Toyota Motor (TM)

5.B LIQUIDITY AND CAPITAL RESOURCES

Historically, Toyota has funded its capital expenditures and research and development activities primarily through cash generated by operations. In fiscal 2009, cash generated by operations decreased due to a decrease in vehicle unit sales that was attributed to the rapid contraction of the automotive market. Therefore, Toyota funded cash partially through additional loans and issuance of notes.

In fiscal 2010, Toyota expects to sufficiently fund its capital expenditures and research and development activities primarily through cash and cash equivalents on hand, cash generated by operations, loans and issuance of notes. Toyota will use its funds for the development of environment technologies, maintenance and replacement of manufacturing facilities, and the introduction of new products. See “Information on the Company — Business Overview — Capital Expenditures and Divestitures” for information regarding Toyota’s material capital expenditures and divestitures for fiscal 2007, 2008 and 2009, and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota funds its financing programs for customers and dealers, including loans and leasing programs, from both cash generated by operations and borrowings by its finance subsidiaries. Toyota seeks to expand its ability to raise funds locally in markets throughout the world by expanding its network of finance subsidiaries.

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Net cash provided by operating activities was ¥1,476.9 billion for fiscal 2009, compared with ¥2,981.6 billion for the prior year. The decrease in net cash provided by operating activities resulted primarily from a decrease in cash collection received from sale of products due to a decrease in net revenue for the automotive operations, partially offset by a decrease in cash payments for cost of products sold within the automotive operations and a decrease in cash payments for income taxes.

Net cash used in investing activities was ¥1,230.2 billion for fiscal 2009, compared with ¥3,874.8 billion for the prior year. The decrease in net cash used in investing activities resulted primarily from a decrease in additions to finance receivables, a decrease in purchases of marketable securities and security investments, and an increase in proceeds from sales of marketable securities and security investments.

Net cash provided by financing activities was ¥698.8 billion for fiscal 2009, compared with ¥706.1 billion for the prior year. The decrease in net cash provided by financing activities resulted primarily from an increase in payments of long-term debt, partially offset by a decrease in repurchase of common stock.

Total capital expenditures for property, plant and equipment, excluding vehicles and equipment on operating leases, were ¥1,364.5 billion during fiscal 2009, a decrease of 7.8% over the ¥1,480.5 billion in total capital expenditures from the prior year. The decrease in capital expenditures resulted primarily from a decrease in investments by subsidiaries especially located in Asia and North America.

Total expenditures for vehicles and equipment on operating leases were ¥960.3 billion during fiscal 2009, a decrease of 24.9% over the ¥1,279.4 billion in expenditures from the prior year. The decrease in expenditures for vehicles and equipment on operating leases resulted primarily from a decrease in investments in the financial services operations.

Toyota expects investments in property, plant and equipment, excluding vehicles and equipment on operating leases, to be approximately ¥830.0 billion during fiscal 2010. Toyota’s expected investments include approximately ¥530.0 billion in Japan, ¥140.0 billion in North America, ¥50.0 billion in Europe, ¥70.0 billion in Asia and ¥40.0 billion in Other.

Based on current available information, Toyota does not expect environmental matters to have a material impact on its financial position, results of operations, liquidity or cash flows during fiscal 2010. However, there exists a substantial amount of uncertainty with respect to Toyota’s obligations under current and future environment regulations as described in “Information on the Company — Business Overview — Governmental Regulations, Environmental and Safety Standards”.

Cash and cash equivalents were ¥2,444.2 billion as of March 31, 2009. Most of Toyota’s cash and cash equivalents are held in Japanese yen and in U.S. dollars. In addition, time deposits were ¥45.1 billion and marketable securities were ¥495.3 billion as of March 31, 2009.

Liquid assets, which Toyota defines as cash and cash equivalents, time deposits, marketable debt securities and its investment in monetary trust funds, decreased during fiscal 2009 by ¥251.8 billion, or 5.6%, to ¥4,229.1 billion.

Trade accounts and notes receivable, net decreased during fiscal 2009 by ¥647.5 billion, or 31.7%, to ¥1,392.7 billion, reflecting the impacts of decreased revenues and fluctuations in foreign currency translation rates.

Inventories decreased during fiscal 2009 by ¥366.4 billion, or 20.1%, to ¥1,459.3 billion, reflecting the impacts of decreased volumes and fluctuations in foreign currency translation rates.

Total finance receivables, net decreased during fiscal 2009 by ¥728.9 billion, or 7.1%, to ¥9,546.9 billion. The decrease in finance receivables, net resulted from a decrease in wholesale and other dealer loans and the

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impact of fluctuations in foreign currency translation rates. As of March 31, 2009, finance receivables were geographically distributed as follows: in North America 63.6%, in Japan 14.1%, in Europe 11.0%, in Asia 3.8% and in Other 7.5%. Although Toyota maintains programs to sell finance receivables through special purpose entities, no sales of finance receivables were made during fiscal 2009.

Marketable securities and other securities investments, including those included in current assets, decreased during fiscal 2009 by ¥1,373.2 billion, or 34.6%, primarily reflecting sales of marketable securities and security investments, and a decrease in the fair values of these securities and investments.

Property, plant and equipment decreased during fiscal 2009 by ¥410.3 billion, or 5.3%, primarily reflecting the impacts of depreciation charges during the year and fluctuations in foreign currency translation rates, partially offset by the capital expenditures.

Accounts payable decreased during fiscal 2009 by ¥913.3 billion, or 41.3%, reflecting the impacts of a decrease in trading volumes and fluctuations in foreign currency translation rates.

Accrued expenses decreased during fiscal 2009 by ¥66.2 billion, or 4.1%, reflecting the impact of fluctuations in foreign currency translation rates.

Income taxes payable decreased during fiscal 2009 by ¥254.2 billion, or 83.2%, primarily as a result of a decrease in income before income taxes.

Toyota’s total borrowings increased during fiscal 2009 by ¥408.5 billion, or 3.3%. Toyota’s short-term borrowings consist of loans with a weighted-average interest rate of 2.44% and commercial paper with a weighted-average interest rate of 1.52%. Short-term borrowings increased during fiscal 2009 by ¥64.9 billion, or 1.8%, to ¥3,617.6 billion. Toyota’s long-term debt consists of unsecured and secured loans, medium-term notes, unsecured notes and long-term capital lease obligations with interest rates ranging from 0.17% to 31.50%, and maturity dates ranging from 2009 to 2047. The current portion of long-term debt increased during fiscal 2009 by ¥24.1 billion, or 0.9%, to ¥2,699.5 billion and the non-current portion increased by ¥319.5 billion, or 5.3%, to ¥6,301.4 billion. The increase in total borrowings primarily resulted from funding obtained to maintain sufficient liquidity. As of March 31, 2009, approximately 28% of long-term debt was denominated in U.S. dollars, 21% in Japanese yen, 15% in euros and 36% in other currencies. Toyota hedges fixed rate exposure by entering into interest rate swaps. There are no material seasonal variations in Toyota’s borrowings requirements.

As of March 31, 2009, Toyota’s total interest bearing debt was 125.4% of total shareholders’ equity, compared to 102.9% as of March 31, 2008.

Toyota’s long-term debt was rated “AA” by Standard & Poor’s Ratings Group, “Aa1” by Moody’s Investors Services and “AAA” by Rating and Investment Information, Inc. as of May 31, 2009. A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.

Toyota’s unfunded pension liabilities increased during fiscal 2009 by ¥242.6 billion, or 59.0%, to ¥653.7 billion. The unfunded pension liabilities relate primarily to the parent company and its Japanese subsidiaries. The unfunded amounts will be funded through future cash contributions by Toyota or in some cases will be funded on the retirement date of each covered employee. The unfunded pension liabilities increased in fiscal 2009 compared to the prior year primarily due to a decrease in the market value of plan assets. See note 19 to the consolidated financial statements for further discussion.

Toyota’s treasury policy is to maintain controls on all exposures, to adhere to stringent counterparty credit standards, and to actively monitor marketplace exposures. Toyota remains centralized, and is pursuing global efficiency of its financial services operations through Toyota Financial Services Corporation.

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The key element of Toyota’s financial policy is maintaining a strong financial position that will allow Toyota to fund its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota believes that it maintains sufficient liquidity for its present requirements and that by maintaining its high credit ratings, it will continue to be able to access funds from external sources in large amounts and at relatively low costs. Toyota’s ability to maintain its high credit ratings is subject to a number of factors, some of which are not within Toyota’s control. These factors include general economic conditions in Japan and the other major markets in which Toyota does business, as well as Toyota’s successful implementation of its business strategy.

5.B LIQUIDITY AND CAPITAL RESOURCES

Historically, Toyota has funded its capital expenditures and research and development activities primarily through cash generated by operations.

Toyota expects to sufficiently fund its capital expenditures and research and development activities in fiscal 2009 primarily through cash and cash equivalents on hand and increases in cash and cash equivalents from operating activities. See “Information on the Company — Business Overview — Capital Expenditures and Divestitures” for information regarding Toyota’s material capital expenditures and divestitures for fiscal 2006, 2007 and 2008 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota funds its financing programs for customers and dealers, including loans and leasing programs, from both operating cash flows and borrowings by its finance subsidiaries. Toyota seeks to expand its ability to raise funds locally in markets throughout the world by expanding its network of finance subsidiaries.

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Net cash provided by operating activities was ¥2,981.6 billion for fiscal 2008, compared with ¥3,238.1 billion for the prior year. The decrease in net cash provided by operating activities resulted primarily from the increase in cash payments of cost of products sold within the automotive and other operations and the increase in cash payments for income taxes, which was partially offset by an increase in cash collection received from the sale of products within the automotive and other operations.

Net cash used in investing activities was ¥3,874.8 billion for fiscal 2008, compared with ¥3,814.3 billion for the prior year. The increase in net cash used in investing activities resulted primarily from the increase in additions to finance receivables, the increase in purchases of marketable securities and security investments and the increase in additions to fixed assets, which was partially offset by an increase in the collection of finance receivables.

Net cash provided by financing activities was ¥706.1 billion for fiscal 2008, compared with ¥881.7 billion for the prior year. The decrease in net cash provided by financing activities resulted primarily from an increase in repayments of long-term debt which was partially offset by increase in proceeds from issuance of long-term debt.

Total capital expenditures for property, plant and equipment, excluding vehicles and equipment on operating leases, were ¥1,480.5 billion during fiscal 2008, an increase of 3.8% over the ¥1,425.8 billion in total capital expenditures for the prior year. The increase in capital expenditures resulted primarily from the impact of higher investments in subsidiaries located in Japan and North America.

Total expenditures for vehicles and equipment on operating leases were ¥1,279.4 billion during fiscal 2008, an increase of 1.2% over the ¥1,264.3 billion in expenditures in the prior year. The increase in expenditures for vehicles and equipment on operating leases resulted primarily from business expansion in the financial services operations.

Toyota expects investments in property, plant and equipment, excluding vehicles and equipment on operating leases, to be approximately ¥1,400.0 billion during fiscal 2009. Toyota’s expected capital expenditures include approximately ¥820.0 billion in Japan, ¥320.0 billion in North America, ¥140.0 billion in Europe, ¥60.0 billion in Asia and ¥60.0 billion in Other.

Based on current available information, Toyota does not expect environmental matters to have a material impact on its financial position, results of operations, liquidity or cash flows during fiscal 2009. However, there exists a substantial amount of uncertainty with respect to Toyota’s obligations under current and future environment regulations as described in “Information on the Company — Business Overview — Governmental Regulations, Environmental and Safety Standards”.

Cash and cash equivalents were ¥1,628.5 billion at March 31, 2008. Most of Toyota’s cash and cash equivalents are held in Japanese yen and in U.S. dollars. In addition, time deposits were ¥134.7 billion and marketable securities were ¥542.2 billion at March 31, 2008.

Liquid assets, which Toyota defines as cash and cash equivalents, time deposits, marketable debt securities and its investment in monetary trust funds, decreased during fiscal 2008 by ¥24.3billion, or 0.5%, to ¥4,480.9 billion.

Trade accounts and notes receivable, net increased during fiscal 2008 by ¥16.4 billion, or 0.8%, to ¥2,040.2 billion, reflecting the impact of increased revenues and offset by the impact of fluctuations in foreign currency translation rates.

Inventories increased during fiscal 2008 by ¥21.8 billion, or 1.2%, to ¥1,825.7 billion, reflecting the impact of increased volumes offset by the impact of fluctuations in foreign currency translation rates.

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Total finance receivables, net increased during fiscal 2008 by ¥272.8 billion, or 2.7%, to ¥10,275.8 billion. The increase in finance receivables, net resulted from the increase in wholesale, the increase in other dealer loans including real estate loans and working capital financing provided to dealers, and the increase in finance leases offset by the impact of fluctuations in foreign currency translation rates. As of March 31, 2008, finance receivables were geographically distributed as follows: in North America 61.9%, in Europe 13.1%, in Japan 12.6%, in Asia 4.0% and in Other 8.4%. Toyota maintains programs to sell finance receivables through special purpose entities and obtained proceeds from securitization transactions, net of purchased and retained interests which totaled ¥91.3 billion during fiscal 2008.

Marketable securities and other securities investments, including those included in current assets, decreased during fiscal 2008 by ¥293.9 billion, or 6.9%, primarily reflecting the decrease in fair value of these securities and investments.

Property, plant and equipment increased during fiscal 2008 by ¥48.0 billion, or 0.6%, primarily reflecting an increase in capital expenditures which was partially offset by the depreciation charges during the year and the impact of fluctuations in foreign currency translation rates.

Accounts payable increased during fiscal 2008 by ¥1.2 billion, or 0.1%, reflecting the impact of increased trading volumes offset by the impact of fluctuations in foreign currency translation rates.

Accrued expenses decreased during fiscal 2008 by ¥61.4 billion, or 3.7%, reflecting the impact of fluctuations in foreign currency translation rates offset by the increase in expenses due to the expansion of the business.

Income taxes payable decreased during fiscal 2008 by ¥115.6 billion, or 27.4%, principally as a result of the timing of cash payments for income taxes.

Toyota’s total borrowings increased during fiscal 2008 by ¥81.0 billion, or 0.7%. Toyota’s short-term borrowings consist of loans with a weighted-average interest rate of 3.36% and commercial paper with a weighted-average interest rate of 3.76%. Short-term borrowings increased during fiscal 2008 by ¥55.4 billion, or 1.6%, to ¥3,552.7 billion. Toyota’s long-term debt consists of unsecured and secured loans, medium-term notes, unsecured notes and long-term capital lease obligations with interest rates ranging from 0.17% to 28.00%, and maturity dates ranging from 2008 to 2047. The current portion of long-term debt increased during fiscal 2008 by ¥307.3 billion, or 13.0%, to ¥2,675.4 billion and the non-current portion decreased by ¥281.6 billion, or 4.5%, to ¥5,981.9 billion. The increase in total borrowings reflects the expansion of the financial services operations. As of March 31, 2008, approximately 34% of long-term debt was denominated in U.S. dollars, 24% in Japanese yen, 10% in euros and 32% in other currencies. Toyota hedges fixed rate exposure by entering into interest rate swaps. There are no material seasonal variations in Toyota’s borrowings requirements.

As of March 31, 2008, Toyota’s total interest bearing debt was 102.9% of total shareholders’ equity, compared to 102.5% as of March 31, 2007.

Toyota’s long-term debt was rated “AAA” by Standard & Poor’s Ratings Group, “Aaa” by Moody’s Investors Services and “AAA” by Rating and Investment Information, Inc. as of March 31, 2008. These ratings represent the highest long-term debt ratings published by each of the rating agencies. A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.

Toyota’s unfunded pension liabilities increased during fiscal 2008 by ¥128.6 billion, or 45.5% to ¥411.1 billion. The unfunded pension liabilities relate primarily to the parent company and its Japanese subsidiaries. The unfunded amounts will be funded through future cash contributions by Toyota or in some cases will be funded on the retirement date of each covered employee. The unfunded pension liabilities increased in fiscal 2008 compared to the prior year mainly due to the decrease in the market value of plan assets. See note 19 to the consolidated financial statements regarding employee benefit plans.

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Toyota’s treasury policy is to maintain controls on all exposures, to adhere to stringent counterparty credit standards, and to actively monitor marketplace exposures. Toyota remains centralized, and is pursuing global efficiency of its financial services operations through Toyota Financial Services Corporation.

The key element of Toyota’s financial policy is maintaining a strong financial position that will allow Toyota to fund its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota believes that it maintains sufficient liquidity for its present requirements and that by maintaining its high credit ratings, it will continue to be able to access funds from external sources in large amounts and at relatively low costs. Toyota’s ability to maintain its high credit ratings is subject to a number of factors, some of which are not within Toyota’s control. These factors include general economic conditions in Japan and the other major markets in which Toyota does business, as well as Toyota’s successful implementation of its business strategy.

5.B LIQUIDITY AND CAPITAL RESOURCES

Historically, Toyota has funded its capital expenditures and research and development activities primarily through cash generated by operations.

Toyota expects to sufficiently fund its capital expenditures and research and development activities in fiscal 2008 primarily through cash and cash equivalents on hand and increases in cash and cash equivalents from operating activities. See “Information on the Company — Business Overview — Capital Expenditures and Divestitures” for information regarding Toyota’s material capital expenditures and divestitures for fiscal 2005, 2006 and 2007 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota funds its financing programs for customers and dealers, including loans and leasing programs, from both operating cash flows and borrowings by its finance subsidiaries. Toyota seeks to expand its ability to raise funds locally in markets throughout the world by expanding its network of finance subsidiaries.

Net cash provided by operating activities was ¥3,238.1 billion for fiscal 2007, compared with ¥2,515.4 billion for the prior year. The increase in net cash provided by operating activities resulted primarily from increased operating cash flows attributed to the increase of net income.

Net cash used in investing activities was ¥3,814.3 billion for fiscal 2007, compared with ¥3,375.5 billion for the prior year. The increase in net cash used in investing activities resulted primarily from the increase in additions to finance receivables, the increase in additions to equipment leased to others and in the increase in purchases of marketable securities and security investments, which was partially offset by an increase in the collection of finance receivables.

Net cash provided by financing activities was ¥881.7 billion for fiscal 2007, compared with ¥876.9 billion for the prior year. The increase in net cash provided by financing activities resulted primarily from an increase in proceeds from issuance of long-term debt, which was partially offset by an increase in repayments of long-term debt.

Total capital expenditures for property, plant and equipment, excluding vehicles and equipment on operating leases, were ¥1,425.8 billion during fiscal 2007, a decrease of 6.4% over the ¥1,523.4 billion in total capital expenditures for the prior year. The decrease in capital expenditures resulted primarily from the impact of decreased capital expenditures in domestic subsidiaries.

Total expenditures for vehicles and equipment on operating leases were ¥1,410.0 billion during fiscal 2007, an increase of 13.0% over the ¥1,247.7 billion in expenditures in the prior year. The increase in expenditures for vehicles and equipment on operating leases resulted primarily from increased operating lease assets in finance subsidiaries in North America and Japan.

Toyota expects investments in property, plant and equipment, excluding vehicles and equipment on operating leases, to be approximately ¥1,500.0 billion during fiscal 2008. Toyota’s expected capital expenditures include approximately ¥800.0 billion in Japan, ¥400.0 billion in North America, ¥110.0 billion in Europe, ¥110.0 billion in Asia and ¥80.0 billion in Other, respectively.

Based on current available information, Toyota does not expect environmental matters to have a material impact on its financial position, results of operations, liquidity or cash flows during fiscal 2008. However, there

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exists a substantial amount of uncertainty with respect to Toyota’s obligations under current and future environment regulations as described in “Information on the Company — Business Overview — Governmental Regulations, Environmental and Safety Standards”.

Cash and cash equivalents were ¥1,900.3 billion at March 31, 2007. Most of Toyota’s cash and cash equivalents are held in Japanese yen and in U.S. dollars. In addition, time deposits were ¥26.7 billion and marketable securities were ¥435.4 billion at March 31, 2007.

Liquid assets, which Toyota defines as cash and cash equivalents, time deposits, marketable debt securities and its investment in monetary trust funds, increased during fiscal 2007 by ¥408.4 billion, or 10.0%, to ¥4,505.2 billion.

Trade accounts and notes receivable, net increased during fiscal 2007 by ¥43.2 billion, or 2.2%, to ¥2,023.8 billion, reflecting the impact of increased revenues and the impact of fluctuations in foreign currency translation rates.

Inventories increased during fiscal 2007 by ¥183.0 billion, or 11.3%, to ¥1,803.9 billion, reflecting the impact of increased volumes and the impact of fluctuations in foreign currency translation rates.

Total finance receivables, net increased during fiscal 2007 by ¥1,403.5 billion, or 16.9%, to ¥9,731.0 billion. The increase in finance receivables resulted from the increase in retail financings due to the increase in vehicle unit sales, the increase in wholesale, the increase in other dealer loans including real estate loans and working capital financing provided to dealers, and the increase in finance leases. As of March 31, 2007, finance receivables were geographically distributed as follows: in North America 64.5%, in Japan 13.1%, in Europe 10.2%, in Asia 3.6% and in Other 8.6%. Toyota maintains programs to sell finance receivables through special purpose entities and obtained proceeds from securitization transactions, net of purchased and retained interests totaling ¥69.0 billion during fiscal 2007.

Marketable securities and other securities investments, including those included in current assets, increased during fiscal 2007 by ¥227.9 billion, or 5.6%, to ¥4,265.3 billion, primarily reflecting the increase of U.S. treasury notes held by a subsidiary in North America, and Japanese government bonds held by the parent company.

Property, plant and equipment increased during fiscal 2007 by ¥993.9 billion, or 14.1%, primarily reflecting an increase in capital expenditures which was partially offset by the depreciation charges during the year.

Accounts payable increased during fiscal 2007 by ¥125.0 billion, or 6.0%, reflecting the impact of increased trading volumes and the impact of fluctuations in foreign currency translation rates.

Accrued expenses increased during fiscal 2007 by ¥204.1 billion, or 13.9%, reflecting the increase in expenses due to the expansion of the business.

Income taxes payable increased during fiscal 2007 by ¥73.7 billion, or 21.2%, principally as a result of the increase in taxable income.

Toyota’s total borrowings increased during fiscal 2007 by ¥1,731.7 billion, or 16.7%. Toyota’s short-term borrowings consist of loans with a weighted-average interest rate of 3.17% and commercial paper with a weighted-average interest rate of 4.95%. Short-term borrowings increased during fiscal 2007 by ¥464.3 billion, or 15.3%, to ¥3,497.3 billion. Toyota’s long-term debt consists of unsecured and secured loans, medium-term notes, unsecured notes and long-term capital lease obligations with interest rates ranging from 0.01% to 18.00%, and maturity dates ranging from 2007 to 2047. The current portion of long-term debt increased during fiscal 2007 by ¥644.3 billion, or 37.4%, to ¥2,368.1 billion and the non-current portion increased by ¥623.1 billion, or 11.0%, to ¥6,263.5 billion. The increase in total borrowings reflects the expansion of the financial services operations. At March 31, 2007, approximately 39% of long-term debt was denominated in U.S. dollars, 24% in Japanese yen, 11% in euros and 26% in other currencies. Toyota hedges fixed rate exposure by entering into interest rate swaps. There are no material seasonal variations in Toyota’s borrowings requirements.

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As of March 31, 2007, Toyota’s total interest bearing debt was 102.5% of total shareholders’ equity, compared to 98.5% as of March 31, 2006.

Toyota’s long-term debt was rated “AAA” by Standard & Poor’s Ratings Group, “Aaa” by Moody’s Investors Services and “AAA” by Rating and Investment Information, Inc. as of March 31, 2007. These ratings represent the highest long-term debt ratings published by each of the respective rating agencies. A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.

Toyota’s treasury policy is to maintain controls on all exposures, to adhere to stringent counterparty credit standards, and to actively monitor marketplace exposures. Toyota remains centralized, and is pursuing global efficiency of its financial services operations through Toyota Financial Services Corporation.

The key element of Toyota’s financial policy is maintaining a strong financial position that will allow Toyota to fund its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota believes that it maintains sufficient liquidity for its present requirements and that by maintaining its high credit ratings, it will continue to be able to access funds from external sources in large amounts and at relatively low costs. Toyota’s ability to maintain its high credit ratings is subject to a number of factors, some of which are not within Toyota’s control. These factors include general economic conditions in Japan and the other major markets in which Toyota does business, as well as Toyota’s successful implementation of its business strategy.

Toyota’s unfunded pension liabilities decreased during fiscal 2007 by ¥24.2 billion, or 7.9% to ¥282.5 billion. The unfunded pension liabilities relate primarily to the parent company and its Japanese subsidiaries. The unfunded amounts will be funded through future cash contributions by Toyota or in some cases will be funded on the retirement date of each covered employee. The unfunded pension liabilities decreased in fiscal 2007 compared to the prior year mainly due to cash contributions to the plans and the increase in the market value of plan assets. See note 19 to the consolidated financial statements.

5.B LIQUIDITY AND CAPITAL RESOURCES

Historically, Toyota has funded its capital expenditures and research and development activities primarily through cash generated by operations.

Toyota expects to sufficiently fund its capital expenditures and research and development activities in fiscal 2007 primarily through cash and cash equivalents on hand and increases in cash and cash equivalents from operating activities. See “Information on the Company — Business Overview — Capital Expenditures and Divestitures” for information regarding Toyota’s material capital expenditures and divestitures for fiscal 2004, 2005 and 2006 and information concerning Toyota’s principal capital expenditures and divestitures currently in progress.

Toyota funds its financing programs for customers and dealers, including loans and leasing programs, from both operating cash flows and borrowings by its finance subsidiaries. Toyota seeks to expand its ability to raise funds locally in markets throughout the world by expanding its network of finance subsidiaries.

Net cash provided by operating activities was ¥2,515.4 billion for fiscal 2006, compared with ¥2,370.9 billion for the prior year. The increase in net cash provided by operating activities resulted primarily from increased operating cash flows attributed to the increase of net income.

Net cash used in investing activities was ¥3,375.5 billion for fiscal 2006, compared with ¥3,061.1 billion for the prior year. The increase in net cash used in investing activities resulted primarily from the increase in additions to finance receivables and the increase in additions to fixed assets including equipment leased to others, which was partially offset by an increase in the collection of finance receivables.

Net cash provided by financing activities was ¥876.9 billion for fiscal 2006, compared with ¥419.3 billion for the prior year. The increase in net cash provided by financing activities resulted primarily from an increase in short-term debt and a decrease in repurchasing shares of common stock of Toyota Motor Corporation.

Total capital expenditures for property, plant and equipment, excluding vehicles and equipment on operating leases, were ¥1,523.4 billion during fiscal 2006, an increase of 42.6% over the ¥1,068.2 billion in total capital expenditures for the prior year. The increase in capital expenditures resulted primarily from the impact of increased capital expenditures in domestic subsidiaries and subsidiaries in North America for expansion of production capability.

Total expenditures for vehicles and equipment on operating leases were ¥1,247.7 billion during fiscal 2006, an increase of 45.9% over the ¥854.9 billion in expenditures in the prior year. The increase in expenditures for vehicles and equipment on operating leases resulted primarily from increased operating lease assets in finance subsidiaries in North America and Europe.

Toyota expects investments in property, plant and equipment, excluding vehicles and equipment on operating leases, to approximately ¥1,550.0 billion during fiscal 2007. Toyota’s expected capital expenditures include approximately ¥850.0 billion in Japan, ¥330.0 billion in North America, ¥130.0 billion in Europe, ¥135.0 billion in Asia and ¥105.0 billion in Other, respectively.

Based on currently available information, Toyota does not expect environmental matters to have a material impact on its financial position, results of operations, liquidity or cash flows during fiscal 2007. However, there

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exists a substantial amount of uncertainty with respect to Toyota’s obligations under current and future environment regulations as described in “Information on the Company — Business Overview — Governmental Regulations, Environment and Safety Standards”.

Cash and cash equivalents were ¥1,569.3 billion at March 31, 2006. Most of Toyota’s cash and cash equivalents are held in Japanese yen and in U.S. dollars. In addition, time deposits were ¥50.3 billion and marketable securities were ¥634.8 billion at March 31, 2006.

Liquid assets, which Toyota defines as cash and cash equivalents, time deposits, marketable debt securities and its investment in monetary trust funds, increased during fiscal 2006 by ¥286.8 billion, or 7.5%, to ¥4,096.8 billion.

Trade accounts and notes receivable, net increased during fiscal 2006 by ¥166.9 billion, or 9.2%, to ¥1,980.6 billion, reflecting the impact of increased revenues and the impact of fluctuations in foreign currency translation rates.

Inventories increased during fiscal 2006 by ¥314.2 billion, or 24.1%, to ¥1,620.9 billion, reflecting the impact of increased volumes and the impact of fluctuations in foreign currency translation rates.

Total finance receivables, net increased during fiscal 2006 by ¥1,340.5 billion, or 19.2%, to ¥8,327.5 billion. The increase in finance receivables resulted from the increase in retail financings due to the increase in vehicle unit sales and the increase in wholesale and other dealer loans, including real estate loans and working capital financing provided to dealers. These increases were partially offset by the decrease in finance leases. As of March 31, 2006, finance receivables were geographically distributed as follows: 65.1% in North America 14.3%, in Japan, 9.7% in Europe, 2.9% in Asia and 8.0% in Other. Toyota maintains programs to sell finance receivables through special purpose entities and obtained proceeds from securitization transactions, net of purchased and retained interests totaling ¥88.6 billion during fiscal 2006.

Marketable securities and other securities investments, including those included in current assets, increased during fiscal 2006 by ¥790.2 billion, or 24.3%, to ¥4,037.4 billion, primarily reflecting the increase of U.S. treasury notes held by a subsidiary in North America and Japanese government bonds held by the parent company and the improvement in the Japanese stock market.

Property, plant and equipment increased during fiscal 2006 by ¥1,271.0 billion, or 21.9%, reflecting an increase in capital expenditures and the impact of fluctuations in foreign currency translation rates, which was partially offset by the depreciation charges during the year.

Accounts payable increased during fiscal 2006 by ¥229.7 billion, or 12.4%, reflecting the increased volumes of transactions and the impact of fluctuations in foreign currency translation rates.

Accrued expenses increased during fiscal 2006 by ¥174.8 billion, or 13.6%, reflecting the increase in expenses due to the expansion of the business.

Income taxes payable increased during fiscal 2006 by ¥54.6 billion, or 18.7%, principally as a result of the increase in taxable income in parent company and in subsidiaries.

Toyota’s total borrowings increased during fiscal 2006 by ¥1,849.7 billion, or 21.6%. Toyota’s short-term borrowings consist of loans with a weighted-average interest rate of 2.20% and commercial paper with a weighted-average interest rate of 3.32%. Short-term borrowings increased during fiscal 2006 by ¥651.2 billion, or 27.3%, to ¥3,033.0 billion. Toyota’s long-term debt consists of unsecured and secured loans, medium-term notes, unsecured notes and long-term capital lease obligations with interest rates ranging from 0.01% to 20.00%, and maturity dates ranging from 2006 to 2035. The current portion of long-term debt increased during fiscal 2006

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by ¥572.9 billion, or 49.8%, to ¥1,723.8 billion and the non-current portion increased by ¥625.6 billion, or 12.5%, to ¥5,640.5 billion. The increase in total borrowings reflects the expansion of the financial services operations and the impact of fluctuations in foreign currency translation rates. At March 31, 2006, approximately 39% of long-term debt was denominated in U.S. dollars, 26% in Japanese yen, 13% in euros and 22% in other currencies. Toyota hedges fixed rate exposure by entering into interest rate swaps. There are no material seasonal variations in Toyota’s borrowings requirements.

As of March 31, 2006, Toyota’s total interest bearing debt was 98.5% of total shareholders’ equity, compared to 94.5% as of March 31, 2005.

Toyota’s long-term debt was rated “AAA” by Standard & Poor’s Ratings Group, “Aaa” by Moody’s Investors Services and “AAA” by Rating and Investment Information, Inc. as of March 31, 2006. These ratings represent the highest long-term debt ratings published by each of the respective rating agencies. A credit rating is not a recommendation to buy, sell or hold securities. A credit rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating.

Toyota’s treasury policy is to maintain controls on all exposures, to adhere to stringent counterparty credit standards, and to actively monitor marketplace exposures. Toyota centralized, and is pursuing global efficiency of, its financial services operations through Toyota Financial Services Corporation.

The key element of Toyota’s financial policy is maintaining a strong financial position that will allow Toyota to fund its research and development initiatives, capital expenditures and financing operations on a cost effective basis even if earnings experience short-term fluctuations. Toyota believes that it maintains sufficient liquidity for its present requirements and that by maintaining its high credit ratings, it will continue to be able to access funds from external sources in large amounts and at relatively low costs. Toyota’s ability to maintain its high credit ratings is subject to a number of factors, some of which are not within Toyota’s control. These factors include general economic conditions in Japan and the other major markets in which Toyota does business, as well as Toyota’s successful implementation of its business strategy.

Toyota’s unfunded pension liabilities decreased during fiscal 2006 by ¥209.3 billion, or 40.6% to ¥306.7 billion. The unfunded pension liabilities relate primarily to the parent company and its Japanese subsidiaries. The unfunded amounts will be funded through future cash contributions by Toyota or in some cases will be funded on the retirement date of each covered employee. The unfunded pension liabilities decreased in fiscal 2006 compared to the prior year mainly due to the increase in the market value of assets of the plans. See note 19 to the consolidated financial statements.