005 and 2004
Thousands

Balance, March 31, 2003
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Shares issued upon conversionof convertible bonds
Increase in treasury stock
Gain on disposal of treasury stockReversal of revaluation reserve for land
Revaluation reserve for land
Increase in unrealized holding gains
on securities
Other comprehensive incomeof foreign subsidiary
Net income
Balance, March 31, 2004
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Increase in the number of companies
accounted for by the equity method
Decrease in treasury stock
Loss on disposal of treasury stock
Increase in unrealized holding gains
on securities
Other comprehensive incomeof foreign subsidiary
Net income
Balance, March 31, 2005
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Increase in the number of companies
accounted for by the equity method
Increase in treasury stock
Loss on disposal of treasury stock
Revaluation reserve for land
Increase in unrealized holding gains
on securities
Other comprehensive incomeof foreign subsidiary
Net income
Balance, March 31, 2006

Millions of yen

Number ofsharesissuedCommonstock

Capitalsurplus

Revaluation
reservefor landRetainedearnings

Net
unrealized
holding
gains onsecurities

746,521¥144,455¥150,766¥ 389¥133,186¥ 3,446

36,345

9,340

Translation
adjustment¥ (18,237)(15,063)

Less –
treasurystock,
at cost¥ (2,753)(6,846)¥411,252(15,063)(6,846)

(171)

(171)

9,305
(45)
36
(31)
32

782,866

153,795

160,107

421

6,845

10,291(7,013)405
38,649453,708(2,574)(7,013)

(157)

(157)

405
38,649165,192(33,300)(2,574)(2,798)567

782,866

153,795

160,071(77)

421

18,645
(45)
36
(31)
32

6,845

1,496
(36)

Total
shareholders’equity

1,496
567
(113)

6,654

6,654

16,945(7,015)343
18,238471,149
17,644(7,015)

(111)

(111)

343
18,238178,022(35,874)
17,644(2,231)

3,466(39,314)
(8)
(131)

3,466
(39,314)
(8)
(131)

4,200

4,200

¥21,145¥(18,230)

31
15,611¥465,522$144,250(59,718)$(305,389) $ (18,992) $4,010,803
150,200
150,200(59,718)

(945)

(945)

782,866¥153,795¥160,071¥ 290

31
15,611¥189,996

782,866$1,309,228$1,362,654$ 3,584$1,515,468¥(41,545)

Thousands of U.S. dollars (Note 1)

Balance, March 31, 2005
Foreign currency translation adjustment
Cash dividends
Payment of bonuses to directors
and statutory auditors
Increase in the number of companies
accounted for by the equity method
Increase in treasury stock
Loss on disposal of treasury stock
Revaluation reserve for land
Increase in unrealized holding gains
on securities
Other comprehensive incomeof foreign subsidiary
Net income
Balance, March 31, 2006

29,505(334,673)(68)(1,115)

782,866

The accompanying notes are an integral part of these statements.

$1,309,228$1,362,654$ 2,469264
132,894$1,617,400

29,505(334,673)(68)(1,115)35,75435,754$180,004

264
132,894$(155,189) $(353,665) $3,962,901
PAGE 37

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Statements of Cash Flows
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES
Years ended March 31, 2006, 2005 and 2004

Cash flows from operating activities:
Income before income taxes and minority interest
Adjustments to reconcile income before income taxes andminority interest to net cash provided by operating activities:
Depreciation and amortization expenses
Loss on sale and disposal of property, plant and equipment, net
Increase (decrease) in accrued pension and severance liability
Gain on sale of securities
Loss on devaluation of securities
Decrease in notes and accounts receivable, trade(Increase) decrease in inventories
Increase (decrease) in notes and accounts payable, trade
Increase in deposits received
Income taxes paid
Impairment loss on property, plant and equipment
Loss on termination of development projects
Loss on compensation to suppliers
Loss on discontinued operations
Amortization of consolidation adjustments
Prior period adjustments
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of investment securities
Purchase of marketable securities
Proceeds from sale of investment securities
Proceeds from sale of marketable securities
Purchase of intangible assets
Disbursement of loans receivableCollection of loans receivable
Price adjustment of investments in subsidiary (Note 4)
Other, net
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debts
Repayment on long-term debts
Issuance of bonds
Redemption of bonds
Net increase (decrease) in short-term borrowings
Purchase of treasury stock
Proceeds from disposal of treasury stock
Dividends paid
Other, net
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents:
Balance at beginning of year
Balance at end of year (Note 4)
Supplementary information on cash flows:
Cash paid during the year for interest
Conversion of convertible bonds
The accompanying notes are an integral part of these statements.
PAGE 38

Thousands of
U.S. dollars(Note 1)
2006

2006

2005

Millions of yen
2004¥ 28,674¥ 21,066¥ 56,266

80,073401(6,859)(3,021)
16
13,893(9,944)
16,55523,964(9,201)
4,064
7,094
—
—
(3,296)—(4,928)137,485

71,0104,752(2,730)
(541)
23
5,353
(11,272)
33
150(6,197)
—
—
4,174
3,467
(31,675)—(286)
57,327

71,112
3,089
73(4,153)
221
1,191
5,889
(13,979)692(18,374)————(4,912)(1,049)3,708
99,774

681,646
3,414(58,389)(25,717)136
118,268(84,651)
140,929
204,001(78,326)
34,59660,390——(28,058)—(41,951)
1,170,384(120,875)
38,115(9,063)(9,489)13,092
21,908(5,127)(124,989)
127,450(7,087)290(75,775)(137,998)
36,411(7,690)(37,119)
5,395
50,474(8,009)(122,633)
101,195—
30,213(89,761)(125,351)
38,634(11,718)(54,192)
11,17843,239(8,070)(90,041)
70,101—(920)(127,140)(1,028,986)
324,466(77,153)(80,778)
111,450
186,499(43,645)(1,064,008)
1,084,958(60,330)2,469(645,058)

15,301(28,996)—(10,300)(18,538)(39,352)30(7,015)(15)(88,885)7,856(19,319)

49,867(37,166)
20,000(10,000)
10,898(399)
24(7,013)(12)
26,199
(1,481)(7,716)

5,269(28,635)
20,000(10,129)
22,662(49)
70(6,846)(7)
2,335(5,512)(30,543)

130,255(246,837)—(87,682)(157,811)(334,996)
255(59,717)(128)(756,661)
66,876(164,459)

131,685¥ 112,366

139,401¥ 131,685

169,944¥ 139,401

$

¥

¥

¥

$

2,920
—

2,432
—

2,361
18,645$244,096

1,121,010
956,551
24,857—

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Notes to Consolidated Financial Statements
FUJI HEAVY INDUSTRIES LTD. AND CONSOLIDATED SUBSIDIARIES

1. Basis of Presentation of the Financial Statements
The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in
the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting
principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application anddisclosure requirements of International Financial Reporting Standards.
The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with generally
accepted accounting principles prevailing in the respective countries of their domicile. The accompanying consolidated
financial statements have been restructured and translated into English (with some expanded descriptions and theinclusion of consolidated statements of shareholders’ equity) from the consolidated financial statements of theCompany prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the
Ministry of Finance as required by the Japanese Securities and Exchange Law. Some supplementary information
included in the statutory Japanese language consolidated financial statements, but not considered necessary for fairpresentation, is not presented in the accompanying consolidated financial statements.
The translation of the Japanese yen amounts into U.S. dollars is included solely for the convenience of readers
outside Japan, using the prevailing exchange rate at March 31, 2006, which was ¥117.47 to U.S.$1. The conveniencetranslations should not be construed as representations that the Japanese yen amounts have been, could have been, or
could in the future be, converted into U.S. dollars at this or any other rate of exchange.

2. Summary of Significant Accounting Policies
Consolidation
The accompanying consolidated financial statements include the accounts of Fuji Heavy Industries Ltd. (the “Company”)
and its significant subsidiaries. All significant intercompany transactions and balances have been eliminated inconsolidation. The fiscal year-end of the consolidated domestic subsidiaries is the same as that of the Company, while
the fiscal year-end of the consolidated foreign subsidiaries is December 31. Although these consolidated foreignsubsidiaries are included based on their fiscal year ended December 31, significant intervening transactions that occurred
for the period between December 31 and March 31 are reflected in the consolidated financial statements.
The consolidated financial statements include the accounts of the Company and 68 subsidiaries in the fiscal years
2006 and 2005, and 66 subsidiaries in the fiscal year 2004.
In addition, 10 non-consolidated subsidiaries and an affiliated company are accounted for by the equity method in
the fiscal year 2006, while there was 4 non-consolidated subsidiaries and an affiliated company accounted for by theequity method in the fiscal year 2005, and there was no affiliated company accounted for by the equity method in thefiscal year 2004.
Investments in insignificant non-consolidated subsidiaries and affiliated companies not accounted for by the equity
method are carried at cost. The difference between the cost and the underlying net equity of investments in subsidiaries
and affiliated companies is allocated to identifiable assets based on their fair value at the date of acquisition. The
unallocated residual value of the excess of the cost over the fair value of the underlying net equity is recognized as
goodwill or consolidation adjustments, and is amortized over a period of 5 years on a straight-line basis. However,the consolidation adjustments (credit side), which arose from making Subaru of Indiana Automotive, Inc. (SIA) a
wholly owned subsidiary of the Company, are amortized differently. The portion that clearly corresponds to theforecasted future losses is amortized according to the generation of those losses, and the remaining portion of theconsolidation adjustments is being amortized by the straight-line method over 5 years.
All assets and liabilities of subsidiaries, which include not only the Company’s interest in the subsidiary but also theminority interest portion, are valued based on their fair value at the time the Company first consolidates the subsidiary.

PAGE 39

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Translation of foreign currency-denominated accounts
Under the Japanese accounting standards for foreign currency translation, monetary assets and liabilities denominatedin foreign currencies are translated into Japanese yen at the exchange rates prevailing at each balance sheet date withthe resulting gain or loss included currently in the statement of income.
The assets and liabilities of foreign subsidiaries and affiliated companies are translated into Japanese yen at theexchange rates in effect at the balance sheet dates of the foreign subsidiaries and affiliated companies, except forcommon stock and capital surplus, which are translated at historical rates. Revenue and expense accounts are translated
at the average exchange rates during the respective years. The resulting foreign currency translation adjustments areincluded in “Translation adjustments” in the shareholders’ equity, and minority interest in the accompanying
consolidated balance sheets.
Cash equivalents
Cash and cash equivalents include all highly liquid investments, generally with original maturities of three months orless that are readily convertible to known amounts of cash and have negligible risk of changes in value due to theirshort maturities.
Revenue recognition
Revenue from sales of finished products is generally recognized when the products are shipped to dealers or customers.
Revenue from operating leases is recognized on a straight-line basis over the lease term.
(Change in accounting policy)(Fiscal 2004)
The Company changed its revenue recognition policy for the Aerospace Division’s production contracts with production
terms exceeding one year and the amount of each contract exceeding ¥5,000 million, from the completed-contract
basis to the percentage-of-completion method beginning in the fiscal year 2004. The Company changed the accounting policy for the purpose of more accurately matching revenue against costs in the period in which they are incurredin light of the recent trend that terms of production contracts of the Aerospace Division tend to extend over a one-year
period and the amounts of such contracts tend to become larger, and such trend is expected to continue.
As a result of the change, net sales increased by ¥4,013 million and gross profit, operating income and income
before income taxes and minority interest increased by ¥231 million in the fiscal year 2004 as compared with theamounts resulting from application of the previous policy.
The impact of such change on segment information is stated in Segment Information (Note 23).
Allowance for doubtful accounts
Allowance for doubtful accounts is provided based on the amount calculated based on the historical ratio of bad debt
for ordinary receivables, and an estimated amount of uncollectible account for specific over-due receivables.
Allowance for devaluation of investments
Allowance for devaluation of investments is provided for estimated losses from a decline in the value of investment
securities for which fair value is not readily available and investments in non-consolidated subsidiaries and affiliatedcompanies, based on the evaluation of the investees’ financial conditions, such as net assets and the probability ofrecovering the value.

PAGE 40

Marketable securities and investment securities
Under the Japanese accounting standards for financial instruments, securities for which fair value is available arestated at their fair value as of the balance sheet dates with unrealized holding gains and losses included as a componentof shareholders’ equity until realized, while securities for which fair value is not readily available are stated at cost as
determined by the moving-average method, after taking into consideration devaluation, if any, for permanent
impairment. Held-to-maturity debt securities are stated using the amortized cost method.

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Derivative financial instruments and hedge accounting
The Japanese accounting standards for financial instruments requires the Company and consolidated domestic
subsidiaries to state derivative financial instruments at their fair value and to recognize changes in the fair value as again or loss unless such derivative financial instruments are used for hedging purposes.
For interest rate swap contracts used as a hedge which meet certain hedging criteria, the net amount to be paid or
received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities forwhich the swap contract is executed.
Derivative financial instruments qualifying as a hedge, along with the underlying transactions, assets and liabilities
are as follows:
Financial Instrument
Interest swaps

Transaction, Assets and Liabilities
Borrowings

The risk exposures to movements in interest rates are hedged according to the Company’s and consolidated
subsidiaries’ risk management policy. An evaluation of hedge effectiveness is not considered necessary as the terms
and notional amounts of these hedging instruments are the same as those of the underlying transactions, assets andliabilities, and therefore they are presumed to be highly effective in offsetting the effect of movements in interest rates
at their inception as well as during their terms.
(Change in accounting policy)(Fiscal 2005)
In the fiscal year 2005, the Company discontinued applying the hedge accounting for its foreign exchange contracts.
The reason for the change was that the Company reconsidered appropriateness of application of the hedge accounting
in connection with its review of the hedge policy and the management activities for foreign exchange contracts.
Previously, for foreign exchange contracts used as a hedge which meet certain hedging criteria, the Company
translated hedged foreign currency-denominated assets and liabilities using the contracted forward rates, and forforward exchange contracts hedging future transactions, the Company deferred the recognition of gains or losses
resulting from changes in fair value of the foreign exchange contracts until the related gains or losses on the hedged
items are recognized in earnings.
As a result of this change, operating income increased by ¥141 million and income before income taxes andminority interest decreased by ¥1,623 million in the fiscal year 2005 as compared with the amounts resulting fromapplication of the previous hedge accounting policy.
The impact of such change on segment information is stated in Segment Information (Note 23).
Inventories
Finished products are stated principally at cost determined by the moving-average method. Raw materials, work inprocess and supplies are stated principally at cost determined by the first-in, first-out method.
Property, plant and equipment
Property, plant and equipment are stated at cost. Significant renewals and additions are capitalized; ordinary
maintenance, ordinary repairs, minor renewals and minor improvements are charged to the consolidated statements
of income as incurred.
Depreciation of the property, plant and equipment of the Company and consolidated domestic subsidiaries isprincipally computed by the declining-balance method, except for the buildings (excluding building improvements)
acquired on or after April 1, 1998, for which the straight-line method is applied. Depreciation of the property, plantand equipment of consolidated foreign subsidiaries is computed by the straight-line method at rates based on theestimated useful lives of the assets according to their general class, type of construction, and use.
Estimated useful lives for depreciable assets are as follows:
Buildings and structures:
7–50 years
Machinery, equipment and vehicles:
2–11 years
PAGE 41FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

(Change in accounting policy)(Fiscal 2006)
In the fiscal year 2006, the Company and the domestic consolidated subsidiaries adopted the new accounting standard
for impairment of fixed assets (“Opinion Concerning Establishment of Accounting Standard for Impairment of Fixed
Assets” issued by the Business Accounting Deliberation Council on August 9, 2002) and the implementation guidance
for the accounting standard for impairment of fixed assets (the Financial Accounting Standard Implementation Guidance
No. 6 issued by the Accounting Standards Board of Japan on October 31, 2003). As a result of this change, income
before income taxes and minority interest decreased by ¥3,263 million (US$27,777 thousand). (Impairment loss onproperty, plant and equipment in the Consolidated Statements of Income in the fiscal year 2006 was ¥4,064 million(US$34,596 thousand), of which ¥801 million (US$6,819 thousand) was related to consolidated subsidiaries in the
United States.) The impact of such change on segment information is stated in Segment Information (Note 23).
An accumulated impairment loss is recorded as direct deduction in the book value of the respective assets.
Accounting for leases
In principle, finance leases are accounted for on a similar basis to sales by lessors or purchases by lessees. However,finance leases which do not transfer ownership of the leased assets to lessees as stipulated in the lease contracts can be
accounted for as operating leases. Therefore, as a lessee, the Company and consolidated subsidiaries account for thoseleases as operating leases and charge periodic lease payments to expenses as incurred. Certain “as-if capitalized” proforma information is disclosed in Note 20 to the consolidated financial statements.
Goodwill and intangible assets
Goodwill is principally amortized by the straight-line method based on the accounting principles generally accepted in
the respective countries of domicile. However, goodwill of the consolidated subsidiary in the U.S. is not amortized inaccordance with SFAS No. 142, while other identifiable assets are being amortized by the straight-line method.
Computer software used internally by the Company and consolidated subsidiaries is amortized by the straight-line
method over the relevant economic useful lives of 3 or 5 years.
Accrued pension and severance liability
Upon termination of employment, employees of the Company and consolidated subsidiaries in Japan are entitled,under most circumstances, to lump-sum indemnities or pensions as described below, based on current rates of pay,
length of service, and conditions under which the termination occurs. The minimum payment is an amount based onvoluntary retirement. In addition to the minimum payment based on voluntary retirement, employees receive
additional benefits for retirement due to age limit, death or other defined reasons.
Certain consolidated subsidiaries in Japan have contributory funded defined benefit pension plans, which are
pursuant to the Japanese Welfare Pension Insurance Law. The contributory pension plans cover a portion of thegovernmental welfare pension program, under which the contributions are made by the companies and theiremployees, and an additional portion representing the corporate noncontributory pension plans.
Under the Japanese accounting standards for pension and severance benefits, accrued pension and severance liability
for employees is provided based on the estimated amounts of projected pension and severance obligation and the fairvalue of plan assets at the end of the fiscal year. Prior service cost is being amortized by the straight-line method overa period (14-18 years), which is shorter than the average remaining service period of the eligible employees. Actuarial
gains and losses are amortized from the following fiscal year by the straight-line method over a period (primarily 18
years), which are shorter than the average remaining service period of the eligible employees.
Accrued pension contribution for defined benefit pension plans is included in accrued pension and severance liability.
Directors and statutory auditors of the Company and consolidated domestic subsidiaries are entitled to receive alump-sum payment at the time of severance or retirement, subject to approval of the shareholders. The liabilities forsuch benefits are determined based on the Company’s and consolidated subsidiaries’ internal rules, and are included
in “Other long-term liabilities” in the accompanying consolidated balance sheets.
PAGE 42FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Accrued warranty claims
The Company and consolidated subsidiaries provide for accrued warranty claims on products sold based on their pastexperience of warranty services and estimated future warranty costs, which are included in “Accrued expenses” in theaccompanying consolidated balance sheets.
Research and development costs
Research and development costs are expensed as incurred and amounted to ¥46,893 million (US$399,191 thousand),¥52,962 million and ¥57,541 million for the fiscal years 2006, 2005 and 2004, respectively.
Income taxes
The provision for income taxes is computed based on the pretax income for the financial reporting purposes. Deferred
tax assets and liabilities are recognized for expected future tax consequences of temporary differences between thefinancial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is recorded toreduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Effective April 1, 2004, “Corporation Size-Based Enterprise Tax System” for the enterprise was introduced. Dueto the introduction, Accounting Standards Board of Japan issued Practical Solutions Report No. 12, “Practical Solution
on Presentation for Size-Based Components of Corporate Enterprise Tax on Income Statement” on February 13,
2004, which prescribes new accounting standards for enterprise taxes. In compliance with the report, the value-added
and the capital components of the enterprise taxes, which are not related to income, are included in selling, generaland administrative expenses from the fiscal year 2005.
As a result, selling, general and administrative expenses increased by ¥1,009 million, and operating income, ordinary
income and income before income taxes and minority interest decreased by the same amount in the fiscal year 2005.
The impact of such change on segment information is stated in Segment Information (Note 23).
Net income per share
Basic net income per share (EPS) is computed based on the average number of shares of common stock outstanding
during each year. Diluted EPS assumes the potential dilution that could occur if all the convertible securities wereconverted or other contracts to issue common stock were exercised to the extent that they are not anti-dilutive.
Reclassifications
Certain reclassifications within the consolidated financial statements for the fiscal years 2005 and 2004 have been
made to conform to the presentation for the fiscal year 2006.

3. Acquisition of Isuzu’s Share of Subaru of Indiana Automotive, Inc.
Subaru of Indiana Automotive, Inc. (“SIA,” formerly Subaru-Isuzu Automotive Inc.), a consolidated subsidiary in the
United States, had been a joint venture company of Isuzu Motors Limited (“Isuzu”) and the Company (the Company
had held a 51% interest in SIA). On January 1, 2003, as a result of dissolution of the joint venture relationship with
Isuzu and execution of an agreement for the consignment of production, the Company acquired Isuzu’s share of SIA
to make SIA a wholly owned subsidiary of the Company, and SIA was assigned to produce certain Isuzu vehicles aswell as Subaru vehicles.
The acquisition cost of the Isuzu’s share of SIA was determined in consideration of certain losses on disposal ofproperty, plant and equipment, losses on cancellation of operating leases, and losses related to personnel reduction,
to be incurred during and after the consigned production activities. Consequently, consolidation adjustments(credit side) arose.
The portion of the consolidation adjustments that clearly corresponds to the forecasted future losses has beenamortized according to the generation of those losses, and the remaining portion has been amortized by thestraight-line method over 5 years.

PAGE 43FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

The Company revised this amortization schedule following the settlement of actual losses with Isuzu according to
the Master Agreement for Cancellation of Joint Venture Relationship and Consignment of Production dated December
20, 2002.
As a result, the consolidation adjustments (credit side) became ¥1,949 million (US$16,591 thousand) as of March
31, 2006, which are to be fully amortized by the end of the next fiscal year.
As a result of this settlement, the consolidation adjustments account (credit side) decreased by ¥7,087 million(US$60,330 thousand) and the amortization of consolidation adjustments (other income) decreased by ¥1,221 million(US$10,394 thousand) in the fiscal year 2006.

4. Additional Cash Flow Information(a) Cash and cash equivalents as of March 31, 2006, 2005 and 2004, consisted of the following:

Cash and time deposits
Marketable securities
Short-term loans
Less maturity over three months
Cash and cash equivalents

2006

2005

Millions of yen
2004¥ 65,524
37,444
118,414221,382(109,016)¥ 112,366¥ 40,742
87,003
128,202
255,947(124,262)¥ 131,685¥ 46,684
113,490
101,871
262,045(122,644)¥ 139,401

Thousands of
U.S. dollars
2006$ 557,793
318,754
1,008,036
1,884,583(928,032)$ 956,551(b) Assets and liabilities of newly consolidated subsidiary through acquisition of shares:(Fiscal 2004)
The acquired assets and liabilities of NIIGATA SUBARU Inc. and a reconciliation between the acquisition cost and thenet cash outflow of such acquisition, which is included in “Other, net” under the cash flows from investing activities
for the fiscal year 2004, were as follows:
Millions of yen

Current assets
Long-term assets
Goodwill
Current liabilities
Long-term liabilities
Acquisition cost of NIIGATA SUBARU Inc.
Cash and cash equivalents of NIIGATA SUBARU Inc.
Net cash used for acquisition of NIIGATA SUBARU Inc.

¥ 2,268
4,065
212(3,145)(1,217)2,183(324)¥ 1,859(c) Significant non-cash transactions:(Fiscal 2005)
On August 2004, the Company executed a share exchange agreement to make Yusoki Kogyo K.K. a wholly owned
subsidiary of the Company. As a result of the share exchange, goodwill increased by ¥833 million and treasury stock
decreased by ¥942 million in the fiscal year 2005.
(Fiscal 2006)
None.

PAGE 44(d) Price adjustment of investments in subsidiary“Price adjustment of investments in subsidiary” included in the cash flows from investing activities represents a cash
payment related to the adjustment to the price of SIA shares transferred from Isuzu under the settlement of actual
losses in the fiscal year 2006, in accordance with the Master Agreement for Cancellation of Joint Venture Relationshipand Consignment of Production with Isuzu, as described in Note 3. Acquisition of Isuzu’s Share of Subaru of Indiana
Automotive, Inc.

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

5. Marketable Securities and Investment Securities
Information as to the value of marketable securities and investment securities as of March 31, 2006 and 2005, was
as follows:(1) Other investment securities (available-for-sale securities) for which fair market value was available:(a) As of March 31, 2006:

Book value exceeding acquisition cost:
Equity securities
Debt securities
Other
Sub-total
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Sub-total
Total

Acquisition cost

Book value

Millions of yen
Difference¥20,162¥55,671¥35,50935
20,197344
56,015309
35,818

223

196

(27)

11,297
3,632
1,335
16,487¥36,684

11,154
3,572
1,314
16,236¥72,251

(143)
(60)
(21)
(251)
¥35,567

Acquisition cost

Book value exceeding acquisition cost:
Equity securities
Debt securities
Other
Sub-total
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Sub-total
Total

Thousands of U.S. dollars
Book value
Difference$171,635$473,917$302,282

298
171,933

2,928
476,8452,630
304,912

1,898

1,668

(230)

96,16930,91911,365140,351$312,284

94,95230,408
11,186138,214$615,059(1,217)(511)(179)(2,137)$302,775

PAGE 45

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006(b) As of March 31, 2005:

Book value exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other
Sub-total
Book value not exceeding acquisition cost:
Equity securities
Debt securities
Government and municipal bonds
Corporate bonds
Other
Other
Sub-total
Total

Acquisition cost

Book value

Millions of yen
Difference¥20,761¥49,214¥28,453

100
2,500
36
4,281
27,678

100
2,501
181
4,282
56,27801145
128,600

256

205

(51)

6,656
4,740
501
2,344
14,497¥42,175

6,627
4,724
500
2,338
14,394¥70,672

(29)
(16)
(1)
(6)
(103)
¥28,497(2) Other investment securities (available-for-sale securities) sold during the fiscal years 2006 and 2005:(a) For the year ended March 31, 2006:
Sales amount

Total gains

Total losses¥615,171 million
US$5,236,835 thousand¥5,475 million
US$46,608 thousand¥2,313 million
US$19,690 thousand

The above sales amount included sales of short-term investments in commercial paper and other amounting to¥580,171 million (US$4,938,887 thousand).
(b) For the year ended March 31, 2005:
Sales amount

Total gains

Total losses¥640,095 million¥633 million¥56 million

The above sales amount included sales of short-term investments in commercial paper and other amounting to¥584,226 million.

PAGE 46

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

(3) Book value of major securities without available fair market value as of March 31, 2006 and 2005:

Money management fundCommercial paper
Unlisted stocks (excluding over-the-counter stocks)
Negotiable certificated deposit
Beneficial interests in the trust
Held-to-maturity debt securities

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥33,679
—
1,469
—
—
—

¥47,688
19,838
6,544
5,000
2,579
6

$286,703—
12,505———

Note: The Company and consolidated subsidiaries recognized ¥16 million (US$136 thousand) and ¥23 million in loss on devaluation of securities forthe fiscal years 2006 and 2005, respectively.
For the purpose of recording a loss on devaluation of securities, the Company and consolidated subsidiaries consider all the securities whose
fair market value has fallen below 50% of the book value to be permanently impaired, and record the relevant loss on devaluation. For securities
whose fair market value has declined between 30% to 50% in relation to their book values, the Company and consolidated subsidiaries specificallyconsider the probability of recovery of the fair value, and record a loss on devaluation in an amount deemed permanently impaired.

(4) Scheduled redemption of other securities (available-for-sale securities) with maturity and held-to-maturity debt
securities as of March 31, 2006 and 2005:(a) As of March 31, 2006:

Debt securities
Government andmunicipal bonds
Corporate bonds
Other
Total

Within 1
year

1 to 5years¥2,846743
174¥3,763¥ 7,086
2,632
469¥10,187

Within 1
year

1 to 5years¥ 1,412
4,195
21,805
5,763¥33,175¥3,393
2,747—
425¥6,565

Millions of yen
5 to 10
Over 10
years
years

¥ 693
196
175
¥1,064

Thousands of U.S. dollars
5 to 10
Over 10
years
years

Within 1
year

1 to 5years$24,228
6,325
1,481$32,034$60,322
22,406
3,992$86,720

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥121,866
74,09018,583
1,857¥216,396¥103,285
54,11015,882
1,810¥175,087$1,037,422
630,714
158,194
15,808$1,842,138

¥ 529
—
496
¥1,025$5,8991,669
1,490$9,058$4,503—
4,223$8,726(b) As of March 31, 2005:

Debt securities
Government andmunicipal bonds
Corporate bonds
Other
Other
Total

Millions of yen
5 to 10
Over 10
years
years

¥1,420262—
54¥1,736

¥501
22
—
359
¥882

6. Inventories
Inventories as of March 31, 2006 and 2005, consisted of the following:

Finished products
Work in process
Raw materials
Supplies

PAGE 47

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

7. Property, Plant and Equipment
Property, plant and equipment as of March 31, 2006 and 2005, are summarized as follows:

Buildings and structures
Machinery and vehicles
Other
Less accumulated depreciation
Land
Construction in progress
Total

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 291,073
517,567
255,678
1,064,318(689,669)
173,928
7,396¥ 555,973¥ 280,438
494,199
216,021990,658(630,632)
170,809
12,891¥ 543,726$ 2,477,850
4,405,950
2,176,539
9,060,339(5,871,022)
1,480,616
62,961$ 4,732,894

8. Revaluation Reserve for Land
In accordance with the Land Revaluation Law (Law No. 34, enacted on March 31, 1998), land owned by a consolidated subsidiary for business use was revalued on March 31, 2002. The unrealized gains from the revaluation were
included in the shareholders’ equity as “Revaluation reserve for land,” net of income taxes. The deferred taxes for the
unrealized gains are included in other long-term liabilities. Unrecorded loss on the revalued land as of March 31,
2006, was ¥463 million (US$3,941 thousand). According to the Law, the Company and consolidated subsidiaries are
not permitted to revalue the land after April 1, 2002.

9. Short-Term Borrowings and Long-Term Debts
Short-term borrowings as of March 31, 2006 and 2005, consisted of the following:

Bank loans with average interest rate of 0.55% and 0.52%
per annum as of March 31, 2006 and 2005, respectively
Commercial paper with average interest rate of 0.24% and 0.04%
per annum as of March 31, 2006 and 2005, respectively

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥191,784¥195,928$1,632,621

8,000¥199,784

22,000¥217,928

68,102$1,700,723

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 73,795—
20,00030,00010,00020,00020,000—¥ 83,462
10,00020,00030,00010,00020,00020,000300$ 628,203—
170,256
255,385
85,128170,256
170,256—500
174,295(24,223)¥150,072500
194,262(34,667)¥159,595

4,257
1,483,741(206,206)$1,277,535

Long-term debts as of March 31, 2006 and 2005, consisted of the following:

Loans principally from banks and insurance companies due
through 2024 with average interest rate of 2.38% and 1.96%
per annum as of March 31, 2006 and 2005, respectively
Unsecured 2.30% bonds due September 30, 2005
Unsecured 0.97% bonds due May 15, 2006
Unsecured 1.22% bonds due September 30, 2008
Unsecured 0.89% bonds due September 28, 2007
Unsecured 0.68% bonds due June 18, 2010
Unsecured 1.31% bonds due April 28, 2011
Secured 1.80% bonds of consolidated subsidiary due July 7, 2005
Unsecured 0.93% bonds of consolidated subsidiary
due February 15, 2007
Less — Portion due within one year
PAGE 48

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Annual maturities of long-term debts as of March 31, 2006, were as follows:

2007
2008
2009
2010
2011
2012 and thereafter

Millions of yen

Thousands of
U.S. dollars¥ 24,223
20,59751,22019,65023,13935,466¥174,295$ 206,206
175,338
436,026
167,277
196,978
301,916$1,483,741

The following assets as of March 31, 2006 and 2005, were pledged as collateral for certain loans:

Notes and accounts receivable, trade
Property, plant and equipment
Other assets

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006

¥ 291
88,854
180¥89,325¥ 11,665
108,664271¥120,600$ 2,477
756,398
1,532$760,407

The unused balance of commitments for borrowings by the Company and consolidated subsidiaries (Subaru ofAmerica, Inc. and Subaru Europe N.V./S.A.) as of March 31, 2006 and 2005, was as follows:

Total commitments
Less amounts currently borrowed
Unused balance

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥81,174—¥81,174¥86,434
10,000¥76,434$691,019—$691,019

10. Unexecuted Balance of Overdraft Facilities and Lending Commitments
The unexecuted balance of overdraft facilities and lending commitments at a consolidated subsidiary (Subaru
Finance Co., Ltd.) as of March 31, 2006 and 2005, was as follows:

Total overdraft facilities and lending commitments
Less amounts currently executed
Unexecuted balance

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥14,310
2,788¥11,522¥12,350
7,510¥ 4,840$121,819
23,734$ 98,085

A portion of the overdraft facilities and lending commitments above is subject to credit considerations as documented in the customer contracts. Therefore, the total balance above is not always available.

11. Pension and Severance Plans
The Company and consolidated domestic subsidiaries have non-contributory funded defined benefit pension plans,and some domestic subsidiaries have defined contribution pension plans. In addition, in certain occasions, additional
retirement payments are made to employees for their retirement. Consolidated foreign subsidiaries primarily havedefined contribution plans.
The Company has transferred from the lump-sum retirement plan to the qualified retirement pension plan for 80%of the employees who terminate their employment at the age of 50 or over.

PAGE 49

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

As of March 31, 2006, the Company and 44 of its consolidated domestic subsidiaries, which add up to a total of 45
companies, have lump-sum retirement payment plans. Within the group, there are also 30 qualified pension plans, 2
defined contribution plans, and a multi-employer welfare pension fund (excluding overlaps from joint trustee
contracts, integration contracts, and joint establishment of a multi-employer fund). In addition, there are 14
single-employer employees’ pension funds subject to the provisions of Article 33 of “Practice Guidelines of Accounting
for Retirement Benefits.”
Certain insignificant consolidated subsidiaries calculated their pension liability using the simplified method. Under
the simplified method, an accrued pension and severance liability is provided at the amount that would have been
payable had all the employees voluntarily retired at the end of the fiscal year, less an amount to be covered from theplan assets, while the Company and significant subsidiaries provide an accrued pension and severance liability basedon the estimated amount of pension and severance obligation (projected benefit obligations), less the fair value of plan
assets at the end of the fiscal year under the actuarial method.
Additional information (Fiscal 2006)
Transfer to the government of the substitutional portion of employee pension fundAs stipulated in the Japanese Defined Benefit Pension Insurance Law, the Tokyo Subaru Employees’ Pension Fund(a multi-employer welfare pension fund), of which certain consolidated subsidiaries are members, obtained an
approval from the Minister of Health, Labor and Welfare for exemption from the benefit obligations related to future
employee service in respect of the substitutional portion on October 28, 2005. The pension fund is currently in theprocess of transferring the obligations related to past employee service to the government.
The amount to be transferred (the minimum reserve obligations) to the government as of March 31, 2006, wasestimated at ¥5,400 million (US$45,969 thousand). Had the amount been transferred at the end of the fiscal year,
other income of approximately ¥2,300 million (US$19,579 thousand) would have been recognized, in accordancewith the provisions of Article 44-2 of “Practice Guidelines of Accounting for Retirement Benefits (Interim Report)”(JICPA Accounting Systems Committee Report No. 13).
A reconciliation between the projected pension and severance obligation and accrued pension and severance liability
as of March 31, 2006 and 2005 was as follows:a. Projected pension and severance obligationb. Plan assetsc. Unfunded pension and severance obligations
d. Unamortized actuarial loss
e. Unamortized prior service cost
f. Net amount recorded in balance sheet
g. Prepaid pension costh. Accrued pension and severance liability

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥125,549(65,763)
59,786(7,062)(448)
52,276(46)¥ 52,322¥138,357(59,548)
78,809(17,472)(2,423)58,914(88)¥ 59,002$1,068,775(559,828)
508,947(60,117)(3,814)445,016(391)$ 445,407

Notes: 1. The above amounts include the government pension plan funded by social security taxes paid by employees and employer.
2. Certain insignificant consolidated subsidiaries calculated the liability using the simplified method.
3. In addition to the above plan assets, there were plan assets of the multi-employer pension plan amounting to ¥17,425 million (US$148,336
thousand) and ¥15,081 million as of March 31, 2006 and 2005, respectively. The plan assets for the multi-employer pension plan could not
be allocated to each participating employer. These amounts were based on the number of participants.

PAGE 50

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Periodic pension and severance costs for the fiscal years 2006, 2005 and 2004, consisted of the following:a. Service costb. Interest costc. Expected return on plan assets
d. Amortization of actuarial gain/loss
e. Amortization of prior service cost
f. Pension and severance cost

2006

2005

Millions of yen
2004¥ 9,351
2,557(1,266)
1,218
186¥12,046¥ 9,647
2,636(1,175)
1,853
257¥13,218¥10,695
3,075(1,155)
1,269
295¥14,719

Thousands of
U.S. dollars
2006$ 79,603
21,767(10,777)
10,3691,583$102,545

Notes: 1. The above amounts do not include the social security taxes paid by employees.
2. Service costs of consolidated subsidiaries using the simplified method are included in the service cost above.
3. Service cost above include service costs for the multi-employer pension plan amounting to ¥831 million (US$7,074 thousand), ¥877
million and ¥1,096 million for the fiscal years 2006, 2005 and 2004, respectively, for which plan assets could not be allocated to eachparticipating employer.
4. Service cost above include contributions for the defined contribution plans of certain consolidated foreign subsidiaries amounting to ¥1,397
million (US$11,892 thousand), ¥1,476 million and ¥1,549 million for the fiscal years, 2006, 2005 and 2004, respectively.
5. In addition to the pension and severance cost above, additional retirement payments amounting to ¥7,467 million (US$63,565 thousand),¥371 million, ¥120 million were made for the fiscal years 2006, 2005 and 2004, respectively. For the fiscal year 2006, ¥37 million (US$315
thousand) out of the total additional retirement payments is included in selling, general and administrative expenses, and the remaining¥7,430 million (US$63,250 thousand) is reflected as “Additional retirement payments” in other expense in the accompanying consolidated
statement of income. For the fiscal year 2005, ¥92 million out of the total additional retirement payments is included in selling, general andadministrative expenses, and the remaining ¥279 million is reflected as part of “Loss on discontinued operations” in other expense in theaccompanying consolidated statement of income, whereas the entire additional retirement payments are included in selling, general andadministrative expenses in the accompanying consolidated statements of income for the fiscal year ended March 31, 2004.

Actuarial assumptions used in computation of pension and severance liability were as follows:a. Attribution of expected benefit obligation
The straight-line method
b. Discount rate
2.0%–2.5%
c. Expected rate of return on plan assets
0.8%–4.0%
d. Amortization of actuarial gain/loss
Primarily 18 years (It is amortized by the straight-line
method starting from the following fiscal year over a period
shorter than the average remaining service periods of theeligible employees)e. Amortization of prior service cost
14 to 18 years

PAGE 51

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

12. Income Taxes
The Company and consolidated subsidiaries were subject to a number of taxes based on income, which in theaggregate, resulted in a normal statutory income tax rate of approximately 40.5% for the fiscal years 2006 and 2005,
and 41.8% for the fiscal year 2004.
A reconciliation of the statutory income tax rates in Japan to the Company’s effective income tax rates for the
fiscal years 2006, 2005 and 2004 was as follows:
Statutory income tax rate in Japan
Increase (reduction) in taxes resulting from:
Changes in valuation allowance and tax benefits realized fromloss carry forwards
Adjustment to past corporate income taxes payable
and corporate income taxes refundable
Adjustment to past deferred income taxes
Adjustment to past corporate income taxes
of consolidated subsidiary in the United StatesSpecial deductions on corporate income taxes
Entertainment and other non-deductible expenses
Equity income
Effect of the change in the statutory income tax rate in Japan
Amortization of consolidation adjustments
Other
Effective income tax rate

2006

2005

2004

40.5%

40.5%

41.8%

20.2

19.8

1.6

2.8
(6.8)

(1.6)
—

(5.3)
—

—
(6.1)
1.1
(2.0)
—
(4.6)
0.0
45.1%

15.8
(5.4)
1.6
0.7
—
(59.0)
0.2
12.6%

—
(4.9)
0.9
—
1.3
(3.4)
(0.7)
31.3%

Significant components of the deferred tax assets and liabilities as of March 31, 2006 and 2005, were as follows:

Deferred tax assets:
Net operating loss carry forwards
Unrealized gain on sale of inventories
Accrued pension and severance liabilities
Accrued expenses
Accrued bonus
Accrued warranty claims
Unrealized gain on sale of property, plant and equipment
Loss on devaluation of inventories
Impairment loss on property, plant and equipmentof consolidated foreign subsidiary
Impairment loss on property, plant and equipment
Other
Total deferred tax assets
Valuation allowance
Total deferred tax assets, net of valuation allowance

PAGE 52

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 17,843
5,240
20,933
10,114
6,296
8,318
6,382
5,458

¥ 7,628
4,444
22,473
11,075
6,177
7,637
6,552
6,016

$ 151,894
44,607
178,199
86,09953,59770,80954,32946,463—
10,541
14,423
105,548(18,149)
87,3997,760—
15,204
94,966(11,890)
83,076—89,733
122,780
898,510(154,499)
744,011

FUJI HEAVY INDUSTRIES LTD.

Deferred tax liabilities:
Depreciation and amortization expenses
Net unrealized holding gains on investment securities
Revaluation reserve for land
Advanced depreciation reserve
Other
Total deferred tax liabilities
Net deferred tax assets

ANNUAL REPORT 2006

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥(16,364)(14,442)
(703)
(468)
(3,085)(35,062)¥ 52,337¥(15,261)(11,496)
(478)
(468)
(2,455)(30,158)¥ 52,918$(139,304)(122,942)(5,984)(3,984)(26,262)(298,476)$ 445,535

The net deferred tax assets are included in the following captions in the accompanying consolidated balance sheets.

Current assets — Deferred tax assets
Investments and other assets — Deferred tax assets
Current liabilities — Other current liabilities
Long-term liabilities — Other long-term liabilities
Total net deferred tax assets

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥32,992
23,612(4)(4,263)¥52,337¥34,859
24,481—(6,422)¥52,918$280,855
201,004(34)(36,290)$445,535

13. Shareholders’ Equity
Under Japanese law, the entire amount of payment for new shares is required to be designated as common stock.
However, a company may, by a resolution of the Board of Directors, designate an amount not exceeding one-half ofthe price of the new shares as additional paid-in capital, which is included in capital surplus.
Japanese Corporate Law (“the Law”) became effective on May 1, 2006, replacing the Japanese Commercial Code(“the Code”).
Under the Code, companies were required to set aside an amount equal to at least 10% of cash dividends and othercash appropriations as legal earnings reserve until the total of legal earnings reserve and additional paid-in capitalequaled 25% of common stock. Legal earnings reserve is included in retained earnings in the accompanying consolidatedbalance sheets. (The total amount of additional paid-in capital and legal earnings reserve of the Company has reached
25% of common stock, and therefore, the Company is not required to provide any more legal earnings reserve.)
Under the Law, in cases where dividends are paid, the smaller of an amount equal to 10% of the dividends or theexcess, if any, of 25% of common stock over the total of additional paid-in-capital and legal earnings reserve must be
set aside as additional paid-in-capital or legal earnings reserve.
Under the Code, legal earnings reserve and additional paid-in capital could be used to eliminate or reduce a deficit
by a resolution of the shareholders’ meeting or could be capitalized by a resolution of the Board of Directors. Under
the Law, both of these appropriations generally require a resolution of the shareholders’ meeting.
Under the Code, additional paid-in capital and legal earnings reserve were available for distribution by the resolutionof the shareholders’ meeting as long as the total amount of legal earnings reserve and additional paid-in capital remained
equal to or exceeded 25% of common stock. Under the Law, all additional paid-in-capital and all legal earnings
reserve may be transferred to surplus, which are available for dividends.
Cash dividends and bonuses to directors and corporate auditors resolved at the shareholders’ meeting on June 27,
2006 as described below were in accordance with the Code.
The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated
financial statements of the Company in accordance with Japanese law.

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FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

At the annual shareholders’ meeting held on June 27, 2006, the shareholders resolved cash dividends and directors’
and corporate auditors’ bonuses amounting to ¥3,226 million (US$27,462 thousand) and ¥66 million (US$562
thousand), respectively. Such appropriations have not been accrued in the consolidated financial statements as ofMarch 31, 2006. Such appropriations will be recognized in the period when they are resolved.
The new accounting standard for directors’ and corporate auditors’ bonuses (Accounting Standards Board
Statement No. 4, “Accounting Standard for Directors’ and Corporate Auditors’ Bonuses”, issued by the AccountingStandards Board of Japan on November 29, 2005) is effective for a semi-annual interim period of a fiscal year ending
after April 30, 2006. As a result, even when shareholders approve payment of directors’ and corporate auditors’
bonuses for fiscal years ending after April 30, 2006, such bonuses may no longer be accounted for as appropriations ofretained earnings. They must be accounted for as expenses.

14. Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal years 2006, 2005 and 2004, consisted of the following:Transportation and packing expenses
Advertisement expenses
Sales incentives
Salary and bonus
Research and development cost
Other

2006

2005

Millions of yen
2004¥ 16,184
45,82338,82748,42145,80997,672¥292,736¥ 15,316
47,88433,67050,04752,042
97,797¥296,756¥ 14,004
53,25733,15052,211
56,405
94,384¥303,411

Thousands of
U.S. dollars
2006$ 137,771
390,083
330,527
412,199
389,963
831,463$2,492,006

15. Impairment Loss on Property, Plant and Equipment
In the fiscal year ended March 31, 2006, the Company recorded an impairment loss with regard to the following
asset groups.
Use
Manufacturing facility
Assets for dealership business
Real estate for lease business
Underutilized real estate

Location
United States
Wakayama Prefectureand 3 other locations
Gunma Prefecture
Hokkaido and 3 otherlocationsCategory
Structures, machinery and equipment
Buildings and structures, machineryand equipment, and land
Buildings
Land, buildings
and structures, and other

The operating properties for dealers are grouped by each company, and the leased property and unused property
are grouped on a property by property basis, and the operating properties of a subsidiary in the United States aregrouped by the product.
The impairment loss by each category of property, plant and equipment was as follows;

Buildings and structures
Machinery and equipment
Land and other
Total

PAGE 54

Millions of yen
2006

Thousands of
U.S. dollars
2006¥1,672782
1,610¥4,064$14,233
6,657
13,706$34,596

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

16. Loss on Termination of Development Projects
In the fiscal year ended March 31, 2006, the company recorded a ¥7,094 million (US$60,390 thousand) loss ontermination of development projects, which consisted of the following two components:(1) A joint development project for new model vehicle
In light of the termination of the Strategic Alliance between the Company and General Motors (GM), the Company
and GM agreed to terminate the joint development project for cross over vehicles with SAAB Automobile AB. As aresult, the Company has recorded an other expense of ¥3,633 million (US$30,927 thousand) on the joint project
costs already incurred. As the Company has since identified certain project asset to be used for another model development, the loss has been reduced by ¥1,980 million (US$16,855 thousand) compared to the amount recorded in
the consolidated financial statements for the semi-annual period of the fiscal year 2006.
(2) New software system development project
The Company started to develop a software operating system which was expected to support its business processes
from order entry to delivery. However, the Company has concluded that the new system would not be as costeffective as it was originally planned. As a result, the Company terminated the development project and has recorded
an other expense of ¥3,461 million (US$29,463 thousand) from the termination.

17. Loss on Devaluation of Inventories at Aerospace Division
In the fiscal year 2005, the Company recorded a ¥8,122 million loss on devaluation of inventories, because theprospect for realization of the “Work in process” inventories of the Aerospace Division’s certain project became
uncertain due to a substantial delay in the progress of the project.

18. Loss on Discontinued Operations
The Company terminated the operations of Trailer, Train Parts, and other productions at Yusoki Kogyo K.K. in thefiscal year 2005. A loss on discontinued operation due to the termination of these operations was ¥3,467 million.

19. Loss on Compensation to Suppliers
In the fiscal year 2005, the Company recorded a ¥4,174 million loss on compensation to suppliers based on the
anticipated compensation payments for suppliers’ development costs which arose from the Company’s partial
rescheduling of a certain development plan in the Automotive Division.

20. Leases(1) Information as lessee
As allowed under the Japanese accounting standards, the Company and consolidated subsidiaries in Japan account for
finance leases, which do not transfer ownership of leased assets to lessees as stipulated in the lease contracts, as operatingleases. The “as-if capitalized” pro forma information of such leases as of March 31, 2006 and 2005, was as follows:

Machinery, equipment and vehicles
Other tangible assets
Intangibles assets
Accumulated depreciation/amortization
Net

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 1,208
2,284
35
3,527
(1,586)¥ 1,941¥ 1,325
2,137
33
3,495
(1,506)¥ 1,989$ 10,284
19,443298
30,025(13,502)$ 16,523

PAGE 55

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Pro forma information related to finance leases for the fiscal years 2006, 2005 and 2004 was as follows:

Rent paid
Depreciation and amortization expenses
Interest expense portion

2006

2005

Millions of yen
2004

¥623
578
51

¥665
599
57

¥757
739
51

Thousands of
U.S. dollars
2006$5,303
4,920
434

The future minimum lease/rent payments, excluding the portion of interest thereon, as of March 31, 2006 and2005, were as follows:

Finance leases:
Due within one year
Due after one year
Operating leases:
Due within one year
Due after one year

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006

¥ 540
1,491
¥2,031¥ 526
1,574¥2,100$ 4,597
12,693$17,290

¥ 834
3,523
¥4,357¥ 694
3,287¥3,981$ 7,100
29,990$37,090(2) Information as lessor
The carrying amounts of leased assets under finance leases as of March 31, 2006 and 2005, were as follows:

Machinery, equipment and vehicles
Other tangible assets
Intangible assets
Accumulated depreciation and amortization

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 22,541
9,202
1,970
33,713(17,879)¥ 15,834¥ 22,595
9,666
1,535
33,796(16,458)¥ 17,338$ 191,887
78,335
16,770286,992(152,200)$ 134,792

Information related to finance leases for the fiscal years 2006, 2005 and 2004, was as follows:

Rent received
Depreciation and amortization expenses
Interest income portion

2006

2005

Millions of yen
2004¥9,357
7,109
1,231¥9,417
7,187
1,313¥8,882
6,438
1,579

Thousands of
U.S. dollars
2006$79,654
60,518
10,479The future minimum lease/rent payments receivable, excluding the portion of interest thereon, as of March 31,
2006 and 2005, were as follows:

Finance leases:
Due within one year
Due after one year

PAGE 56

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 6,966
11,487¥18,453¥ 6,989
13,189¥20,178$ 59,300
97,787$157,087

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Operating leases:
Due within one year
Due after one year

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥ 4,904
4,261¥ 9,165¥ 4,097
5,163¥ 9,260$ 41,747
36,273$ 78,020

2006

Millions of yen
2005

Thousands of
U.S. dollars
2006¥41,451¥40,408$352,865

21. Contingent Liabilities
Contingent liabilities as of March 31, 2006 and 2005, were as follows:As guarantor of third-party indebtedness from financial institutes

22. Derivative Financial Instruments
In the normal course of business, the Company and consolidated subsidiaries employ derivative financial instruments,
including foreign exchange forward contracts, foreign currency options and interest rate swaps, to manage their
exposures to fluctuations in foreign currency exchange rates and interest rates. The Company and consolidated
subsidiaries do not use derivatives for speculative or trading purposes.
The fair value information of derivative financial instruments as of March 31, 2006 and 2005, was as follows:(1) Foreign currency contracts:(a) As of March 31, 2006:
Notional
amountForeign exchange forward contracts:
Sell —
U.S. dollar
Euro
Canadian dollar
Buy —U.S. dollar
Foreign currency options contracts:
Sell —
Call U.S. dollar
Call Euro
Call Canadian dollar
Buy —Put U.S. dollar
Put Euro
Put Canadian dollar

Millions of yen
Valuation
Fair value
gain (loss)

Notional
amountThousands of U.S. dollars
Valuation
Fair value
gain (loss)¥108,109
5,911
10,041¥112,859
6,083
10,375¥(4,750)
(172)
(334)

$920,312
50,31985,477$960,748
51,78388,320$(40,436)(1,464)(2,843)

20,374

20,333(41)

173,440

173,091

(349)

2,673

(911)

375

34

170

119

1,498

(264)

273

(136)

221

(68)

24,689
[207]
7,916
[48]
3,641
[34]
24,586
[207]
690
[48]
3,477
[34]

314

(107)

44

4

20

14

176

(31)

32

(16)

26

(8)

210,173[1,762]
67,387[409]
30,995[289]
209,296[1,762]
5,874[409]
29,599[289]

PAGE 57FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006(b) As of March 31, 2005

Foreign exchange forward contracts:
Sell —
U.S. dollar
Euro
Canadian dollar
Buy —U.S. dollar
Foreign currency options contracts:
Sell —
Call U.S. dollar
Call Euro
Call Canadian dollar
Buy —Put U.S. dollar
Put Euro
Put Canadian dollar

Notional
amountFair value

Millions of yen
Valuation
gain (loss)¥100,153
8,906
6,183

¥102,393
8,979
6,438

¥(2,240)
(73)
(255)

20,021

20,274

253

841

(422)

7

6

28

(21)

133

(203)

1

(12)

2

(4)

26,843
[419]
690
[13]
855
[7]
21,626
[336]
675
[13]
855
[6]

Note: The amounts in [brackets] are the carrying amounts of the premium on the option contracts recorded as other current assets or liabilities.

(2) Interest rate contracts:(a) As of March 31, 2006:
None(b) As of March 31, 2005:
None
The method to determine the fair value is based on quotations obtained from financial institutions.
Derivative financial instruments that qualify as a hedge and are accounted for using the deferred hedge accounting
method are excluded from the above table according to the disclosure requirements.

23. Segment Information
Information by business segment
The Company and consolidated subsidiaries operate principally in four business segments: automobiles, industrial
products, aerospace and other business fields (including eco-related equipment).

PAGE 58

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

A summary of net sales, operating income, assets, depreciation and amortization expenses and capital expendituresby business segment for the fiscal years 2006, 2005 and 2004, is shown below:
Net sales:
Automobiles —Outside customers
Inter-segment
Sub-total
Industrial products —Outside customers
Inter-segment
Sub-total
Aerospace —Outside customers
Inter-segment
Sub-total
Other —
Outside customers
Inter-segment
Sub-total
Total
Corporate and elimination
Consolidated total

Segment income or loss:
Operating income (loss):
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination
Consolidated total

Assets:Total assets:
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination
Consolidated total

Thousands of
U.S. dollars
2006

2006

2005

Millions of yen
2004¥1,329,161
3,688
1,332,849¥1,319,603
4,069
1,323,672¥1,316,951
3,847
1,320,798$11,314,898
31,395
11,346,293

52,436116
52,552

46,814307
47,121

42,257333
42,590446,378987
447,365

81,78735
81,82259,43440
59,47456,632
218
56,850696,237
298
696,535

12,984
20,6402,518
2,994
15,502
23,634
1,482,725
1,453,901(6,357)(7,410)¥1,476,368 ¥1,446,491

23,611
3,284
26,895
1,447,133(7,682)¥1,439,451

110,531
21,435
131,966
12,622,159(54,116)$12,568,043
Thousands of
U.S. dollars
2006

2006

2005

Millions of yen
2004¥51,559
2,038
2,795
1,231
57,623
716¥58,339¥40,942
849
195
(590)
41,396621¥42,017¥52,114(299)(327)(1,482)50,006318¥50,324$438,912
17,34923,794
10,479490,534
6,095$496,629

2005

Millions of yen
2004

Thousands of
U.S. dollars
2006¥1,110,445 ¥1,136,372
56,621
57,611
147,557
127,548
68,43574,4491,383,058
1,395,980(34,658)(38,521)¥1,348,400 ¥1,357,459¥1,139,138
57,432
109,684
76,695
1,382,949(33,222)¥1,349,727$ 9,453,009
482,004
1,256,125582,574
11,773,712(295,037)$11,478,675

2006

PAGE 59

FUJI HEAVY INDUSTRIES LTD.

Other significant items:
Depreciation and amortization expenses:
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination
Consolidated total
Impairment loss on property, plant and equipment
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination
Consolidated total
Capital expenditures for segment assets:
Automobiles
Industrial products
Aerospace
Other
Total
Corporate and elimination
Consolidated total

ANNUAL REPORT 2006

2006

2005

Millions of yen
2004¥ 74,431
1,795
1,941
1,906
80,073—¥ 80,073¥ 64,630
1,999
1,912
2,469
71,010—¥ 71,010¥ 65,486
2,115
1,712
1,799
71,112—¥ 71,112¥ 3,968
—
—
96
4,064
—
¥ 4,064

—
—
—
—
—
—
—

—
—
—
—
—
—
—

¥109,955
1,195
7,605
534
119,289—¥119,289¥135,972
1,013
2,614
8,160
147,759—¥147,759¥118,591
852
2,893
5,690
128,026—¥128,026

Thousands of
U.S. dollars
2006$ 633,617
15,281
16,523
16,225
681,646—$ 681,646$$

33,779——817
34,596—
34,596$ 936,026
10,17364,7404,546
1,015,485—$1,015,485

Notes: 1. Definition of business segments
Business segments are defined based on their product line and market.
2. Main products by each business segment
Business segments’ main products:
Automobiles
Legacy, Impreza, Forester, B9Tribeca, R1, R2, Pleo, Samber
Industrial products
Robin engines, power generators, pumps
Aerospace
Aircraft, parts of space-related devices
Other
Garbage collection vehicles, specialized vehicles, real estate lease
3. All operating costs and expenses are allocated to each business segment.
4. All figures in corporate and elimination represent elimination.
5. “Houses” are excluded from main products of “Other segment” as a result of transfer of the business to a non-consolidated subsidiary, whichis accounted for by the equity method, on April 1, 2004.
6. Changes in accounting policies(Fiscal 2004)
Revenue recognition
The Company changed its revenue recognition policy for the Aerospace Division’s production contracts with production terms exceeding
one year and the amount of each contract exceeding ¥5,000 million, from the completed-contract basis to the percentage-of-completion
method beginning in the fiscal year 2004. As a result of the change, in the Aerospace segment, net sales increased by ¥4,013 million andoperating income increased by ¥231 million in the fiscal year 2004 as compared with the amounts resulting from application of theprevious policy.
(Fiscal 2005)
Method of hedge accounting
As stated in “Summary of Significant Accounting Policies,” the Company discontinued applying the hedge accounting for is foreign currency
contract in the fiscal year 2005. As a result of this change, net sales and operating income increased by ¥133 million in the Automobiles
segment and ¥8 million in the Industrial products segment in the fiscal year 2005 as compared with the amounts resulting from application of
the previous hedge accounting policy.
(Fiscal 2006)
Impairment loss on property, plant and equipment
The Company and domestic consolidated subsidiaries adopted the accounting standards for impairment of fixed assets in the fiscal year 2006.
As a result of this change, the assets of the Automobiles segment decreased by ¥3,167 million (US$26,960 thousand) and the assets of the
Other segment decreased by ¥96 million (US$817 thousand) in the fiscal year 2006.
7. Introduction of Corporation Size-Based Enterprise Tax System
As stated in “Summary of Significant Accounting Policies,” the Corporation Size-Based Enterprise Tax System for the enterprise taxes wasintroduced in the fiscal year 2005. As a result, operating expense increased by ¥881 million in the Automobiles segment, ¥46 million in the
Industrial products segment, ¥61 million in the Aerospace segment and ¥21 million in the Other segment, and operating income for therespective segments decreased by the same amounts in the fiscal year 2005.
PAGE 60

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Information by geographic area
A summary of net sales, operating income and assets by geographic area for the fiscal years 2006, 2005 and 2004 isshown below:
Net sales:
Japan —
Outside customers
Inter-segment
Sub-total
North America —Outside customers
Inter-segment
Sub-total
Other —
Outside customers
Inter-segment
Sub-total
Total
Corporate and elimination
Consolidated total

Segment income or loss:
Operating income:Japan
North America
Other
Total
Corporate and elimination
Consolidated total

Thousands of
U.S. dollars
2006

2006

2005

Millions of yen
2004¥ 888,117
257,456
1,145,573¥ 886,793
241,860
1,128,653¥ 840,330
263,260
1,103,590$ 7,560,373
2,191,674
9,752,047

572,4122,298
574,710544,7532,027
546,780590,271
1,692
591,963

4,872,836
19,562
4,892,398

15,83914,945313
391
16,152
15,336
1,736,435
1,690,769(260,067)(244,278)¥1,476,368 ¥1,446,491

8,850
344
9,194
1,704,747(265,296)¥1,439,451

134,834
2,665
137,499
14,781,944(2,213,901)$12,568,043
Thousands of
U.S. dollars
2006$485,137
16,7702,630
504,537(7,908)$496,629

2006

2005

Millions of yen
2004¥56,989
1,970
309
59,268(929)¥58,339¥40,517(6,678)367
34,206
7,811¥42,017¥37,670
1,071
259
39,00011,324¥50,324

PAGE 61FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Assets:Assets:Japan
North America
Other
Total
Corporate and elimination
Consolidated total

2005

Millions of yen
2004

Thousands of
U.S. dollars
2006¥1,006,951 ¥1,080,303
368,541
307,858
2,716
2,439
1,378,208
1,390,600(29,808)(33,141)¥1,348,400 ¥1,357,459¥1,077,341
309,8422,102
1,389,285(39,558)¥1,349,727$ 8,571,984
3,137,320
23,121
11,732,425(253,750)$11,478,675

2006

Notes: 1. Geographic areas are based on geographical proximity.
2. Principal countries or districts in each geographic area:
North America: United States and Canada
Other:
Europe3. All operating costs and expenses are allocated to each segment.
4. All figures in corporate and elimination represent elimination.
5. Changes in accounting policies(Fiscal 2004)
Revenue recognition
The Company changed its revenue recognition policy for the Aerospace Division’s production contracts with production terms exceeding
one year and the amount of each contract exceeding ¥5,000 million, from the completed-contract basis to the percentage-of-completion
method beginning in the fiscal year 2004. As a result of the change, in the Japan segment, net sales increased by ¥4,013 million and operating
income increased by ¥231 million in the fiscal year 2004 as compared with the amounts resulting from application of the previous policy.
(Fiscal 2005)
Method of hedge accounting
As stated in “Summary of Significant Accounting Policies,” the Company discontinued applying the hedge accounting for its foreign currency
contracts in the fiscal year 2005. As a result of this change, net sales and operating income increased by ¥141 million in the Japan segment in
the fiscal year 2005 as compared with the amounts resulting from application of the previous hedge accounting policy.
(Fiscal 2006)
Impairment loss on property, plant and equipment
The Company and domestic consolidated subsidiaries adopted the accounting standards for impairment of fixed assets in the fiscal year 2006.
As a result of this change, the assets of the Japan segment decreased by ¥3,263 million (US$27,777 thousand).
6. Introduction of Corporation Size-Based Enterprise Tax System
As stated in “Summary of Significant Accounting Policies,” the Corporation Size-Based Enterprise Tax System for the enterprise taxes wasintroduced in the fiscal year 2005. As a result, operating expense increased by ¥1,009 million in the Japan segment and operating income in
the Japan segment decreased by the same amount in the fiscal year 2005.

Overseas sales
Overseas sales for the years ended March 31, 2006, 2005 and 2004, are summarized as follows:

Overseas sales:
North America
EuropeOther
Total
Consolidated net sales

2006

2005

Millions of yen
2004¥ 616,437 41.8%
128,777
8.7
127,016
8.6¥ 872,230 59.1%¥1,476,368 100.0%¥ 593,249 41.0%
117,826
8.2
108,357
7.5¥ 819,432 56.7%¥1,446,491 100.0%¥ 624,372 43.4%
101,049 7.0
86,113 6.0¥ 811,534 56.4%¥1,439,451 100.0%

Thousands of
U.S. dollars
2006$ 5,247,612
1,096,255
1,081,263$ 7,425,130$12,568,043

Notes: 1. Geographic areas are based on geographical proximity.
2. Principal countries or districts in each geographic area:
North America: United States and Canada
Europe:Germany, Switzerland and England
Other:
Australia
3. Overseas sales are sales outside of Japan by the Company and consolidated subsidiaries.
4. Changes in accounting policies(Fiscal 2004)
None(Fiscal 2005)
Method of hedge accounting
As stated in “Summary of Significant Accounting Policies,” the Company discontinued applying the hedge accounting for its foreign currency
contracts in the fiscal year 2005. As a result of this change, net sales increased by ¥56 million in North America and ¥85 million in Europe ascompared with the amounts resulting from application of the previous hedge accounting policy.
(Fiscal 2006)
None

PAGE 62

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

24. Subsequent Events
The share exchange to make Fuji Machinery Co., Ltd. a wholly owned subsidiary
Fuji Machinery Co., Ltd., a consolidated subsidiary, accounts for approximately 90% of its sales to Fuji Heavy
Industries Ltd. (the Company). In order to enhance group management, the Company, at its Board of Directors’
meeting on May 9, 2006, approved a share exchange (under the simplified share exchange provisions), in which Fuji
Machinery Co., Ltd. will become a wholly owned subsidiary, and it executed the share exchange agreement with Fuji
Machinery Co., Ltd.
1. Principal terms and conditions of the share exchange(1) Timetable
May 9, 2006:

Board of Directors’ approval of the share exchange agreement
Execution of the share exchange agreement
June 28, 2006: General meeting of the shareholders of Fuji Machinery Co., Ltd. to vote on the proposed
share exchange
October 1, 2006: Closing date of the share exchange (Deadline to submit stock certificate)
The Company will conduct this share exchange in accordance with the simplified share exchange provisions
in Article 796 of the Corporate Law, without seeking the approval at a shareholders’ meeting.

(2) Share exchange ratio

Share exchange ratio

The company(Future 100% parent company)
1

Fuji Machinery Co., Ltd.
(Future wholly-owned subsidiary)
0.52

Note: Basis of determining the share exchange ratio
The Company and Fuji Machinery Co., Ltd. individually engaged third party appraisers to analyze the exchange ratio. The analysis was
performed based on the market stock prices, the comparable-company comparisons, and the discounted cash flows. The Company andFuji Machinery Co., Ltd. have agreed to the above ratio, taking into consideration the results of such third party appraisals and certain
other factors.

(3) Share transfer payment in connection with the share exchange
No share transfer payment will be paid in connection with the share exchange.
2. Operations following the closing of the share exchange(1) Company name, nature of business, management, and location of the head office
There will be no change as a result of the share exchange.
(2) Common stock of the Company
There will be no change in the amount of common stock of the Company because the Company intends to
re-issue its treasury stock for all the shares to be exchanged.
(3) Effect on the results of the Company’s operation
The Company expects the share exchange will have no material effect on its results of operations.

PAGE 63

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Independent Auditors’ Report
To the Board of Directors of
FUJI HEAVY INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of FUJI HEAVY INDUSTRIES LTD. (“the Company”)
and consolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income,shareholders’ equity and cash flows for each of the three years in the period ended March 31, 2006, expressed inJapanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to independently express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosuresin 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, theconsolidated financial position of the Company and subsidiaries as of March 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in the period ended March 31, 2006, inconformity with accounting principles generally accepted in Japan.
Without qualifying our opinion, we draw attention to the following.
(1) As discussed in Note 2 to the consolidated financial statements, the Company adopted the new accounting standard
for impairment of fixed assets (“Opinion Concerning Establishment of Accounting Standard for Impairment of
Fixed Assets” issued by the Business Accounting Deliberation Council on August 9, 2002) and the implementation
guidance for the accounting standard for impairment of fixed assets (the Financial Accounting Standard Implementation
Guidance No.6 issued by the Accounting Standards Board of Japan on October 31, 2003) in fiscal year 2006.
(2) As discussed in Note 2 to the consolidated financial statements, the Company and consolidated domestic subsidiaries
stopped applying the hedge accounting for foreign exchange contracts in fiscal year 2005.
(3) As discussed in Note 2 to the consolidated financial statements, the Company changed the method of the revenue
recognition policy for Aerospace Division’s production contracts in fiscal year 2004.
(4) As discussed in Note 24 to the consolidated financial statements, the Company executed a share exchange agreementwith Fuji Machinery Co., Ltd. on May 9, 2006.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March
31, 2006 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S.
dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated
financial statements.

Tokyo, Japan
June 27, 2006

PAGE 64

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Consolidated Subsidiaries and Affiliates(As of March 31, 2006)

JAPANOVERSEAS

Fuji Robin Industries Ltd. (58.1%)
Manufacture, service, and sales of agricultural/forestry
equipment, engines, fire pumps, and related parts
http://www5.mediagalaxy.co.jp/fujirobin/

Subaru of America, Inc. (100.0%) and 10 subsidiaries
Subaru Plaza, 2235 Route 70 West, Cherry Hill, NJ 08002,
U.S.A.
Phone: +1-856-488-8500
Fax: +1-856-488-3137
Distribution and sales of Subaru automobiles and parts
http://www.subaru.com/

Fuji Machinery Co., Ltd. (69.5%)
Manufacture and sales of automobile parts and industrial
product parts
http://www.fuji-machinery.co.jp/
Ichitan Co., Ltd. (51.0%)
Manufacture and sales of forged automobile/industrial
product parts
http://www.ichitan.co.jp
Kiryu Industrial Co., Ltd. (97.5%)
Manufacture of Subaru specially equipped automobiles anddistribution of Subaru automobile parts
http://www.kiryu-kougyo.co.jp/
Subaru Kosan Co., Ltd. (100.0%)
Sales and leasing of real estate and travel agency operations
Subaru UI Co., Ltd. (100.0%)
Refurbishment, distribution, and sales of used Subaru
automobiles
http://www.subaru-ui.jp/
FICS Corporation (100.0%)
Distribution and service of Volvo automobiles
Subaru Finance Co., Ltd. (100.0%)
Leasing and rental of Subaru automobiles and equipment
and credit, financing, accounting service, and sales of
insurance
http://www.subaru-finance.co.jp/contents.htm
Yusoki Kogyo K.K. (100.0%)
Manufacture and sales of parts for aerospace
http://www.yusoki.co.jp/<As of April 1, 2006>
TOKYO SUBARU INC. (100.0%)
and 33 other dealerships
Distribution, sales, and services of Subaru automobiles
http://www.tokyo-subaru.co.jp/

Fuji Heavy Industries U.S.A., Inc. (100.0%)
and one subsidiaryc/o Subaru of America, Inc.
Subaru Plaza, 2235 Route 70 West, Cherry Hill, NJ 08002,
U.S.A.
Phone: +1-856-488-8743
Fax: +1-856-488-8517
Distribution and sales of Subaru automobiles and parts toforeign countries
Subaru Research & Development, Inc.
3995 Research Park Drive, Ann Arbor, MI 48108, U.S.A.
Phone: +1-734-623-0075
Fax: +1-734-623-0076
Research and development of automobiles
Subaru of Indiana Automotive, Inc. (100.0%)
and one subsidiary
5500 State Road 38 East, Lafayette, IN 47905, U.S.A.
Phone: +1-765-449-1111
FAX: +1-765-449-6952
Manufacture of Subaru automobiles
http://www.subaru-sia.com/
Subaru Canada, Inc. (100.0%) and one subsidiary
560 Suffolk Court Mississauga, Ontario L5R 4J7, Canada
Phone: +1-905-568-4959
Fax: +1-905-568-8087
Distribution and sales of Subaru automobiles and parts
http://www.subaru.ca/
Subaru Europe N.V./S.A. (100.0%)
Leuvensesteenweg 555 B/8, 1930 Zaventem, Belgium
Phone: +32-2-714-0400
Fax: +32-2-725-7792
Distribution, sales and marketing of automobiles, parts andaccessories<As of June 1, 2006>
Subaru of China, Inc. (100.0%)
Beijing Landmark Towers Office Building 2-1506, 8 North
Dongsanhuan Road, Chaoyang District, Beijing 100004, China
Tel: +86-10-6590-0725
Fax: +86-10-6590-0729
Subaru of Taiwan Co., Ltd. (80.0%)
8F-1, No.100, Sec. 2, Chung Hsiao E. Rd., Taipei, Taiwan
Phone: +886-2-8866-6630
FAX: +886-2-2832-4021
http://www.subaru-sot.com.tw/
Robin Manufacturing U.S.A., Inc. (60.0%)1201 Industrial Road, Hudson, WI 54016, U.S.A.
Phone: +1-715-381-5902
Fax: +1-715-381-5901
Manufacture and sales of general-purpose, four-wheel
buggy and golf cart engines
PAGE 65

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Investor Information(As of March 31, 2006)

Head Office
Subaru Building, 7-2, Nishi-Shinjuku 1-chome, Shinjuku-ku,
Tokyo 160-8316, Japan
Phone: +81-3-3347-2111
Fax: +81-3-3347-2338
Investor Relations Office
Subaru Building, 7-2, Nishi-shinjuku 1-chome, Shinjuku-ku,
Tokyo 160-8316, Japan
Phone: +81-3-3347-2655
Fax: +81-3-3347-2295
Established
July 15, 1953

Major Shareholders
Toyota Motor Corporation
Fuji Heavy Industries Ltd.
Japan Trustee Services Bank, Ltd. (Trust Account)
The Master Trust Bank of Japan, Ltd. (Trust Account)
The Chase Manhattan Bank, N.A. London
Depositary Nominees Inc.
Northern Trust Company (AVFC) Sub-account American
ClientNippon Life Insurance Company
Suzuki Motor Corporation
Mizuho Corporate Bank, Ltd.
Stock Listings
Tokyo Stock Exchange

Paid-in Capital¥153,795 million

Transfer Agent
Mizuho Trust & Banking Co., Ltd.
2-1 Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan

Number of Shareholders
57,494
Number of Common Stock Issued
782,865,873

Web Site Address
http://ir.fhi.co.jp/english/

Domestic Manufacturing Division
Gunma Manufacturing Division (Automobiles Division)
Utsunomiya Manufacturing Division (Aerospace Division
and Eco Technologies Division)
Saitama Manufacturing Division (Industrial Products
Division)

Quarterly Common Stock Price Range (Tokyo Stock Exchange)
(Yen)
1,200
1,000
800
600
400
200
0

FY
High
Low
PAGE 66

2002
¥944
471

2003
¥712
362

2004
¥668
414

2005
¥627
462

2006
¥704
437

FUJI HEAVY INDUSTRIES LTD.

ANNUAL REPORT 2006

Subaru introduced the Stella, all-new minicar for the Japanese market, in June 2006.

PAGE 67

FUJI HEAVY INDUSTRIES LTD.
Subaru Building, 7-2, Nishi-Shinjuku 1 chome,
Shinjuku-ku, Tokyo 160-8316, Japan

http://ir.fhi.co.jp/english/

Printed on recycled paper in Japan