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<TITLE>CANON INC.</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
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<DIV align="center" style="font-size: 14pt; margin-top: 12pt">UNITED STATES<BR>
 SECURITIES AND EXCHANGE COMMISSION
</DIV>

<DIV align="center" style="font-size: 12pt">Washington, D.C. 20549
</DIV>

<DIV align="center" style="font-size: 18pt; margin-top: 12pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV>
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<DIV align="center" style="font-size: 18pt; margin-top: 6pt">FORM 20-F
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    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#111;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">REGISTRATION STATEMENT PURSUANT TO
</TD>
    <TD>&nbsp;</TD>
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<TD align="center" valign="top" Style="font-size: 12pt">SECTION
12(b)
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt"> OR (g)&nbsp;OF THE SECURITIES EXCHANGE ACT OF 1934</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">OR</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#254;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">OF THE SECURITIES EXCHANGE ACT OF 1934</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">For the fiscal year ended December&nbsp;31, 2006</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">OR</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#111;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">TRANSITION REPORT PURSUANT TO SECTION 13</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">OR 15(d) </TD>
    <TD>&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt"> OF THE SECURITIES EXCHANGE ACT OF 1934</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">For the transition period from <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U> to <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">OR</TD>
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</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><FONT face="Wingdings">&#111;</FONT>
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">SHELL COMPANY REPORT PURSUANT TO SECTION 13</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
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    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top" Style="font-size: 12pt">OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934</TD>
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    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">Date of event requiring this shell company report <U>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</U></TD>    <TD>&nbsp;</TD>
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<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Commission file number 001-15122</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>

<DIV align="center" style="font-size: 24pt; margin-top: 12pt">CANON KABUSHIKI KAISHA
</DIV>

<DIV align="center" style="font-size: 10pt">(Name of Registrant in Japanese as specified in its charter)</DIV>


<DIV align="center" style="font-size: 24pt; margin-top: 12pt">CANON INC.
</DIV>

<DIV align="center" style="font-size: 10pt">(Name of Registrant in English as specified in its charter)</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 12pt"><B>JAPAN</B><BR>
(Jurisdiction of incorporation or organization)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan<BR>
(Address of principal executive offices)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities registered or to be registered pursuant to Section&nbsp;12(b) of the Act.</DIV>

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    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title of each class </B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Name of each exchange on which registered</B></TD>
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    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(1) Common Stock (the &#147;shares&#148;)
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">New York Stock Exchange*</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">(2) American Depositary Shares (&#147;ADSs&#148;), each of which represents one share
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">New York Stock Exchange</TD>
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<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities registered or to be registered pursuant to Section&nbsp;12(g) of the Act.</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">None<BR>
(Title of Class)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 6pt"><DIV align="center"><DIV style="font-size: 3pt; margin-top: 16pt; width: 26%; border-top: 1px solid #000000">&nbsp;</DIV></DIV></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Securities for which there is a reporting obligation pursuant<BR>
to Section&nbsp;15(d) of the Act.<BR>
None<BR>
(Title of Class)</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">* Not for trading, but only for technical purposes in connection with the registration of ADSs.</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Indicate the number of outstanding shares of each of the issuer&#146;s classes<BR>
of capital or common stock as of the close of the period covered by the<BR>
annual report.</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">As of December&nbsp;31, 2006, 1,333,445,830 shares of common stock, including 68,908,753<BR>
ADSs, were outstanding.</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes <FONT face="Wingdings">&#254;</FONT>&nbsp;No<FONT face="Wingdings">&#111;</FONT>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934. Yes <FONT face="Wingdings">&#111;</FONT>&nbsp;No <FONT face="Wingdings">&#254;</FONT>
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Indicate by check mark whether the registrant (1)&nbsp;has filed all reports<BR>
required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act of<BR>
1934 during the preceding 12&nbsp;months (or for such shorter period that the<BR>
registrant was required to file such reports), and (2)&nbsp;has been subject to such<BR>
filing requirements for the past 90&nbsp;days.</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Yes <FONT face="Wingdings">&#254;</FONT> &nbsp;&nbsp;&nbsp;&nbsp;&nbsp; No <FONT face="Wingdings">&#111;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of &#147;accelerated filer and large accelerated filer&#148; in Rule&nbsp;12b-2 of the Exchange
Act. (Check one):
</DIV>
<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Large accelerated filer <FONT face="Wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Accelerated filer <FONT face="Wingdings">&#111;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Non-accelerated filer <FONT face="Wingdings">&#111;</FONT></DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Indicate by check mark which financial statement item the registrant has<BR>
elected to follow.</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 12pt">Item&nbsp;17
<FONT face="Wingdings">&#254;</FONT>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Item&nbsp;18 <FONT face="Wingdings">&#111;</FONT></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule&nbsp;12b-2 of the Exchange Act). Yes <FONT face="Wingdings">&#111;</FONT>&nbsp;No <FONT face="Wingdings">&#254;</FONT>
</DIV>

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<DIV style="width: 100%; border-bottom: 2pt solid black; font-size: 1pt">&nbsp;</DIV>





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<A name="tocpage"></A>
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<DIV align="center" style="font-size: 10pt; margin-top: 12pt">TABLE OF CONTENTS</DIV>

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    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Page number</TD>
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    <TD colspan="5" valign="top" align="left"><A href="#101">CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">1</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
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    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#102">FORWARD-LOOKING INFORMATION</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">1</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
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    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="center"><A href="#103">PART I<BR></A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#104">Item&nbsp;1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Identity of Directors, Senior Management and Advisers</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
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    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#105">Item&nbsp;2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Offer Statistics and Expected Timetable</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#106">Item&nbsp;3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Key Information</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#107">A.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#107">Selected financial data</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">2</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#108">B.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#108">Capitalization and indebtedness</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">3</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#109">C.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#109">Reasons for the offer and use of proceeds</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">3</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#110">D.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#110">Risk factors</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">3</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#111">Item&nbsp;4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Information on the Company</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">9</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#112">A.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#112">History and development of the Company</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">9</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#113">B.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#113">Business overview</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">10</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#114">Products</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">10</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#115"> Marketing and distribution</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">13</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#116">Service</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">13</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#117">Net sales by product group and geographic area</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">14</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#118">Seasonality</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">15</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#119">Sources of supply</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">15</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#120">Competition</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">15</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#121">Patents and licenses</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">16</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#122">Environmental regulations</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">17</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#123">C.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#123">Organizational structure</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">19</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#124">D.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#124"> Property, plants and equipment</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">20</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#125">Item&nbsp;5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating and Financial Review and Prospects</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">23</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#126">A.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#126">Operating results</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">23</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#127">Overview</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">23</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#128">Critical accounting policies and estimates</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">24</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#129">Consolidated result of operations</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">26</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#130">Fiscal 2006 compared with fiscal 2005
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">26</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#131">Fiscal 2005 compared with fiscal 2004
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">29</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#132">Foreign operations and foreign currency transactions
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">34</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#133">Recent developments
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">34</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#134">B.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#134">Liquidity and capital resources</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">34</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#135">C.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#135">Research and development, patents and licenses</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">35</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#136">D.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#136">Trend information</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">36</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#137">Trend information</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">36</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#138">Forward looking statements</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">37</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#139">E.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#139">Off-balance sheet arrangements</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">38</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#140">F.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#140">Contractual obligations</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">38</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#141">Item&nbsp;6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors, Senior Management and Employees</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">39</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#142">A.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#142">Directors and senior management</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">39</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#143">B.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#143">Compensation</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">44</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#144">C.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#144">Board practices</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">44</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#145">D.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#145">Employees</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">45</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#146">E.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#146">Share ownership</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">46</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="5" valign="top" align="left"><A href="#147">Item&nbsp;7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Major Shareholders and Related Party Transactions</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">47</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#148">A.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#148">Major shareholders</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">47</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#149">B.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#149">Related party transactions</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">47</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><A href="#150">C.</A></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left"><A href="#150">Interests of experts and counsel</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">47</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<!-- /TOC -->
</DIV>

<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">i

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="6%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="82%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000">Page number</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#151">Item&nbsp;8.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#151">Financial Information</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">48</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#152">A.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#152">Consolidated financial statements and other financial information
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">48</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#153">Consolidated financial statements
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">48</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#154">Legal proceedings
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">48</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#155">Dividend policy
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">49</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#156">B.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#156"> Significant changes
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">49</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#157">Item&nbsp;9.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#157">The Offer and Listing</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">50</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#158">A.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#158">Offer and listing details
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">50</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#159"> Trading in domestic markets
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">50</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#160">Trading in foreign markets
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">51</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#161">B.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#161">Plan of distribution
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">51</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#162">C.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#162"> Markets
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">51</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top" align="left"><A href="#163">Item&nbsp;10.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#163">Additional Information</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">52</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#164">A.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#164">Share capital
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">52</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#165">B.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#165">Memorandum and articles of association
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">52</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#166">C.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#166">Material contracts
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">57</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#167">D.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#167">Exchange controls
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">57</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#168">E.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#168">Taxation
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">58</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#169">F.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#169"> Dividends and paying agents
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#170">G.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#170">Statement by experts
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#171">H.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#171">Documents on display
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px"><A href="#172">I.
</A></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#172">Subsidiary information
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#173">Item&nbsp;11.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#173">Quantitative and Qualitative Disclosures about Market Risk</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#174">Market risk exposures
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#175">Equity price risk
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">60</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#176">Foreign currency exchange rate and interest rate risk
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">61</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#177">Item&nbsp;12.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#177">Description of Securities Other than Equity Securities</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">62</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="7" valign="top" align="center"><A href="#178">PART II<BR></A></TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#179">Item&nbsp;13.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#179">Defaults, Dividend Arrearages and Delinquencies</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">63</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#180">Item&nbsp;14.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#180">Material Modifications to the Rights of Security Holders and Use of Proceeds</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">63</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="1" valign="top" align="left"><A href="#181">Item&nbsp;15.</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="bottom"><A href="#181">Controls and Procedures</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">63</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#182">Item&nbsp;16A.</A></TD>
    <TD nowrap align="left" valign="bottom"><A href="#182">Audit Committee Financial Expert</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">64</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#183">Item&nbsp;16B. </A></TD>
    <TD nowrap align="left" valign="bottom"><A href="#183">Code of Ethics</A></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">64</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#184">Item&nbsp;16C.</A></TD>
    <TD><A href="#184">Principal Accountant Fees and Services</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">64</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#185">Item&nbsp;16D. </A></TD>
    <TD><A href="#185">Exemptions from the Listing Standards for Audit Committees</A></TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">66</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#186">Item&nbsp;16E. </A></TD>
    <TD><A href="#186">Purchases of Equity Securities by the Issuer and Affiliated Purchasers</A></TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">67</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="7" valign="top" align="center"><A href="#187">PART III</A></TD>
   </TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#188">Item&nbsp;17. </A></TD>
    <TD><A href="#188">Financial Statements</A></TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">68</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#189">Report of Independent Registered Public Accounting Firm
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">69</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#191">Consolidated Balance Sheets
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">71</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#192">Consolidated Statements of Income
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">72</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#193">Consolidated Statements of Stockholders&#146; Equity
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">73</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#194">Consolidated Statements of Cash Flows
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">74</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#195">Notes to Consolidated Financial Statements
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">75</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><A href="#196">Valuation and Qualifying Accounts
</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">120</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#197">Item&nbsp;18. </A></TD>
    <TD><A href="#197">Financial Statements</A></TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">121</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="2" valign="top" align="left"><A href="#198">Item&nbsp;19.</A></TD>
    <TD><A href="#198">Financial Statements and Exhibits</A></TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">121</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" valign="top" align="left"><A href="#199">SIGNATURES</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">122</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD align="right" valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD colspan="3" valign="top" align="left"><A href="#200">EXHIBIT INDEX</A></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="bottom">&nbsp;</TD>
    <TD align="right" valign="bottom">123</TD>
    <TD nowrap valign="bottom">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="Center" style="font-size: 10pt; margin-top: 6pt">ii

</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->&nbsp;<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="101"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">All information contained in this Annual Report is as of December&nbsp;31, 2006 unless otherwise
specified.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">References in this discussion to the &#147;Company&#148; are to Canon Inc. and, unless otherwise indicated,
references to the financial condition or operating results of &#147;Canon&#148; refer to Canon Inc. and its consolidated subsidiaries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On
March&nbsp;30, 2007, the noon buying rate for yen in New York City as reported by the Federal Reserve
Bank of New York was &#165;117.56 = U.S.$1.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s fiscal year end is December&nbsp;31. In this Annual Report &#147;fiscal 2006&#148; refers to the
Company&#146;s fiscal year ended December&nbsp;31, 2006, and other fiscal years of the Company are referred to in a corresponding manner.
</DIV>

<DIV align="left">
<A name="102"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">FORWARD-LOOKING INFORMATION
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">This Annual Report contains forward-looking statements and information relating to Canon that are
based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual
Report, the words &#147;anticipate,&#148; &#147;believe,&#148; &#147;estimate,&#148; &#147;expect,&#148; &#147;intend,&#148; &#147;may,&#148; &#147;plan,&#148; &#147;project&#148; and &#147;should&#148; and similar expressions, as they relate
to Canon or its management, are intended to identify forward-looking statements. Such statements reflect the current views and assumptions of
the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements
of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such
forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates,
introduction of competing products by other companies, lack of acceptance of new products or services by Canon&#146;s targeted customers, inability to meet
efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual
Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume
any obligation to update these forward-looking statements.
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->1<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="103"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt"><B>PART I</B>
</DIV>

<DIV align="left">
<A name="104"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;1. Identity of Directors, Senior Management and Advisers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="105"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;2. Offer Statistics and Expected Timetable</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="106"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;3. Key Information</B>
</DIV>

<DIV align="left">
<A name="107"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Selected financial data</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following selected consolidated financial data has been derived from the consolidated
financial statements of Canon as of each of the dates and
for each of the periods indicated below. This information should be read in conjunction with and
qualified in its entirety by reference to the Consolidated
Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this
Annual Report. These financial statements have been audited by Ernst &#038; Young ShinNihon, Independent
Registered Public Accounting Firm as of and for the years ended December&nbsp;31, 2006, 2005 and 2004.
The financial statements for periods prior to the year ended December&nbsp;31, 2004 were audited by KPMG
AZSA &#038; Co., Independent Registered Public Accounting Firm.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Selected financial data *1:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2003</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2002</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="19"><B>(Millions of yen except average number of shares and per share data)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 6pt">
<TD>&nbsp;</TD>
</Tr>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,198,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">2,940,128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating
profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">707,033</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">543,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">454,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">346,359</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">455,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">190,737</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Advertising
expenses .</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116,809</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">111,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">100,278</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">71,725</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Research and
development
expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">308,307</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">286,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">259,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">233,669</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Depreciation of
property,
plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">235,804</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">205,727</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,636</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,469</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital
expenditures</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">379,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">383,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">318,730</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">210,038</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">198,702</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt,
excluding current
installments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,789</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,082</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,651</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,260</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,349</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Common
stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,603</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,438</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,864</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">168,892</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167,242</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146;
equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,986,606</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,604,682</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,209,896</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,865,545</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,591,950</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,521,915</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,043,553</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,587,021</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,182,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,942,706</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Average number of
common shares
in thousands *3</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,331,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,330,761</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,328,048</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,317,974</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,315,074</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Per share data *3:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">341.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">288.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">258.53</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">209.21</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">145.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">341.84</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257.85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">207.17</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">143.20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends
declared</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">83.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66.67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20.00</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends
declared (U.S.$)*2</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD  align="right" colspan="1">0.709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.580</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.309</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">$</TD>
    <TD align="right">0.169</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Notes:
</DIV>


<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">1.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The above financial data are prepared in accordance with U.S. generally accepted accounting
principles.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">2.</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average
of the noon buying rates for yen in New York city as reported by the Federal Reserve Bank of New York
in effect on the date of each semiannual dividend payment.</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">3.</TD>
    <TD width="1%">&nbsp;</TD>

    <TD>The Company has made a three-for-two stock split on July&nbsp;1, 2006. The average number of common shares and the
per share data have been adjusted to reflect the stock split.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->2<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table provides the noon buying rates for Japanese yen in New York City as
reported by the Federal Reserve Bank of New York expressed in
Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for
Japanese yen per U.S.$1 during the months indicated.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Yen exchange rates per U.S. dollar:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Average</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Term end</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">124.81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">134.77</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.83</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107.13</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121.42</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102.68</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102.56</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.30</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005 -</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110.74</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.88</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">120.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">102.26</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 - Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110.07</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- 1(st) half</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.51</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.07</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110.07</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- July</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">113.97</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- August</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.21</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- September</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117.99</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116.04</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- October</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116.82</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">116.82</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- November</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.55</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115.55</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- December</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">119.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114.98</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007 - January</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121.81</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.49</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;- February</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.33</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">121.77</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118.33</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">

<TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;&nbsp;&nbsp;&nbsp;-
March</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="RIGHT">117.56</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="RIGHT">118.15</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="RIGHT">116.01</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left">
<A name="108"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Capitalization and indebtedness</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left">
<A name="109"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Reasons for the offer and use of proceeds</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left">
<A name="110"></A>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>D.&nbsp;Risk Factors</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is one of the world&#146;s leading manufacturers of plain paper copying machines, digital
multifunction devices, laser beam printers, bubble jet printers, cameras, steppers and aligners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Primarily because of the nature of the business areas and geographical areas in which Canon
operates and the highly competitive nature of the industries to which it belongs, Canon is exposed
to a variety of risks and uncertainties in carrying out its businesses, including, but not limited
to, the following:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Risks Related to Canon&#146;s Industries</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon has invested and will continue to invest heavily in next-generation technologies. If the
market for these technologies does not develop as Canon expects or if its competitors produce these
or competing technologies in a more timely or effective manner, Canon&#146;s operating results could be
materially adversely affected.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has made and will continue to make investments in next-generation technology research
and development initiatives. Canon&#146;s competitors may achieve research and development breakthroughs
in these technologies more quickly than Canon, or may achieve advances in competing technologies
that render products under development by Canon uncompetitive. In step with the continuous
evolution in technologies, Canon has increased the size of its investment in development and
manufacturing. If Canon&#146;s business strategies diverge from market needs, Canon may not recover some
or all of its investment, lose business opportunities, or both, which may materially adversely
affect Canon&#146;s operating results. While differentiation in technology and product development is an
important part of Canon&#146;s strategy, Canon must also accurately assess the demand for and perceived
market acceptance of new technologies and products that it develops. If Canon pursues technologies
or develops products that do not become commercially accepted, its operating results could be
adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 0pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;It is assumed that Canon as a matter of corporate strategy seeks to enter into new business
fields by developing next-generation technologies . If Canon enters new business field, Canon may
not be able to establish a successful business model, or may face severe competition with new
competitors. If such risks arise, Canon&#146;s operating results may be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>If Canon does not effectively manage transitions in its products and services, its operating
results may decline.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many of the businesses in which Canon competes are characterized by rapid technological
advances in hardware performance, software functionality and product features, the frequent
introduction of new products, short product life cycles, and continual improvement in product price
characteristics relative to product performance. If Canon does not make an effective transition
from existing products and services to new offerings, its revenue and profits may decline. Among
the risks associated with the introduction of new products and services are delays in development
or manufacturing, low product marketability due to poor product quality, variations in
manufacturing costs, delays in customer purchases in anticipation of new introductions, difficulty
in predicting customer demand for new product offerings and difficulty in effective management of
inventory levels in line with anticipated demand. Canon&#146;s revenue and gross margin also may suffer
due to the timing of product or service introductions by its competitors. This risk is exacerbated
when a product has a short life cycle or a competitor introduces a new product just before Canon&#146;s
introduction of a similar product. Furthermore, sales of Canon&#146;s new products and services may
replace sales of, or result in discounting of, some of its current product offerings, sometimes
offsetting the benefits derived from the introduction of a successful new product or service. Canon
must also ensure that its new products are not duplicative and do not overlap with existing
products and operations. Given the competitive nature of Canon&#146;s businesses, if any of these risks
materialize, future demand for its products and services will be reduced and its results of
operations may decline.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->3<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s digital camera business operates in a highly competitive environment.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The recent accelerated trend towards digitalization has resulted in the entry of new
competitors, such as electronics manufacturers and other specialized companies which were not
active during the analog camera era. If this industry develops more rapidly than initially
anticipated by Canon, it may not be able to maintain its position as an industry leader in many of
its business categories. Canon&#146;s success in this increasingly competitive environment will depend
on its investments in research and development, ability to cut costs and commitment to continuously
providing the market with attractive products offering high added-value.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Because the semiconductor industry is highly cyclical, Canon may be adversely affected by any
downturn in the industry.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The semiconductor industry is characterized by up and down business cycles, the timing, length
and volatility of which are difficult to predict. Recurring periods of oversupply of integrated
circuits have at times led to significantly reduced demand for capital equipment, including the
steppers and aligners Canon produces. Despite this cyclicality, Canon must maintain significant
levels of research and development expenditure in order to maintain its competitiveness. Canon&#146;s
business and operating results could be materially adversely affected by future downturns in the
semiconductor industry and related fluctuations in the demand for capital equipment in general, and
particularly by memory manufacturers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, liquid crystal display ( &#147;LCD&#148;) panel manufacturers are facing severe price
reductions of LCD panels as a result of intense competition among makers of LCD televisions and LCD
monitors used in personal computers (&#147;PC&#148;)s. As a result, panel manufacturers may reduce equipment
investment, which may adversely affect Canon&#146;s business operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Downturns in the semiconductor industry have caused Canon&#146;s customers to change their
operating strategies, which in turn may affect Canon&#146;s business.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Many device manufacturers have changed their business models to focus on the design of
semiconductors, while consigning the production of semiconductors to lower-cost foundries. Canon
cannot accurately predict the future effect of these trends on its business. However, as research
and development, manufacturing and sales activities become increasingly globalized in response to
these trends, shifting particularly to emerging markets, unexpected global developments, such as
adverse regulatory or legal changes, and unanticipated events, such as natural disasters, may
adversely affect Canon&#146;s business operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, there are only approximately ten companies in the world which produce large-sized
LCD panels. If Canon is insufficiently responsive to market trends in the LCD panel
industry base, including market reorganization, Canon may not be able to maintain its customer base
which may materially adversely affect Canon&#146;s business operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>The semiconductor equipment industry is characterized by rapid technological change. If Canon
does not constantly develop new products to keep pace with technological change and meet its
customer requirements, Canon may lose customers and its business may suffer.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s steppers and mask aligners are affected by rapid technological change and can quickly
become obsolete. Canon believes its future success in the stepper and aligner business depends on its ability to continue to enhance its existing products
and develop new products using new and more advanced technologies. In particular, as semiconductor
pattern sizes continue to decrease, the demand for more technologically advanced steppers is likely
to increase. Although Canon will continue to offer cost effective products by managing
manufacturing costs through its technology, Canon&#146;s existing stepper and mask aligner products
could become obsolete sooner than anticipated because of faster than anticipated changes in one or
more of the technologies related to Canon&#146;s products or in the market demand for products based on
a particular technology. Any failure by Canon to develop the advanced technologies required by its
customers at progressively lower costs and to supply sufficient quantities to a worldwide customer
base could adversely affect Canon&#146;s net sales and profitability.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Growing popularity of High Definition (HD)&nbsp;and increased diversification of recording media
may adversely affect Canon&#146;s video camcorder business.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The video camcorder market is now almost entirely based on digital formats and the increase in
High-Definition television broadcasts has led to a gradual shift from the SD (Standard Definition)
format to the HD (High Definition) format. At the same time many products using new types of media
such as MiniDV tapes, DVD (Digital Versatile Drive), HDD (Hard Disk Drive) and SD (Secure Digital)
cards, have appeared at a rate that outpaces the proliferation of HD. Failure by Canon accurately to
forecast demand in these increasingly diversified markets could have an adverse affect on Canon&#146;s
operating results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If
the market demands shift to new product using a new type of recording media unexpected by
Canon, Canon may be required to increase the size of its investments in research and development. It could have
an adverse affect on Canon&#146;s business and operating results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Risks Related to Canon&#146;s Business</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon derives a significant percentage of its revenues from Hewlett-Packard.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon depends on Hewlett-Packard for a significant part of its business. For fiscal 2006,
approximately 22% of Canon&#146;s net sales were to Hewlett-Packard. As a result, Canon&#146;s business and
results of operations may be affected by the policies, business and results of operations of
Hewlett-Packard. Any decision by Hewlett-Packard management to limit or reduce the scope of its
relationship with Canon would adversely affect Canon&#146;s business and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon depends on a limited number of suppliers for certain key components.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon relies on a limited number of outside vendors which meet Canon&#146;s strict criteria for
quality, efficiency and environmental friendliness for certain critical components used in its
products. In some cases, Canon may be forced to discontinue its production of some or all of its
products if certain vendors that supply key components across Canon&#146;s product lines experience
unforeseen difficulties, or if such parts experience quality problems or are in short supply.
Canon&#146;s reliance on a limited number of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, the risk of untimely delivery of
these subassemblies and components and the risk for a substantial increase in price of these
components to occur. If such problems arise, Canon&#146;s operating results will be adversely affected.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Although competition is increasing in the market for sales of supplies and services following
initial product placement, Canon maintains a high market share in sales of such supplies. As a
result, Canon may be subject to antitrust-related suits, investigations or proceedings which may
adversely affect its operating results or reputation.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A portion of Canon&#146;s net sales consists of sales of supplies and the provision of services
occurring after the initial equipment placement. As these supplies and services have become more
commoditized, the number of competitors in these markets has increased. Canon&#146;s success in
maintaining these post-placement sales will depend on its ability to compete successfully with
these competitors, some of which may offer lower-priced products or services. Despite the increase
in competitors, however, Canon currently maintains high market shares in the market for supplies.
Accordingly, Canon may be subject to suits, investigations or proceedings under relevant antitrust
laws and regulations. Any such suits, investigations or proceedings may lead to substantial costs
and have an adverse effect on Canon&#146;s operating results or reputation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Increases in counterfeit Canon products may adversely affect Canon&#146;s brand image and its
operating results.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In recent years, Canon has experienced a worldwide increase in the emergence of counterfeit
Canon products. Such counterfeit products may diminish Canon&#146;s brand image, particularly if
purchasers of such products are unaware of their counterfeit status and attribute the counterfeit
products&#146; poor product quality to Canon. Canon has been taking measures to halt the spread of
counterfeit products. However, there can be no assurance that such measures will be successful, and
the continued production and sale of such products could adversely affect Canon&#146;s brand image as
well as its operating results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Per unit production costs are highest when a new product is introduced, and if such new
products are not successful or if Canon fails to achieve cost reductions over time, Canon&#146;s gross
profits may be adversely affected.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The unit cost of Canon&#146;s products has historically been highest when they are newly introduced
into production. New products have at times had a negative impact on its gross profit, operating
results and cash flow. Cost reductions and enhancements typically come over time through:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>engineering improvements;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>economies of scale;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>improvements in manufacturing processes;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>improved serviceability of products; and</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>reduced inventories of parts and products</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Initial shipments of Canon&#146;s new products adversely affect its profit or cash flow, and if
sales of such new products are not successful, Canon may be unable therefore to improve its gross
profit, operating results and cash flow.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Cyclical patters in sales of Canon&#146;s products make planning and inventory management difficult
and future financial results less predictable.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon generally experiences variable seasonal trends in the sale of its consumer- oriented
products, which results in sales fluctuations. Canon has little to no control over the various
factors that produce these seasonal trends. Accordingly, it is difficult to predict near-term
demand which as a result places pressure on Canon&#146;s inventory management and logistics systems. If
product supply from Canon is substantially greater than actual demand, there will be excess
inventory, thereby putting downward pressure on selling prices and reducing Canon&#146;s revenue.
Alternatively, if demand substantially exceeds the supply of products from Canon, its ability to
fulfill orders may be limited, which could adversely affect net sales and increase the risk of
unanticipated variations in its results of operation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s business is subject to changes in the sales environment.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Particularly in Europe and the United States, a substantial portion of market share is
concentrated in a relatively small number of large distributors. Canon&#146;s sales of products to these
distributors constitute a significant percentage of Canon&#146;s overall sales. As a result, any
disruptions in its relationships with these large distributors in specific sales territories could
adversely affect Canon&#146;s ability to meet its sales targets. Any increase in concentration of
Canon&#146;s sales to in these large distributors could result in a reduction of Canon&#146;s pricing power
and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses
may render conventional distribution channels obsolete. These and other changes in Canon&#146;s sales
environment could adversely affect Canon&#146;s results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon is subject to financial and reputational risks due to product quality and liability
issues.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although Canon works to minimize risks that may arise from product quality and liability
issues, there can be no assurance that Canon will be able to eliminate or mitigate occurrences of
these issues and consequent damages. If such factors adversely affect Canon&#146;s operating activities,
generate expenses such as those for product recalls, service and compensation, or hurt its brand
image, its operating results or reputation for quality products may be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s success depends on the value of its brand name, and if the value of the brand name is
diminished, operating results and prospects will be adversely affected.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s success in its markets depends in part on its brand name and its value. Any negative
publicity regarding the quality of our products could have an adverse impact on operations,
especially those involving consumer products. There can be no assurance that such adverse
publicity will not occur or that such claims will not be made in the future. Furthermore, Canon
cannot predict the impact of such adverse publicity on its business and results of operations.
</DIV>

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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>A substantial portion of Canon&#146;s business activity is conducted outside Japan, exposing Canon
to the risks of international operations.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A substantial portion of Canon&#146;s business activity is conducted outside Japan, which includes
in developing and emerging markets in Asia. There are a number of risks inherent in doing business
in those markets, including the following:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>less developed technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canon&#146;s services;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>difficulties in recruiting and retaining personnel;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>potentially adverse tax consequences;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>longer payment cycles;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>unfavorable political or economic factors; and</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>unexpected legal or regulatory changes.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s inability to manage successfully the risks inherent in its international activities
could adversely affect its business and operating results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to produce Canon&#146;s products competitively and to reduce costs, Canon has established
new production facilities in China and other countries. Canon has more than ten sales offices which
support its sales activity in China. However, with China&#146;s entry into the WTO, conditions within
China are continuing to change. For example, unexpected events, including political or legal
change, labor shortage or strikes, increased personnel costs or changes in economic conditions, may
occur. In particular, a large revaluation of the yuan, or a sudden change in the tax system or
other regulatory regimes of a significant magnitude could adversely affect Canon&#146;s overall
performance.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The spread of an epidemic disease, such as the avian flu transmitting to humans, in China or
elsewhere in Asia could also have a negative effect on Canon&#146;s business. Canon has previously
imposed on its personnel travel restrictions to and from certain countries affected by severe acute respiratory syndrome (SARS) and similar medical crises in the future may disrupt manufacturing processes and markets for Canon&#146;s
products. Given the importance of Canon&#146;s Asian sales, production facilities and supply
relationships, especially in China, Canon&#146;s business may be more exposed to this risk than to the
global economy generally.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon may unintentionally infringe international trade laws and regulations, and any such
infringement may lead to an adverse effect on its business. The extent of the effect on Canon&#146;s
business will depend upon the nature of the infringement and the severity of fines or other
sanctions imposed upon Canon. A major infringement could result in suspension of Canon&#146;s trading
rights in one or more jurisdictions. In addition to any sanctions prescribed by law, adverse
publicity regarding an alleged infringement of trade laws and regulations by Canon may also have a
negative effect on the Canon brand and image.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the above factors regarding international operations could have an adverse impact on
Canon&#146;s business results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon depends on efficient logistics services to distribute its products worldwide.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon&#146;s computerized logistics system, or regional disputes or labor disputes, such as a
dockworker&#146;s strike, could lead to a disruption of Canon&#146;s operations and result not only in
increased logistical costs, but also in loss of sales opportunities due to delays in delivery.
Also, because demand for Canon&#146;s consumer products can fluctuate throughout the year, the failure
to adjust bookings of vessels and the preparation of warehouse space to reflect such fluctuations
could result in either a loss of sales opportunities or the incurrence of unnecessary costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the increasingly higher levels of precision required of semiconductor production
equipment like steppers and mask aligners and the resulting increase in the value of this equipment
in recent years have resulted in a concurrent increase in the need for sensitive handling and
transportation of these products. Due to their precision nature, even a very trivial shock to these
products during the handling and transportation process could disable the entire product. If
unforeseen accidents during the handling and transportation process render a significant portion of
Canon&#146;s higher-end precision products unmarketable, Canon may not be able to fully recover its
investment in the research, development and production of these precision products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Substantially higher crude oil prices have lead to increases in the cost of airfreight in the
form of fuel surcharge. Continued or further increases in crude oil prices could adversely affect
Canon&#146;s results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is endeavoring to reduce carbon dioxide emissions by implementing such measures as a new
transportation system, including an efficient new rail container system. Failure by Canon to meet
its targets may have a negative effect on Canon&#146;s brand and image and its business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Economic trends in Canon&#146;s major markets may adversely affect its results of operations.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Economic downturns and declines in consumption in Canon&#146;s major markets, including Japan, the
United States and Europe, may affect the levels of both corporate and consumer sales. Demand of
Canon&#146;s consumer products, such as cameras and printers, is to a very significant degree
discretionary. A decline in the level of consumption caused by the weakening of general economic
conditions could adversely affect Canon&#146;s results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s operating results are also affected by levels of business activity of its customers,
which in turn are affected by levels of economic activity in the industries and markets that they
serve. Declines in levels of business activity of Canon&#146;s customers caused by the weakening of the
global economy could adversely affect Canon&#146;s results of operations.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->6<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Risks Related to Environmental Issues</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s business is subject to environmental laws and regulations.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is subject to certain Japanese and foreign environmental requirements in areas such as
energy resource conservation, reduction of hazardous substances, collection and recycling of
products, clean air, water protection and waste disposal. A violation of these regulations by Canon
could have an adverse affect on Canon&#146;s operating results. Canon cannot predict whether any
pending or future legislation will be adopted or what effect such legislation would have on it.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In some cases, mainly in the European Union, such as with the Directive on the Restriction of
the Use of Certain Hazardous Substances in Electrical and Electronic Equipment or the Directive
establishing a framework for the setting of EcoDesign requirements for Energy-using Products,
detailed implementation standards have not yet been determined. Canon intends to implement such
standards as they are determined and adopted. If Canon&#146;s measures do not meet such standards when
they are adopted, however, Canon may be required to take further action and incur additional costs
to comply with these regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Environmental clean-up and remediation costs relating to Canon&#146;s properties and associated
litigation could decrease Canon&#146;s net cash flow, adversely affect its results of operations and
impair its financial condition.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is subject to potential liability for the investigation and clean-up of environmental
contamination at each of the properties that it owns or operates, at certain properties Canon
formerly owned or operated and at off-site locations where Canon arranged for the disposal of
hazardous substances. If Canon is held responsible for such costs in any future litigation or
proceedings, such costs may not be covered by insurance and may be material.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, Canon may face liability for alleged personal injury or property damage due to
exposure to chemicals or other hazardous substances from its facilities. Canon may also face
liability for personal injury, property damage or natural resource damage, or for clean-up costs
for the alleged migration of contamination or other hazardous substances from its facilities. A
significant increase in the number or success of these claims and costs could adversely affect
Canon&#146;s results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Risks Related to Intellectual Property</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon may be subject to intellectual property litigation and infringement claims, which could
cause it to incur significant expenses or prevent it from selling its products.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because of the emphasis on product innovation in the markets for Canon&#146;s products, many of
which are subject to frequent technological innovations, patents and other intellectual property
are an important competitive factor. Canon relies primarily on technology it has developed, and
Canon seeks to protect such technology through a combination of patents, trademarks and other
intellectual property rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon faces the risks that:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>competitors will be able to develop similar technology independently;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon&#146;s pending patent applications may not be issued;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>intellectual property laws may not adequately protect Canon&#146;s intellectual property, particularly in some emerging markets.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In case Canon is not aware of actual or potential infringement of, or adverse claim to, its
rights in such technologies, any interference in Canon&#146;s rights to use such technologies could
adversely affect its operating results.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, Canon may need to litigate in order to enforce its patents, copyrights or other
intellectual property rights, to protect its trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement, which can be
expensive and time-consuming. In the event any government agency or third party were adjudicated to
have a valid claim against Canon, Canon could be required to:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>refrain from selling the affected product in certain markets;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>make royalty payments or pay monetary damages;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>seek to develop non-infringing technologies, which may not be feasible; or</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon also licenses its patents to third parties in exchange for payment or cross-licensing.
The terms and conditions of such licensing or changes in the conditions for renewals of such
licenses could affect Canon&#146;s business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s businesses, company image and result of operations could be adversely affected by any
of these developments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Disputes involving payment of remuneration for employee inventions may materially affect
Canon&#146;s brand image as well as its business.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon may face disputes involving payment of remuneration given to employee inventions for
which the rights have been succeeded by Canon. This risk is particularly relevant in countries such
as Japan and Germany, where patent laws require companies to pay remuneration to employees for the
succession of the employee&#146;s invention to the company. Canon maintains company rules on and an
evaluation system for employee inventions. Canon believes it has been making adequate payments to
employees for assignment of inventions based on these rules and a fair and objective succession of
amounts to be paid. There can be no assurance, however, that disputes will not arise with respect
to the amount of payments to employees.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->7<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Other Risks</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon must attract and retain  highly qualified professionals.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s future operating results depend in significant part upon the continued contributions
of its employees. In addition, Canon&#146;s future operating results depend in part on its ability to
attract, train and retain other qualified personnel in development, production, sales and
management for Canon&#146;s operations. The competition for these human resources in the high-tech
industries in which Canon competes has been increasingly intense in recent years. Moreover, due to
the accelerating pace of technological change, the importance of training new personnel in a timely
manner to meet product research and development requirements will increase. Failure by Canon to
recruit and train qualified personnel or the loss of key employees could adversely affect Canon&#146;s
business and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Maintaining a high level of expertise in Canon&#146;s manufacturing technology is critical to
Canon&#146;s business. However, it is difficult to secure the expertise required for a special skills
area, such as lens processing, in a short time period. While Canon is currently undertaking a
series of planning exercises in order to obtain the expertise needed for each skills area, Canon
cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure
to do so may adversely affect Canon&#146;s business and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s physical facilities, information systems and information security systems are subject
to damage as a result of disasters, outages or similar events.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s headquarters functions, its information systems and its research and development
centers are located in or near Tokyo, Japan, where the possibility of disaster or damage from
earthquakes is generally higher than in other parts of the world. In addition, Canon&#146;s facilities
or offices, including those for research and development, material procurement, manufacturing,
logistics, sales, and services are located throughout the world and subject to the possibility of
disaster or outage or similar disruption as a result of any of a number of events, including
natural disasters, computer viruses and terrorist attacks. Although Canon is working to establish
appropriate backup structures for its facilities and information systems, there can be no assurance
that Canon will be able to completely prevent or mitigate the effect of events or developments such
as the aforementioned disasters, leakage of harmful substances, shutdowns of information systems,
and leakage, falsification, and disappearances of internal databases. Although Canon has
implemented backup plans to permit the production of products at multiple production facilities,
such plans do not cover all product models. In addition, such backup arrangements may not be
adequate to maintain production quantity levels. Such factors may adversely affect Canon&#146;s
operating activities, generate expenses relating to physical or personal damage, or hurt Canon&#146;s
brand image, and its operating results may be adversely affected.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon&#146;s operating and financing activities expose Canon to foreign currency exchange and
interest rate risks that may adversely affect its revenues and profitability.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is exposed to the risks of foreign currency exchange rate fluctuations. Canon&#146;s
consolidated financial statements, which are presented in Japanese yen, are affected by foreign
exchange rate fluctuations. These fluctuations can affect the yen value of Canon&#146;s equity
investments denominated in foreign currencies and monetary assets and liabilities arising from
business transactions in foreign currencies. They can also affect the costs and sales proceeds of
products that are denominated in foreign currencies. In addition, as a result of translating
foreign currency financial statements of Canon&#146;s foreign subsidiaries into Japanese yen, its
reporting currency, assets and liabilities, and revenues and expenses will fluctuate. Canon is also
exposed to the risk of interest rate fluctuations, which may affect the value of Canon&#146;s financial
assets and liabilities, long-term debt in particular.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>The cooperation and alliances with, and strategic investments in, third parties undertaken by
Canon may not produce successful results. Also, unexpected emergence of strong competitors through
mergers and acquisitions, may affect Canon&#146;s business environment.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon carries out many activities with other companies in the form of alliances, joint
ventures, and strategic investments. These activities help Canon&#146;s technological development
process. However, weak business trends or disappointing performance by partners may adversely
affect the success of these activities. In addition, the success of these activities may be
adversely affected by the inability of Canon and its partners to successfully define and reach
common objectives. An unexpected cancellation of a major business alliance may disrupt Canon&#146;s
overall business plans and may also result in a delayed return-on-investment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the unexpected emergence of strong competitors through mergers and acquisitions
or the formation of business alliances may change the competitive environment of the businesses in
which Canon engages, thereby affecting Canon&#146;s future results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Canon may be adversely affected by fluctuations in the stock and bond markets.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s assets include investments in publicly traded securities. As a result, Canon&#146;s
operating results and general financial position may be affected by price fluctuations in the stock
and bond markets. In addition, if valuations of investment assets decrease due to conditions in,
for example, stock or bond markets, additional funding and accruals with respect to Canon&#146;s pension
and other obligations may be required, and such funding and accruals may adversely affect Canon&#146;s
operating results and consolidated financial condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Confidential information may be inadvertently disclosed which could lead to damage claims or
harm Canon&#146;s reputation, and may have an adverse effect upon
Canon&#146; s business.</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with certain projects, Canon may receive confidential or sensitive information
(such as personal information) from its customers relating to these customers or to other parties. In addition, Canon uses computer systems and electronic
data in managing information relating to its employees. Although Canon makes every effort to keep
this information confidential through procedures designed to prevent accidental release of
confidential or sensitive information, such information may be inadvertently disclosed without
Canon&#146;s knowledge. If this occurs, Canon may be subject to claims for damages from the parties or
the employees affected, suffer harm to its reputation or be subject to liabilities and/or penalties
under applicable statutes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inadvertent disclosure of secret information regarding new technology, would also have a
material adverse effect upon Canon&#146;s business.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->8<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="111"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Item&nbsp;4. Information on the Company</B>
</DIV>
<DIV align="left">
<A name="112"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;History and development of the Company</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon
Inc. is a joint stock corporation (KABUSHIKI KAISHA) formed under the Corporation Law of
Japan. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501,
Japan. The telephone number is &#043;81-3-3758-2111.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company was incorporated under the laws of Japan on August&nbsp;10, 1937 to produce and sell
Japan&#146;s first focal plane shutter 35mm still camera, which was developed by its predecessor
company, Precision Optical Research Laboratories, which was organized in 1933.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the late 1950s, Canon entered the business machines field utilizing technology obtained
through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to
expand its operations to include plain paper copying machines, faxes, laser beam printers, bubble jet printers, computers, video camcorders and digital
cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following are important events in the development of Canon&#146;s business in recent years.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In 2001, Canon Vietnam Co., Ltd. was established in Hanoi, Vietnam as a production site
for bubble jet printers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In 2001, Canon Zhongshan Business Machines Co., Ltd. was established in Zhongshan, China
as a production site for laser beam printers.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In 2001, Canon (Suzhou) Inc. was established in Suzhou, China as a production site for
digital copying machines and digital multifunction devices.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In January&nbsp;2003, Canon Aptex Inc. and Copyer Co., Ltd., two of Canon Inc.&#146;s
manufacturing subsidiaries in Japan, merged to become Canon Finetech Inc. The merger was
conducted with the aim of concentrating and further strengthening the core competencies of
the two merged companies in office equipment-related technologies.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In April&nbsp;2003, Fukushima Canon Inc. was established as a wholly-owned subsidiary through
the spin-off of Fukushima Plant, with the aim of establishing a high value-added
manufacturing company equipped with product-launching capability.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In April&nbsp;2003, Canon N.T.C.&#146;s marketing operations were spun off and merged with
Canon System &#038; Support Inc., and its real estate operations were spun off into Canon
Facility Management, Inc. Following the corporate spin-offs, Canon N.T.C.&#146;s operations
focuses on development and manufacturing.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In January, 2004, Canon Precision Inc., or Canon Precision, a wholly-owned subsidiary
of Canon Inc., merged with Hirosaki Precision, Inc., or Hirosaki Precision, a wholly-owned
subsidiary of Canon Precision. Hirosaki Precision was merged into Canon Precision, the
surviving company. Canon Precision targets the improved efficiency and specialization of
business operations. Since both Canon Precision and Hirosaki Precision were consolidated
subsidiaries of Canon Inc., the merger has no impact on Canon&#146;s current or future business
results.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On October&nbsp;15, 2004, the Company entered into an agreement with Canon Sales Co., Inc. and
Canotec Co., Inc., or Canotec, joint equity shareholders of Niigata Canotec Co., Inc., or
Niigata Canotec, to acquire all outstanding shares of Niigata Canotec. Therefore, on
January&nbsp;1, 2005, Niigata Canotec became a wholly-owned subsidiary of the Company and
changed its name to Canon Imaging System Technologies Inc. By making Canon Imaging System
Technologies, Inc. a wholly-owned subsidiary of the Company, Canon aims to raise the level
of its technical capacity and improve development efficiency by enabling closer
coordination.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On January&nbsp;1, 2005, Canotec and FastNet, Inc. merged, and the merged entity changed
its name to Canon Network Communications, Inc. The purpose of the merger was to increase
management efficiency by consolidating the Canon Group&#146;s network and Internet service
operations. Canon Network Communications, Inc. aims to strengthen Information Technology
Management Services, dealing with all stages from the establishment of comprehensive
network systems to their operation and management.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On September&nbsp;30, 2005, Canon acquired all of the issued and outstanding shares of
ANELVA Corporation, which possesses advanced vacuum technology, and made it into a
subsidiary. ANELVA Corporation&#146;s corporate name was changed to Canon ANELVA Corporation as
of October&nbsp;1, 2005. By making Canon ANELVA Corporation a subsidiary of the Company, Canon
aims to promote the in-house production of manufacturing equipment which is indispensable
to differentiate Canon products from the competitions in various fields, including Canon&#146;s
new display business.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On October&nbsp;19, 2005, Canon acquired the share of NEC Machinery Corporation (listed on
the Second Section of the Osaka Securities Exchange Co.,Ltd.), which possesses advanced
automation technologies, through tender offer and made it into a subsidiary. NEC Machinery
Corporation&#146;s corporate name was changed to Canon Machinery Inc. as of December&nbsp;17, 2005.
By making Canon Machinery Inc. a subsidiary of the Company, Canon aims to make further
advance in its production reform activities, including the automation of production
processes for Canon products.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>On December&nbsp;27, 2006, Canon Electronics Inc. acquired shares of e-System Corporation
(listed on the Hercules Section of the Osaka Securities Exchange) through a third party
distribution in order to strengthen its group&#146;s information-related business and develop
it into a core business, and made that company its subsidiary.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In
fiscal 2006, 2005 and 2004, Canon&#146;s capital expenditures were
&#165; 379,657&nbsp;million, &#165; 383,784
million and &#165; 318,730&nbsp;million, respectively. In fiscal 2006, capital expenditures were mainly used
to expand production capabilities in both domestic and overseas regions, and to bolster Canon&#146;s
R&#038;D-related infrastructure. In addition, Canon has been continually investing in tools and dies for
business machines, in which the amount invested is generally the same each year.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->9<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For
fiscal 2007, Canon projects its capital expenditures will be
approximately &#165; 480,000
million. This amount is expected to be spent for investments in new production plants and new
facilities of Canon. Canon anticipates that the funds needed for these capital expenditures will be
generated internally through operations.
</DIV>
<DIV align="left">
<A name="113"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Business overview</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is one of the world&#146;s leading manufacturers of plain paper copying machines, digital
multifunction devices, or MFDs, laser beam printers, bubble jet printers, cameras and steppers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon sells its products principally under the Canon brand name and through sales
subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail
dealers in an assigned territory. Approximately 75% of consolidated net sales in fiscal 2006 were
generated outside Japan; approximately 31% in the Americas, 31% in Europe and 13% in other areas
including Asia.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s strategy is to develop innovative, high value-added products which incorporate
advanced technologies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s research and development activities range from basic research to product-oriented
research directed at keeping and increasing the technological leadership of Canon&#146;s products in the
market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon manufactures the majority of its products in Japan, but in an effort to reduce currency
exchange risks and production cost, Canon has increased overseas production and the use of local
parts. Canon has manufacturing subsidiaries in countries and regions such as the United States,
Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a concerned member of the world community, Canon emphasizes recycling, and has increased
its use of clean energy sources and cleaner manufacturing processes. Canon has also adopted
programs to collect and recycle used cartridges and to refurbish used copy machines. In addition,
Canon has virtually removed all environmentally unfriendly chemicals from its manufacturing
processes.
</DIV>
<DIV align="left">
<A name="114"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Products</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s products are divided into the following three product groups: business machines,
cameras, and optical and other products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>-
Business machines -</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The business machines product group is divided into three sub-groups consisting of office
imaging products, computer peripherals and business information products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Office
imaging products</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon manufactures, markets and services a wide range of office network digital MFDs, color
network digital MFD&#146;s, office copying machines, personal-use copying machines.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The office-use market is subject to rapid change, and customer preferences have been shifting
from copying machines to digital MFDs, as well as from monochrome to color products. To respond to
these trends, Canon has been strengthening its lineup of digital MFDs in the imageRUNNER (iR)
series, which have versatile functions, such as copying, printing, scanning, faxing and
data-sharing functions on the Internet and intranets. Canon is also marketing diverse expansion
modules, software and business solutions to increase customer value. For the development of MFDs,
Canon makes effective use of a wide range of technologies from the fields of optics, mechatronics,
electrophotography, chemistry and image processing. Canon has developed a high-performance image
processing chip called &#147;Third color iR controller&#148; and an expandable and functional platform called
&#147;MEAP&#148;, multifunctional embedded application platform. This controller provides easy integration
with customers&#146; IT environments together with speedy, high-quality image processing. This boosts
office productivity, thereby garnering acclaim from business customers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2006, sales of color office imaging products continued solid growth as the office color
market continued to expand and sales of monochrome digital devices were stable. Canon has expanded
its color office imaging products lineups by introducing the iRC5180/4580 and iRC3380/2880 series
worldwide to further increase color MFD sales. Canon has also introduced new monochrome MFD models
to strengthen its industry leading monochrome MFD product lineup.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has a powerful line of full- color digital MFDs for users ranging from professional
graphic designers to business offices. The trend in the printing industry is gradually moving away
from long run printing using expensive machinery to short run printing-on-demand and variable data
printing. Canon&#146;s high-end MFDs and color digital MFDs can be applied to the print on demand
market. Canon aims to respond to the growing demand for digital color imaging in the commercial
print market with products using its renowned V Toner, featuring broad color space and a
microscopic wax-based structure, and its oil-less fixing system.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has a leading market share in monochrome MFDs and copying machines including machines
for personal use. While the shift to color has been in progress, especially in Japan, the demand
for monochrome machines has been stable accompanying with the expansion of their multifunction
capabilities and software development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With the evolution of digital technology and communication, MFDs that enable seamless
conversion between paper documents and electronic documents have also evolved from being
input-output devices to a sophisticated information systems. To deliver solutions that meet the
diversifying needs of customers in various industries and niche, Canon has brought to market a full
offering of MEAP-enabled office MFD lines both in monochrome and color as well as software
products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The office imaging products category also includes the related sales of paper and chemicals,
service and replacement parts.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->10<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Computer
peripherals</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Computer peripherals include laser beam printers, inkjet printers and scanners.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Developed and fostered by Canon, laser beam printers are standard output peripherals for
offices. Canon&#146;s laser beam printers are relatively small in size and have high-quality printing
capabilities attributable to Canon&#146;s expertise in laser beam printing and plain paper copying
technologies. Canon&#146;s adoption of a user-replaceable toner cartridge system containing optical
components makes its laser beam printers easy to maintain. Most of Canon&#146;s laser beam printer sales
are on an OEM basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As for the monochrome laser beam printer, Canon has started to produce and sell sub-L products
that belong to the lower segment of low-end products in Southern China. The unexpected expansion production and selling has caused Canon to expand production in the laser beam printers
business.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As the inventor of bubble jet printing technology, Canon believes it continues to provide
customers with the best performance the technology has to offer. Canon provides high-performance
and high value added models both in single-function printers and multi function printers. In
response to intense competition in the inkjet printer segment, Canon launched new lineup of
multifunction printers and single function printers from flagship to entry models in 2006. All new
model feature a print head called Canon Full-photolithography Inkjet Nozzle Engineering (&#147;FINE&#148;),
which boosts print speed and image quality up to 9600 x 2400 dpi with microscopic droplets as small
as one picoliter, and ChromaLife100 system, which provides high quality and long-lasting photo
images. In addition to high-quality images, Canon PIXMA branded photo printers offer advanced
paper handling, such as dual paper path and two-sided duplex printing and new Easy-Scroll Wheel
makes operation much easier. With these advanced printer line-ups, Canon has expanded its sales
volume and expects the consumables business will expand accordingly.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon markets a wide variety of scanners for a spectrum of user needs, including image
scanners in the CanoScan LiDE series using Contact Image Sensor (CIS), and scanners with
Charge-Coupled Devices (CCD)&nbsp;for high resolution in the CanoScan series. CIS is a close-contact
method that allows a significant reduction in scanner weight and size. Canon has deployed its
expertise to develop space-saving, energy-efficient scanners, as well as easy personal computer
(&#147;PC&#148;) connection via universal serial bus interface. Although the scanner market has continued to
shrink and shift to multi-function printers, Canon has successfully introduced new scanner models
to attain a high market share.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Business
information products</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Business information products primarily consist of micrographic equipment, personal computers,
calculators, document scanners and work stations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With the movement toward digitalization, the need to scan documents into text data or image
data is expanding. Canon&#146;s document scanners rapidly and efficiently digitize large volumes of
information on paper. Canon offers a wide range of scanner models, including color capable compact
sheet-fed types and a flatbed model suitable for book-type documents. Canon also offers a hybrid
model that can create microfilm records while digitizing the information. Canon&#146;s diverse lineup
seeks to meet increased demands for digitizing office documents to share across Internet or
intranet platforms or to capture data from forms with optical character recognition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s calculator operations, from development to production and marketing, are centered in
Hong Kong. Canon&#146;s tradition of technological innovation has been inherited by its personal
information products, from calculators with printers to electronic dictionaries. Canon continues to
develop distinct, appealing personal information products that reflect trends and demand.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The work stations and personal computers sold by Canon are manufactured by third parties under
the manufacturers&#146; own brand names.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">-
<I>Cameras</I> -
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon manufactures and markets digital cameras and film cameras. Canon also manufactures and
markets digital video camcorders, lenses, and various camera accessories.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;DIGIC III, an improved and upgraded new image processor, features face detection system, and
this is the distinguishing feature of Canon&#146;s compact digital cameras. DIGIC III and DIGIC II, both
of them have enhanced capabilities for high-quality image reproduction, high-speed data processing,
and high quality movie image processing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to aiming for the best possible image quality throughout its product lineup, Canon
offers digital compact cameras that are easy to use with highly sophisticated product design. The
compact digital camera market continued to grow in 2006. Canon increased sales of compact digital
cameras through the introduction of 16 new compact digital camera models in 2006. In 2006, new
products, such as the Digital Elph SD800 IS (IXY 900 IS in Japan) and PowerShot A530, were
well-received in the market worldwide, and Canon increased its market shares and remained a leader
in sales of compact digital cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the Compact Photo Printer segment Canon has shown significant leadership in this market.
Although the majority of the compact photo printer purchasers are considered &#147;early adopters&#148;, as
market growth doubled in 2005, and retailers are now realizing the importance of this new business
segment. In 2006, Canon introduced three new compact photo printers, one of which is under the
brand-new ES series. Canon has been able to leverage the brand recognition of its cameras to
attract new customers for its compact photo printers. In addition, Canon is starting to realize
profits from sales of consumables, such as paper and ink cartridges related to compact photo
printers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While the digital SLR market continues its healthy growth, Canon introduced two new digital
SLRs in 2006 to keep refreshing its complete lineup. With its unique, and leading digital imaging
technology, such as its own Complementary Metal Oxide Semiconductor (CMOS)&nbsp;imaging sensors, Canon
has the capability of meeting the requirement of various photographers ranging from professional
photographers to the entry-level users.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->11<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In response to the strong increase in unit sales of digital cameras, Canon expanded its
internet-based customer support service system in order to strengthen customer services.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although the conventional film camera market continues to decline, Canon intends to maintain
its firm commitment to lead the film camera business, while closely monitoring the market trends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the camera lens segment, technological developments, including diffractive optical
elements, image stabilizers and ultrasonic motors, have helped Canon to maintain a technical lead
over other makers. Canon offers over 60 lenses in the EF series. These high-quality,
high-performance lenses provide outstanding performance with digital cameras as well as
silver-halide cameras, greatly contributing to Canon&#146;s sales. The market for interchangeable
lenses, which are used for SLR cameras, has grown and aggregate sales of the interchangeable lens
have increased every year for the past four years. In 2006, Canon launched a total of four new
interchangeable lens models to the market, two of these were launched in the first half of 2006. In
response to the increasing demand of the digital SLR, Canon intends to expand its lens sales and
market share by introducing interchangeable lenses especially designed for digital SLR cameras, the
market of which Canon expects to expand.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon also provides a full line-up of digital video camcorders from versatile, compact and
stylish models to its flagship models for professionals. In 2006, Canon finally developed an
original imaging sensor for full HD video images, a Complementary Metal Oxide Semiconductor (CMOS)
sensor. Together with Canon&#146;s CMOS sensor, HD lens and digital imaging processor (DIGIC DV II),
Canon can offer the best quality HD movie in the market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The digital camcorder market continues to diversify. In the autumn of 2005 Canon began
offering camcorders using DVD and camcorders with HD picture quality in addition to a full line-up
of conventional MiniDV products. And in 2006, Canon further strengthened its line-up by introducing a variety of DVD and HDV products. DC40 with 4M pixel CCD brings the &#147;movie and still&#148; concept into DVD
camcorder category. HV10 is Canon&#146;s first compact HD camcorder for consumers, equipped with a
Canon original HD CMOS sensor, which ensures best quality high definition movie image.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Quality
and performance measures such as high resolution, high brightness, and greater detail
or sharpness are the key competitive factors in the market for projectors. In addition to Canon&#146;s
independently developed high-resolution projector SX50 launched at the end of 2004, Canon launched
three new models SX6, SX60, and X600 in the first half of 2006. The high image quality and high
resolution of these products has been well received by system integrators, and these products are
capturing high market shares. Canon intends to introduce more new products, differentiated by
higher image quality, resolution, and brightness.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">-
<I>Optical and other products</I> -
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s optical and other products includes semiconductor production equipment, medical
equipment and electronic components.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Semiconductor production equipment includes steppers and mask aligners. Steppers are used
to expose circuits on silicon substrates. Canon has commercialized Krypton Fluoride excimer-laser
steppers, Argon Fluoride excimer-laser steppers and i-line steppers. In fiscal 2006, the semiconductor
production equipment market expanded, mainly supported by the strong demand from memory
manufacturers in Japan, Korea and Taiwan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To respond to the demand, Canon accelerated its related activities, including improving the quality
of its products and shortening the lead time. As a result, Canon expanded its sales volume. In
particular, FPA-6000 ES6a / ES5a (KrF scanning stepper) and FPA-5500 iZa (i-line stepper) made a
large contribution to its sales.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Mask aligners are used to produce liquid crystal displays, or LCDs. The LCD market recently
faced an oversupply of LCD panels, which led to severe price-reduction of LCD panels. As a result,
Canon was affected by the reduction of equipment investment by panel manufacturers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon believes that, based on global units, it is the world leader in television broadcasting
lenses, which are used to capture images from sports and news events, concerts and studio
broadcasts. In fiscal 2006, the market for television broadcasting lenses grew, as a result of a
global trend to introduce digital broadcasting equipment. In fiscal 2006, Canon launched a series
of cost-effective HD lenses that match both the performance and the costs of the new HD acquisition
systems, developed in response to the transitioning to HDTV Newsgathering, HD reality shows, and
other lower-budget HD productions. Canon maintained its position as the market leader for
television broadcasting lenses.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Medical equipment sold by Canon includes X-ray cameras, retinal cameras, autofractmeters and
image-processing equipments for computerized diagnostic systems. Canon&#146;s pioneering digital
radiography system takes X-ray photography and medical diagnosis into the digital age.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other products sold by Canon include electronic components, such as magnetic heads for audio
and video tape recorders and micro-motors for printers and other components, which are sold
primarily to equipment manufacturers.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->12<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="115"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Marketing and distribution</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon sells its products primarily through subsidiaries with responsibility for specific
geographic areas. Each subsidiary is responsible for its own market research and for determining
its sales channels, advertising and promotional activities.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Japan, Canon sells its products primarily through Canon Marketing Japan Co., Inc., mainly
to dealers and retail outlets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., Canon Canada,
Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Europe, Canon sells its products primarily through Canon Europa N.V., which sells primarily
through subsidiaries or independent distributors to dealers and retail outlets in each locality. In
addition, copying machines are sold directly to end-users by Canon (U.K.) Ltd. in the United
Kingdom, and by Canon France S.A.S. in France.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those
areas. In addition, copying machines are sold directly to end-users by Canon Australia Pty. Ltd. in
Australia.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon also sells laser beam printers on an OEM basis to Hewlett-Packard Company.
Hewlett-Packard Company resells these printers under the &#147;HP LaserJet Printers&#148; name. During fiscal
2006, such sales constituted approximately 22% of Canon&#146;s consolidated net sales, as compared to
21% in the previous fiscal year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon continues to enhance its distribution system by promoting continuing education of its
sales personnel and improving inventory management and business planning through the weekly
analysis of Canon&#146;s sales data.
</DIV>
<DIV align="left">
<A name="116"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Service</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Japan and overseas, product service is provided in part by independent retail outlets and
designated service centers that receive technical training assistance from Canon. Canon also
services its products directly.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Most of Canon&#146;s business machines carry warranties of varying terms depending upon the model
and the country of sale. Cameras and camera accessories carry a one-year warranty based on normal
use.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon services its copying machines and supplies replacement drums, parts, toner and paper. In
Japan, most customers enter into a maintenance service contract under which Canon provides
maintenance services, replacement drums and parts in return for a per-copy charge. Copying machines
which are not covered by a service contract may be serviced from time to time by Canon or local
dealers for a fee.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->13<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="117"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>NET SALES BY PRODUCT GROUP</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>Years ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Office imaging products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,185,925</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,153,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,120,972</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Computer peripherals</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,398,408</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,244,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,149,914</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Business information products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104,255</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-10.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,067</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,691,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,502,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,387,953</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,041,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">879,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">763,079</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">423,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">372,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">316,821</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>NET SALES BY GEOGRAPHIC AREA</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>Years ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,037,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">5.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">979,748</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">6.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">919,153</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,311,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,046,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,882,973</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,349,139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,025,921</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,802,126</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Americas</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,277,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">12.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,139,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,057,066</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,764</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-35.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-16.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,863</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,282,631</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,147,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,065,929</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Europe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,313,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">11.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,178,672</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">8.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,090,712</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">62.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-47.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,161</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,317,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,180,878</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,094,873</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">527,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">455,987</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">13.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">400,922</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">792,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">646,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">591,677</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,319,334</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,102,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11.1</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">992,599</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Eliminations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-3,111,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-2,702,333</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-2,487,674</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-3,111,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-2,702,333</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">-2,487,674</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Consolidated</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">10.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">8.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left">
<DIV style="font-size: 3pt; margin-top: 3pt; width: 18%; border-top: 0px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD nowrap align="left">Note:</TD>
    <TD>&nbsp;</TD>
    <TD>The segments are defined under Japanese GAAP. In grouping of segment information by product, Japanese GAAP requires that consideration be given to similarities of
product types and characteristics, manufacturing methods, sales markets, and other factors that are similar. In grouping of segment information by geographic area, Japanese
GAAP requires that consideration be given to geographic proximity, as well as similarities of economic activities, interrelationships of business activities and other similar
factors. Segment information by geographic area is determined by the location of the Company or its relevant subsidiary making the sale.</TD>
</TR>

<TR style="font-size: 3pt"><TD>&nbsp;</TD></TR>

<TR valign="top">
    <TD COLSPAN="3">Total operating profit by category is discussed in Item&nbsp;5A &#147;Operating Results&#148;.</TD>

</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->14<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">





<DIV align="left">
<A name="118"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Seasonality</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s sales for the 4th quarter are usually higher than those in the other three quarters,
mainly owing to strong demand for consumer products, such as cameras and bubble jet printers,
during the year-end holiday season. In Japan, corporate demand for office products peaks in the 1st
quarter, as many Japanese companies close their books in March. Sales also tend to increase at the
start of the new school year in each of the respective regions.
</DIV>
<DIV align="left">
<A name="119"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Sources of supply</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon purchases materials such as glass, aluminums, plastics, steels, and chemicals for
using it for various product parts and in the manufacturing of products. With the development of
globalization in production, Canon procures raw materials from all over the world, and selects
suppliers based on a number of criteria, including environmental friendliness, quality, cost,
supply stability, and financial condition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prices of some raw materials fluctuate according to the market. Due to the high price of crude
oil and increase in demand toward China, the market place is tight since the beginning of last
year. However, Canon believes it will be able to continue to obtain sufficient quantities of raw
materials to meet its needs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon also places significant emphasis on in-house development of production tools. Canon also
produces many of the tuning and measuring tools needed for the development, maintenance and repair
of its production equipment. Key tools such as these are not marketed for sale; they are reserved
for use within the Canon Group. Canon&#146;s ability to develop its own production tools helps establish
quality control and allows for speed and flexibility when retooling is necessary &#151; a crucial
advantage in its cell production processes. Cell production is the production system in which the
entire production process is undertaken by small groups of employees. In-house tool development may
also help cut costs over time and prevent the leakage of Canon&#146;s core proprietary technologies.
</DIV>
<DIV align="left">
<A name="120"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Competition</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon encounters intense competition in all areas of its business activity throughout the
world. Canon&#146;s competitors range from some of the world&#146;s major multinational corporations to
smaller, highly specialized companies. Canon competes in a number of different business areas,
whereas many of its competitors are relatively more focused on one or more individual industries.
Consequently, Canon may face significant competition from entities that apply greater financial,
technological, sales and marketing or other resources than Canon to their activities in a
particular market segment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The principal elements of competition which Canon faces in each of its markets are technology,
quality, reliability, performance, price and customer service and support. Canon believes that much
of its ability to compete effectively depends on conducting successful research and development
activities that enable it to create new or improved products and release them on a timely basis and
at commercially attractive prices.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The competitive environments in which each product group operates are described below:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><i>Business machines</i></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The markets for office imaging products, computer peripherals and business information
products are highly competitive.
Canon&#146;s primary competitors in these markets are Xerox Corporation/ Fuji Xerox Co., Ltd.,
Hewlett-Packard Company, Lexmark International Inc., Ricoh Company, Ltd., Konica Minolta Holdings,
Inc. and Seiko Epson Corporation. Canon believes that it is one of the leading global manufacturers
of copying machines, digital MFDs, laser beam printers, bubble jet printers, image scanners and
facsimile machines. In addition to the general elements of competition described above, Canon&#146;s
ability to compete successfully in these markets also depends significantly on whether it can
provide effective, broad-based &#147;business solutions&#148; to its customers that solve multiple
interrelated client needs. In particular, the ability to provide equipment and software that
connect effectively to networks (ranging in scope from local area networks to the Internet) is
often a key to Canon&#146;s competitive strength in these markets. In China, the current market
leaders for business machines are Toshiba Tec Corporation, Sharp Corporation and Konica Minolta
Holdings, Inc. Canon hopes to join this group by introducing products tailored to the market and by
strengthening sales and service channels. Also in regards to the office color market, in addition
to Ricoh and Xerox, Konica Minolta has been very aggressive with its color strategy especially in
Europe and the US, and competition in this market has become fierce.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Also, as a recent trend, convergence of the copier industry and the printer industry has
become apparent. Competition at the low-end segment has turned especially fierce by the impact of
printer-based MFDs on copier market. Canon sees this market convergence as a growth opportunity and
has enhanced our printer and printer-
based MFP lineups. Canon also ensures to differentiate itself from other competitors by offering
comprehensive solutions to customers.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><i>Cameras</i></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Competition in the camera industry is intense, with many established market participants
offering excellent products with competitive pricing. Canon&#146;s primary competitors in digital
cameras are Sony Corporation, Fujifilm Imaging Co., Ltd., Olympus Corporation, Nikon Corporation,
Casio Computer Co., Ltd., Matsushita Electric Industrial Co., Ltd., Samsung Electronics Co., Ltd.
and Eastman Kodak Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the digital SLR market, competition has become tougher in 2006, with more newcomers with
aggressive approach into the growing market. Canon is committed to keep leading the digital SLR
market, with aggressive investment to develop new models.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s primary competitor in the lens market is Nikon Corporation whose popular class digital
SLR cameras are selling well. Another major competitor is Sigma Corporation, which sells products
that are compatible with Canon&#146;s SLR camera lens.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->15<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the compact digital cameras, the segment industry&#146;s trend of declining prices will continue
in 2007, and it will become tougher to maintain current profit levels. Also, the market in the economically
developed countries could be peaking due to high household penetration.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While we see the above-mentioned tough signs, we also see many positive signs as well. For
instance, as China and Eastern Europe including Russia have shown significant growth, Canon has
achieved the leading market share in China and Russia. Also, Canon&#146;s cost reduction efforts have
shown very positive progress utilizing the advantages of significant economies of scale. We believe
Canon&#146;s compact Digital Steel Camera (&#147;DSC&#148;) business will continue to benefit from these conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s primary competitors in digital video camcorders are Sony Corporation, Matsushita
Electric Industrial Co., Ltd., Victor Company of Japan Ltd., Hitachi Ltd. and Samsung Electronics
Co., Ltd. In fiscal 2006, Canon expanded its line-up of DVD and HDV camcorders.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><i>Steppers and Aligners</i></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The market for steppers and aligners, used in the manufacture of semiconductor devices and
LCDs, is highly competitive. The market is characterized by a relatively small number of dominant
suppliers, since the development of steppers and aligners requires extremely precise design and
manufacturing techniques and, as a result, very high levels of capital investment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s primary competitors in the market for steppers and aligners are Nikon Corporation and
ASML Holding N.V., (&#147;ASML&#148;). Nikon Corporation has a reputation for its excellent technology,
especially optical lenses, and Intel Corporation, the world&#146;s leading semiconductor manufacturer,
is one of their major customers. ASML has in recent years improved its competitive position by
taking advantage of government subsidies and by focusing on the rapidly growing foundry
manufacturer industry. In fiscal 2002, ASML further increased its competitive position by acquiring
SVG Lithography Systems Inc. As a result of the acquisition, ASML is now one of the largest
semiconductor manufacturing equipment companies in Europe.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because of the substantial capital expenditures required to install and integrate equipment
into a semiconductor production line, semiconductor manufacturers tend to purchase their stepper
and aligner production equipment from the vendor that originally supplied the chip fabrication
equipment. Canon competes principally on its ability to meet and exceed product specifications,
including resolution and throughput, quality, reliability and system maintenance cost. Because of
the very rapid pace of technological innovation in the semiconductor industry, Canon believes
that its ability to provide new products on a timely basis is also a key competitive consideration
for customers seeking to integrate stepper and aligner production systems into the planning and
design of their new facilities.
</DIV>
<DIV align="left">
<A name="121"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Patents and licenses</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon holds a large number of patents (including utility model rights), design rights and
trademarks in Japan and abroad to protect its technology products that arise from its research and
development and utilizes these intellectual property rights as important strategic management
tools. For instance, Canon has been utilizing its intellectual property rights, such as patents, to
expand its product lines and business operations and to form alliances and exchange technologies
with other companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;According to the United States patent annual list, which IFI CLAIMS&#174; Patent Services have
released, Canon has been consistently ranked as second or third in recent years in terms of the
number of patents issued in the United States, as Canon maintained reputation as a famous
technology-oriented company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has granted licenses with respect to its patents to various Japanese and foreign
companies, particularly in areas such as electrophotography, laser beam printers, multifunction
printers, facsimiles and cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Some examples include:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="35%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Oki Electric Industry Co., Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(LED printers, multifunction printers and facsimiles)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Matsushita Electric Industrial Co., Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Ricoh Company, Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Sanyo Electric Co., Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electronic still camera)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Samsung Electronics Co., Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(laser beam printers, multifunction printers and facsimiles)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Brother Industries, Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography and facsimiles)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Kyocera Mita Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Konica Minolta Holding Co.,Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(business machines)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Toshiba Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(business machines)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Sharp Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has also been granted licenses with respect to patents held by other companies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Some examples include:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="35%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Jerome H. Lemelson Patent Incentives, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(computer systems, image recording apparatus, and communication apparatus)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Energy Conversion Devices, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(solar battery)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Honeywell Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(camera and video products)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Gilbert P. Hyatt U.S. Philips Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(microcomputer)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Nano-Proprietary Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(FED technology)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">St. Clair Intellectual Property Consultants, Inc.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Selection of digital camera&#146;s image format)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->16<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has also entered into cross-licensing agreements with other major industry participants.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Some examples include:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="35%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="60%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">International Business Machines Corporation
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(information handling systems)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hewlett-Packard Company
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(bubble jet printers)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Xerox Corporation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(business machines)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Matsushita Electric Industrial Co., Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(video tape recorders and video cameras)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Eastman Kodak Co.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography and image processing technology)</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Ricoh Company, Ltd.
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(electrophotography products, facsimiles and word processors)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has placed high priority on the management of its intellectual property as part of its
management strategies to enhance its global business operations. Some products which are material
to Canon&#146;s operating results, incorporate patented technology which is critical to the continued
success of these products. Typically, these products incorporate technology reflected in dozens of
different patents. Canon does not believe that its business, as a whole, is dependent on, or that
its profitability would be materially affected by the revocation, termination, expiration or
infringement upon, any particular patent, copyright, license or intellectual property rights or
group thereof.
</DIV>
<DIV align="left">
<A name="122"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Environmental regulations</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is subject to a wide variety of laws and regulations as well as industry standards
relating to energy and resource conservation, recycling, global warming, pollution prevention,
pollution remediation, and environmental health and safety. Some of the environmental laws which
affect Canon&#146;s businesses are summarized below.
</DIV>


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt"><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">    <TD width="1%" nowrap align="left"><I>1.</I></TD>    <TD>&nbsp;</TD>    <TD><I>European Union Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (&#147;the RoHS Directive&#148;), and Directive on Waste Electrical and
Electronic Equipment (&#147;theWEEE Directive&#148;).</I>

</TR></TABLE></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These directives were published in the European Union&#146;s Official Journal on February&nbsp;13, 2003.
Member states were required to bring into force the laws necessary to comply with these directives
by August&nbsp;13, 2004. Beginning July&nbsp;1, 2006, companies must ensure that their electrical and
electronic equipment sold in the European Union does not contain lead, cadmium, hexavalent
chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers if placed on the
market after that date. Pursuant to the RoHS Directive, Canon adapted its products so that they do
not contain the prohibited hazardous substances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The WEEE Directive requires that after August&nbsp;13, 2005, companies that sell electrical and
electronic equipment bearing their trade names in the European Union must arrange and pay for the
collection, treatment, recycling, recovery and disposal of their equipment and achieve designated
recycling rates by December&nbsp;31, 2006. Pursuant to the WEEE Directive, Canon is joining a collective
compliance scheme for WEEE Directive in each member state, and will achieve the recycling ratio of
waste electrical and electronic equipment through these schemes by the target date.
</DIV>



<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><I>2.</I></TD>
    <TD>&nbsp;</TD>
    <TD><I> Soil Pollution Prevention Law of Japan</I>



</TR>

</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Soil Pollution Prevention Law of Japan , administered by the Japanese Ministry of the
Environment, went into effect in February&nbsp;2003. The law requires an owner of land to have the soil
investigated by a designated organization for the purpose of measuring the level of soil pollution
when the land is to be transferred or to be used for another purpose. The results of such
investigation are reported to the prefectural governor. If the soil pollution is not within
standards specified in the law, the governor will designate the land as &#147;a designated area&#148;,
publicly announce such designation and make available upon request the investigation report. The
substances designated in the law consist of 25 chemical groups, including substances such as lead,
arsenic, and trichloro ethylene. If there is a possibility that the soil pollution of the
designated area may affect human health, the governor will issue an order to the landowner to take
remedial actions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In response to the law, Canon has commenced a detailed survey and measurement of soil and
groundwater to determine the existence of pollution at all of Canon Group&#146;s operational sites in
Japan. Additional costs may arise as remedial measures become necessary. These factors may
adversely affect Canon&#146;s results of operations and financial conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See &#147;Risk Factors&#151;Risks Related to Environmental Issues &#151;Environmental clean-up and remediation
costs relating to Canon&#146;s properties and associated litigation could decrease Canon&#146;s net cash
flow, adversely affect its results of operations and impair its financial condition.&#148;
</DIV>



<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><I>3.</I></TD>
    <TD>&nbsp;</TD>
    <TD><I> Law for Promotion of Effective Utilization of Resources of Japan</I>


</TR>

</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Law for Promotion of Effective Utilization of Resources of Japan, administered by the Japanese
Ministry of Economy, Trade and Industry, was enacted in April&nbsp;2001. This Law requires manufacturers
of &#147;specified reuse-promoted products&#148;, including copiers, to promote the use of recyclable
resources and recovered products (designing and manufacturing products that can be easily reused or
recycled). The coverage and requirements of the law may be expanded in the future, and may have an
adverse affect on its results of operations.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->17<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><I>4.</I></TD>
    <TD>&nbsp;</TD>
    <TD><I> Law on Promoting Green Purchasing of Japan</I>


</TR>

</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Law on Promoting Green Purchasing of Japan, administered by the Japanese Ministry of the
Environment, took effect in April&nbsp;2001. The law encourages both national and local governments to
procure products with low environmental burdens. Businesses are required to provide information
that is necessary to determine the environmental impact of products that they manufacture.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In response to the law, Canon now promotes :
</DIV>

<DIV style="margin-top: 1pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%">&nbsp;</TD>

    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD>manufacture of products that consume less electricity to prevent global warming and to conserve energy,</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">

    <TD width="3%">&nbsp;</TD>

    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>

    <TD>use of recycled parts and recycled materials,</TD>
</TR>



<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%">&nbsp;</TD>


    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD>reduction of the types of raw materials used in order to conserve resources, and</TD>
</TR>



<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%">&nbsp;</TD>


    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD>acceleration of the date by which the requirements of the law are implemented to promote the elimination of hazardous substances.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The law also requires Canon to collect its used products and recycle them, establish alternative
technologies for hazardous substances used in products and standardize the substances used in its
products. These measures will entail additional costs and may adversely affect its results of
operations and financial conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>5.&nbsp;&nbsp;&nbsp; European Union Directive on Batteries and Accumulators and Waste Batteries and Accumulators</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;26, 2006, a new directive on batteries and accumulators and waste batteries and
accumulators was published in the EU Official Journal to replace a similar existing directive. EU member
states must implement the directive by September&nbsp;26, 2008, and manufacturers and sellers must
comply with these laws based on the new directive. Whereas the existing directive applies only to
batteries with a certain mercury, cadmium and lead content, the new directive applies to all
batteries and accumulators placed on the European Community market. When enacted, the new
directive will require specified labels on all batteries (The deadline differs from country to
country). In addition, it establishes specific targets for collection, treatment and recycling of
batteries and accumulators. Canon expects that compliance with the new directive will increase its
financial costs such as recycling fees and guarantees of products placed on the market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>6.&nbsp;&nbsp;&nbsp; Administrative Measures on the Control of Pollution Caused by Electronic Information Products
of China</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Modeled on the European Union RoHS Directive described above, the Chinese Ministry of Information
Industry published Administrative Measures on the Control of Pollution Caused by Electronic
Information Products on February&nbsp;28, 2006. These measures regulate the content of electronic
information products. Step 1 was implemented for the products manufactured on and after March
1, 2007. Almost all the Canon products will be covered by this regulation. The regulation targets
electronic information products however, it also covers medical equipments, semi-conductor
manufacturing equipments and consumables such as cartridges, as well as component, parts and
materials of such products, which are not covered by EU RoHS Directive.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To comply with Step 1 requirements, a specified China specific mark shall be put on all the covered
products, and their use of the six substances same as those regulated by the EU RoHS must be shown
on product manuals. In addition, product&#146;s environmental protection use period (EPUP)&nbsp;must be
described on its recycling mark with the production date, and packaging materials shall be shown on
the boxes, etc. that pack the covered products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As Step 2 requirements, the content of six substances in specific electronic information products
(those specified in the &#147;list for emphasized management&#148;) would be restricted by the similar
limitation of the EU RoHS Directive, and a China-specific compulsory products certification system
will be introduced for such products. However, the publication of the standards to implement these
measures has been delayed, and the &#147;emphatic management list&#148; has not been published.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These requirements will increase Canon&#146;s costs and may have an adverse affect on its results of
operations and financial conditions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>7.&nbsp;&nbsp;&nbsp; U.S. States&#146; Legislations concerning Waste Electric and Electronic Products and RoHS-like
Regulations</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The electric and electronic equipment recycling laws have been enacted in some states such as
California or Washington, and more draft recycling laws are now being discussed in about 20 states.
Most states&#146; laws cover only displays or TVs, so the impact on Canon has not been significant to
date. However, there are some state laws, like the law of Massachusetts, which require
manufacturers to bear the costs of collection and recycling of printers and fax, and some other
products made by Canon. Canon expects that compliance with the state requirements might increase
its costs such as recycling fees and guarantees of products sold there.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Some drafts state laws are being considered in California and other states., which would restrict a
certain hazardous substances in the electric and electronic equipments in a manner similar to the
EU RoHS Directive. If such requirements are enacted, they might increase Canon&#146;s costs .
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>8.&nbsp;&nbsp;&nbsp; The European Framework for the management of chemical substances, or REACH Regulations</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On Dec. 18, 2006, the European Union has approved the draft REACH Regulations which would establish
a framework for the management scheme for all the commercial chemical substances. After publication
in the Official Journal, it will be implemented on June&nbsp;1, 2007. This framework, if adopted, would
apply to almost all the chemicals (that is, products in gaseous, liquid, paste or powdery form) and
the &#147;articles&#148; (products in solid state) manufactured in or imported into the European Union. All
the chemicals manufactured/ imported over specific thresholds shall be registered in the European
Union with information about its usage or chemical characters, etc., and authorization shall be
required when using certain substances. Moreover, the use of substances regarded as &#147;dangerous&#148;
might be prohibited. The suppliers of the &#147;articles&#148; will have to report to the EU when certain
substances are contained in them, and to provide information about such substances to consumers
upon its requests. When such requirements are enacted, they might increase Canon&#146;s costs to comply
with them.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>9.&nbsp;&nbsp;&nbsp; The European Framework for the Setting of Requirements for Energy-Using Products (so-called
&#147;EuP directive&#148;)</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The European Union published a directive that establishes a framework for the setting of
environmental requirements for energy-using products, the &#147;EuP directive&#148;, on July&nbsp;22, 2005.
Member states are required to bring into force the laws necessary to comply with the directive
concerning eco-design by August&nbsp;11, 2007. This framework directive applies to all products that use
energy, and under this directive, implementing measures for specific product categories must be
adopted by the European Commission and the member states. Until these implementing measures are
clarified, it is difficult to predict the effects of the EuP directive. However, one of the first
implement measures is expected to require that covered products should not use more than 1 watt (2
watts for a product with a facsimile function) in their standby mode.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->18<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>10.&nbsp;&nbsp;&nbsp; Kyoto Protocol to the United Nations Framework Convention on Climate Change</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into
force on February&nbsp;16, 2005. In order for the Japanese Government to achieve a goal set in the Kyoto
Protocol, a Kyoto Protocol Target Achievement Plan was issued and decided at a Cabinet Meeting in
April, 2005, and the related revisions of the Energy Conservation Law as well as the Global Warming
Prevention Promotion Law came into force in April, 2006. Since CO<SUB style="font-size: 85%; vertical-align: text-bottom">2 </SUB>emissions in Japan
have been increasing each year, the Japanese Government is required to include stricter measures
for significant CO<SUB style="font-size: 85%; vertical-align: text-bottom">2 </SUB>emission reductions in a revised Kyoto Protocol Target Achievement
Plan which will be reviewed and decided sometime early in 2008.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon will try to achieve its voluntary action plan that corresponds to voluntary action
plans of the Japan Business Federation (Nihon Keidanren) and the Electric &#038; Electronic Industries Four
Associations to which Canon belongs, and to comply with the revised regulations. Canon will
carefully monitor the Japanese Government&#146;s actions as well as activities of industrial sectors and
consider a contingency plan, if necessary, such as the Kyoto Mechanism.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From product planning stage, Canon places considerable emphasis on meeting requirements of green
purchasing laws, international ENERGY STAR Program, and other standards. Canon is also actively
promoting to acquire certification for all major eco-labels.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is promoting to grasp and establish management of the environmental impact of chemical
substances in products , and to limit use of products in line with the EU&#146;s RoHS Directive, which
requires makers to eliminate or replace six hazardous substances from a very early stage.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Along with the global movement to establish a green purchasing network, Canon has built an
assurance system for chemical substances contained in its products under which Canon will only buy
from those suppliers that comply with the Green Procurement Standards.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is establishing the infrastructure for recycling and reduced waste generation in line with
the concepts of Extended Producer Responsibility, which is achieving greater acceptance worldwide.
</DIV>
<DIV align="left">
<A name="123"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Organizational structure</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent
company. As of December&nbsp;31, 2006, Canon had 219 consolidated subsidiaries and 14 affiliated
companies accounted for by the equity method.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table lists the significant subsidiaries owned by Canon Inc., all of which are
consolidated, as of December&nbsp;31, 2006.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="35%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="38%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Proportion of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Proportion of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>ownership interest</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>voting power</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name of company</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="LEFT" colspan="2" style="border-bottom: 1px solid #000000"><B>Head office location</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>owned</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>held</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Marketing Japan Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="LEFT">Tokyo, Japan</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">50.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">50.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon U.S.A., Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" nowrap align="LEFT">New York, U.S.A.</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Europa N.V.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" nowrap align="LEFT">Amstelveen, The Netherlands</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->19<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="124"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>D.&nbsp;Property, plants and equipment</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s manufacturing is conducted primarily at 23 plants in Japan and 17 plants in other
countries. Canon owns all of the buildings and the land on which its plants are located, with the
exception of certain leases of land and floor space of certain of its subsidiaries. The names and
locations of Canon&#146;s plants and other facilities, their approximate floor space and the principal activities and products
manufactured therein as at December&nbsp;31, 2006 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="30%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Floor space</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(including</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name and location</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>leased space)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Principal activities and products manufactured</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Domestic</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(Thousands of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>square feet)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->

<TR>
    <TD>&nbsp;</TD>

</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Headquarters, Tokyo
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2,468</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D, corporate administration, other functions</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Canon
Global Management Institute, Tokyo
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">100</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">HRD Training &#038; administration</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Mizonokuchi HRD center, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">78</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">HRD Training &#038; administration</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Kosugi Office, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">398</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development of software for office imaging products</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Fuji-Susono Research Park, Shizuoka
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,039</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D in electrophotographic technologies</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Hiratsuka
Development Center, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">348</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development of displays, electronic devices</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Ayase Office, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">394</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D and manufacturing of semiconductor devices</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Optics R&#038;D Center, Tochigi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">473</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D in optical technologies, development and sales of
broadcasting equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Tamagawa Office, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">95</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Quality Engineering Division</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Yako Development Center, Kanagawa
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">902</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development of inkjet printers, Ink Jet chemical products</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Utsunomiya Plant, Tochigi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">857</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Manufacturing of EF lenses, video camcorder lenses,
broadcasting lenses, lenses for business machines, other
specialized optical lenses</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Toride Plant, Ibaraki
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2,914</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D in electrophotographic technologies, mass-production
trials and support; manufacturing of office imaging
products,chemical products</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Ami Plant, Ibaraki
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,252</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">semiconductor production equipment; design and
manufacturing of factory automation equipment and metal
molds</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Utsunomiya
Optical Products Plant, Tochigi
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,420</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">R&#038;D, manufacturing, sales and servicing of semiconductor
equipment; sales of broadcasting equipment; R&#038;D and
sales of medical equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">

<TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Canon
Electronics Inc.,Saitama and Gunma
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,153</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development, production and sales of camera components,
magnetic heads, sensors, micrographics, document
scanners, LBPs, laser scanner units, portable data
terminals, semiconductor equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Canon Finetech Inc, , Ibaraki, Tokyo,
Yamanashi, and Fukui
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">763</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and sales of business machines, business
machine peripherals, chemical products, business-use
printers</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Canon Precision Inc.,Aomori
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,089</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development, production and sales of motors; production
of toner cartridges, sensors</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Optron Inc., Ibaraki
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">143</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Polishing of optical crystals (for steppers, cameras,
telescopes), vapor deposition materials</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->20<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center"><B>Floor space</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap  colspan="2" align="center"><B>(including</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name and location</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap  colspan="2" align="center" style="border-bottom: 1px solid #000000"><B>leased space)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Principal activities and products manufactured</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Domestic</B></TD>
    <TD>&nbsp;</TD>
    <TD  colspan="2" nowrap align="center"><B>(Thousands of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap  colspan="2" align="center"><B>square feet)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Chemicals Inc.,Ibaraki</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,783</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Toner cartridges and advanced-function parts, plastic precision-molded parts, metal molds</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Components Inc.,Saitama</DIV></TD>
    <TD>&nbsp;</TD>
        <TD align="right" valign="top">602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Image sensor units, printed circuit boards, Ink Jet print heads/ink tanks</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Oita Canon Inc., Oita</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">SLR cameras, digital SLR and compact cameras, digital video camcorders, visual communication cameras</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nagahama Canon Inc., Shiga</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">LBPs, toner cartridges, a-si drums</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Oita Canon Materials Inc., Oita</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chemical products for copying machines and printers</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ueno Canon Materials Inc., Mie</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">632</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Chemical products for copying machines and printers</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fukushima Canon Inc., Fukushima</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">971</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of inkjet printers, Ink Jet print heads/ink tanks; analysis of software and fonts</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="TOP">
    <TD><DIV style="margin-left:0px; text-indent:0px">Canon Semiconductor Equipment Inc., Ibaraki</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">495</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development and production of semiconductor production-related equipment; production of small-sized copying machines and copying units</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon Ecology
Industry Inc., Ibaraki and Saitama</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">369</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Recycling of toner cartridges; business machine repair</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nisca Corporation, Yamanashi</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Development, design, production and sales of business machines, information products, optical equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Miyazaki Daishin Canon Co., Ltd., Miyazaki</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">130</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Digital video camcorders, digital cameras, electronics packaging</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon ANELVA Corporation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">490</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Electron devices, panel devices, electronic components, for R&#038;D</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Machinery Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">293</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Semiconductor, electronic components, energy relation</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">SED Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">739</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Flat-screen SED(Surface-conduction Electron-emitter Display)panels</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->21<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="33%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
 <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="55%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center"><B>Floor space</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center"><B>(including</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name and location</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center" style="border-bottom: 1px solid #000000"><B>leased space)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Principal activities and products manufactured</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">

<TD nowrap align="left" style="border-bottom: 0px solid #000000"><B>Overseas</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center"><B>(Thousands of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="center"><B>square feet)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&#091;Europe&#093;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Giessen GmbH, Giessen, Germany</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and remanufacturing of copying machines; refilling of toner cartridges; remanufacturing of semiconductor production equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Bretagne S.A.S., Liffre, France</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">506</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of low-speed copying machines and toner cartridges; recycling of toner cartridges</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&#091;America&#093;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Virginia, Inc.,Virginia, U.S.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">828</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of toner cartridges, toner for copying machines</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&#091;Asia&#093;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Inc., Taiwan, Taiwan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">415</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of SLR and compact cameras, EFS and other lenses, precision-metal molds</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon Opto &#40;Malaysia&#41; Sdn. Bhd., Selangor,
<br>Malaysia</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">561</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of Digital cameras, EF lenses, optical lens parts</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon Dalian
Business Machines, Inc. , Dalian <br>China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and recycling of toner cartridges; production of LBPs, MFDs</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon Zhuhai, Inc., Zhuhai, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">836</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of Compact cameras, digital cameras, LBPs, MFDs, image scanners, contact image sensors</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tianjin Canon Inc., Tianjin, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and sales of copying machines</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Hi-Tech Thailand Ltd., Ayutthaya, <br>Thailand</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Ink Jet printers, personal-use copying machines, facsimile machines, MFDs</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Ayutthaya Thailand Ltd., <br>Thailand</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">182</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Ink Jet printers, personal-use copying machines, facsimile machines, MFDs</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Engineering Thailand Ltd., Ayutthaya,
<br>Thailand</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">130</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Metal molds, plastic injection mold parts</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Zhougshan Business Machines Co., <br>Ltd., Zhougshan, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of LBPs</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon
Vietnam Co., Ltd., Hanoi, Vietnam</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">1,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of Ink Jet printers, LBPs</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Canon
(Suzhou) Inc., Suzhou, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">805</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of Color and monochrome digital copying machines</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Finetech(Suzhou) Business Machines <br>Inc.
, Suzhou, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production of digital printers, peripherals, service parts</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Thai Nisca Co.Ltd., Ayutthaya, Thailand</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and sales of optical equipment and OA equipment</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Canon
Finetech Industries Development Co., <br>Ltd., Shenzhen, China</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="top">216</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Production and sales of copying machines, semi-finished products, parts</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon considers its manufacturing and other facilities to be well maintained and
believes that its
plant capacity is adequate for its current requirements.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->22<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="125"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;5. Operating and Financial Review and Prospects</B>
</DIV>

<DIV align="left">
<A name="126"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Operating Results</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following discussion and analysis provides information that management believes to be
relevant to understanding Canon&#146;s consolidated financial condition and results of operations.
</DIV>
<DIV align="left">
<A name="127"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Overview</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is one of the world&#146;s leading manufacturers of copying machines, laser beam printers,
inkjet printers, cameras, steppers and aligners. Canon earns revenues primarily from the
manufacture and sale of these products domestically and internationally. Canon&#146;s basic management
policy is to contribute to the prosperity and well-being of the world while endeavoring to become a
truly excellent global corporate group targeting continued growth and development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon divides its businesses into three product groups: business machines, cameras, and
optical and other products. The business machines product group has three sub-groups: office
imaging products, computer peripherals and business information products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Economic environment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Looking back at the global economy in 2006, in the United States, despite a decrease in
housing investment, the economy continued to display growth with healthy employment conditions and
continued growth in consumer spending, along with an increase in corporate capital investment. In
Europe, while exports appeared somewhat sluggish due to the appreciation of the euro, the region
indicated a trend toward moderate recovery as domestic demand expanded in major European countries,
boosted by such factors as increased consumer spending owing to improvements in the employment
environment. Within Asia, the Chinese economy maintained a high growth rate while other economies
in the region also enjoyed generally favorable conditions. In Japan, although consumer spending has
yet to fully regain its strength, the economy maintained a trend toward recovery amid increased
capital spending fueled by strong corporate performances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Market environment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With respect to the markets in which the Canon Group operates, within the camera segment demand for
digital single-lens reflex (SLR)&nbsp;cameras and compact digital cameras continued to realize healthy
growth during the term. Within the office imaging product market, demand for network digital
multifunction devices (MFDs) remained solid as the office market moved toward color and
multifunctionality. As for computer peripherals, including printers, although demand grew for color
as well as monochrome laser beam printers, and shifted rapidly within the inkjet printer market
from single-function to multifunction models, the segment suffered amid severe price competition.
In the optical equipment segment, although demand for projection aligners, which are used to
produce liquid crystal display (LCD)&nbsp;panels, declined due to restrained investment by LCD
manufacturers, demand for steppers, used in the production of semiconductors, was strong, supported
by increased investment by manufacturers. The average value of the yen for the year was &#165;116.43 to
the U.S. dollar and &#165;146.51 to the euro, representing year-on-year decreases of about 5% against
the U.S. dollar, and 7% against the euro.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Summary of operations</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In 2006, the first year of a new five-year management plan&#151;Phase III of Canon&#146;s Excellent
Global Corporation Plan&#151;Canon achieved record highs in both consolidated net sales and net income,
and a seventh consecutive year of sales and profit growth, mainly due to a solid rise in sales of
digital cameras and color network digital MFDs, and laser beam printers, along with the positive
effects of the depreciation of the yen.In fiscal 2006, Canon achieved 10.7% growth in net sales,
to &#165;4,156,759&nbsp;million, and an 18.5% increase in net income, to &#165;455,325&nbsp;million. Canon&#146;s gross
profit increased by 13.3%, to &#165;2,060,480&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Key performance indicators</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Following are the key performance indicators (KPIs) that Canon uses in managing its business.
The changes from year to year in these KPIs are set forth in the table shown below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>KEY PERFORMANCE INDICATORS</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2006</b></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2005</b></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2004</b></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2003</b></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><b>2002</b></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales (Millions of yen)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&nbsp;4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&nbsp;3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&nbsp;3,467,853</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&nbsp;3,198,072</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&nbsp;2,940,128</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Gross profit to net sales ratio</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">49.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">48.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">49.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">50.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">47.6</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">R&#038;D expense to net sales ratio</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">8.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">7.9</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit to net sales ratio</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">17.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">15.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">14.2</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">11.8</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Inventory turnover within days</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" nowrap align="right">45 days</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" nowrap align="right">47 days</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" nowrap align="right">49 days</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" nowrap align="right">49 days</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" nowrap align="right">51 days</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Debt to total assets ratio</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">0.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">1.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">3.1</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">5.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stockholders&#146; equity to total assets ratio</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">66.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">64.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">61.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">58.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">54.1</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left">
<DIV style="font-size: 6pt; margin-top: 3pt; width: 18%; border-top: 0px solid #000000">&nbsp;</DIV>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96"></TD>
</TR>

<TR valign="top">
    <TD colspan="3">Note: Inventory turnover within days; Inventory divided by net sales for the previous six months,
multiplied by 182.5.</TD>
</TR>

</TABLE>


<P align="center" style="font-size: 10pt"><!-- Folio -->23<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">






<DIV align="left" style="font-size: 10pt; margin-top: 12pt">-Revenues-
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As Canon seeks to become a truly excellent global company, one indicator upon which Canon&#146;s
management places strong emphasis is revenue. Following are some of the KPIs relating to revenue
that management considers to be important.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to
a much lesser extent, provision of services relating to its products. Sales vary based on such
factors as product demand, the number and size of transactions within the reporting period, product
reputation for new products, and changes in sales prices. Other factors involved are market share
and market environment. In addition, management considers an evaluation of net sales by product
group important to assessing Canon&#146;s performance in sales in various product groups in light of
market trends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gross profit ratio (ratio of gross profit to net sales) is another KPIs for Canon. Through its
reforms in product development, Canon has been striving to shorten product development lead times
in order to launch new, competitively priced products at a faster pace. In addition, Canon has
achieved cost reductions through efficiency enhancements in production. Canon believes that these
achievements have contributed to improving Canon&#146;s gross profit ratio, and Canon intends to
continue to pursue further shortening of product development lead times and reductions in
production costs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit ratio (ratio of operating profit to net sales) and research and development
(&#147;R&#038;D&#148;) expense to net sales ratio are considered by Canon to be KPIs. Canon is focusing on two
areas for improvement. On one hand, Canon strives to control and reduce its selling, general and
administrative expenses. On the other hand, Canon&#146;s R&#038;D policy is designed to maintain a high level
of spending in core technology in order to sustain Canon&#146;s leading position in its current fields
of business, and to explore possibilities in other markets. Canon believes such investments will be
the basis for future success in its business and operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">-Cash Flow Management-
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon also places significant emphasis on cash flow management. The following are the KPI
relating to cash flow management that management believes to be important.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventory turnover within days is a KPI because it is a measure of supply-chain management
efficiency. Inventories have inherent risks of becoming obsolete, deteriorating or otherwise
decreasing in value significantly, which may adversely affect Canon&#146;s operating results. To
mitigate these risks, management believes that it is important to continue reducing inventories and
shortening production lead times in order to achieve early recovery of related product expenses by
strengthening supply-chain management.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s management seeks to meet its liquidity and capital requirements primarily with cash
flow from operations. Management also seeks debt-free operations. For a manufacturing company such
as Canon, the process for realizing profit on any endeavor can be lengthy, involving as it does
R&#038;D, manufacturing, and sales activities. Management, therefore, believes that it is important to
have sufficient financial strength so that it does not have to rely on external funding. Canon has
continued to reduce its reliance on external funding for capital investments in favor of generating
the necessary funds from its own operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stockholders&#146; equity to total assets ratio (ratio of total stockholder&#146;s equity to total assets)
is another KPI for Canon. Canon believes the stockholders&#146; equity to total asset ratio measures its
long-term viability. Canon believes that a high or increasing stockholders&#146; equity ratio usually
indicates that Canon has a good, or improving ability to fund debt obligations and other unexpected
expenses, which means in the long-term that Canon is better able to maintain a high level of stable
investments for its future operations and development. As Canon puts a strong emphasis on its
research and development activities, management believes that it is important to maintain a stable
financial base and, accordingly, a high level of stockholders&#146; equity to total assets ratio.
</DIV>
<DIV align="left">
<A name="128"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Critical accounting policies and estimates</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles and based on the selection and application of significant accounting policies
which require management to make significant estimates and assumptions. Canon believes that the
following are the more critical judgment areas in the application of its accounting policies that
currently affect its financial condition and results of operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Revenue recognition
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon generates revenue principally through the sale of consumer products, equipment, supplies, and
related services under separate contractual arrangements. Canon recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred and title and risk of loss have been
transferred to the customer, the sales price is fixed or determinable, and collectibility is
probable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative fair
value if such element meets the criteria for treatment as a separate unit of accounting as
prescribed in the Emerging Issues Task Force Issue 00-21 (&#147;EITF 00-21&#148;), &#147;Revenue Arrangements with
Multiple Deliverables.&#148; Otherwise, revenue is deferred until the undelivered elements are
fulfilled as a single unit of accounting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the customer.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is installed
at the customer site and the specific criteria of the equipment functionality are successfully
tested and demonstrated by Canon. Service revenue is derived primarily from maintenance contracts
on equipment sold to customers and is recognized over the term of the contract.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon offers service maintenance contracts for most office imaging products for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue from
these service maintenance contracts is recognized as services are provided.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenue from the sale of equipment under sales-type leases is recognized at the inception of
the lease. Income on sales-type leases and direct-financing leases is recognized over the life of
each respective lease using the interest method. Leases not qualifying as sales-type leases or
direct-financing leases are accounted for as operating leases and related revenue is recognized
over the lease term.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated reductions in
sales are based upon historical trends and other known factors at the time of sale. In addition,
Canon provides price protection to certain resellers of its products, and records reductions to
sales for the estimated impact of price protection obligations when announced.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Estimated product warranty costs are recorded at the time revenue is recognized and is
included in selling, general and administrative expenses. Estimates for accrued product warranty
costs are based on historical experience, and are affected by ongoing product failure rates,
specific product class failures outside of the baseline experience, material usage and service
delivery costs incurred in correcting a product failure.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->24<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Allowance for doubtful receivables
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Allowance for doubtful receivables is determined using a combination of factors to ensure that
Canon&#146;s trade and financing receivables are not overstated due to uncollectibility. Canon maintains
an allowance for doubtful receivables for all customers based on a variety of factors, including
the length of time receivables are past due, trends in overall weighted average risk rating of the
total portfolio, macroeconomic conditions, significant one-time events and historical experience.
Also, Canon records specific reserves for individual accounts when Canon becomes aware of a
customer&#146;s inability to meet its financial obligations to Canon, such as in the case of bankruptcy
filings or deterioration in the customer&#146;s operating results or financial position. If
circumstances related to customers change, estimates of the recoverability of receivables would be
further adjusted.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Valuation of inventories
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Inventories are stated at the lower of cost or market value. Cost is determined principally by the
average method for domestic inventories and the first-in, first-out method for overseas
inventories. Market value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely
reviews its inventories for their salability and for indications of obsolescence to determine if
inventories should be written-down to market value. Judgments and estimates must be made and used
in connection with establishing such allowances in any accounting period. In estimating the market
value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage
or changes in market demand for its inventories.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Environmental liabilities
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is subject to liability for the investigation and clean-up of environmental contamination at
each of the properties that Canon owns or operates, as well as at certain properties Canon formerly
owned or operated. Canon employs extensive internal environmental protection programs that focus on
preventive measures. Canon conducts environmental assessments for a number of its locations and
operating facilities. If Canon was to be held responsible for damages in any future litigation or
proceedings, such costs may not be covered by insurance and may be material. The liability for
environmental remediation and other environmental costs is accrued when it is considered probable
and costs can be reasonably estimated.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Valuation of deferred tax assets
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon currently has significant deferred tax assets, which are subject to periodic recoverability
assessments. Realization of Canon&#146;s deferred tax assets is principally dependent upon its
achievement of projected future taxable income. Canon&#146;s judgments regarding future profitability
may change due to future market conditions, its ability to continue to successfully execute its
operating restructuring activities and other factors. Any changes in any of these factors may
require possible recognition of significant valuation allowances to these deferred tax asset
balances. When Canon determines that certain deferred tax assets may not be recoverable, the
amounts which may not be realized are charged to income tax expense and will adversely affect net
income.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Employee retirement and severance benefit plans
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has significant employee retirement and severance benefit obligations which are recognized
based on actuarial valuations. Inherent in these valuations are key assumptions, including discount
rates and expected return on plan assets. Management must consider current market conditions,
including changes in interest rates, in selecting these assumptions. Other assumptions include
assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in
these assumptions inherent in the valuation are reasonably likely to occur from period to period.
These changes in assumptions may lead to changes in related employee retirement and severance
benefit costs in the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Actual results that differ from the assumptions are accumulated and amortized over future
periods and, therefore, generally affect future pension expenses. While management believes that
the assumptions used are appropriate, the differences may affect employee retirement and severance
benefit costs in the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In preparing its financial statements for fiscal 2006, Canon estimated a discount rate of 2.7%
and an expected long-term rate of return on plan assets of 4.8%. In estimating the discount rate,
Canon uses available information about rates of return on high-quality fixed-income governmental
and corporate bonds currently available and expected to be available during the period to the
maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan
assets based on management&#146;s expectations of the long-term return of the various plan asset
categories in which it invests. Management develops expectations with respect to each plan asset
category based on actual historical returns and its current expectations for future returns.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Decreases in discount rates lead to increases in actuarial pension benefit obligations which,
in turn, could lead to an increase in service cost and amortization cost through amortization of
actuarial gain or loss, a decrease in interest cost, and vice versa. A decrease of 50 basis points
in the discount rate increases the projected benefit obligation by approximately 11%. The net
effect of changes in the discount rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent periods, as permitted by the Statement of
Financial Accounting Standards (&#147;SFAS&#148;) No.&nbsp;87, &#147;Employers&#146; Accounting for Pensions.&#148;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Decrease in expected return on plan assets may increase net periodic benefit cost by
decreasing expected return amounts, while differences between expected value and actual fair value
of those assets could affect pension expense in the following years, and vice versa. For fiscal
2007, if a change of 50 basis points in the expected long-term rate of return on plan assets is to
occur, that may cause a change of approximately &#165;3,040&nbsp;million in net periodic benefit cost. Canon
multiplies management&#146;s expected long-term rate of return on plan assets by the value of its plan
assets, to arrive at the expected return on plan assets that is included in pension income
(expense). Canon defers recognition of the difference between this expected return on plan assets
and the actual return on plan assets. The net deferral affects the value of plan assets in future
fiscal years and, ultimately, future pension income (expense).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On December&nbsp;31, 2006, Canon adopted the recognition and disclosure provisions of
SFAS 158.
SFAS 158 required Canon to recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension plans in the December&nbsp;31, 2006
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January&nbsp;1, 2007, Canon and certain of its domestic subsidiaries have amended their
defined benefit pension plans, and the projected benefit obligation has decreased by &#165;101,620
million. This decrease will be amortized as a reduction of net periodic benefit cost over the
employees&#146; average remaining service period. The amount will be approximately &#165;5,834&nbsp;million per
year. In conjunction therewith, Canon and certain of its domestic subsidiaries have implemented a
defined contribution pension plan for certain future pension benefits
attributable to employees&#146;
future services.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->25<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="129"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Consolidated result of operations</B>
</DIV>

<DIV align="left">
<A name="130"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Fiscal 2006 compared with fiscal 2005</B>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Summarized results of operations for fiscal 2006 and fiscal 2005 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except per share</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>amounts and percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;10.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">707,033</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;21.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income taxes
and minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">719,143</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;17.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">612,004</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">455,325</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;18.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">341.95</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;18.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.63</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">341.84</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;18.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.36</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note: See note of Item&nbsp;3A &#147;Selected Financial Data&#148;.

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Sales</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s consolidated net sales in fiscal 2006 totaled &#165; 4,156,759&nbsp;million. This represents a 10.7%
increase from the previous fiscal year, reflecting solid rises in sales of digital cameras and
color network digital MFDs, and laser beam printers, along with the positive effects of the
depreciation of the yen.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Overseas operations are significant to Canon&#146;s operating results and generated approximately
75% of total net sales in fiscal 2006. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The average value of the yen in fiscal 2006 was &#165; 116.43 to the U.S. dollar, and &#165; 146.51 to the
euro, representing depreciation of about 5% against the U.S. dollar, and 7% against the euro,
compared with the previous year. The effects of foreign exchange rate fluctuations favorably
impacted net sales by approximately &#165; 138,700&nbsp;million. This
favorable impact was comprised of approximately
&#165;&nbsp;67,800&nbsp;million for U.S.&nbsp;dollar denominated
sales, &#165;&nbsp;65,900&nbsp;million for euro-denominated sales and
&#165;&nbsp;5,000&nbsp;million for other foreign currency-denominated
sales.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cost of sales</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the
manufacture of its products. A portion of the raw materials used by Canon is imported or includes
imported materials. Such raw materials are subject to fluctuations in world market prices and
exchange rates that may affect Canon&#146;s cost of sales. Other components of cost of sales include
depreciation expenses from plants, maintenance expenses, light and fuel expenses and rent expenses.
The ratio of cost of sales to net sales for fiscal 2006, 2005 and 2004 was 50.4%, 51.5% and 50.6%,
respectively.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Gross profit</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s gross profit in fiscal 2006 increased by 13.3% to &#165; 2,060,480&nbsp;million from fiscal 2005. The
gross profit ratio improved 1.1 points year on year to reach 49.6%. The improved gross profit ratio
was mainly the result of such factors as the introduction of automated production lines, and the
in-house manufacturing of key components and key devices, in addition to cost-reduction efforts
realized through ongoing production-reform and procurement-reform activities, which absorbed the
negative effects of severe price competition in the consumer product market.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The major components of operating expenses are payroll, R&#038;D, advertising expenses and other
marketing expenses. Although R&#038;D expenditures grew 7.6% in fiscal 2006 from the previous year to
&#165; 308,307&nbsp;million, the operating expenses to net sales ratio improved 0.4 points. This was achieved
by limiting growth in selling, general and administrative expenses, with the exception of a
temporary increase in expenses related to the relocation of operation bases, below the growth rate
for net sales. In general, Canon maintains a high level of R&#038;D expenditure to strengthen its R&#038;D
capabilities. R&#038;D expenditures grew in fiscal 2006 from the previous year, resulting from increased
R&#038;D activities.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating profit</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit in fiscal 2006 increased by 21.3% to &#165; 707,033&nbsp;million from fiscal 2005. Operating
profit in fiscal 2006 was 17.0% of net sales, compared with 15.5% in fiscal 2005.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other income (deductions)</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income (deductions)&nbsp;declined &#165; 16,851&nbsp;million, attributable to an increase of currency
exchange losses and a decrease in gains on sales of securities, although interest income grew in
line with the rise in the interest rate.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income before income taxes and minority interests</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income before income taxes and minority interests in fiscal 2006 was &#165; 719,143&nbsp;million, a 17.5%
increase from fiscal 2005, and constituted 17.3% of net sales.</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->26<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income taxes</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision for income taxes increased by &#165; 35,448&nbsp;million from fiscal 2005, primarily as a result of
the increase in income before income taxes and minority interests. The effective tax rate during
fiscal 2006 declined by 0.3% compared with fiscal 2005.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net income</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As a result of factors offerings above, net income in fiscal 2006 increased by 18.5% to &#165; 455,325
million, which exceeds the growth rate of income before income taxes and minority interests. This
represents an 11.0% return on net sales.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Product information
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon divides its businesses into three product groups: business machines, cameras and optical and
other products.
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The business machines product group </B>includes office imaging products, computer
peripherals and business information products.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Office imaging products include office network digital MFDs, color
network digital MFDs, office copying machines, personal-use copying machines and
full-color copying machines.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Business information products include micrographic equipment, personal computers and
calculators.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The cameras product group </B>includes single lens reflex
(&#147;SLR&#148;) cameras, compact cameras, digital cameras and
digital video camcorders.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The optical and other products product group </B>includes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Sales by product</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s sales by product group are summarized as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Office imaging products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,185,925</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;2.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,153,240</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Computer peripherals</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,398,408</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;12.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,244,906</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Business information products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">106,754</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;2.4</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104,255</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total business machines</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,691,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;7.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,502,401</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,041,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;18.5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">879,186</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">423,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;13.7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">372,604</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;10.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of business machines, constituting 64.7% of consolidated net sales, increased 7.5%, to
&#165; 2,691,087&nbsp;million in fiscal 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of office imaging products increased 2.8% in fiscal 2006, to &#165; 1,185,925&nbsp;million. In the
business machine segment, sales of color network digital MFDs, which are grouped in the office
imaging products sub-segment, recorded significant growth with the launch of such new models as the
mid to high-speed office-use iR C5180 series, the low-power-consumption iR C3380 series, and the
high-image-quality imagePRESS C1 for commercial printing. Among monochrome network digital MFDs,
while the sales increased in the Asian
market, sales of monochrome models declined in other markets as demand shifted toward color models. Color office imaging products accounted for 31% and 28% and monochrome office
imaging products accounted for 52% and 56% of office imaging products sales in fiscal 2006 and
2005, respectively. Sales of facsimiles and information system business accounted for 17% and 16%
of sales of office imaging products in both fiscal 2006 and 2005, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of computer peripherals increased 12.3% in fiscal 2006 to &#165; 1,398,408&nbsp;million. Laser beam
printers enjoyed a year-on-year increase in unit sales, with color models growing more than 50% and
monochrome machines, particularly low-end models, also recording healthy growth of over 10%. Sales
in value terms also rose significantly. As for inkjet printers, despite a decline in demand for
single-function models and severe price competition in the market, sales in value terms increased
along with unit sales. Sales performance was boosted by the introduction of 24 new models&#151;13
single-function models and 11 multifunction models&#151;including the high-speed user-friendly PIXMA
MP600 and overseas entry-level-model PIXMA MP160 all-in-ones, which contributed to a stronger
product lineup while also supporting favorable sales growth for consumables.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of business information products increased 2.4%, to &#165; 106,754&nbsp;million in fiscal 2006,
mainly due to the growth in the demand for document scanner.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->27<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of cameras continued to achieve significant sales growth of 18.5% in fiscal 2006, totaling
&#165; 1,041,865&nbsp;million. The continued strong demand for digital SLR cameras has fueled continued
growth with particularly strong sales for the advanced-amateur-model EOS 30D, launched in the first
half of 2006, and the EOS DIGITAL REBEL XTi, launched in the second half. This, in turn, led to
expanded sales of interchangeable lenses for SLR cameras. Sales of compact digital cameras also
continued to expand steadily with the introduction of 16 new models in 2006, including six stylish
ELPH-series models and 10 PowerShot-series models that cater to a diverse range of shooting styles.
As a result, unit sales of digital cameras grew by more than 20% compared with the previous year.
Digital cameras accounted for 75% and 72% and conventional film cameras accounted for 15% and 16%
of camera sales in fiscal 2006 and 2005, respectively. In the field of digital video camcorders,
the launch of consumer-market HDV models equipped with Canon HD CMOS sensors contributed to
expanded sales, filling out the company&#146;s digital camcorder lineup along with MiniDV and DVD
models. Video camcorders accounted for the remaining 10% and 12% of camera sales in fiscal 2006 and
2005, respectively. Sales of cameras constituted 25.1% of consolidated net sales in fiscal 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of optical and other products increased 13.7% in fiscal 2006, to &#165; 423,807&nbsp;million. In the
optical and other products segment, while steppers, used in the production of semiconductors,
enjoyed steady demand due to a significant increase in investment by manufacturers, sales of
optical products decreased amid declining demand for aligners, used to produce LCD panels, due to
restrained investment by LCD manufacturers. As for the other products included in the segment, the
newly consolidated subsidiaries last year contributed to significant sales growth. Sales of optical
and other products constituted 10.2% of consolidated net sales in fiscal 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Sales by region</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A summary of net sales by region in fiscal 2006 and fiscal 2005 is provided below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">932,290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;8.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">856,205</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Americas</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,283,646</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;12.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,145,950</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Europe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,314,305</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;11.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,181,258</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">626,518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;9.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">570,778</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;10.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note: This summary of net sales by region of destination is determined by the location of the
customer.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A geographical analysis indicates that net sales in fiscal 2006 increased in every region.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Japan, net sales increased by 8.9% in fiscal 2006 from fiscal 2005. The results were mainly
attributable to increased sales of digital cameras and steppers, used in the production of
semiconductors and the significant sales growth of the newly consolidated subsidiaries acquired
last year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the Americas, net sales increased by 6.6% on a local currency basis, mainly due to
increased sales of digital cameras and laser beam printers. Sales of digital cameras experienced
continued strong demand and benefited from the effect of newly-launched products such as the EOS
30D, advanced-amateur-model, and the EOS DIGITAL REBEL XTi. On a yen basis, after accounting for
the depreciation of the yen against the U.S. dollar, net sales in the Americas increased by 12.0%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Europe, net sales increased by 4.3% on a local currency basis mainly due to increased sales
of digital cameras and laser beam printers. On a yen basis, after accounting for the depreciation
of the yen against the euro, net sales in Europe grew 11.3% in fiscal 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales in other areas increased by 9.8% on a yen basis in fiscal 2006, reflecting overall sales
growth, particularly in digital cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Operating profit by product</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit for business machines in fiscal 2006 increased &#165; 57,201&nbsp;million to &#165; 599,229
million. The gross profit ratio improved compared to the previous year, due to cost reduction
efforts, and the sales-to-expense ratio declined, contributing to an increase in operating profit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit for cameras increased &#165; 95,032&nbsp;million to &#165; 268,738&nbsp;million. The gross profit
ratio for the camera segment improved, due to such factors as increased sales of new products and
cost reduction efforts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit for optical and other products in fiscal 2006 increased &#165; 2,655&nbsp;million to
&#165; 41,475&nbsp;million. The gross profit ratio increased compared to the previous year, due to an increase
in sales of steppers.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->28<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="131"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Fiscal 2005 compared with fiscal 2004</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Summarized results of operations for fiscal 2005 and fiscal 2004 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except per share</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>amounts and percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;   8.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;   7.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">543,793</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income taxes and minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">612,004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;  10.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">552,116</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;  11.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;  11.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">258.53</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;  11.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257.85</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note: See note of Item&nbsp;3A &#147;Selected Financial Data&#148;.

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Sales</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s consolidated net sales in fiscal 2005 totaled &#165; 3,754,191&nbsp;million. This represents an
8.3% increase from the previous fiscal year, reflecting significant growth in sales of digital
cameras, color network digital MFDs and projection aligners.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Overseas operations are significant to Canon&#146;s operating results and generated approximately
74% of total net sales in fiscal 2005. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The average value of the yen in fiscal 2005 was &#165; 110.58 to the U.S. dollar, and &#165; 137.04 to
the euro, representing a depreciation of 2% against both currencies, compared with the previous
year. The effects of foreign exchange rate fluctuations favorably impacted net sales by
approximately &#165; 66,400&nbsp;million. Net sales denominated in foreign currency increased by approximately
&#165; 41,500&nbsp;million in U.S. dollars, increased by &#165; 16,300&nbsp;million in euro, and increased by &#165; 8,600
million in other foreign currencies.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cost of sales</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the
manufacture of its products. A portion of the raw materials used by Canon is imported or includes
imported materials. Such raw materials are subject to fluctuations in world market prices and
exchange rates that may affect Canon&#146;s cost of sales. Other components of cost of sales include
depreciation expenses from plants, maintenance expenses, light and fuel expenses and rent expenses.
The ratio of cost of sales to net sales for fiscal 2005, 2004 and 2003 was 51.5%, 50.6% and 49.7%,
respectively.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Gross profit</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s gross profit in fiscal 2005 increased by 6.2% to &#165; 1,819,043&nbsp;million from fiscal 2004.
Despite such negative factors as escalating prices of raw materials and a severe price competition,
the gross profit ratio for the year remained at high, with a decrease of 0.9 points from the
previous year, owing to cost reductions realized through ongoing production-reform and
procurement-reform efforts.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating expenses</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The major components of operating expenses are payroll, R&#038;D, advertising expenses and other
marketing expenses. Although R&#038;D expenses grew 4.1% from the previous year to &#165; 286,476&nbsp;million,
keeping spending growth below the growth rate for net sales, the operating expenses to net sales
ratio improved 0.7 points. In general, Canon maintains a high level of R&#038;D expenditure to
strengthen its R&#038;D capabilities. R&#038;D expenditures grew in fiscal 2005 from the previous year,
resulting from increased R&#038;D activities.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Operating profit</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit in fiscal 2005 increased by 7.2% to &#165; 583,043&nbsp;million from fiscal 2004.
Operating profit in fiscal 2005 was 15.5% of net sales, compared with 15.7% in fiscal 2004.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Other income (deductions)</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other income (deductions)&nbsp;improved by &#165; 20,638&nbsp;million, attributable to an increase of
interest revenue, resulting from such factors as an increase in surplus funds accompanying the
improved balance sheet and a rise in interest rates in the United States, along with a decrease in
currency exchange losses.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income before income taxes and minority interests</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Income before income taxes and minority interests in fiscal 2005 was &#165; 612,004&nbsp;million, a
10.8% increase from fiscal 2004, and constituted 16.3% of net sales.</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->29<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Income taxes</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 0pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provision for income taxes increased by &#165; 18,771&nbsp;million from fiscal 2004, primarily as a
result of the increase in income before income taxes and minority interests. The effective tax rate
during fiscal 2005 declined by 0.3% compared with fiscal 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Net income</I>
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net income in fiscal 2005 increased by 11.9% to &#165; 384,096&nbsp;million, which exceeds the growth
rate of income before income taxes and minority interests. This represents a 10.2% return on net
sales.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Product information</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon divides its businesses into three product groups: business machines, cameras and optical and
other products.
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The business machines product group </B>includes office imaging products, computer
peripherals and business information products.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Office imaging products include office network digital MFDs, color network digital
MFDs, office copying machines, personal-use copying machines and full-color copying
machines.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="9%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Business information products include micrographic equipment, personal computers and
calculators.</TD>
</TR>

</TABLE>
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The cameras product group </B>includes SLR cameras, compact cameras, digital cameras and
digital video camcorders.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>The optical and other products product group </B>includes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January&nbsp;2004, Canon has changed classification of product categories with regards to
information system business, which had been classified in &#147;Optical and other products,&#148; to
&#147;Business machines (Office imaging products)&#148; in order to better reflect the current relation with
those products. Accordingly, information for previous fiscal years has been reclassified to conform
with the current classification.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Sales by product</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s sales by product group are summarized as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Office imaging products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,153,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043; 2.9</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,120,972</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Computer peripherals</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,244,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043; 8.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,149,914</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Business information products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104,255</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">-10.9</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,067</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total business machines</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,502,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;4.8</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,387,953</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">879,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043; 15.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">763,079</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">372,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;17.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">316,821</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;8.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of business machines, constituting 66.7% of consolidated net sales, increased 4.8%, to &#165; 2,502,401&nbsp;million
in fiscal 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of office imaging products increased 2.9%, to &#165; 1,153,240&nbsp;million. Demand for network
digital MFDs continues to shift from monochrome machines to color models, as well as towards
higher-end features. The Color imagingRunner(&#147;iR&#148;) C3170/2570 series, equipped with a new
high-speed image-processing chip, and the iR C3220/2620 series continued to sell well in both Japan
and European markets, as did the new high-speed iR C6870/5870 series models. Among monochrome
network digital MFDs, mid-level models such as the iR4570/3570/2870/2270 series contributed to
expanded sales, along with the iR6570/5570, featuring energy-saving performance and high
productivity, and the iR2020/2016 series, with enhanced networking features. Color office imaging
products accounted for 28% and 24% and monochrome office imaging products accounted for 56% and 62%
of office imaging products sales in fiscal 2005 and 2004, respectively. Sales of facsimiles and
information system business accounted for 16% and 14% of sales of office imaging products in both
fiscal 2005 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of computer peripherals increased 8.3% to &#165; 1,244,906&nbsp;million. Laser beam printers
enjoyed a year-on-year increase in unit sales, with color models growing more than 30% and
monochrome machines, particularly low-end models, also recording healthy growth. Sales in value
terms also rose despite the effect of the shift in market demand toward lower priced models. Inkjet
printers recorded an increase in unit sales of more than 10%, with the PIXMA iP3000/4000 and, in
markets outside of Japan, the PIXMA MP110/130 maintaining brisk sales. Additionally, newly
introduced models, including the PIXMA iP4200, the PIXMA iP1600 in overseas markets, and high-speed
all-in-one models such as the PIXMA MP500, contributed to a stronger product lineup, which also
fueled sales growth in value terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of business information products decreased 10.9%, to &#165; 104,255&nbsp;million in fiscal 2005,
mainly due to the intentional curtailing of personal computer sales in the domestic market.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->30<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of cameras continued to achieve significant sales growth of 15.2%, totaling &#165; 879,186
million. The continued strong demand for digital SLR cameras has fueled robust growth, with the
EOS DIGITAL REBEL XT, launched in the first half of 2005, and the EOS 5D, launched in the second
half, recording particularly strong sales along with continued healthy sales of the EOS 20D,
launched in the previous period. This, in turn, has led to expanded sales of interchangeable lenses
for SLR cameras. Sales of compact-model digital cameras also continued to expand steadily, with
healthy demand for the PowerShot SD400 and PowerShot A520, launched in the first half of 2005, as
well as the PowerShot SD550 and PowerShot SD450 models, introduced in the second half. As a
result, unit sales of digital cameras grew by more than 20% compared with the previous year.
Digital cameras accounted for 72% and 69% and conventional film cameras accounted for 17% and 16%
of camera sales in fiscal 2005 and 2004, respectively. In the field of digital video camcorders,
newly introduced Mini DV, DVD, and HDV models, including the Optura 600, the DC20/10, and the XL H1
registered strong performances. Video camcorders accounted for the remaining 11% and 15% of camera
sales in fiscal 2005 and 2004, respectively. Sales of cameras constituted 23.4% of consolidated net
sales in fiscal 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales of optical and other products increased 17.6%, to &#165; 372,604&nbsp;million. In the optical and
other products segment, demand for steppers, used in the production of semiconductors, has
continued to lag since the summer of 2004, resulting in a drop in the number of units sold and,
consequently, a decrease in sales value. Sales of aligners, however, which are used in the
production of LCD panels realized notable growth in terms of both volume and value owing to
increased investments by LCD manufacturers in response to the rapidly expanding LCD television
market. Additionally, the vacuum thin-film deposition and processing equipment produced by the
Company&#146;s newly consolidated subsidiaries contributed to expanded sales. Sales of optical and
other products constituted 9.9% of consolidated net sales in fiscal 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Sales by region</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A summary of net sales by region in fiscal 2005 and fiscal 2004 is provided below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Change</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen, except percentage data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japan</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">856,205</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;  0.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">849,734</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Americas</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,145,950</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;  8.2</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,059,425</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Europe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,181,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#043;  8.0</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,093,295</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Others</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">570,778</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" nowrap>&#043;  22.6</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">465,399</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">&#043;  8.3</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note: This summary of net sales by region of destination is determined by the location of the
customer.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A geographical analysis indicates that net sales in fiscal 2005 increased in every region.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Japan, net sales increased by 0.8% in fiscal 2005 from fiscal 2004. The results were mainly
attributable to increased sales of office imaging products, computer peripherals, and digital
cameras. Color network digital MFDs which include the Color imageRUNNER(iR) C3170/2570 series,
equipped with a new high-speed image-processing chip, and the iR C3220/2620 series lineup, have
contributed to increased sales of office imaging products.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the Americas, net sales increased by 5.7% on a local currency basis, mainly due to
increased sales of digital cameras, and laser beam printers. Sales of digital cameras experienced
continued strong demand and benefited from the effect of newly-launched products such as
PowerShot-series models and Canon&#146;s digital SLR. On a yen basis, after accounting for the
appreciation of the yen against the U.S. dollar, net sales in the Americas increased by 8.2%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In Europe, net sales increased by 6.1% on a local currency basis mainly due to increased sales
of digital cameras and laser beam printers. On a yen basis, after accounting for the depreciation
of the yen against the euro, net sales in Europe grew 8.0% in fiscal 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales in other areas increased by 22.6% on a yen basis in fiscal 2005, reflecting overall
sales growth, particularly in digital cameras and semiconductor equipment.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Operating profit by product</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating profit for business machines in fiscal 2005 increased &#165; 20,944&nbsp;million to &#165; 542,028
million. The gross profit ratio remained at a previous year level, due to cost reduction efforts,
and the sales-to-expense ratio declined, contributing to an increase in operating profit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Operating
profit for cameras increased &#165; 42,908&nbsp;million to &#165; 173,706 million. The gross profit
ratio improved, due to an increase in unit sales of digital cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Optical and other products in fiscal 2005 increased &#165; 9,988&nbsp;million to &#165; 38,820&nbsp;million. The
gross profit ratio increased compared to the previous year, due to an increase in sales of
aligners.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->31<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Segment information by product and geographic area</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Segment information by product and by geographic area for the years ended December&nbsp;31, 2006,
2005 and 2004 are shown below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table provides segment information by product:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Optical</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Business</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>and other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>machines</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cameras</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>products</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,691,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,041,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">423,807</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">190,687</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(190,687</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,691,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,041,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">614,494</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(190,687</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,091,858</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">773,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">573,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,722</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,449,726</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">599,229</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">268,738</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">41,475</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(202,409</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">707,033</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,617,198</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">542,866</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">501,008</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,860,843</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,521,915</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">127,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,756</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">68,647</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">262,294</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital expenditure</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">154,259</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36,272</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">157,609</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">379,657</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Optical</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Business</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>and other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>machines</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cameras</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>products</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,502,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">879,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">372,604</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">158,114</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(158,114</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,502,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">879,186</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">530,718</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(158,114</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,960,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">705,480</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">491,898</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,171,148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">542,028</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">173,706</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">38,820</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(171,511</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,427,277</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">480,957</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">517,527</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,617,792</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,043,553</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">123,037</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,662</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47,231</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,941</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital expenditure</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">201,887</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,955</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">383,784</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Optical</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Business</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>and other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>machines</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cameras</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>products</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,387,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">763,079</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">316,821</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">138,419</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(138,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,387,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">763,079</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">455,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(138,419</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,866,869</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">632,281</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">426,408</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,498</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,924,060</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">521,084</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">130,798</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">28,832</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(136,921</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">543,793</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,338,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">399,207</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">418,418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,430,579</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,587,021</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115,830</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,087</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,692</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital expenditure</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">134,128</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39,783</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,264</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">92,555</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">318,730</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 16pt">Notes:

</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>General corporate expenses of &#165; 202,328&nbsp;million, &#165; 171,522&nbsp;million and &#165; 136,929&nbsp;million in
the years ended December&nbsp;31, 2006, 2005 and 2004, respectively, are included in &#147;Corporate and
Eliminations.&#148; For the fiscal year ended December&nbsp;31, 2004, a gain of &#165; 17,141&nbsp;million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Corporate assets of &#165; 1,860,933&nbsp;million, &#165; 1,239,255&nbsp;million and &#165; 1,430,599&nbsp;million as of
December&nbsp;31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
&#147;Corporate and Eliminations.&#148;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The segments are defined under Japanese GAAP. In grouping of segment information by product,
Japanese GAAP requires that consideration be given to similarities of product types and
characteristics, manufacturing methods, sales markets, and other factors that are similar.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->32<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following table provides segment information by geographic area:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japan</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Americas</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Europe</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Others</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,037,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,277,867</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,313,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">527,316</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,311,482</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,764</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">792,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(3,111,850</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,349,139</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,282,631</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,317,505</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,319,334</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,111,850</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,156,759</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,558,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,236,138</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,272,463</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,275,817</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,893,377</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,449,726</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">790,454</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">46,493</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">45,042</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">43,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(218,473</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">707,033</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,644,116</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">432,001</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">682,381</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">339,314</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">424,103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,521,915</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japan</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Americas</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Europe</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Others</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">979,748</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,139,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,178,672</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">455,987</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,046,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,424</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,206</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">646,530</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,702,333</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,025,921</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,147,208</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,180,878</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,102,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,702,333</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,362,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,110,415</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,147,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,071,155</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,520,099</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,171,148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">663,902</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">36,793</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">33,220</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">31,362</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(182,234</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,419,012</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">406,101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">569,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">312,472</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">336,218</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,043,553</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD nowrap align="center" colspan="22" style="border-bottom: 1px solid #000000"><B>As of/for the year ended December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Corporate and</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japan</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Americas</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Europe</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Others</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Eliminations</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Consolidated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="22"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Unaffiliated customers</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">919,153</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,057,066</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,090,712</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">400,922</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Intersegment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,882,973</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,863</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">591,677</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(2,487,674</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,802,126</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,065,929</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,094,873</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">992,599</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,487,674</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating cost and expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,206,141</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,025,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,071,552</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">965,080</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,344,341</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,924,060</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">595,985</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">40,301</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">23,321</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27,519</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(143,333</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">543,793</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,793,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">341,616</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">533,865</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">271,566</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">646,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,587,021</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 16pt">Notes:

</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>General corporate expenses of &#165; 202,328&nbsp;million, &#165; 171,522&nbsp;million and &#165; 136,929&nbsp;million in
the years ended December&nbsp;31, 2006, 2005 and 2004, respectively, are included in &#147;Corporate and
Eliminations.&#148; For the fiscal year ended December&nbsp;31, 2004, a gain of &#165; 17,141&nbsp;million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Corporate assets of &#165; 1,860,933&nbsp;million, &#165; 1,239,255&nbsp;million and &#165; 1,430,599&nbsp;million as of
December&nbsp;31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
&#147;Corporate and Eliminations.&#148;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Segment information by geographic area is determined by the location of the Company or its
relevant subsidiary making the sale. The segments are defined under Japanese GAAP. In grouping
of segment information by geographic area, Japanese GAAP requires that consideration be given
to geographic proximity, as well as similarities of economic activities, interrelationships of
business activities and other similar factors.</TD>
</TR>

</TABLE>
</DIV>
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</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">



</TABLE>
</DIV>
<DIV align="left">
<A name="132"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Foreign operations and foreign currency transactions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s marketing activities are performed by subsidiaries in various regions in local currencies,
while the cost of sales is generally in yen. Given Canon&#146;s current operating structure,
appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce
the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial
instruments, which are comprised principally of forward currency exchange contracts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The return on foreign operation sales is usually lower than that from domestic operations
because foreign operations consist mainly of marketing activities. Return on foreign operation
sales is calculated by dividing net income of foreign subsidiaries, after factoring in
consolidation adjustments between foreign subsidiaries, by net sales of foreign subsidiaries.
Marketing activities are generally less profitable than production activities, which are mainly
conducted by the Company and its domestic subsidiaries. The returns on foreign operation sales in
fiscal 2006, 2005 and 2004 were 3.7%, 3.0% and 2.8%, respectively. This compares with returns of
11.0%, 10.2% and 9.9% on total operations for the respective years.
</DIV>
<DIV align="left">
<A name="133"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>Recent developments</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has decided to purchase from Toshiba Corporation (&#147;Toshiba&#148;) all of Toshiba&#146;s
outstanding shares of SED Inc., a Canon subsidiary. On completion of the purchase, SED Inc. became
a wholly owned subsidiary of Canon, effective January&nbsp;29, 2007. In accordance with this decision,
which was based on the assumption of prolonged litigation pending against Canon in the United
States with respect to SED technology, Canon will carry out the SED panel business independently in
order to facilitate the earliest possible launch of a commercial SED television business. Canon,
with the necessary cooperation from Toshiba, will make every effort for the smooth launch of its
television business based on the high image quality achieved by SED technology.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon Electronics Inc. acquired the shares of e-System Corporation (listed on the Hercules
Section of the Osaka Securities Exchange) through a third-party distribution and made it into a
subsidiary as of December&nbsp;27, 2006. By making e-System Corporation a subsidiary, Canon Electronics
Inc. aims to make further advances in its group&#146;s information-related business and develop it into
a core business.
</DIV>
<DIV align="left">
<A name="134"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Liquidity and capital resources</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash and cash equivalents in fiscal 2006 increased &#165;150,673&nbsp;million to &#165;1,155,626&nbsp;million,
compared with &#165;1,004,953&nbsp;million in fiscal 2005 and &#165;887,774&nbsp;million in fiscal 2004. Canon&#146;s cash
and cash equivalents are typically denominated in Japanese yen, with the remainder denominated in
foreign currencies such as the U.S. dollar.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities in fiscal 2006 increased by &#165;89,563&nbsp;million from the
previous year to &#165;695,241&nbsp;million, reflecting the substantial growth in sales and increased cash
proceeds from sales, combined with a substantial increase in net income. Cash flow from operating
activities consisted of the following components: the major component of Canon&#146;s cash inflow is
cash received from customers, while the major components of Canon&#146;s cash outflow are payments for
parts and materials, operating expenses, and income taxes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For fiscal 2006, cash inflow from cash received from customers increased, due to the increase
in net sales. This increase in cash inflow was within the range of the increase in net sales, as
there were no significant changes in Canon&#146;s collection rates. Cash outflow for payments for parts
and materials also increased, as a result of an increase in net sales. However, this increase was
less than the increase in net sales, due to the effects of cost reduction. Cost reduction reflects
a decline in unit prices of parts and raw materials, as well as a streamlining of the process of
using these parts and materials through promoting efficiency in operations. Cash outflow for
payroll payments increased, due to the increase in the number of employees. The employees in the
Asian region increased, due to the expansion of production in the regions. Cash outflow for
payments for selling, general and administrative expenses increased, but the increase was within
the range of the increase in net sales, due to cost-cutting efforts. Cash outflow for payments of
income taxes increased, due to the increase in taxable income.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash used in investing activities in fiscal 2006 was &#165;460,805&nbsp;million, compared with
&#165;401,141&nbsp;million in fiscal 2005 and &#165;252,967&nbsp;million in fiscal 2004, consisting primarily of
capital expenditures. Capital expenditures in fiscal 2006 totaled &#165;424,862&nbsp;million, which was used
mainly to expand production capabilities in Japan and overseas regions and to strengthen the
Company&#146;s R&#038;D-related infrastructure. As a result, free cash flow, or cash flow from operating
activities minus cash flow from investing activities, totaled &#165;234,436&nbsp;million for fiscal 2006 as
compared to &#165;204,537&nbsp;million for fiscal 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash used in financing activities totaled &#165;107,487&nbsp;million in fiscal 2006, mainly
resulting from a decrease in loan repayments accompanying the company&#146;s strengthened financial
position despite a large increase in the dividend payout. The Company paid dividends in fiscal 2006
of &#165;83.33 per share, which was an increase of &#165;16.66 per share over the prior year (after adjusting
for the effect of three for two stock split in 2006).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon seeks to meet its liquidity and capital requirements principally with cash flow from
operations. Consistent with this objective, Canon continued to reduce its reliance on external
funding for capital investments in favor of relying upon internally generated cash flows. This
approach is supplemented with group-wide treasury and cash management activities undertaken at the
parent company level. Canon believes that its working capital is sufficient for its present
requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the extent Canon relies on external funding for its liquidity and capital requirements, it
generally has access to various funding sources, including issuance of additional share capital,
long-term debt or short-term loans. While Canon has been able to obtain funding from its
traditional financing sources and from the capital markets, and believes it will continue to be
able to do so in the future, there can be no assurance that adverse economic or other conditions
will not affect Canon&#146;s liquidity or long-term funding in the future.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Short-term loans (including current portion of long-term debt) amounted to &#165;15,362&nbsp;million at
December&nbsp;31, 2006 compared to &#165;5,059&nbsp;million at December&nbsp;31, 2005. Long-term debt (excluding
current portion) amounted to &#165;15,789&nbsp;million at December&nbsp;31, 2006 compared to &#165;27,082&nbsp;million at
December&nbsp;31, 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s long-term debt generally consists of lease obligations, as well as fixed-rate notes
and convertible debentures which Canon has issued in the domestic market with original maturities
of ten to fifteen years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In order to facilitate access to global capital markets, Canon obtains credit ratings from two
rating agencies, Moody&#146;s Investors Services, Inc. (&#147;Moody&#146;s&#148;) and Standard and Poor&#146;s Rating
Services (&#147;S&#038;P&#148;). In addition, Canon maintains a rating from Rating and Investment Information,
Inc. (&#147;R&#038;I&#148;), a rating agency in Japan, for access to the Japanese capital market.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->34<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of February&nbsp;28, 2007, Canon&#146;s debt ratings are: Moody&#146;s: Aa2 (long-term); S&#038;P: AA
(long-term), A-1&#043; (short-term); and R&#038;I: AA&#043; (long-term). Canon does not have any rating downgrade
triggers that would accelerate the maturity of a material amount of its debt. A downgrade in
Canon&#146;s credit ratings or outlook could, however, increase the cost of its borrowings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capital expenditure in fiscal 2006 amounted to &#165;379,657&nbsp;million compared with &#165;383,784&nbsp;million
in fiscal 2005 and &#165;318,730&nbsp;million in fiscal 2004. In fiscal 2005, capital expenditures were
mainly used to expand production capabilities in both domestic and overseas regions, and to bolster
the Company&#146;s R&#038;D-related infrastructure. In addition, Canon has been continually investing in
tools and dies for business machines, in which the amount invested is generally the same each year.
For fiscal 2007, Canon projects its capital expenditures will be approximately &#165;480,000&nbsp;million.
The capital expenditures include investments in new production plants and new facilities of Canon.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employer contributions to Canon&#146;s worldwide defined benefit pension plans were &#165;44,981&nbsp;million
in fiscal 2006, &#165;40,059&nbsp;million in fiscal 2005, &#165;31,018&nbsp;million in fiscal 2004. During fiscal 2007,
Canon expects to make cash contributions of approximately &#165;17,369&nbsp;million to its defined benefit
pension plans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Working capital in fiscal 2006 increased &#165;239,101&nbsp;million, to &#165;1,619,042&nbsp;million, compared
with &#165;1,379,941&nbsp;million in fiscal 2005 and &#165;1,248,987&nbsp;million in fiscal 2004. This increase was
primarily a result of an increase in cash and cash equivalents. Canon believes its working capital
will be sufficient for its requirements for the foreseeable future. Canon&#146;s capital requirements
are primarily dependent on management&#146;s business plans regarding the levels and timing of capital
expenditures and investments. The working capital ratio (ratio of current assets to current
liabilities) for fiscal 2006 was 2.39 compared to 2.28 for fiscal 2005 and 2.27 for fiscal 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Return on assets (Net income divided by the average of total assets as of December&nbsp;31, 2006,
2005 and 2004) recorded 10.6% in fiscal 2006, compared to 10.1% in fiscal 2005 and 10.1% in fiscal
2004. Return on stockholders&#146; equity was 16.3% in fiscal 2006 compared with 16.0% in fiscal 2005
and 16.8% in fiscal 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Debt to total assets ratio was 0.7%, 0.8% and 1.1% as of December&nbsp;31, 2006, 2005 and 2004,
respectively. Canon had short-term loans and long-term debt of &#165;31,151&nbsp;million as of December&nbsp;31,
2006, &#165;32,141&nbsp;million as of December&nbsp;31, 2005 and &#165;38,530&nbsp;million as of December&nbsp;31, 2004.
</DIV>
<DIV align="left">
<A name="135"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Research and development, patents and licenses</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon kicked off the year 2006, the first year of Phase III (2006-2010) of the Excellent Global
Corporation Plan, with an objective to realize &#147;Sound Growth&#148; toward &#147;Joining the World&#146;s Top 100
Companies.&#148;
</DIV>


<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&nbsp;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon has established the following as key strategies:</TD>
</TR>



<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Realize the overwhelming No.1 position worldwide in all current core businesses,</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Expand operations through diversification and</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Identify new business domains and accumulate necessary technological capabilities</TD>
</TR>


<TR><TD>&nbsp;</TD></TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon is striving to achieve these strategies as follows:</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Realize the No.1 position worldwide in all current core businesses: Product R&#038;D
divisions will work together with the corporate R&#038;D headquarters to bolster product
competitiveness through development of superior next-generation products.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Expand operations through diversification: Canon is studying existing technologies to
expand business opportunities and develop required technologies for new SED businesses to
make SEDs the windows for images and information in living rooms.</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Identify new business domains and accumulate necessary technological capabilities: Canon
has established a Strategic Committee for New Businesses. In
addition, Canon is developing and
strengthening relationships with universities and other research institutes to carry on
fundamental research and develop cutting-edge technologies. Canon has signed a
comprehensive partnership agreement with Tokyo Institute of Technology in 2005 regarding
joint research on advanced materials and imaging technologies. Canon has also tied up with
Kyoto University to develop next-generation medical-image processing technologies.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has utilized 3D-CAD systems for some time to boost R&#038;D efficiency by curtailing product
development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and
analysis technologies by introducing leading-edge facilities, including one of Japan&#146;s
highest-performance cluster computers in 2005. As a result, Canon has succeeded in further reducing
the need for prototypes, dramatically lowering costs and shortening development lead times.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has R&#038;D centers worldwide, including the USA. Each of our R&#038;D centers, with its
expertise, is collaborating with other centers to achieve synergies, and cultivating closer ties in
fields ranging from basic research to product development.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s R&#038;D activities are conducted in the following four organizations:
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Core Technology Development Headquarters, where component engineering and base
technology R&#038;D, such as optics technology and nanotechnology, is conducted</TD>
</TR>
<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Leading-Edge Technology Development Headquarters, where most advanced technology
R&#038;D, aiming to create new technological capabilities, is conducted</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Platform Technology Development Headquarters, where platform technology R&#038;D, such
as system Large-Scale Integration (LSI)&nbsp;chips, network technology and visual information
technology, is conducted</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" style="background: transparent">&nbsp;</TD>
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Device Technology Development Headquarters, where key device R&#038;D, such as for
semiconductor devices, is conducted</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s consolidated R&#038;D expenditures were &#165;308,307&nbsp;million in fiscal 2006, &#165;286,476&nbsp;million
in fiscal 2005 and &#165;275,300&nbsp;million in fiscal 2004. The ratios of R&#038;D expenditure to consolidated
total net sales for fiscal 2006, 2005, and 2004 were 7.4 %, 7.6% , and 7.9%, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon believes that new products protected by seminal patents will not easily allow competitors to
catch up with it, and provide Canon with advantages in establishing standards in the market and
industry. According to the United States patent annual list, which IFI CLAIMS<SUP style="font-size: 85%; vertical-align: text-top">&#174;</SUP> Patent Services
released, Canon obtained the 3rd-greatest number of private sector patents in 2006. This
achievement marks Canon&#146;s fifteenth consecutive year as one of the top three patent-receiving
private-sector organizations.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->35<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="136"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>D.&nbsp;Trend information</B>
</DIV>


<DIV align="left">
<A name="137"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Trend information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The global economy is generally expected to maintain a prolonged economic growth this year,
despite predictions of slightly lower growth rate in major areas of Japan, the U.S., and Europe.
Business competition in general, however, is expected to further intensify and the business
conditions surrounding the Canon Group will likely remain difficult.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under these circumstances, the Canon Group has positioned 2007, the second year of Phase III
(2006 to 2010) of its &#147;Excellent Global Corporation Plan,&#148; as a year for fundamental strengthening
to achieve 2010 objectives and will accelerate our growth.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For this year, the 70th anniversary of our founding, key objectives toward that end include,
first of all, introducing even more competitive new products to boost our competitiveness against
other companies with the aim of achieving the overwhelming No.1 position worldwide in all of our
current core businesses. Secondly, we aim to achieve steady cost reductions and further reduce our
cost ratio through continuous measures to improve productivity, such as promoting production
automation by introducing high-speed automation equipment; bringing the in-house production of more
key parts, taking procurement innovation activities to an even higher level; and building an IT
system that centralizes business information for everything from planning and development to
production, sales, procurement, and logistics.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Renewing our awareness that companies&#146; mission is to maintain product quality, we will build
or enhance our systems for quality management, safety management and crisis management, including
measures to heighten awareness, to help ensure that our quality fits for an excellent global
corporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We will also reform our research and development activities from the new perspective to secure
robust patents, which are a critical lifeline for a manufacturer and the very source of
competitiveness for a high-value-added manufacturing business. Lastly, toward the objective of
becoming a truly excellent global corporation, we will bring to bear the resource of the entire
Canon Group to ensure that our compliance activities are thoroughly implemented, that our internal
controls are strictly enforced, and that our management excels in transparency.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Business machines segment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Office imaging products

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the office imaging products segment, it has become more important to provide added value in
the form of networking, integration, color printing, and multifunction models. Also, in addition to
the mid-segment products for the office market which is enjoying steady growth, Canon expects that
the market for higher-end models and low-end multifunction models will expand as well. The market
for color digital devices continued to grow rapidly, and sales of monochrome digital MFDs were
stable, reflecting the market trend shifting from single-function to multifunction. Recently, there
has been a new, printer-based MFP market created by other printer vendors as they seek to enter the
copier and MFD market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To maintain and enhance a competitive edge and to meet more sophisticated customer demands,
Canon is strengthening its marketing capabilities by reinforcing its hardware and software product
lineups and by improving functionality. In 2006, Canon strengthened the product lineups of its
color digital devices in addition to its existing full line of monochrome machines and maintained
its market share by executing business strategies in line with current market trends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Computer peripheral products

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the Inkjet printer market, Canon expects a continuation of declines in market prices,
slowdown in market growth, and a shift from single-function printers (&#147;SFP&#148;) to MFPs. To manage in
line with these trends, Canon launched new lineups of SFP and MFP from flagship to entry models in
order to expand its printer sales.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s laser beam printer business holds a strong position in the market. In the monochrome
laser beam printer market, Canon expects that the transition to a low price segment will expand
sales in the micro-business/home office market and in the emerging markets. In the color laser beam
printer market, Canon expects continued strong growth in demand. In general, competition will
become more intense as competitors implement aggressive price strategies in order to establish
themselves as market leaders. Canon seeks to remain competitive by developing technologies that can
be deployed in a timely fashion to produce innovative products in all segments. Canon is also
working to lower costs by automating production of consumables and to secure procurement of
essential parts through internal sourcing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although Canon expects that the size of the scanner market will continue to contract, the
stylish and compact CanoScan LiDE series and hyper CCD models with ultrahigh-resolution were both
introduced in fiscal 2005 in order to increase Canon&#146;s share of this market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The size of the worldwide facsimile market has remained stable, as expansion in Asia, mainly
China, has offset declines in other regions. Due to price declines for inkjet MFPs with facsimile
function, prices are also declining for stand-alone machines.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Business information products
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The market for business-use document scanners has further expanded as demand for document
scanners has accelerated due to the evolving office IT environment and the need to comply with
various laws related to the management of information. Under these conditions, in the &#147;DR Scanner
series&#148; , Canon has introduced the &#147;DR-2050C II&#148; as a new product for the segment of affordable
machines with the most significantly expanding demand and worked to expand sales of this product
and the &#147;DR-1210C&#148; introduced in the first half of 2006. As a result, sales steadily increased.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;With regard to servers and personal computers, demand from corporate clients in the Japanese
market held steady in fiscal 2006, but a decline in sales was caused by Canon&#146;s change in marketing
strategy from selling single products to a solutions business involving the proposal of unique
combinations of various products. This trend is expected to continue in fiscal 2007.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->36<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Cameras segment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The entire digital camera market continues to expand. While the growth rate has slowed in
Japan and the United States, emerging markets, especially China and Eastern Europe, have
experienced strong growth. In addition, the emergence of digital imaging systems has contributed to
this growth as well, such as PC-free direct printing systems, by expanding the digital imaging
functionality through network connectivity, along with the improvement of the user-friendly image
processing interfaces and software.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The digital camera industry is seeing growth on various fronts. As with most other digital
consumer electronics, the digital camera market is now confronted with a fierce price war and
intensified technological competition in terms of picture quality and functions. Profit margins
have been shrinking for the overall industry, but Canon has been able to maintain higher margins
through reforms of its production and procurement systems.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon expects the market for compact digital cameras to expand in the intermediate term.
However, profit margins for the overall industry are moving lower as prices fall and competition
increases. Therefore, Canon seeks to continue cutting production costs while expanding sales
volumes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There are signs of rapid growth in the market for compact photo printers, which present a new
business opportunity. By creating a strong product line over the mid-term, Canon believes that it
will be able to take a significant role in this market and turn the compact photo printer business
into a new earnings source for Canon.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon played a major role in the continued expansion of the digital SLR market in fiscal 2006.
This market is expected to continue growing for the time being. However, Canon expects the growth
rate to decline over-time.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The market for film cameras is contracting as a result of the rapid shift to digital cameras.
Canon anticipates this trend to continue, both for film single lens reflex cameras and for film
compact cameras.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon expects the interchangeable lens market to grow as a result of the rapid market
penetration of digital SLR cameras. Canon aims to expand its sales and market share by introducing
the most suitable products for the digital SLR camera market, which is expected to continue
growing.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For video camcorders, analog camcorder sales have been further replaced by sales of digital
camcorders even in the United States and Europe, where this transition had been comparatively slow.
Now almost the entire world has made the switch over to digital. Against this background two new
trends have emerged in the market. First, the introduction of video cameras using DVDs, HDDs, SD
cards and other new forms of media has resulted in a trend in which convenience offered by the
products is increasingly emphasized. Second, the trend towards higher picture quality has evolved,
provided by products using high-resolution recording methods such as HDV and AVCHD. Canon believes
that these two trends are stimulating the market by responding to more diverse user needs, and will
likely contribute to further growth for the overall digital video market.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon will seek continued sales growth with a stronger product line while investing in
research and development in order to better respond to new market trends.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon expects that the market for business-use liquid crystal projectors will continue to grow
by about 20% per year on a unit basis, while market prices will continue to decline, resulting in
almost no growth in monetary terms. In addition to our independently developed SX50 high-resolution
projector released at the end of 2004, Canon has also introduced the SX6, 60 and X600 models late
in the second half of 2006. The high picture quality and resolution offered by these models have
won high praise from system integrators, allowing Canon to capture a large share of the market for
high-resolution projectors. Canon expects to continue to develop distinctive, value-added products
by further improving picture quality, resolution and brightness.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Optical and other products segment</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the semiconductor-production equipment industry, equipment manufacturers must provide high
quality products corresponding to rapid technology progress.
Canon will continue to focus on developing new products which adopt leading-edge technologies,
such as immersion exposure technology and ultra precision processing and measurement technology.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the LCD production mask aligner market, Canon will seek to strengthen its technical
capabilities to meet the recent trend toward larger glass-substrates due to the increasing demand
for larger LCD televisions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, Canon will continue to make distinctive products enabling high resolution and
high productivity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the TV lens market, demand for HDTV, which has grown in the United States and Japan, is now
growing as well in Europe. In particular, there has been increased demand for lenses used for
broadcasting sporting events and for producing dramas and documentaries. Canon also expects to see
new demand in China and other Asian markets thanks to greater progress in digitalization. At the
same time, there have been signs of expanded HDTV applications by the press in Japan and the United
States while Canon already has a major market share worldwide for this class of lens, it intends to
continue to strengthen its position in this market.
</DIV>
<DIV align="left">
<A name="138"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Forward looking statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The foregoing discussion and other disclosure in this report contains forward-looking
statements that reflect management&#146;s current views with respect to certain future events and
financial performance. Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are based upon assumptions
of future events that may not prove to be accurate. The following important factors could cause
actual results to differ materially from those projected or implied in any forward-looking
statements: foreign currency exchange rate fluctuations; the uncertainty of Canon&#146;s ability to
implement its plans to localize production and other measures to reduce the impact of foreign
currency exchange rate fluctuations; uncertainty as to economic conditions, in Canon&#146;s major
markets; uncertainty of continued demand for Canon&#146;s high-value-added products; uncertainty as to
the recovery of computer and related markets; uncertainty of recovery in demand for Canon&#146;s
semiconductor production equipment; Canon&#146;s ability to continue to develop products and to market
products that incorporate new technology on a timely basis, are competitively priced and achieve
market acceptance; the possibility of losses resulting from foreign currency transactions designed
to reduce financial risks from changes in foreign currency exchange rates; and inventory risk due
to shifts in market demand.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->37<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="139"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>E.&nbsp;Off-balance sheet arrangements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of its ongoing business, Canon does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon provides guarantees to third parties of bank loans of its employees, affiliates and
other companies. Canon would have to perform under a guarantee, if the borrower defaults on a
payment within the contract periods of 1&nbsp;year to 30&nbsp;years in the case of employees with housing
loans, and of 1&nbsp;year to 10&nbsp;years in the case of affiliates and other companies. The maximum amount
of undiscounted payments Canon would have had to make in the event of default by all borrowers was
&#165;30,051&nbsp;million at December&nbsp;31, 2006. The carrying amounts of the liabilities recognized for
Canon&#146;s obligations as a guarantor under those guarantees are insignificant.
</DIV>
<DIV align="left">
<A name="140"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>F.&nbsp;Contractual obligations</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following summarizes Canon&#146;s contractual obligations at December&nbsp;31, 2006.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Payments Due By Period</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Less than</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>More than</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1 year</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>1-3 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>3-5 years</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>5 years</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Contractual
obligations:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-Term Debt:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Capital Lease Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,585</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">465</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other Long-Term Debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,467</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,432</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating Lease Obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">60,378</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,025</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22,565</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,532</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,256</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Purchase commitments for :</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Property Plant and Equipment.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">107,685</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Parts and Raw Materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85,403</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">284,518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">224,376</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,847</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,019</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,276</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon provides warranties generally less than one year against defects in materials and
workmanship on most of its consumer products. Estimated product warranty related costs are
established at the time revenue is recognized and is included in selling, general and
administrative expenses. Estimates for accrued product warranty cost are primarily based on
historical experience, and are affected by ongoing product failure rates, specific product class
failures outside of the baseline experience, material usage and service delivery costs incurred in
correcting a product failure. As of December&nbsp;31, 2006, accrued product warranty costs amounted to
&#165;18,144&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At December&nbsp;31, 2006, commitments outstanding for the purchase of property, plant and
equipment approximated &#165;107,685&nbsp;million, and commitments outstanding for the purchase of parts and
raw materials approximated &#165;85,403&nbsp;million, both for use in the ordinary course of its business.
Canon anticipates that funds needed to fulfill these commitments will be generated internally
through operations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s management believes that current financial resources, cash generated from operations
and Canon&#146;s potential capacity for additional debt and/or equity financing will be sufficient to
fund current and future capital requirements.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->38<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="141"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;6. Directors, Senior Management and Employees</B>
</DIV>

<DIV align="left">
<A name="142"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.</B>&nbsp;<B>Directors and senior management</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors and corporate auditors of the Company as of March&nbsp;31, 2007 and their respective
business experience are listed below.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="9%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="32%">&nbsp;&nbsp;&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Business experience</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Date of birth)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Group executive/function)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>commencement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(*current position/function)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">Fujio Mitarai</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Chairman &#038; CEO</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1961</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Sept. 23, 1935)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1979</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon U.S.A., Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1981</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1985</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1989</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">In charge of HQ administration</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1989</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1993</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Executive Vice President</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">9/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President &#038; CEO</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chairman of the Board &#038; President &#038; CEO</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chairman &#038; CEO*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:90px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Tsuneji Uchida</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">President &#038; COO</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1965</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 30, 1941)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Lens Products Group</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of Camera Operations HQ/
Group Executive of Photo Products Group</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Camera Operations HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">In charge of promotion of digital photo
business</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2000</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">In charge of promotion of digital photo home
business</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Image Communications
Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Executive Vice President</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President &#038; COO *</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:75px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Toshizo Tanaka</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Executive Vice President</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1964</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 8, 1940)</TD>
    <TD>&nbsp;</TD>

<TD align="left" nowrap valign="top"><DIV style="margin-left:0px; text-indent:-0px">(Group Executive of Finance &#038; Accounting HQ <BR>
Group Executive
of Policy and Economy Research
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1992</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Finance &#038; Accounting HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top" nowrap><DIV style="margin-left:15px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Finance &#038; Accounting HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Policy and Economy Research HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Executive Vice President*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:75px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Nobuyoshi Tanaka</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Senior Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1970</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Dec. 23, 1945)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Corporate Intellectual Property &#038; Legal
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1991</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of Semiconductor Production Equipment Development Center</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"><FONT style="white-space: nowrap">&nbsp;</FONT></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1993</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1993</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Optical Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Corporate Intellectual
Property &#038; Legal HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:60px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Junji Ichikawa</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Senior Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1965</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered Shiba Electronics Co., Ltd.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Feb. 9, 1943)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Chief Executive of Optical Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1970</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1994</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Peripheral Group 1</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of Peripheral Products
HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2000</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Peripheral Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Production Management HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>

 <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Optical Products HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:90px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->39<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="9%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="32%">&nbsp;&nbsp;&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Business experience</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Date of birth)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Group executive/function)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>commencement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(*current position/function)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">Hajime Tsuruoka</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Senior Managing Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1970</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered Meiji Seika Kaisha Ltd.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(July 9, 1943)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">11/1973&nbsp;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon Italia S.p.A.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">9/1997</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon Deutschland GmbH</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon Europa N.V.*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior Managing Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Akiyoshi Moroe</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1968</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Sept. 28, 1944)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of General
Affairs HQ, Group Executive of
External Relations HQ)</DIV>
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/1996</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group of Executive of
Human Resource
Management &#038; Organization
HQ</DIV></TD>
</TR>






<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of General Affairs HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">10/2000&nbsp;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Information &#038; Communications
Systems HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of External Relations HQ*</DIV></TD>
</TR>

<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Kunio Watanabe</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1969</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 3, 1944)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Corporate
Strategy &#038; Development HQ,
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Corporate
Strategy &#038; Development
HQ*</DIV></TD>
</TR>






<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of
Policy and Economy Research HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1999<BR>3/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Director<BR>Managing Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Policy and Economy
Research HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Yoroku Adachi</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1970</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 11, 1948)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chairman of Canon Singapore Pte. Ltd.
Chairman of Canon Hong Kong Co., Ltd.
Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon (China) Co., Ltd.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2005</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director *</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2005</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">President of Canon U.S.A., Inc.*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Yasuo Mitsuhashi</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1974</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Nov. 23, 1949)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">(Chief Executive of Peripheral
Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">2/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Chemical Products HQ</DIV></TD>
</TR>





<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Peripheral Products HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2005</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director *</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Tomonori Iwashita</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 28, 1949)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Chief Executive of Image</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">Communications
Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:30px; text-indent:-15px">Camera Development Center</DIV></TD>
</TR>




<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Global</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2001</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Photo</DIV></TD>
</TR>


<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">Environment Promotion HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:30px; text-indent:-15px">Products Group</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px"></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of Image Communication Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2006</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Image
Communication Products HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>

<TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Global Environment Promotion HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Masahiro Osawa</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1971</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(May 26, 1947)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">(Group Executive of
Global Procurement HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/1997<BR>
2/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Vice President of Canon
U.S.A., Inc.<BR>
Senior Vice President of Canon U.S.A., Inc.</DIV></TD>
</TR>





<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/2003</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Finance &#038; Accounting HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD nowrap valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Global Procurement HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Shigeyuki Matsumoto</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1977</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Nov. 15, 1950)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">(Group Executive of Device Technology
Development Headquarters)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2002</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Device
Technology Development
Headquarters*</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Managing Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000" align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->40<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="11%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Business experience</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Date of birth)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Group executive/function)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>commencement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(*current position/function)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">Katsuichi Shimizu</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">4/1970</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Nov. 13, 1946)</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top" nowrap><DIV style="margin-left:15px; text-indent:-15px">(Chief
Executive of Inkjet
Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of
Office Imaging Products HQ
HQ</DIV></TD>
</TR>

<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>

<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Inkjet Products HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Ryoichi Bamba</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Nov. 25, 1946)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1998</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior Vice President of Canon U.S.A., Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">2/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Executive Vice President of Canon U.S.A., Inc.*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Toshio Honma</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>

<TR valign="bottom">
    <TD align="left" valign="top">(Mar. 10, 1949)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of L
Printer
Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of i
Printer Products HQ</DIV></TD>
</TR>




<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Business Promotion HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of L Printer Business Promotion HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of L Printer Products HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Keijiro Yamazaki</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">4/1971</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 14, 1948)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Human Resource Management &#038; Organization HQ,</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General
Manager of Human Resource Management &#038; Organization Div.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2000</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Human Resource
Management &#038; Organization HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Information &#038;
Communications Systems HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Human Resource Management &#038;
Organization HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Shunichi Uzawa</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">8/1978</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 26, 1949)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Core
Technology
Development
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1998</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior
General Manager of

Nano-technology Research
Center</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Display Development HQ</DIV></TD>
</TR>

<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of SED Development HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">10/2004&nbsp;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">President of SED Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Core Technology Development HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Masaki Nakaoka</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1975</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 3, 1950)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Office
Imaging Products HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1997</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior
General Manager of
Office Imaging
Products
Development Center 1</DIV></TD>
</TR>





<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Office Imaging Products Group 1</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of Office Imaging
Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2005</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Office Imaging Products HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Toshiyuki Komatsu</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 19, 1950)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of
Leading-Edge Technology
Development HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1998</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of
Canon Research Center</DIV></TD>
</TR>




<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2000</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Core Technology
Development HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Leading-Edge
Technology Development HQ*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/2005</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Core Technology
Development HQ</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Haruhisa Honda</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1974</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 14, 1948)</TD>
    <TD>&nbsp;</TD>
    <TD rowspan="2" align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Chief Executive of
Chemical Products
Operations
Group Executive of
Product
Engineering
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD valign="top"><DIV style="margin-left:15px; text-indent:-15px">Senior
General Manager of
Cartridge Development
Center</DIV></TD>
</TR>




<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>






<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top"></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Chemical
Products Operations*</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group
Executive of Production Engineering HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->41<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="11%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Business experience</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Date of birth)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Group executive/function)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>commencement</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(*current position/function)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Tetsuro Tahara</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1971</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Jan. 31, 1949)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Global
Manufacturing &#038; Logistics
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of
Office
Imaging Products
Production Management
Center</DIV></TD>
</TR>




<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2002</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive of
Office Imaging Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">President of Canon (Suzhou) Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Global
Manufacturing &#038; Logistics HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Seijiro Sekine</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 20, 1948)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of
Information &#038;
Communication Systems HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Business
Information Systems
Division</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Information
&#038; Communication Systems HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">10/2004&nbsp;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Logistics HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Information
&#038; Communication Systems HQ,
Deputy Group Executive of Global
Manufacturing &#038; Logistics HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Information &#038;
Communication Systems HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Shunji Onda</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered Canon Sales Co., Inc.
</DIV></TD>
</TR>



<TR valign="bottom">
    <TD align="left" valign="top">
(Mar. 13, 1950)</TD>
    <TD>&nbsp;</TD>

<TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Deputy Group Executive of Finance &#038;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">(renamed Canon Marketing
Japan Inc.)
</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">Accounting
HQ)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/1980</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:30px; text-indent:-15px">
&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Peripheral Products
Chief Executive Office</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2002</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Finance Division</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of Optical Products
Business Administration Center</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Finance &#038;
Accounting HQ*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Kazunori Fukuma</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1972</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered Toshiba Corporation</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Feb. 24, 1950)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">6/2005</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Executive Officer &#038; Corporate Vice President
of Toshiba Corporation</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">President of SED Inc.*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>

<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Hideki Ozawa</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1973</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered Canon Sales Co., Inc.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Apr. 28, 1950)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:30px; text-indent:-15px">(renamed Canon Marketing Japan Inc.)</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/1980</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">President of Canon Singapore Pte. Ltd.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2005</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">President of Canon (China) Co.,Ltd*.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Masaya Maeda</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Director</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1975</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 17, 1952)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><DIV style="margin-left:15px; text-indent:-15px">(Group Executive of Digital Imaging
Business Group)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2002</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of Digital Consumer
Products Development Center
of Toshiba Corporation</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">7/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Digital Imaging
Business Group</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Group Executive of Digital Imaging Business Group*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2007</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>

</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->42<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="10%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="11%">&nbsp;&nbsp;&nbsp;</TD>
    <TD width="2%">&nbsp;&nbsp;</TD>
    <TD width="30%">&nbsp;&nbsp;&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Date of</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Business experience</B></TD>

</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Date of birth)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(Group executive/function)</B></TD>
    <TD>&nbsp;</TD>

    <TD style="border-bottom: 1px solid #000000" align="center"><b>commencement</b></TD>

    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>(*current position/function)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="left" valign="top">Teruomi Takahashi</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Corporate Auditor</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">9/1971</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(June 10, 1943)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Director</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1999</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Chemical Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">2/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of BJ Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2001</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of i Printer Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Chief Executive of Chemical Products HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate Auditor *</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Kunihiro Nagata</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Corporate Auditor</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1970</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered the Company</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(Mar.16, 1948)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/1991</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Business Machines
Accounting Dept.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1995</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Senior General Manager of Business
Machines Accounting &#038; Production
Planning Center</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">10/2000&nbsp;&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Corporate Planning Division</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">1/2003</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Group Executive of Corporate
Strategy Development HQ</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2004</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate Auditor *</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">Tadashi Ohe</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Corporate Auditor</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1969</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Registration as a lawyer*</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">(May 20, 1944)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1989</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Instructor
of Judicial Research and Training Institute</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1994</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate Auditor, the Company*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Yoshinobu Shimizu</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Corporate Auditor</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/1973</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Registered as Certified Public Accountant*</DIV></TD>
</TR>


<TR valign="bottom">
    <TD align="left" valign="top">(Oct. 26, 1944)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">6/1990</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Representative Partner of Showa Ota &#038; Co.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">5/2002</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deputy Chief Executive Officer of Century
Ota Showa &#038; Co. (renamed Ernst &#038; Young ShinNihon)</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate Auditor, the Company*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top" nowrap>Minoru Shishikura</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Corporate Auditor</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1976</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Entered The Dai-Ichi Mutual
Life Insurance Co.</DIV></TD>
</TR>





<TR valign="bottom">
    <TD align="left" valign="top">(Sept. 13, 1953)</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/1998</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Metropolitan Corporate
Loan Dept. of The Dai-Ichi Mutual Life Insurance Co.</DIV></TD>
</TR>

<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2000</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Loan Department of The
Dai-Ichi Mutual Life Insurance Co.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">4/2002</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">General Manager of Credit Department of The
Dai-Ichi Mutual Life Insurance Co.</DIV></TD>
</TR>
<TR valign="bottom">
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">3/2006</TD>
    <TD>&nbsp;</TD>
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate Auditor, the Company*</DIV></TD>
</TR>
<TR style="font-size: 1px">
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="1" align="center" valign="bottom" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Term</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All directors and corporate auditors are elected by the shareholders at their general meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The term of office of directors is one year. The current term of all directors expires in
March&nbsp;2008. The term of office of corporate auditors is four years. The current term for Mr.&nbsp;Ohe
expires in March&nbsp;2011, while current terms for Mr.&nbsp;Takahashi and Mr.&nbsp;Nagata, who were elected in
the general meeting of shareholders in March&nbsp;2004, expire in March&nbsp;2008, and current terms for
Mr. Shimizu and Mr. Shishikura, who were elected in the general meeting of shareholders in March
2006, expires in March&nbsp;2010.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Board members and corporate auditors may serve any number of consecutive terms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no arrangement or understanding between any director or corporate auditor and any
major shareholder, customer, supplier or other material stakeholders in connection with the
selection of such director or corporate auditor.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Board of Directors and Corporate Auditors</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s articles of incorporation provide for a board of directors of not more than 30
members and for not more than five corporate auditors. Currently the number of board members is 27,
and the number of corporate auditors is five. There is no maximum age limit for members of the
board. Board members and corporate auditors may be removed from office at any time by a resolution
of a general meeting of shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The board of directors has ultimate responsibility for the administration of the Company&#146;s
affairs. By resolution, the board of directors designates, from among its members, representative
directors, who have authority individually to represent the Company generally in the conduct of its
affairs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Corporation Law of Japan, board members must refrain from engaging in any business
competing with the Company unless approved by a board resolution, and no board member may vote on a
proposal, arrangement or contract in which that board member is deemed to be materially interested.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan requires a resolution of the board of directors for a company to
acquire or dispose of material assets, to borrow substantial amounts of money, to employ or
discharge important employees such as corporate officers, and to establish, change or abolish
material corporate organizations such as a branch office.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->43<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The corporate auditors are not required to be certified public accountants, although
Mr.Shimizu is a certified public accountant. At least half of corporate auditors must be persons
who have not been either board members or employees of the Company or any of its subsidiaries. A
corporate auditor may not at the same time be a board member or an employee of the Company or any
of its subsidiaries. The corporate auditors have the statutory duty of examining the Company&#146;s
financial statements and the Company&#146;s business reports to be submitted annually by the board of
directors at the general meetings of shareholders and of reporting their opinions to the
shareholders. They also have the statutory duty of supervising the administration by the board
members of the Company&#146;s affairs. They shall participate in the meetings of the board of directors
but are not entitled to vote.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The corporate auditors constitute the board of corporate auditors. Under the Corporation Law
of Japan, the board of corporate auditors has a statutory duty to prepare and submit its audit
report to the board of directors each year. A corporate auditor may note an opinion in the auditor
report if a corporate auditor&#146;s opinion is different from the opinion expressed in the audit
report. The board of corporate auditors is empowered to establish audit principles, the method of
examination by corporate auditors of the Company&#146;s affairs and financial position and other matters
concerning the performance of the corporate auditors&#146; duties. The Company does not have an audit
committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The amount of remuneration payable to the Company&#146;s board members as a group and that of the
Company&#146;s corporate auditors as a group in respect of a fiscal year is subject to approval by a
general meeting of shareholders. Within those authorized amounts, the compensation for each board
member and corporate auditor is determined by the board of directors and a consultation of the
corporate auditors, respectively. The Company does not have a remuneration committee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In fiscal 2004, Canon established a standing committees, the Internal Control Committee, with
the president appointed as chairman of the group. The Internal Control Committee has built a highly
effective internal control system unique to the Canon Group, which not only serves to ensure the
reliability of the company&#146;s financial reporting, but also aims to ensure the effectiveness and
efficiency of its business operations, as well as compliance with related laws, regulations, and
internal controls.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Additionally, in fiscal 2005, the Disclosure Committee was established with the president
appointed as chairman. This committee was formed to ensure that Canon is not only in compliance
with applicable laws, rules and regulations, but also to ensure that information disclosed to
shareholders and capital markets is both correct and comprehensive.
</DIV>
<DIV align="left">
<A name="143"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Compensation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the fiscal year ended December&nbsp;31, 2006, the Company paid approximately &#165; 1,628&nbsp;million, in
total to directors and corporate auditors. This amount includes bonuses but excludes retirement
allowances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Directors and corporate auditors are not covered by the Company&#146;s retirement program. However,
in accordance with customary Japanese business practices, directors and corporate auditors receive
lump-sum retirement benefits, subject to shareholder approval. The Company paid retirement benefits
aggregating &#165; 241&nbsp;million to two directors and one auditor during the fiscal year ended December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company does not have a stock option plan for directors, corporate auditors or any other
employees.
</DIV>
<DIV align="left">
<A name="144"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Board practices</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;6A &#147;Directors and senior management&#148; and Item&nbsp;6B &#147; Compensation&#148;.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->44<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="145"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>D. Employees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Following table lists the number of Canon&#146;s full-time employees as of December&nbsp;31, 2006, 2005
and 2004.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japan</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Americas</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Europe</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Others</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">December&nbsp;31, 2006</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">79,293</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">30,046</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,409</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,636</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,841</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,422</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,652</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,381</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,386</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,494</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,768</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,164</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">703</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,859</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,871</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">310</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">118,499</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50,753</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,269</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,286</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,191</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">December&nbsp;31, 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">77,906</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,964</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,297</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,988</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,657</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,308</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,552</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,405</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,088</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,762</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,249</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">999</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">435</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,079</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,607</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,161</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">262</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">115,583</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48,637</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,938</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,922</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,086</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">December&nbsp;31, 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Business machines</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">74,772</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,928</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,833</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,997</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,014</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cameras</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,534</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,008</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,724</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Optical and other products</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,397</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,458</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">908</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,640</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Corporate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,554</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">620</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">108,257</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,103</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,258</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,898</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,998</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There was an increase of approximately 2,900 employees as of the end of fiscal 2006 as
compared to the end of fiscal 2005. This increase is mainly due to
employment increases in the domestic region for the purpose to expand the staff for R&#038;D purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon had approximately 30,400 temporary employees on average during fiscal 2006. This number
includes seasonal workers as well as temp-staff employees such
as security staff, meal service staff and janitorial staff.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company and its subsidiaries have their own independent labor union. Canon has not
experienced a labor strike since its establishment. The Company
believes that the relationship between Canon and its labor union is good.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->45<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="146"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>E.&nbsp;Share ownership</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table lists the number of shares owned by the directors and corporate auditors
of the Company as of March&nbsp;31, 2007. The total is 338,246
shares constituting 0.03% of all outstanding shares.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="7%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Position</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Number of shares</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Fujio Mitarai</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Chairman &#038; CEO </FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">92,300</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tsuneji Uchida</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">President &#038; COO</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">9,600</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Toshizo Tanaka</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Executive Vice President</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17,752</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nobuyoshi Tanaka</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Senior Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">19,432</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Junji Ichikawa</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Senior Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">17,096</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Hajime Tsuruoka</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Senior Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">12,700</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Akiyoshi Moroe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">16,932</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Kunio Watanabe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">13,352</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Yoroku Adachi</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">10,742</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Yasuo Mitsuhashi</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">8,677</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tomonori Iwashita</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">6,250</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Masahiro Osawa</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5,342</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shigeyuki Matsumoto</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Managing Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">4,152</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Katsuichi Shimizu</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">9,937</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Ryoichi Bamba</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5,400</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Toshio Honma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">10,492</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Keijiro Yamazaki</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5,850</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shunichi Uzawa</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">6,392</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Masaki Nakaoka</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">3,400</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Toshiyuki Komatsu</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2,900</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Haruhisa Honda</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5,789</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tetsuro Tahara</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,652</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Seijiro Sekine</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">4,990</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Shunji Onda</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">4,402</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Kazunori Fukuma</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Directo</FONT>r</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,000</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Hideki Ozawa</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">719</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Masaya Maeda</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Director</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,000</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Teruomi Takahashi</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Corporate Auditor</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">10,846</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Kunihiro Nagata</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Corporate Auditor</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2,150</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tadashi Ohe</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Corporate Auditor</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">24,300</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Yoshinobu Shimizu</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Corporate Auditor</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,100</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minoru Shishikura</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Corporate Auditor</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1,600</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top"><FONT style="white-space: nowrap">Total</FONT></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">338,246</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" valign="top" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company and certain of its subsidiaries encourage its employees to purchase shares of
their Common Stock
in the market through an employees&#146; stock purchase association.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->46<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="147"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;7. Major Shareholders and Related Party Transactions</B>
</DIV>

<DIV align="left">
<A name="148"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Major shareholders</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The table below shows the number of The Company&#146;s shares held by the top ten holders of the
Company&#146;s shares and their percentage ownership as of December&nbsp;31, 2006:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Name of major shareholder</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Shares owned</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Percentage</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(In thousands)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">The Dai-Ichi Mutual Life Insurance Co.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">93,312</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">7.0</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japan Trustee Services Bank, Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">82,773</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">6.2</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="top">
    <TD><DIV style="margin-left:15px; text-indent:-15px">(Trust Account)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">The Master Trust Bank of Japan, Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">74,645</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5.6</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">(Trust Account)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Moxley &#038; Co.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">68,908</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">5.2</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State Street Bank and Trust Company 505103</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">34,955</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2.6</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">State Street Bank and Trust Company</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">34,198</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2.6</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Mizuho Corporate Bank, Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">28,419</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2.1</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Nomura Securities Co., Ltd.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">27,175</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">2.0</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Sompo Japan Insurance Inc.</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">22,910</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1.7</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">BNP Paribas
Securities (Japan) Ltd</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">21,105</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">1.6</TD>
    <TD nowrap valign="top">%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s major shareholders do not have different voting rights from other shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As
of December&nbsp;31, 2006, 21.4% of the outstanding shares of common
stock was held of record
by 254 residents of the United States of America.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is not directly or indirectly owned or controlled by any other corporation, by any
government, or by any other natural or legal person or
persons severally or jointly.
</DIV>
<DIV align="left">
<A name="149"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Related party transactions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the beginning of Canon&#146;s last full fiscal year, Canon has not transacted with, nor does
Canon currently plan to transact with a related party
(other than certain transactions with subsidiaries of the Company). For purposes of this paragraph,
a related party includes: (a)&nbsp;enterprises that directly or
indirectly through one or more intermediaries, control or are controlled by, or are under common
control with, Canon; (b)&nbsp;associates; (c)&nbsp;individuals owning,
directly or indirectly, an interest in the voting power of Canon that gives them significant
influence over Canon, and close members of any such individual&#146;s
family; (d)&nbsp;key management personnel, that is, those persons having authority and responsibility
for planning, directing and controlling the activities of
Canon, including directors and senior management of companies and close member of such individual&#146;s
families; (e)&nbsp;enterprises in which a substantial interest
in the voting power is owned, directly or indirectly, by any person described in (c)&nbsp;or (d)&nbsp;or over
which such a person is able to exercise significant influence. This includes enterprises owned by
directors or major shareholders of Canon and enterprises that have a member of key management in
common with Canon. Close members of an individual&#146;s family are those that may be expected to
influence, or be influenced by, that person in their dealings with Canon. An associate is an
unconsolidated
enterprise in which Canon has a significant influence or which has significant influence over
Canon. Significant influence over an enterprise is the power to participate in the financial and
operating policy decisions of the enterprise but is less than control over those policies.
Shareholders beneficially owning a 10% interest in the voting power of the Company are presumed to
have a significant influence on Canon.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;To the Company&#146;s knowledge, no person owned a 10% interest in the voting power of the Company
as of March&nbsp;31, 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the ordinary course of business on an arm&#146;s length basis, Canon purchases and sells
materials, supplies and services from and to its affiliates accounted for by the equity method.
There are 14 affiliates which are accounted for by the equity method. Canon does not consider the
amounts of the transactions with the above affiliates to be material to its business.
</DIV>
<DIV align="left">
<A name="150"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Interests of experts and counsel</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not Applicable.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->47<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="151"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;8. Financial Information</B>
</DIV>

<DIV align="left">
<A name="152"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Consolidated financial statements and other financial information</B>
</DIV>
<DIV align="left">
<A name="153"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Consolidated financial statements</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Annual Report contains consolidated financial statements as of December&nbsp;31, 2006 and 2005
and for each of the three years in the period ended
December&nbsp;31, 2006 prepared in accordance with U.S. generally accepted accounting principles and
audited in accordance with the standards of the Public Company Accounting Oversight Board (United
States) by an Independent Registered Public Accounting Firm. The financial statements as of and
for the years ended December&nbsp;31, 2004, 2005 and 2006 have been audited by Ernst &#038; Young ShinNihon,
and their audit report covering each of the periods is included in Item 17 of this report.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Refer to Item&nbsp;17, Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
</DIV>
<DIV align="left">
<A name="154"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Legal proceedings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other than as described below, neither the Company nor its subsidiaries are involved in any
litigation or other legal proceedings that, if determined adversely to the Company or its
subsidiaries, would individually or in the aggregate have a material adverse effect on the Company
or its operations.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In December&nbsp;2002, the European Commission instituted an investigation into the
printer and supply market. Canon received a questionnaire in connection with the
investigation of the printer and supply market in January&nbsp;2003 and Canon has submitted its
response. The investigation is yet to be closed.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In January&nbsp;2003, the Dusseldorf District Court in Germany issued rulings in Canon&#146;s
favor in two patent infringement actions filed by Canon against Pelikan Hardcopy
Deutschland GmbH and Pelikan Hardcopy European Logistics &#038; Services GmbH (collectively,
&#147;Pelikan Hardcopy&#148;). Pelikan Hardcopy has appealed against the decision. In November&nbsp;2003,
the Dusseldorf District Court in Germany issued a ruling in Canon&#146;s favor in another
patent infringement action filed by Canon against Pelikan Hardcopy. Pelikan Hardcopy has
appealed against the decision. The Dusseldorf High Court issued rulings in Canon&#146;s favor
in one of the three appeals by Pelikan Hardcopy. Pelikan Hardcopy has applied for further
appeal to the Supreme Court. In November&nbsp;2005, the Dusseldorf High Court issued a ruling
in Canon&#146;s favor in another of the three appeals by Pelikan hard copy. The ruling has
become finally binding, and now the procedure for enforcing the ruling is underway. The
remaining one of the appeals has been suspended by the Court since April&nbsp;2004.</TD>
</TR>



<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>



<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In February&nbsp;2003, a lawsuit was filed by St. Clair Intellectual Property Consultants,
Inc. (&#147;St. Clair&#148;) against the Company and one of its subsidiaries in the United States
District Court of Delaware, which accused the Company of infringement of patents related
to certain technology. In connection with this case, in October&nbsp;2004, a jury
preliminarily found damages against the Company of approximately &#165; 4,000&nbsp;million based on a
percentage of certain product sales in the United States through 2003. Subsequent to this
jury finding, St. Clair also made a motion to the court for damages relating to certain
2004 sales, using the same royalty rate awarded by the jury. In March&nbsp;2006, the Company
and St. Clair entered into a settlement agreement, pursuant to which the lawsuit was
withdrawn in July&nbsp;2006.</TD>
</TR>


<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In October&nbsp;2003, a lawsuit was filed by a former employee against the Company at the
Tokyo District Court in Japan. The lawsuit alleges that the former employee is entitled
to &#165; 45,872&nbsp;million as compensation for an invention related to certain technology used by
the Company, and the former employee has sued for a partial payment of &#165; 1,000&nbsp;million and
interest thereon. On January&nbsp;30, 2007, the Tokyo District Court in Japan ordered the
Company to pay the former employee approximately &#165; 33.5&nbsp;million and interest thereon. On
the same day, the Company appealed the decision.</TD>
</TR>


<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In Germany, Verwertungsgesellschaft Wort (&#147;VG Wort&#148;), a collecting agency
representing certain copyright holders, has filed a series of lawsuits seeking to impose
copyright levies upon digital products such as PCs and printers, that allegedly enable the
reproduction of copyrighted materials, against the companies importing and distributing
these digital products. In May&nbsp;2004, VG Wort filed a civil lawsuit against
Hewlett-Packard GmbH seeking levies on multi-function printers. This is an industry test
case under which Hewlett-Packard GmbH represents other companies sharing common interests,
and Canon has undertaken to be bound by the final decision of this court case. The court
of first instance and the court of appeals held that the multi-function printers were
subject to a levy. In particular, the court of appeals ordered Hewlett-Packard GmbH to
pay the amount equivalent to the levies imposed on photocopiers (EUR 38.35 to EUR 613.56
per unit, depending on printing speed and color printing capability). This lawsuit is
currently under appeal before the German Federal Supreme Court. With regard to
single-function printers, VG Wort filed a separate lawsuit in January&nbsp;2006 against Canon,
seeking payment of copyright levies, and the court of first instance in D&#252;sseldorf ruled
in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such
decision in December&nbsp;2006. In a similar court case, which does not include Canon, seeking
copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and
Kyocera Mita Deutschland GmbH, the court of appeals in D&#252;sseldorf rejected such alleged
levies on January&nbsp;23, 2007. Canon, other companies and the industry associations have
expressed opposition to such extension of the levy scope and the final conclusion of these
court cases including the amount of levies to be imposed, remains uncertain.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In April&nbsp;2004, Canon filed two patent infringement actions against Recycle&#149;Assist
Co., Ltd. (&#147;Recycle Assist&#148;) before the Tokyo District Court. In December&nbsp;2004, the Tokyo
District Court issued rulings in Recycle Assist&#146;s favor in the two actions. In December
2004, Canon appealed against the decisions of the two actions. In January&nbsp;2006, the
Intellectual Property High Court issued a ruling in favor of Canon in one of the two
appeal cases. In February&nbsp;2006, Recycle Assist further appealed against this ruling of
the Intellectual Property High Court. Canon has withdrawn the remaining appeal case in
view of the judicial economy.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In April&nbsp;2005, a lawsuit was filed by Nano-Proprietary Inc. (&#147;NPI&#148;) against the
Company and Canon U.S.A. Inc. in the United States District Court of
Texas alleging that SED Inc., a joint venture company established by the Company and Toshiba
Corporation, is not regarded as a &#147;Subsidiary&#148; under the Patent License Agreement between
the Company and NPI (the &#147;Agreement&#148;) and that the extension of the license to SED Inc.
constitutes a breach of the Agreement. NPI also alleges that there was fraudulent conduct
by the Company in executing the Agreement, and requests rescission of the Agreement and
compensatory damages. This case is still pending and the final outcome, including any
liability to the Company, is not yet determined, but in November&nbsp;2006, the Court denied the
Company&#146;s Motion for a summary judgment that SED Inc. is a Subsidiary of the Company. In
January&nbsp;2007, the Company purchased all the shares of SED Inc. owned by Toshiba Corporation,
making SED Inc. a 100% owned subsidiary of the Company. However, on February&nbsp;22, 2007, the
court issued a summary judgment stating that SED Inc. (before the above stock purchase) was
not a Subsidiary of the Company, and that the Agreement has been terminated due to a
material breach of the Agreement by the Company. The remaining pending issues at the
district court are whether the Company was engaged in fraudulent conduct and whether
compensatory damages should be granted. The Company will appeal to the appellate court
immediately after the current proceeding at the district court has been concluded regardless
of any judgments rendered by the district court.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->48<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="155"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Dividend policy</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends are proposed by the Board of Directors of the Company based on the year-end
non-consolidated financial statements of the Company, and are approved at the ordinary general
meeting of shareholders, which is held in March of each year. Record holders of the Company&#146;s
American Depositary Receipts (ADRs) on the dividends&#146; record date are entitled to receive payment
in full of the declared dividend. In addition to annual dividends, by resolution of the Board of
Directors, the Company may declare a cash distribution as an interim dividend. The record date for
the Company&#146;s year-end dividends and for the interim dividends are December&nbsp;31 and June&nbsp;30,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since 1996, under the two five-year initiatives &#151; Phases I and II of the Excellent Global
Corporation Plan &#151; the Canon Group has been working towards increasing its corporate value. During
this period, management has focused on profitability and cash flow, which has led to greater
competitiveness of its products and a stronger financial position.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Going forward, Canon will actively invest in strategic areas to accelerate growth, and will
also place priority on actively returning profits to shareholders as an important management
measure, taking full advantage of its financial base strengthened by the two five-year plans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From now on, as an important part of its capital strategy, the Company will acquire its own
shares, as it deems necessary, to improve capital efficiency and realize a flexible capital
strategy, taking into account future investment and other financial plans. As for shareholder
return, the Company will continue its current dividend policy to gradually raise the payout ratio
to approximately 30% on a consolidated basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accordingly, in response to the continued support of shareholders and based on the new policy
on returning profits to shareholders, Canon has increased its full-year dividend per share from &#165;
66.67 in 2005, to &#165; 83.33 for fiscal year 2006.
</DIV>
<DIV align="left">
<A name="156"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Significant changes</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No significant change has occurred since the date of the annual financial statements.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->49<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="157"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;9. The Offer and Listing</B>
</DIV>

<DIV align="left">
<A name="158"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Offer and listing details</B>
</DIV>
<DIV align="left">
<A name="159"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Trading in domestic markets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The common stock of the Company has been listed on the Tokyo Stock Exchange, Inc. (&#147;TSE&#148;), the
principal stock exchange market in Japan, since 1949, and is traded on the First Section of the
TSE. The shares are also listed on four other regional markets in Japan.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table lists the reported high and low sales prices of the shares on the TSE and
the closing highs and lows of the Tokyo Stock Price Index (&#147;TOPIX&#148;) and Nikkei Stock Average for
the five most recent years. TOPIX is an index of the market value of stocks listed on the First
Section of the TSE. The Nikkei Stock Average, an index of 225 selected stocks on the First Section
of the TSE, is another widely accepted index.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>TSE</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>TOPIX</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>Nikkei Stock Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Canon Inc.)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Reference data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Reference data)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Japanese yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Points)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Japanese yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,413</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,144.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">807.35</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,979.85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">8,303.39</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,607</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,114.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">770.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,161.71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,607.88</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,880</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,273</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,225.97</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,017.84</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,195.66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,299.43</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005 1(st) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,860</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,460</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,206.93</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,128.75</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,975.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,212.63</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:43px; text-indent:-15px">2(nd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,202.46</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,104.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,911.90</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,770.58</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:43px; text-indent:-15px">3(rd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,127</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,430.80</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,174.16</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,678.44</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,540.93</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:43px; text-indent:-15px">4(th) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,673.18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,363.66</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,445.56</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,996.29</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,460</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,673.18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,104.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,445.56</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,770.58</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 1(st) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,287</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,735.25</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,538.85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,125.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,059.52</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:43px; text-indent:-15px">2(nd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,013</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,173</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,783.72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,439.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,563.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,045.53</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:43px; text-indent:-15px">3(rd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,655.27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,473.59</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,414.94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,437.24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:43px; text-indent:-15px">4(th) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,685.76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,526.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,301.69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,615.56</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,783.72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,439.00</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,563.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,045.53</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="28%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>TSE</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>TOPIX</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>Nikkei Stock Average</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Canon Inc.)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Reference data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Reference data)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Japanese yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Points)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Japanese yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 July</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,810</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,240</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,606.86</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,473.59</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,710.39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">14,437.24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">August</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,850</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,350</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,645.43</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,540.12</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,244.84</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,154.06</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">September</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,160</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,655.27</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,546.03</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,414.94</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,513.87</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">October</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,672.02</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,596.24</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,901.53</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,028.32</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">November</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,420</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,840</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,629.29</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,526.37</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,512.51</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,615.56</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">December</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,780</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,960</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,685.76</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,594.72</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,301.69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,185.92</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007 January</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,750</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,290</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,749.18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,650.82</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,617.64</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,758.46</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">February</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,070</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,823.89</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,712.28</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,300.39</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,199.66</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD align="left"><DIV style="margin-left:30px; text-indent:-15px">March</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,600</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,020</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,755.70</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,656.74</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,558.04</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,532.91</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">Note:</TD>
    <TD>&nbsp;</TD>
    <TD>Canon has made a three-for-two stock split on July&nbsp;1, 2006. The information above has been
adjusted to reflect the stock
split.</TD>
</TR>
</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->50<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>




<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="160"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Trading in foreign markets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s ADRs are listed on the New York Stock Exchange (&#147;NYSE&#148;) and the Company&#146;s Global
Bearer Certificates (&#147;GBCs&#148;) are listed on the Frankfurt Stock Exchange.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since the Company&#146;s 1969 public offering in the United States of U.S.$9,000,000 principal
amount of its 6 1/2 % Convertible Debentures due 1984, there has been limited trading in the
over-the-counter market in the Company&#146;s ADRs. Since March&nbsp;16, 1998, each ADR represents one share
of the Company&#146;s common stock. The Company&#146;s ADSs had been quoted on the National Association of
Securities Dealers Automated Quotation system (&#147;NASDAQ&#148;) since 1972 to September&nbsp;13, 2000 under the
symbol CANNY.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On September&nbsp;14, 2000, Canon listed its ADSs on the NYSE under the symbol CAJ. The table below
displays historical transition of high and low prices of
our ADSs on NYSE.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>NYSE</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Canon Inc.)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(U.S. dollars)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2002 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">26.933</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">20.100</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2003 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">35.333</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">22.487</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2004 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.260</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29.627</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005 1(st) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.327</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33.687</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">2(nd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37.140</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34.000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">3(rd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">36.700</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.640</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">4(th) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40.280</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34.380</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2005 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40.280</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32.640</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 1(st) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44.620</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39.630</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">2(nd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53.100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42.160</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">3(rd) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52.380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">44.310</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">4(th) quarter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57.320</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50.840</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 Year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57.320</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">39.630</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(Canon Inc.)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>(U.S. dollars)</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>High</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Low</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2006 July</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">50.870</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">$</TD>
    <TD align="right">44.310</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">August</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49.310</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">47.260</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">September</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52.380</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">48.400</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">October</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">56.500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52.800</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">November</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">54.500</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50.840</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">December</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">57.320</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51.970</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2007 January</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">56.990</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52.020</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">February</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">55.400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">50.720</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">March</DIV></TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right">56.190</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="2" align="right">51.770</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Note: Canon has made a three-for-two stock split on July&nbsp;1, 2006. The information above has been
adjusted to reflect the stock
split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The depositary and agent of the ADRs is JPMorgan Chase Bank, located at 1 Chase Manhattan
Plaza, New York, N.Y. 10081, U.S.A.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Co-ownership shares in a GBCs are listed on the Frankfurt Stock Exchange.
</DIV>

<DIV align="left">
<A name="161"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>B. Plan of distribution</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="162"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>C. Markets</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;See Item&nbsp;9A &#147;Offer and Listing Details&#148;.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->51<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="163"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;10. Additional Information</B>
</DIV>

<DIV align="left">
<A name="164"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>A.&nbsp;Share capital</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>

<DIV align="left">
<A name="165"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>B.&nbsp;Memorandum and articles of association</B>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Objects and Purposes in Canon Inc. (the &#147;Company&#148;)&#146;s Articles of Incorporation</I>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 3%">Objects of the Company provided in Article&nbsp;2 of the Company&#146;s Articles of Incorporation shall
be to engage in the following business:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(1)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of optical machineries and instruments of various kinds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(2)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of acoustic, electrical and electronic machineries and instruments of
various kinds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(3)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of precision machineries and instruments of various kinds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(4)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of medical machineries and instruments of various kinds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(5)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of general machineries, instruments and equipments of various kinds.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(6)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of
the preceding items.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(7)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Production and sale of software products.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(8)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manufacture and sale of pharmaceutical products</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(9)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Telecommunications business, and information service business such as information processing service business, information providing
service business, etc.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(10)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Contracting for telecommunications works, electrical works and machinery and equipment installation works.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(11)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(12)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Manpower providing business, property leasing business and travel business.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(13)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Business relative to investigation, analysis of the environment and purification process of soil, water, etc.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" nowrap align="left">(14)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Any and all business relative to each of the preceding items.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Provisions Regarding Directors</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no provision in the Company&#146;s Articles of Incorporation as to a Director&#146;s power to
vote on a proposal, arrangement or contract in which the Director is materially interested, but,
under the Corporation Law of Japan, the new law relating to joint stock corporations (known in
Japanese as <I>kabushiki kaisya</I>) which came into effect on May&nbsp;1, 2006, a director is required to
refrain from voting on such matters at meetings of the board of directors.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan provides that compensation for directors is determined at a
general meeting of shareholders of a company. Within the upper limit
approved at the shareholders&#146;
meeting, the board of directors will determine the amount of compensation for each director. The
board of directors may, by its resolution, leave such decision to the discretion of the company&#146;s
representative director.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan provides that the incurrence by a company of a significant loan
from a third party should be approved by the company&#146;s board of directors. The Company&#146;s
Regulations of the Board of Directors have adopted this policy.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no mandatory retirement age for the Company&#146;s Directors under the Corporation Law of
Japan or its Articles of Incorporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There is no requirement concerning the number of shares an individual must hold in order to
qualify him as a Director of the Company under the Corporation Law of Japan or its Articles of
Incorporation.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Holding of Shares by Foreign Investors</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other than the Japanese unit share system that is described in &#147;Rights of Shareholders -
Japanese Unit Share System&#148; below, there are no limitations on the rights of non-residents or
foreign shareholders to hold or exercise voting rights on the Company&#146;s shares imposed by the laws
of Japan or the Company&#146;s Articles of Incorporation or other constituent documents.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Rights of Shareholders</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Set forth below is information relating to the Company&#146;s common stock, including brief
summaries of the relevant provisions of its Articles of Incorporation and Regulations for Handling
of Shares, as currently in effect, and of the Corporation Law of Japan and related legislation.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->52<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>General</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s authorized share capital is 3,000,000,000 shares, of which 1,333,445,830 shares
were issued and outstanding as of December&nbsp;31, 2006. Under the Corporation Law of Japan, shares
must be registered and are transferable by delivery of share certificates. In order to assert
shareholders&#146; rights against the Company, a shareholder must have its name and address registered
on its register of shareholders, in accordance with the Company&#146;s Regulations for Handling of
Shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares may choose, at its discretion, to participate in the central clearing
system for share certificates under the Law Concerning Central Clearing of Share Certificates and
Other Securities of Japan. Participating shareholders must deposit certificates representing all of
the shares to be included in this clearing system with the Japan Securities Depository Center, Inc.
(the &#147;Securities Center&#148;). If a holder is not a participating institution in the Securities Center,
it must participate through a participating institution, such as a securities company or bank
having a clearing account with the Securities Center. All shares deposited with the Securities
Center will be registered in the name of the Securities Center on the Company&#146;s register of
shareholders. Each participating shareholder will in turn be registered on the Company&#146;s register
of beneficial shareholders and be treated in the same way as shareholders registered on its
register of shareholders. For the purpose of transferring deposited shares, delivery of share
certificates is not required. Entry of the share transfer in the books maintained by the Securities
Center for participating institutions, or in the book maintained by a participating institution for
its customers, has the same effect as delivery of share certificates. The registered beneficial
owners may exercise the rights attached to the shares, such as voting rights, and will receive
dividends (if any) and notices to shareholders directly from the Company. The shares held by a
person as a registered shareholder and those held by the same person as a registered beneficial
owner are aggregated for these purposes. Beneficial owners may at any time withdraw their shares
from deposit and receive share certificates, subject to the limitations caused by the Japanese unit
share system described below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A new law to establish a new central clearing system for shares of listed companies and to
eliminate the issuance and use of certificates for such shares was promulgated in June&nbsp;2004 and the
relevant law will come into effect within five years of the date of promulgation. On the effective
date, a new central clearing system will be established and the shares of all Japanese companies
listed on any Japanese stock exchange, including the Company&#146;s shares, will be subject to the new
central clearing system. On the same day, all existing share certificates for share of all
Japanese companies listed on any Japanese stock exchange, including the Company&#146;s shares, will
become null and void and the transfer of such shares will be effected through entry in the books
maintained under the new central clearing system.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The registered beneficial holder of deposited shares underlying the ADSs is the depositary for
the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders&#146; rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Distributions of Surplus</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Corporation Law of Japan, distributions of cash or other assets by joint stock
corporations to their shareholders, so called &#147;dividends&#148;, are referred to as &#147;distributions of
Surplus&#148; (&#147;Surplus&#148; is defined in &#147;-Restriction on Distributions of Surplus&#148; below). The Company
may make distributions of Surplus to the shareholders any number of times per fiscal year, subject
to certain limitations described in &#147;-Restriction on Distributions of Surplus&#148;. Under the
Corporation Law of Japan, distributions of Surplus are required to be authorized by a resolution of
a general meeting of shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Articles of Incorporation of the Company, year-end dividends and interim dividends,
if any, may be distributed to shareholders (or pledgees) appearing in the register of shareholders
as of December&nbsp;31 and June&nbsp;30 of each year, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions of Surplus may be made in cash or in kind in proportion to the number of shares
held by each shareholder. A resolution of shareholders&#146; meeting must specify the kind and
aggregate book value of the assets to be distributed, the manner of allocation of such assets to
shareholders, and the effective date of the distribution. If a distribution of Surplus is to be
made in kind, the Company may, pursuant to a resolution of shareholders meeting, grant a right to
its shareholders to require the Company to make such distribution in cash in stead of in kind. If
no such right is granted to shareholders, the relevant distribution of Surplus must be approved by
a special resolution of a general meeting of shareholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Restriction on Distributions of Surplus</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;When the Company makes a distribution of Surplus, the Company must, until the aggregate amount
of its additional paid-in capital and legal reserve reaches one-quarter of its stated capital, set
aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the
amount of Surplus so distributed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The amount of Surplus at any given time must be calculated in accordance with the following
formula:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A &#043; B &#043; C &#043; D &#150; (E &#043; F &#043; G)
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the above formula, the alphabet from &#147;A&#148; to &#147;G&#148; is defined as follows:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;A&#148;= the total amount of &#147;other capital surplus&#148; and &#147;other retained earnings&#148;, each such
amount being that appearing on its non-consolidated balance sheet as of the end of the last fiscal
year;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;B&#148;= (if the Company has disposed of its treasury stock after the end of the last fiscal
year) the amount of the consideration for such treasury stock received by the Company less the book
value thereof;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;C&#148;= (if the Company has reduced its stated capital after the end of the last fiscal year)
the amount of such reduction less the portion thereof that has been transferred to additional
paid-in capital or legal reserve (if any);
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;D&#148;= (if the Company has reduced its additional paid-in capital or legal reserve after the
end of the last fiscal year) the amount of such reduction less the portion thereof that has been
transferred to stated capital (if any);
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;E&#148;= (if the Company has cancelled its treasury stock after the end of the last fiscal year)
the book value of such treasury stock;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;F&#148;= (if the Company has distributed Surplus to its shareholders after the end of the last
fiscal year) the total book value of the Surplus so distributed;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;G&#148;= certain other amounts set forth in the ordinances of the Ministry of Justice, including
(if the Company has reduced Surplus and increased its stated capital, additional paid-in capital or
legal reserve after the end of the last fiscal year) the amount of such reduction and (if the
Company have distributed Surplus to the shareholders after the end of the last fiscal year) the
amount set aside in the additional paid-in capital or legal reserve (if any) as required by the
ordinances of the Ministry of Justice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The aggregate book value of Surplus distributed by the Company may not exceed a prescribed
distributable amount (the &#147;Distributable Amount&#148;), as calculated on the effective date of such
distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus
less the aggregate of the following:
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;the book value of the Company&#146;s treasury stock;
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;the amount of consideration for the treasury stock disposed of by the Company after the
end of the last fiscal year; and
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;certain other amounts set forth in the ordinances of the Ministry of Justice, including
(if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital,
additional paid-in capital and legal reserve, each such amount being that appearing on the
non-consolidate balance sheet as of the end of the last fiscal year) all or certain part of such
exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the Company has become at its option a company with respect to which consolidated balance
sheets should also be taken into consideration in the calculation of the Distributable Amount
(<I>renketsu haito kisei tekiyo kaisha</I>), it will be required to further deduct from the amount of
Surplus the excess amount (if the amount is zero or below zero, zero) of (x)&nbsp;the total amount of
shareholders&#146; equity appearing on its non-consolidated balance sheet as of the end of the last
fiscal year and certain other amounts set forth in the ordinances of the Ministry of Justice over
(y)&nbsp;the total amount of shareholders&#146; equity and certain amounts set forth in the ordinances of the
Ministry of Justice appearing on its consolidated balance sheet as of the end of the last fiscal
year.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If the Company has prepared interim financial statements as described below, and if such
interim financial statements have been approved (unless exempted by the Corporation Law of Japan)
by a general meeting of shareholders, the Distributable Amount must be adjusted to take into
account the amount of profit or loss, and the amount of consideration for the treasury stock
disposed of by the Company, during the period in respect of which such interim financial statements
have been prepared. The Company may prepare non-consolidated interim financial statements
consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and an
income statement for the period from the first day of the current fiscal year to the date of such
balance sheet. Interim financial statements so prepared by the Company must be approved by the
board of directors and audited by its independent auditors, as requires by the ordinances of the
Ministry of Justice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock Splits</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to
make stock splits, regardless of the value of net assets (as appearing in its latest
non-consolidated balance sheet) per share. In addition, by resolution of the Company&#146;s Board of
Directors, the Company may increase the authorized shares up to the number reflecting the rate of
stock splits and amend its Articles of Incorporation to this effect without the approval of a
shareholders&#146; meeting. For example, if each share became three shares by way of a stock split, the
Company may increase the authorized shares from the current 3,000,000,000 shares to 9,000,000,000
shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Japanese Unit Share System</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s Articles of Incorporation provided that 100 shares of common stock constitute
one &#147;unit&#148;. The Corporation Law of Japan permits the Company, by resolution of its Board of
Directors, to reduce the number of shares which constitutes one unit or abolish the unit share
system, and amend its Articles of Incorporation to this effect without the approval of a
shareholders&#146; meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Transferability of Shares Representing Less than One Unit</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company may not issue share certificates for a number of shares not constituting an
integral number of units, except in limited circumstances. Because the transfer of shares normally
requires delivery of the share certificates for the shares being transferred, shares constituting a
fraction of a unit and for which no share certificates are issued may not be transferable. Because
transfer of ADRs does not require a change in the ownership of the underlying shares, holders of
ADRs evidencing ADSs that constitute less than one unit of shares are not affected by these
restrictions in their ability to transfer the ADRs.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, because transfers of less than one unit of the underlying shares are normally prohibited
under the unit share system, the deposit agreement provides that the right of ADR holders to
surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as
to whole units.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its
Shares</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares representing less than one unit may at any time require the Company to
purchase its shares. These shares will be purchased at (a)&nbsp;the closing price of the shares reported
by the Tokyo Stock Exchange, Inc. (the &#147;Tokyo Stock Exchange&#148;) on the day when the request to
purchase is made or (b)&nbsp;if no sale takes place on the Tokyo Stock Exchange on that day, then the
price at which sale of shares is effected on such stock exchange immediately thereafter. In such
case, the Company will request payment of an amount equal to the brokerage commission applicable to
the shares purchased pursuant to its Regulations for Handling of Shares. However, because holders
of ADSs representing less than one unit are not able to withdraw the underlying shares from
deposit, these holders will not be able to exercise this right as a practical matter.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares
up to a Whole Unit</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Articles of Incorporation of the Company provide that a holder of shares representing less
than one unit may require the Company to sell its shares to such holder so that the holder can
raise its fractional ownership to a whole unit. These shares will be sold at (a)&nbsp;the closing price
of the shares reported by the Tokyo Stock Exchange on the day when the request to sell becomes
effective or (b)&nbsp;if no sale has taken place on the Tokyo Stock Exchange on that day, then
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">the price
at which sale of shares is effected on such stock exchange immediately thereafter. In such case,
the Company will request payment of an amount equal to the brokerage commission applicable to the
shares sold pursuant to its Regulations for Handling of Shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Voting Rights of a Holder of Shares Representing Less than One Unit</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares representing less than one unit cannot exercise any voting rights
pertaining to those shares. In calculating the quorum for various voting purposes, the aggregate
number of shares representing less than one unit will be excluded from the number of outstanding
shares. A holder of shares representing one or more whole units will have one vote for each whole
unit represented.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares representing less than one unit does not have any rights relating to
voting, such as the right to participate in a demand for the resignation of a director, the right
to participate in a demand for the convocation of a general meeting of shareholders and the right
to join with other shareholders to propose an agenda item to be addressed at a general meeting of
shareholders. In addition, a holder of shares constituting less than one unit does not have the
right to require the Company to issue share certificates for those shares.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;However, a holder of shares constituting less than one unit has all other rights of a
shareholder in respect of those shares, including the following rights:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to receive annual and interim dividends,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to receive cash or other assets in case of consolidation or split of shares, exchange or
transfer of shares or corporate merger,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>to participate in any distribution of surplus assets upon liquidation.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Ordinary and Extraordinary General Meeting of Shareholders</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company normally holds its ordinary general meeting of shareholders in March of each year
in Ohta-ku, Tokyo or in a neighbouring area. In addition, the Company may hold an extraordinary
general meeting of shareholders whenever necessary by giving at least two weeks&#146; advance notice.
Under the Corporation Law of Japan, notice of any shareholders&#146; meeting must be given to each
shareholder having voting rights or, in the case of a non-resident shareholder, to his resident
proxy or mailing address in Japan in accordance with the Company&#146;s Regulations for Handling of
Shares, at least two weeks prior to the date of the meeting.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Voting Rights</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A shareholder is generally entitled to one vote per one unit of shares as described in this
paragraph and under &#147;Japanese Unit Share System&#148; above. In general, under the Corporation Law of
Japan, a resolution can be adopted at a general meeting of shareholders by a majority of the shares
having voting rights represented at the meeting. The Corporation Law of Japan and the Company&#146;s
Articles of Incorporation require a quorum for the election of Directors and Corporate Auditors of
not less than one-third of the total number of outstanding shares having voting rights. The
Company&#146;s shareholders are not entitled to cumulative voting in the election of Directors. A
corporate shareholder whose outstanding shares are in turn more than one-quarter directly or
indirectly owned by the Company does not have voting rights. Shareholders may exercise their voting
rights through proxies, provided that those proxies are also shareholders who have voting rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the Corporation Law of Japan and the Company&#146;s Articles of Incorporation, a quorum
of, not less than one-third of the outstanding shares with voting rights must be present at a
shareholders&#146; meeting to approve any material corporate actions such as:
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a reduction of stated capital,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>amendment of the Articles of Incorporation (except amendments which the board of directors are
authorized to make under the Corporation Law of Japan as described in&#147;Stock Splits&#147;and&#147;Japanese
Unit Share System&#147;above),</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the removal of a Director or Corporate Auditor,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a dissolution, merger or consolidation,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a corporate separation,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the transfer of the whole or an important part of the Company&#146;s business,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the taking over of the whole of the business of any other corporation,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>any issuance of new shares at a &#147;specially favourable&#148; price, stock acquisition
rights (<I>shinkabu yoyakuken</I>) with &#147;specially
favourable&#148; conditions or bonds with stock
acquisition rights (<I>shinkabu yoyakuken-tsuki shasai</I>) with
&#147;specially favourable&#148; conditions to
persons other than shareholders,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>release of part of Directors&#146; or Corporate Auditors&#146; liabilities to the Company,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make
such distribution in cash instead of in kind,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>purchase of shares by the Company from a specific shareholder other than its subsidiaries,</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>consolidation of shares, and</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->55<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>discharge of a portion of liabilities of Directors, Corporate Auditors or independent auditors that are owed to the Company.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At least two-thirds of the outstanding shares having voting rights present at the meeting must approve these actions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Subscription Rights</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Holders of shares have no pre-emptive rights. Authorized but un-issued shares may be issued at
such times and upon such terms as the board of directors determines, subject to the limitations as
to the issue of new shares at a &#147;specially favorable&#148; price mentioned in &#147;Voting Rights&#148; above. The
board of directors may, however, determine that shareholders be given subscription rights to new
shares, in which case they must be given on uniform terms to all shareholders as of a record date
of which not less than two weeks&#146; prior public notice of the date on which such subscription rights
must be given. Each of the shareholders to whom such rights are given must also be given at least
two weeks&#146; prior notice of the date on which such rights will expire.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Stock Acquisition Rights</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company may issue stock acquisition rights or bonds with stock acquisition rights (in
relation to which the stock acquisition rights are undetachable). Except where the issue would be
on &#147;specially favorable&#148; conditions mentioned in &#147;Voting Rights&#148; above, the issue of stock
acquisition rights or bonds with stock acquisition rights may be authorized by a resolution of the
board of directors. Subject to the terms and conditions thereof, holders of stock acquisition
rights may acquire a prescribed number of shares by exercising their stock acquisition rights and
paying the exercise price at any time during the exercise period thereof. Upon exercise of stock
acquisition rights, the Company will be obliged to either issue the relevant number of new shares
or transfer the necessary number of existing shares held by it as treasury stock to the holder. The
entitlements accorded to stock acquisition rights attached to bonds are substantially similar to
those accorded to stock acquisition rights
issued without being attached to bonds, provided that, if so determined by the board of directors
at the time of its resolution authorizing the issue of the relevant bonds with stock acquisition
rights, then, upon exercise of the stock acquisition rights, their exercise price will be deemed to
have been paid by the holder thereof to the Company in lieu of the Company redeeming the relevant
bonds.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Liquidation Rights</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the event of liquidation, the assets remaining after payment of all debts, liquidation
expenses and taxes will be distributed among the shareholders in proportion to the number of shares
they own.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Liability to Further Calls or Assessments</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the Company&#146;s currently outstanding shares, including shares represented by the ADSs,
are fully paid and nonassessable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Share Registrar</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Mizuho Trust &#038; Banking Co., Ltd. is the share registrar for the Company&#146;s shares. Mizuho
Trust&#146;s office is located at 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan. Mizuho Trust maintains the
Company&#146;s register of shareholders and records transfers of record ownership upon presentation of
share certificates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Record Date</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The close of business on December&nbsp;31 is the record date for the Company&#146;s year-end dividends,
if paid. June&nbsp;30 is the record date for interim dividends, if paid. A holder of shares constituting
one or more whole units who is registered as a holder on the Company&#146;s register of shareholders at
the close of business as of December&nbsp;31 is also entitled to exercise shareholders&#146; voting rights at
the ordinary general meeting of shareholders with respect to the fiscal year ending on December&nbsp;31.
In addition, the Company may set a record date for determining the shareholders entitled to other
rights and for other purposes by giving at least two weeks&#146; public notice.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the
third business day before a record date (or if the record date is not a business day, the fourth
business day prior thereto), for the purpose of dividends or rights offerings.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Repurchase by the Company of Shares</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Corporation Law of Japan, the Company may acquire its shares (i)&nbsp;by soliciting all
shareholders to offer to sell its shares held by them (in this case, the certain terms of such
acquisition, such as the total number of the shares to be purchased and the total amount of the
consideration, shall be set by an ordinary resolution of a general meeting of shareholders in
advance, and acquisition shall be effected pursuant to a resolution of the board of directors),
(ii)&nbsp;from a specific shareholder other than any of the Company&#146;s subsidiaries (pursuant to a
special resolution of a general meeting of shareholders), (iii)&nbsp;from any of the Company&#146;s
subsidiaries (pursuant to a resolution of the board of directors), or (iv)&nbsp;by way of purchase on
any Japanese stock exchange on which the Company&#146;s shares are listed by way of tender offer (in
either case pursuant to a resolution of the board directors). In the case of (ii)&nbsp;above, if the
purchase price or any other consideration to be received by the relevant specific shareholder
exceeds the then market price of the Company&#146;s shares calculated in a manner set forth in the
ordinances of the Ministry of Justice, any other shareholder may make a request to a representative
director to be included as a seller in the proposed acquisition by the Company.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The total amount of the purchase price of the Company&#146;s shares may not exceed the
Distributable Amount, as described in &#147;Restriction on Distributions of Surplus&#148; above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the Company may acquire its shares by means of repurchase of any number of shares
constituting less than one unit upon the request of the holder of those shares, as described under
&#147;Japanese Unit Share System&#148; above.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->56<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="166"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>C.&nbsp;Material contracts</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All contracts entered into by us during the two years preceding the date of this annual report
were entered into in the ordinary course of business.
</DIV>
<DIV align="left">
<A name="167"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>D.&nbsp;Exchange controls</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;Information with respect to Japanese exchange regulations affecting the Company&#146;s
security holders is as follows:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Foreign Exchange and Foreign Trade Law of Japan, as amended and effective from
April&nbsp;1, 1998, and the cabinet orders and ministerial
ordinances thereunder (the &#147;Foreign Exchange Regulations&#148;) govern certain aspects relating
to the issuance of securities by the Company and the acquisition and holding of such
securities by &#147;non-residents of Japan&#148; and by &#147;foreign investors&#148;, as hereinafter defined.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&#147;Non-residents of Japan&#148; are defined as individuals who are not resident in Japan and
corporations whose principal offices are located
outside Japan. Generally, branches and other offices of Japanese corporations located
outside Japan are regarded as non-residents of
Japan, while branches and other offices located within Japan of non-resident corporations
are regarded as residents of Japan. &#147;Foreign
investors&#148; are defined to be (i)&nbsp;individuals not resident in Japan, (ii)&nbsp;corporations which
are organized under the laws of foreign
countries or whose principal offices are located outside Japan, (iii)&nbsp;corporations of which
50% or more of the shares are held by (i)&nbsp;and /
or (ii)&nbsp;above and (iv)&nbsp;corporations in respect of which (a)&nbsp;a majority of the officers are
non-resident individuals or (b)&nbsp;a majority of the
officers having the power to represent the corporation are non-resident individuals.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Issuance of Securities by the Company:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Foreign Exchange Regulations, the issue of securities outside Japan by the
Company is, in principle, not subject to a prior
notification requirement, but subject to a post reporting requirement of the Minister of
Finance. Under the Foreign Exchange Regulations as
currently in effect, payments of principal, premium and interest in respect of securities
and any additional amounts payable pursuant to
the terms thereof may in general be paid when made without any restrictions under the
Foreign Exchange Regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisition of Shares:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, the acquisition of shares of stock of a Japanese company listed on any Japanese
stock by a non-resident of Japan from a resident of Japan is not subject to a prior
notification requirement, but subject to a post reporting requirement of the Minister of
Finance by such resident.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the case where a foreign investor intends to acquire listed shares (whether from a
resident or a non-resident of Japan, from another
foreign investor or from or through a designated securities company) and as a result of
such acquisition the number of shares held,
directly or indirectly, by such foreign investor would become 10% or more of the total
outstanding shares of the company, the foreign investor
must generally report such acquisition to the Minister of Finance and other Ministers having
jurisdiction over the business of the subject
company within 15&nbsp;days from and including the date of such acquisition. In certain
exceptional cases, a prior notification is required in respect
of such acquisition.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Acquisition of Shares upon Exercise of Rights for Subscription of Shares:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The acquisition by a non-resident of Japan of shares upon exercise of his rights for
subscription of shares is exempted from the notification
and reporting requirements described under &#147;Acquisition of Shares&#148; above.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends and Proceeds of Sales:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Foreign Exchange Regulations currently in effect, dividends paid on, and the
proceeds of sale in Japan of, the shares held by
non-residents of Japan may be converted into any foreign currency and repatriated abroad.
The acquisition of shares by non-resident<BR>
shareholders by way of stock splits is not subject to any of the aforesaid notification
requirements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt ; margin-left: 0%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;Reporting of Substantial Shareholdings:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Securities and Exchange Law of Japan requires any person who has become,
beneficially and solely or jointly, a holder of more than 5%
of the total outstanding voting shares of capital stock of a company listed on any Japanese
stock exchange to file with the relevant Local Finance Bureau of the Minister of Finance
within five business days a report concerning such share ownership. A similar report must
also be made in respect of any subsequent change of 1% or more in any such holding. Copies
of any such report must also be furnished to the issuer of such shares and all Japanese
stock exchanges on which the shares are listed. For this purpose, shares issuable exercise
of rights for subscription of shares held by such holder are taken into account in
determining both the size of a holding and a company&#146;s total outstanding share capital.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->57<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="168"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>E.&nbsp;Taxation</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">1. Taxation in Japan
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Generally, a non-resident of Japan or non-Japanese corporation ( &#147;Non-Resident Holders&#148;) is
subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits
are not subject to Japanese income tax. Due to the 2001 Japanese tax legislation, a conversion
of retained earnings or legal reserve (but, not additional paid-in capital, in general) into
stated capital (whether made in connection with a stock split or otherwise) is no longer
treated as a deemed dividend payment to shareholders for Japanese tax purposes. Thus, such a
conversion does not trigger Japanese withholding taxation.
(Article&nbsp;2 (16)&nbsp;of the Japanese Corporation Tax Law and Article&nbsp;8 (1) (xv)&nbsp;of the Japanese
Corporation Tax Law Enforcement Order).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Japan is a party to a number of income tax treaties, conventions and agreements,
(collectively &#147;Tax Treaties&#148;), whereby the maximum withholding tax rate for dividend payments
is set at, in most cases, 15% for portfolio investors who are Non-Resident Holders. Specific
countries with which such Tax Treaties have been entered into include Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, and Switzerland. Pursuant to the Convention Between
the Government of the United States of America and the Government of Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the
Treaty, dividend payments made by a Japanese corporation to a U.S. resident or corporation,
unless the recipient of the dividend has a &#147;permanent establishment&#148; in Japan and the shares
with respect to which such dividends are paid are effectively connected with such &#147;permanent
establishment&#148;, will be subject to withholding tax at rate of: (1)&nbsp;10% for dividends declared
on or after July&nbsp;1, 2004 for portfolio investors who are qualified U.S. residents eligible for
benefits of the Treaty; and (2)&nbsp;0% (i.e., no withholding) for dividends declared on or after
July&nbsp;1, 2004 for pension funds which are qualified U.S. residents eligible for benefits of the
Treaty, provided that the dividends are not derived from the carrying on of a business,
directly or indirectly, by such pension funds. The similar withholding tax treatment applies
under the new tax treaty between the United Kingdom and Japan for dividends declared on or
after January&nbsp;1, 2007 due to the renewal of the tax treaty. The tax treaty between France and
Japan will be renewed effective from January&nbsp;1, 2008 under which the reduction of the standard
treaty withholding rate on dividends (15% to 10%) is promulgated. On the other hand, under the
Japanese Income Tax Law, the temporary rate of Japanese withholding tax applicable to dividends
paid with respect to listed shares, such as those paid by the Company, to Non-Resident Holders
is currently 7% which is applicable for the period from January&nbsp;1, 2004 to March&nbsp;31, 2008 (15%
rate(10% for eligible US residents) will apply thereafter), except for dividends paid to any
individual shareholder who holds 5% or more of the total issued shares for which the applicable
rate is 20%. While the treaty rate normally overrides the domestic rate, due to the so-called
&#147;preservation doctrine&#148; under Article&nbsp;1(2) of the Treaty, and/or due to Article&nbsp;3-2 of the
Special Measurement Law for the Income Tax Law, Corporation Tax Law and Local Taxes Law with
respect to the Implementation of Tax Treaties, if the tax rate under the domestic tax law is
lower than that promulgated under the applicable income tax
treaty, then the domestic tax rate is still applicable. If the domestic tax rate applies,
as will generally be the case until March&nbsp;31, 2008 for most shareholders who are US residents
or corporations, no treaty application is required to be filed.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Gains derived from the sale outside Japan of Japanese corporations&#146; shares by a
non-resident of Japan or a non-Japanese corporation, or from the sale of Japanese corporations&#146;
shares within Japan by a non-resident of Japan as an occasional transaction or by a
non-Japanese corporation not having a permanent establishment in Japan, are generally not
subject to Japanese income or corporation taxes, provided that the seller is a portfolio
investors. Japanese inheritance and gift taxes at progressive rates may apply to an individual
who has acquired Japanese corporations&#146; shares as a distributee, legatee or donee.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">2. Taxation in the United States
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a discussion of material U.S. federal income tax consequences of
purchasing, owning and disposing of Canon shares or ADSs to the
persons described below, but it does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to a particular person&#146;s decision to acquire, hold
or dispose of such securities. The discussion applies only if you hold Canon shares or ADSs as
capital assets for U.S. federal income tax purposes and it does not address special classes of
holders, such as:
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">
<TR style="font-size: 6pt">
<TD colspan="3">&nbsp;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>certain financial institutions;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>insurance companies;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>dealers and traders in securities or foreign currencies;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons holding Canon shares or ADSs as part of a hedge, straddle, conversion or other
integrated transaction;</TD>
</TR>

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons whose functional currency for U.S. federal income tax purposes is not the U.S.
dollar;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>partnerships or other entities classified as partnerships for U.S. federal income tax
purposes;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons liable for the alternative minimum tax;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>tax-exempt organizations;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons holding Canon shares or ADSs that own or are deemed to own 10% or more of any
class of Canon stock; or</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>persons who acquired Canon shares or ADSs pursuant to the exercise of any employee stock
option or otherwise as compensation.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion is based on the Internal Revenue Code of 1986, as amended, administrative
pronouncements, judicial decision and final, temporary and proposed Treasury regulations, all as of
the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also
based in part on representations by the depositary and assumes that each obligation under the
deposit agreement and any related agreement will be performed in accordance with its terms. An
investor should consult its own tax advisers concerning the U.S. federal, state, local and foreign
tax consequences of purchasing, owning and disposing of Canon shares or ADSs in its particular
circumstances.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As used herein, a &#147;U.S. holder&#148; is a beneficial owner of Canon shares or ADSs that is, for
U.S. federal tax purposes:
</DIV>

<DIV style="margin-top: 0pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR style="font-size: 6pt">
<TD colspan="3">&nbsp;</TD>
</TR>


<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a citizen or resident of the United States;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>a corporation, or other entity taxable as a corporation, created or organized in or under
the laws of the United States or any political</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>subdivision thereof; or</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="2%" style="background: transparent">&nbsp;</TD>
    <TD width="2%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>an estate or trust the income of which is subject to U.S. federal income taxation regardless
of its source.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In general, if a U.S. holder holds ADSs, it will be treated for U.S. federal income tax
purposes as the holder of the underlying shares represented by those ADSs. Accordingly, no gain or
loss will be recognized if a U.S. holder exchanges ADSs for the underlying shares represented by
those ADSs.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->58<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>



<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S.
holders. Accordingly, the analysis of the creditability of Japanese taxes and the reduced rates of
taxation applicable to dividends received by certain non-corporate U.S. holders, both as described
below, could be affected by actions that may be taken by parties to whom ADSs are pre-released.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This discussion assumes that Canon was not a passive foreign investment company
for 2006, as described below.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Taxation of Distributions</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions paid on Canon Shares or ADSs, other than certain pro rata distributions of
common shares, to the extent paid out of Canon&#146;s current or accumulated earnings and profits (as
determined under U.S. federal income tax principles) will be treated as dividends. The amount of
a dividend will include any amounts withheld by Canon or its paying agent in respect of Japanese
taxes. The amount of the dividend will be treated as foreign-source dividend income and will not
be eligible for the dividends-received deduction generally allowed to U.S. corporations. Subject
to applicable limitations that may vary depending upon a U.S. holder&#146;s individual circumstances
and the concerns expressed by the U.S. Treasury, dividends paid to certain non-corporate holders
in taxable years beginning before January&nbsp;1, 2011 will be taxable at a maximum rate of 15%.
Non-corporate U.S. holders should consult their own tax advisers to determine whether they are
subject to any special rules that limit their ability to be taxed at this favorable rate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Dividends paid in Japanese yen will be included in a U.S. holder&#146;s income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the date of receipt of the
dividend by the U.S.holders, in the case of Canon shares, or by the depository, in the case of
ADSs, regardless of whether the payment is in fact converted into U.S. dollars at that time. If
the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should
not be required to recognize foreign currency gain or loss in respect of the dividend income. A
U.S.holder may have foreign currency gain or loss if it does not convert the amount of such
dividend into U.S. dollars on the date of receipt.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Japanese taxes withheld from cash dividends on Canon shares or ADSs will be creditable
against a U.S. holder&#146;s U.S. federal income tax liability, subject to applicable limitations that
may vary depending upon U.S. holder&#146;s circumstances and the concerns expressed by the U.S.
Treasury. Instead of claiming a credit, a U.S.holder may, at its election, deduct such Japanese
taxes in computing its income, subject to generally applicable limitations under U.S. law. The
limitation on foreign taxes eligible for credit is calculated separately with respect to specific
classes of income. A U.S. holder should consult its own tax adviser to determine whether it is
subject to any special rules that limit its ability to make effective use of foreign tax credits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Sale and Other Disposition of Canon Shares or ADSs</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For U.S. federal income tax purposes, gain or loss a U.S. holder realizes on the sale or other
disposition of Canon shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if such holder held the Canon shares or ADSs for more
than one year. The amount of a U.S. holder&#146;s gain or loss will be
equal to the difference between its U.S. dollar tax basis in the Canon shares or ADSs disposed of
and the U.S. dollar amount realized on the disposition. Such gain or loss will generally be U.S.
source gain or loss for foreign tax credit purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Passive Foreign Investment Company Rules</I></DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon believes that it was not a passive foreign investment company (&#147;PFIC&#148;) for U.S. federal
income tax purposes for 2006. However, since PFIC status depends upon the composition of Canon&#146;s
income and assets and the market value of its assets (including, among others, goodwill and equity
investments in less than 25% owned entities) from time to time, there can be no assurance that
Canon will not be considered a PFIC for any taxable year. If Canon were treated as a PFIC for any
taxable year during which a U.S.holder held Canon shares or ADSs, certain adverse tax consequences
could apply to such U.S. holder.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If Canon were treated as a PFIC for any taxable year during which a U.S. holder held Canon
 shares or ADSs, gain recognized by a U.S.holder on the sale or other disposition of Canon shares
or ADSs would be allocated ratably over its holding period for such securities. The amounts
allocated to the taxable year of the sale or other disposition and to any year before Canon became
a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be
subject to tax at the highest rate in effect in such taxable year for individuals or corporations,
as appropriate, and an interest charge would be imposed on the tax liability attributable to such
allocated amounts. Further, any distribution in respect of Canon shares or ADSs in excess of 125% of the average of the annual distributions on such securities received by a U.S.holder during the
preceding three years or its holding period, whichever is shorter, would be subject to taxation as
described above. Certain elections (including a mark-to-market election) may be available to a
U.S.holder that may mitigate the adverse tax consequences resulting from PFIC status.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, if Canon were treated as a PFIC in a taxable year in which it pays a dividend or
the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to
certain non-corporate U.S.holders would not apply.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Information Reporting and Backup Withholding</I></DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Payment of dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless the U.S. holder is a corporation or
other exempt recipient or, in the case of backup withholding, the U.S. holder provides a correct
taxpayer identification number and certify that no loss of exemption from backup withholding has
occurred.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The amount of any backup withholding from a payment to a U.S. holder will be allowed as a
credit against such holder&#146;s U.S. federal income tax liability and may entitle it to a refund,
provided that the required information is furnished to the Internal Revenue Service.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->59<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="169"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>F.&nbsp;Dividends and paying agents</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="170"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>G.&nbsp;Statement by experts</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="171"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>H.&nbsp;Documents on display</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;According to the Securities Exchange Act of 1934, as amended, the Company is subject to the
requirements of informational disclosure. The Company files
various reports and other information, including Form 20-F and Annual Reports, with the Securities
Exchange Commission and the NYSE. These reports may be inspected at the following sites.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 15px; text-indent: -0px">Securities Exchange Commission:<BR>
450 Fifth Street, N.W., Washington D.C. 20549
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 15px; text-indent: -0px">New York Stock Exchange, Inc. :<BR>
20 Broad Street, New York, New York 10005
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Form&nbsp;20-F is also available at the Electronic Data Gathering, Analysis, Retrieval system
(EDGAR)&nbsp;website which is maintained by the Securities
Exchange Commission.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 15px; text-indent: -0px">Securities Exchange Commission Home Page:<BR>
http://www.sec.gov
</DIV>
<DIV align="left">
<A name="172"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>I.&nbsp;Subsidiary information</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>
<DIV align="left">
<A name="173"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;11. Quantitative and Qualitative Disclosures about Market Risk</B>
</DIV>

<DIV align="left">
<A name="174"></A>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>Market risk exposures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is exposed to market risks, including changes in foreign currency exchange rates,
interest rates and prices of marketable securities and investments. In order to hedge the risks of
changes in foreign currency exchange rates and interest rates, Canon uses derivative financial
instruments.
</DIV>
<DIV align="left">
<A name="175"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Equity price risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon holds marketable securities included in current assets as short-term investments, which
consists generally of highly-liquid and low-risk instruments. Investments included in noncurrent
assets are held as long-term investments. Canon does not hold marketable securities and investments
for trading purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Maturities and fair values of such marketable securities and investments were as follows at
December&nbsp;31, 2006 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Available-for-sale securities
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">294</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">71</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after one year through five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,606</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,104</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,811</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,243</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,891</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,947</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,352</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,376</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,648</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">29,852</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,474</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,550</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">21,440</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">40,197</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">16,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">33,240</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Held-to-maturity securities
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,151</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after one year through five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,311</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,462</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,462</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->60<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="176"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Foreign currency exchange rate and interest rate risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon operates internationally, exposing it to the risk of changes in foreign currency exchange
rates and interest rates. Derivative financial instruments are comprised principally of foreign
currency exchange contracts and interest rate swaps utilized by the Company and certain of its
subsidiaries to reduce these risks. Canon assesses foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these exposures and by evaluating hedging
opportunities. Canon does not hold or issue derivative financial instruments for trading purposes.
Canon is also exposed to credit-related losses in the event of non-performance by counterparties
to derivative financial instruments, but it is not expected that any counterparties will fail to
meet their obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s international operations expose Canon to the risk of changes in foreign currency
exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange
exposures principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts
are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canon&#146;s policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table provides information about Canon&#146;s major derivative financial instruments
related to foreign currency exchange transactions existing at December&nbsp;31, 2006. All of the foreign
exchange contracts described in the following table have a contractual maturity date in 2007.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>Millions of yen</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>U.S.$</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>euro</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Others</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Forwards to sell foreign currencies:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Contract amounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">392,402</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">286,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">38,586</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">717,136</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Estimated fair value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,692</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,671</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(392</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,755</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Forwards to buy foreign currencies:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Contract amounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">34,004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,204</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,981</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">51,189</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Estimated fair value</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(310</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(111</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,051</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,472</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Derivative financial instruments designated as fair value hedges principally relate to
interest rate swaps associated with fixed-rate debt obligations. Changes in fair values of the
hedged debt obligations and derivative instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or net
gains or losses excluded from the assessment of hedge effectiveness for fiscal 2004 as the critical
terms of the interest rate swaps match the terms of the hedged debt obligations. Canon had no fair
value hedges in 2006 or 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Changes in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted intercompany sales and interest
rate swaps associated with variable rate debt obligations, are reported in accumulated other
comprehensive income (loss). These amounts are subsequently reclassified into earnings through
other income (deductions)&nbsp;in the same period as the hedged items affect earnings. Substantially all
amounts recorded in accumulated other comprehensive income (loss)&nbsp;at year-end are expected to be
recognized in earnings over the next twelve months. Canon excludes the time value component from
the assessment of hedge effectiveness.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The amounts of the hedging ineffectiveness are not material for the years ended December&nbsp;31,
2006, 2005 and 2004. The amounts of net gains or losses excluded from the assessment of hedge
effectiveness which are recorded in other income (deductions)&nbsp;are net losses of &#165;5,917&nbsp;million,
&#165;3,725&nbsp;million and &#165;2,096&nbsp;million for the years ended December&nbsp;31, 2006, 2005 and 2004,
respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon has entered into certain foreign currency exchange contracts to manage its foreign
currency exposures. These foreign currency exchange contracts have not been designated as hedges.
Accordingly, the changes in fair values of the contracts are recorded in earnings immediately.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->61<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For debt obligations, the table below presents principal cash flows by expected maturity dates and
related weighted average interest rates, as of December&nbsp;31, 2006 and 2005.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Long-term debt (including due within one year)</I>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="19%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Expected maturity date</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>interest</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>rates*</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2007</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2008</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2009</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2010</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2011</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Thereafter</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen except interest rate data)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended
December&nbsp;31, 2006:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japanese yen notes </DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.61</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,319</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japanese yen convertible
debentures </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,819</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other long-term
debt </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.34</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,734</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,132</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,832</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,657</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">31,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,263</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,450</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,832</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">418</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">32,795</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="19%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Weighted Average</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="26" style="border-bottom: 1px solid #000000"><B>Expected maturity date</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>interest</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>rates*</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2007</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2008</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2009</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2010</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Thereafter</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="34"><B>(Millions of yen except interest rate data)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended
December&nbsp;31, 2005:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japanese yen notes </DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">2.61</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">20,848</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japanese yen convertible
debentures </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.30</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,052</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other long-term
debt </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1.40</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,425</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,702</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,294</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 0px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total </DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">32,074</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,992</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,318</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">12,351</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">895</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">417</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">35,194</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="margin-top: 12pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt; background: transparent; color: #000000">
<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD></TD>
</TR>
<TR valign="top">
    <TD nowrap align="left">Note:</TD>
    <TD>&nbsp;</TD>
    <TD>All long-term debt is fixed rate.</TD>
</TR>
</TABLE>
</DIV>
<DIV align="left">
<A name="177"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;12. Description of Securities Other than Equity Securities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Not applicable.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->62<!-- /Folio -->
</DIV>


<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="178"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt"><B>PART II</B>
</DIV>

<DIV align="left">
<A name="179"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;13. Defaults, Dividend Arrearages and Delinquencies</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</DIV>
<DIV align="left">
<A name="180"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;14. Material Modifications to the Rights of Security Holders and Use of Proceeds</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Corporation Law of Japan, which came into effect on May&nbsp;1, 2006, generally maintained the
unit share system under the Commercial Code of Japan. The Company&#146;s Articles of Incorporation
provide that 100 shares constitute one &#147;unit&#148;.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the unit share system, shareholders have one voting right for each unit of shares they
hold. Shares not constituting a full unit will carry all shareholders&#146; rights except for those
relating to voting rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s Articles of Incorporation provide that no share certificates shall, in general,
be issued with respect to any shares constituting less than one unit. Consequently, no certificates
for shares other than a full unit or an integral multiple thereof
will be issued unless the Company determines that it is necessary to issue such certificates for
protection of the holders of shares constituting less than one
unit. As the transfer of shares normally requires delivery of the relevant share certificates, any
fraction of a unit for which no share certificates are issued
will not be transferable.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares constituting less than one unit may at any time require the Company
(through the participating institution in the case of a beneficial
shareholder under the central clearing system) to purchase such shares at the last selling price of
a share as reported by the Tokyo Stock Exchange, Inc. on the day when such request is made.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Shareholders (including beneficial owners) who own less than one unit of shares may request
that Company sell them a number of shares which, when added to their less than one unit shares,
would equal one unit of shares; provided, however, that the Company is not obliged to do so if the
Company does not own its own shares in the number which it is requested to sell.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A holder of shares constituting less than one unit is entitled as a shareholder to the rights
(i)&nbsp;to receive distribution of dividends of profit or interest, (ii)&nbsp;to receive cash or other
assets in case of consolidation or split of shares, exchange or transfer of shares or corporate
merger, (iii)&nbsp;to be allotted rights to subscribe for free for new shares when such rights are
granted to shareholders; and (iv)&nbsp;to participate in any distribution of surplus assets upon
liquidation. Such holder cannot exercise any voting rights pertaining to those shares. For
calculation of the quorum for various voting purposes, the aggregate number of shares constituting
less than one unit will be excluded from the number of voting rights.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the Company&#146;s unit share system, the depositary under the Deposit Agreement may be
unable to deliver share certificates with respect to those shares
otherwise deliverable upon the surrender of ADRs which do not constitute one or more complete
units. In such case, the Deposit Agreement provides that the depositary will promptly advise the
holder of the amount of such shares, deliver to the holder a new ADR evidencing such shares, and
notify the holder of
the additional amount of ADRs which the holder must surrender in order for the depositary to effect
delivery of share certificates for all of shares represented by the holder&#146;s ADSs.
</DIV>
<DIV align="left">
<A name="181"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;15. Controls and Procedures</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Evaluation of disclosure controls and procedures</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed in this report is recorded, processed, summarized and reported
on a timely basis.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;31, 2006, Canon, under the supervision and with the participation of its
management, including the chief executive officer and the chief financial officer, performed an
evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined
in Rule&nbsp;13a-15(f) of the Securities Exchange Act of 1934, as amended. Based on this evaluation,
Canon&#146;s chief executive officer and chief financial officer concluded that Canon&#146;s disclosure
controls and procedures are effective at the reasonable assurance level for gathering, analyzing
and disclosing the information Canon is required to disclose in the reports it files under the
Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC&#146;s rules
and forms.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Management&#146;s Report on Internal Control over Financial Reporting</I>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The management of Canon is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under
the supervision of, the company&#146;s principal executive and principal financial officers and effected
by the company&#146;s board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that (1)&nbsp;pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2)&nbsp;provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)&nbsp;provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company&#146;s assets that could have a material effect on the financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->63<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s management assessed the effectiveness of internal control over financial reporting as
of December&nbsp;31, 2006. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in <I>Internal Control-Integrated
Framework </I>(the COSO criteria).
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Based on its assessment, management concluded that, as of December&nbsp;31, 2006, Canon&#146;s internal
control over financial reporting was effective based on the COSO criteria.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s independent registered public accounting firm, Ernst &#038; Young
ShinNihon has issued an audit report on our assessment of internal
control over financial reporting. This report appears in item 17.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>Changes in internal controls over financial reporting</I>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There has been no change in Canon&#146;s internal control over financial reporting that occurred
during the period covered by this Annual Report that has materially affected, or is reasonably
likely to materially affect, its internal control over financial reporting.
</DIV>
<DIV align="left">
<A name="182"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16A. Audit Committee Financial Expert</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s Board of Directors has determined that Kunihiro Nagata qualifies as
an &#147;audit committee financial expert&#148; as defined by the rules of the SEC. Mr.&nbsp;Nagata began his
career at Canon in 1970, and since that time has worked in the field of finance and accounting for
nearly thirty years. From 1996 to 1999, Mr.&nbsp;Nagata served as a senior manager of the Accounting
Planning &#038; Administration Division, the division responsible for Canon&#146;s consolidated reporting.
Mr.&nbsp;Nagata was elected as one of Canon&#146;s corporate auditors at an ordinary general meeting of
shareholders held in March&nbsp;2004. See Item&nbsp;6.A. for additional information regarding Mr.&nbsp;Nagata.
</DIV>
<DIV align="left">
<A name="183"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16B. Code of Ethics</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon maintains a &#147;Canon Group Code of Conduct&#148;, or Code of Conduct, applicable to all
executives and employees. The Code of Conduct sets forth provisions relating to honest and ethical
conduct (including the handling of conflicts of interest), compliance with applicable laws, rules
and regulations and accountability for adherence to the provisions of the Code of Conduct. In
addition, on March&nbsp;31, 2004, the Board of Directors adopted a &#147;Code of Ethics&#148; as a supplement to
the Code of Conduct. This Code of Ethics applies to Canon&#146;s President and Chief Executive Officer,
each member of the Board of Directors (which includes the Chief Financial Officer) and general
managers belonging to Canon&#146;s accounting headquarters. The Code of Ethics requires full, fair,
accurate, timely and understandable disclosure in reports and documents that Canon files with or
submits to the SEC and in Canon&#146;s other communications with the public, prompt internal reporting
of violations of the Code of Conduct or Code of Ethics, and accountability for adherence to their
provisions. Both the Code of Conduct and the Code of Ethics have been filed as exhibits to this
Annual Report.
</DIV>
<DIV align="left">
<A name="184"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16C. Principal Accountant Fees and Services</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><I>Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors</I>

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s board of corporate auditors consisting of five members, including three outside
corporate auditors, is responsible for the oversight of the services of its independent registered public accounting firm. The
board of corporate auditors has established Pre-Approval Policies and Procedures for Audit and
Non-Audit Services, effective as of May&nbsp;28, 2003. These policies and procedures govern the board
of corporate auditors&#146; review and approval of the board of director&#146;s engagement of Canon&#146;s
independent registered public accounting firm to render audit or non-audit services. Non-audit services include audit-related
services, tax services and other services, as described in greater detail below under &#147;Fees and
Services&#148;. Canon and any affiliate controlled by Canon directly, indirectly or through one or more
intermediaries must follow these policies and procedures before any engagement of Canon&#146;s
independent registered public accounting firm for U.S. securities law reporting purposes.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The policies and procedures stipulate three means by which audit and non-audit services may be
pre-approved, depending on the content of and the fee for the services.
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the
Public Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions,
and any engagement of an Independent Registered Public Accounting
Firm for any audit or non-audit service involving estimated fees
exceeding &#165; 10,000,000 per single engagement must be approved by
the full board of corporate auditors.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certain other services may be pre-approved under detailed
categories of audit and non-audit services established annually by
the board of corporate auditors, as long as those services do not
exceed specified maximum yen limits for aggregate fees relating to
each of those categories. Any engagement of an Independent
Registered Public Accounting Firm by these means must be reported
to the board of corporate auditors at its next regularly scheduled
meeting.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For services that are not covered by the above two means of
pre-approval, the board of corporate auditors has delegated
pre-approval authority to the Chairman of the board of corporate
auditors. Any engagement of an Independent Registered Public
Accounting Firm by the Chairman is required to be reported to the
board of corporate auditors at its next regularly scheduled
meeting.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Additional services may be pre-approved by the board of corporate auditors on an individual basis.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;No services were provided for which pre-approval was waived pursuant to paragraph (c)(7)(i)(C)
of Rule&nbsp;2-01 of Regulation&nbsp;S-X.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->64<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><i>Fees
and Services.</i>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table discloses the aggregate fees accrued or paid to Canon&#146;s principal
accountant for each of the last two fiscal years and briefly describes the services performed:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="96%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="80%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Year ended</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Year ended</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,052</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">968</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Audit-related fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">439</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Tax fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">49</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">All other fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">92</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,177</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,548</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><I>Audit fees </I>include fees billed for professional services rendered for audits of Canon&#146;s annual
consolidated financial statements, limited review procedures of consolidated quarterly
financial information,
statutory audits of the Company and its subsidiaries.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><I>Audit-related fees </I>include fees billed for assurance and related services such as due
diligence, accounting consultations and audits in connection with
mergers and acquisitions, employee benefit plan audits, internal control reviews, and
consultations concerning financial accounting and reporting standards.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><I>Tax fees </I>include fees billed for services related to tax compliance, including the preparation
of tax returns and claims for refund, tax planning and tax advice, including assistance with
tax audits and appeals, advice related to mergers and acquisitions, tax services for employee
benefit plans and assistance with respect to requests for rulings from tax authorities.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%"><I>All other fees </I>include fees billed primarily for services rendered with respect to learning
products and services.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt; margin-left: 2%">Ernst &#038; Young ShinNihon served as Canon&#146;s principal accountant for fiscal 2006 and 2005.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->65<!-- /Folio -->
</DIV>
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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="left">
<A name="185"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16D. Exemptions from the Listing Standards for Audit Committees</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon is relying on the general exemption contained in Rule&nbsp;10A-3(c)(3) under the Exchange
Act. Because of such reliance, Canon does not have an audit committee which can act independently
and satisfy the other requirements of Rule&nbsp;10A-3 under the Exchange Act.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;According to Rule&nbsp;10A-3 under the Exchange Act and NYSE listing standards, Canon&#146;s board of
corporate auditors has been identified to act in place of an audit committee. The board of
corporate auditors meets the following requirements of the general exemption contained in Rule
10A-3(c)(3):
</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="3%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors is established pursuant to applicable Japanese law and Canon&#146;s
Articles of Incorporations;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>under Japanese legal requirements, the board of corporate auditors is separate from the board of
directors;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors is not elected by the management of Canon and no executive
officer of Canon is a member of the board of corporate auditors;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>all of the members of the board of corporate auditors meet specific independence requirements
from Canon and the Canon Group, the management and the auditing firm, as set forth by Japanese
legal provisions;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors, in accordance with and to the extent permitted by Japanese law,
is responsible for the appointment, retention and oversight of the work of Canon&#146;s external
auditors engaged for the purpose of issuing audit reports on Canon&#146;s annual financial statements;</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors adopted a complaints procedure (which became effective prior to
July&nbsp;31, 2005) in accordance with Rule&nbsp;10A-3(b)(3) of the Exchange Act; and</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors is authorized to engage independent counsel and other advisers,
as it deems appropriate.</TD>
</TR>

<TR>
    <TD style="font-size: 0pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>&#149;</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD>the board of corporate auditors is provided for appropriate funding for payment of (i)
compensation to Canon&#146;s independent registered public accounting
firm engaged for the purpose of issuing audit reports on
Canon&#146;s annual financial statements, (ii)&nbsp;compensation to independent counsel and other advisers
engaged by the board of corporate auditors, and (iii)&nbsp;ordinary administrative expenses of the board
of corporate auditors in carrying out its duties.</TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Canon&#146;s reliance on Rule&nbsp;10A-3(c)(3) does not, in its opinion, materially adversely affect the
ability of its board of corporate auditors to act independently and to satisfy the other
requirements of Rule&nbsp;10A-3.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->66<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="186"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth, for each of the months indicated, the total number of shares
purchased by Canon, or on Canon&#146;s behalf or by an any affiliated purchaser, the average price paid
per share, the number of shares purchased pursuant to the applicable shareholder resolution or
board resolution, which are publicly announced and the maximum number of shares that may yet be
purchased pursuant to these shareholder resolutions or board resolutions.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #ffffff"><B>Period</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(a) Total Number of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(b) Average Price</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(c) Total Numbers of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(d) Maximum Numbers of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>Shares Purchased</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>Paid per Share</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shares Purchased as</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Shares that May</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Part of Publicly</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Yet Be Purchased</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Announced Plans or</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Under the Plans or</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>(Shares)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>(Yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>Programs</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #ffffff"><B>Programs</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR style="font-size: 1px">
    <TD style="border-top: 1px solid #000000"><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">January 1 - January 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,115</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,714</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">February 1 - February 28</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,760</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,775</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">March 1 - March 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,910</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,930</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">April 1 - April 30</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,597</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">May 1 - May 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,276</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,664</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">June 1 - June 30</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,638</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,181</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">July 1 - July 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,770</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">August 1 - August 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,602</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,521</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">September 1- September 30</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,930</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,858</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">October 1 - October 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,382</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,434</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">November 1 - November 30</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,047</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,270</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">December 1 - December 31</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,884</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Notes:
</DIV>


<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(1)&nbsp;On May&nbsp;11, 2006 our board of directors authorized a three-for-two stock split. Canon
shares held by stockholders were split on a three-for-two basis on July&nbsp;1, 2006. The information
above has been adjusted to reflect the stock split.</DIV>



<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(2)&nbsp;A resolution approved at the meeting of our board of directors held on February&nbsp;15, 2007
authorized us to acquire up to 17&nbsp;million shares with an aggregate purchase price of &#165;100&nbsp;billion
during the period from February&nbsp;16, 2007 through March&nbsp;16, 2007.</DIV>



<DIV align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(3)&nbsp;A resolution approved at the meeting of our board of directors held on March&nbsp;8, 2007
authorized us to acquire up to 17&nbsp;million shares with an aggregate purchase price of &#165;100&nbsp;billion
during the period from March&nbsp;9, 2007 through April&nbsp;9, 2007.</DIV>



<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All of the purchases shown above represent the purchase of fractional shares from fractional
share owners, in accordance with the Corporation Law of Japan.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->67<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="187"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt"><B>PART III</B>
</DIV>

<DIV align="left">
<A name="188"></A>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;17. Financial Statements</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="85%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="10%">&nbsp;</TD>
</TR>
<TR style="font-size: 10pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 0px solid #000000">Consolidated financial statement of Canon Inc. and Subsidiaries:</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Page number</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Report of
Independent Registered Public Accounting Firm</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">69</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Consolidated Balance Sheets as of December&nbsp;31, 2006 and 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">71</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Consolidated Statements of Income for the years ended December
31, 2006, 2005 and 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">72</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Consolidated Statements of Stockholders&#146; Equity for the years
ended December&nbsp;31, 2006, 2005 and 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">73</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Consolidated Statements of Cash Flows for the years ended
December&nbsp;31, 2006, 2005 and 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">74</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Notes to Consolidated Financial Statements</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">75</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Schedule:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Schedule&nbsp;II Valuation and Qualifying Accounts for the years ended
December&nbsp;31, 2006, 2005 and 2004</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="bottom">120</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;All other schedules are omitted as permitted by the rules and
regulations of the Securities and Exchange Commission as not
applicable.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->68<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="189"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Report of Independent Registered Public Accounting Firm
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Board of Directors and Stockholders of<BR>
Canon Inc.

</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries (the
&#147;Company&#148;) as of December&nbsp;31, 2006 and 2005, and the related consolidated statements of income,
stockholders&#146; equity, and cash flows for each of the three years in the period ended December&nbsp;31,
2006, all expressed in Japanese yen. Our audits also included the financial statement schedule
listed in the Index at Item&nbsp;17. These financial statements and schedule are the responsibility of
the Company&#146;s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company&#146;s consolidated financial statements do not disclose segment information required by
Statement of Financial Accounting Standards No.&nbsp;131, &#147;Disclosures about Segments of an Enterprise
and Related Information.&#148; In our opinion, disclosure of segment information is required by U.S.
generally accepted accounting principles.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, except for the omission of segment information as discussed in the preceding
paragraph, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Canon Inc. and subsidiaries at December&nbsp;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 December&nbsp;31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Canon Inc. and subsidiaries&#146; internal control over
financial reporting as of December&nbsp;31, 2006, based on criteria established in Internal
Control&#151;Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March&nbsp;16, 2007 expressed an unqualified opinion thereon.
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">/s/ Ernst &#038; Young ShinNihon
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Tokyo, Japan<BR>
March&nbsp;16, 2007

</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->69<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Report of Independent Registered Public Accounting Firm
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">The Board of Directors and Stockholders of<BR>
Canon Inc.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We have audited management&#146;s assessment, included in the accompanying Management&#146;s Report on
Internal Control over Financial Reporting, that Canon Inc. and subsidiaries (the &#147;Company&#148;)
maintained effective internal control over financial reporting as of December&nbsp;31, 2006, based on
criteria established in Internal Control&#151;Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company&#146;s management
is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management&#146;s assessment and an opinion on the effectiveness of the
Company&#146;s internal control over financial reporting based on our audit.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management&#146;s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A company&#146;s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company&#146;s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2)&nbsp;provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3)&nbsp;provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company&#146;s assets that could have a material effect on the
financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In our opinion, management&#146;s assessment that Canon Inc. and subsidiaries maintained effective
internal control over financial reporting as of December&nbsp;31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Canon Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial reporting as of
December&nbsp;31, 2006, based on the COSO criteria.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the accompanying consolidated balance sheets of Canon Inc. and subsidiaries
as of December&nbsp;31, 2006 and 2005, and the related consolidated statements of income, stockholders&#146;
equity, and cash flows for each of the three years in the period ended December&nbsp;31, 2006, all
expressed in Japanese yen, and our report thereon dated March&nbsp;16, 2007 stated that, except for the
omission of segment information required by Statement of Financial Accounting Standards No.&nbsp;131,
&#147;Disclosures about Segments of an Enterprise and Related Information,&#148; the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of
Canon Inc. and subsidiaries at December&nbsp;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 December&nbsp;31, 2006,
in conformity with U.S. generally accepted accounting principles.
</DIV>


<DIV align="right" style="font-size: 10pt; margin-top: 12pt">/s/
Ernst &#038; Young ShinNihon
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Tokyo,
Japan<BR>
March&nbsp;16, 2007
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->70<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>

<DIV align="left">
<A name="191"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Consolidated Balance Sheets
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px"><B>Assets</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Current assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>1,155,626</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,004,953</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Marketable securities <I>(Notes 3 and 10)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,445</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Trade receivables, net <I>(Note 4)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>761,947</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">689,427</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Inventories <I>(Note 5)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>539,057</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">510,195</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Prepaid expenses and other current assets <I>(Notes 1, 7 and 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>315,274</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">253,822</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,782,349</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,458,569</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Noncurrent receivables <I>(Note 19)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>14,335</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,122</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Investments <I>(Notes 3 and 10)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>110,418</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">104,486</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Property, plant and equipment, net <I>(Notes 6 and 7)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,266,425</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,148,821</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Other assets <I>(Notes 7, 8, 9, 12 and 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>348,388</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">317,555</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>4,521,915</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,043,553</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px"><B>Liabilities and stockholders&#146; equity</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Current liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Short-term loans and current portion of long-term debt <I>(Note 10)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>15,362</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,059</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Trade payables <I>(Note 11)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>493,058</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">505,126</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Income taxes <I>(Note 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>133,745</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110,844</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Accrued expenses <I>(Note 19)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>303,353</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">248,205</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Other current liabilities <I>(Notes 6 and 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>217,789</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">209,394</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,163,307</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,078,628</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Long-term debt, excluding current installments <I>(Note 10)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>15,789</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,082</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Accrued pension and severance cost <I>(Note 12)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>83,876</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">80,430</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Other noncurrent liabilities <I>(Note 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>55,536</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">52,395</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,318,508</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,238,535</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>216,801</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">200,336</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Commitments and contingent liabilities <I>(Note 19)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Stockholders&#146; equity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Common stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Authorized 3,000,000,000 shares;<br>
issued 1,333,445,830 shares in 2006 and 1,333,114,169 shares in 2005 <I>(Note 14)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>174,603</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,438</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Additional paid-in capital <I>(Note 14)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>403,510</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403,246</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Legal reserve <I>(Note 15)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>43,600</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,331</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Retained earnings <I>(Note 15)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,368,047</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,018,289</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Accumulated other comprehensive income (loss) <I>(Note 16)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,718</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,212</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-0px">Treasury stock, at cost 1,794,390 shares in 2006 and 1,718,523 shares in 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(5,872</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,410</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,986,606</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,604,682</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:0px; text-indent:-0px">Total liabilities and stockholders&#146; equity</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>4,521,915</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,043,553</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>See accompanying notes to consolidated financial statements.</I>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->71<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>

<DIV align="left">
<A name="192"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Consolidated Statements of Income
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right"><B>4,156,759</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,754,191</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,467,853</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cost of sales <I>(Notes 9, 12 and 19)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,096,279</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,935,148</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,754,510</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Gross profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,060,480</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,819,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,713,343</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Operating expenses:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Selling, general and administrative expenses <I>(Notes
1, 9, 12 and 19)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,045,140</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">949,524</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">894,250</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>308,307</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">286,476</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">275,300</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,353,447</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,236,000</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,169,550</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Operating profit</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>707,033</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">583,043</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">543,793</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other income (deductions):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest and dividend income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>27,153</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,118</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest expense</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2,190</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,741</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,756</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other, net <I>(Notes 1, 3 and 18)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(12,853</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,450</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>12,110</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">28,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,323</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income before income taxes and minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>719,143</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">612,004</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">552,116</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income taxes <I>(Note 13)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>248,233</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">212,785</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">194,014</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Income before minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>470,910</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">399,219</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">358,102</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>15,585</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,123</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,758</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>455,325</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" align="center"><B>(Yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share <I>(Note 17)</I>:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>341.95</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">288.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">258.53</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>341.84</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257.85</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends per share</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>83.33</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">66.67</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">43.33</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 18pt"><I>See accompanying notes to consolidated financial statements.</I>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->72<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>

<DIV align="left">
<A name="193"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Consolidated Statements of Stockholders&#146; Equity
</DIV>

<DIV align="center">
<TABLE style="font-size: 9pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="37%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Additional</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>other</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Common</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>paid-in</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Legal</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Retained</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>comprehensive</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Treasury</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>stockholders&#146;</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>stock</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>capital</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>reserve</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>earnings</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>income (loss)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>stock</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>equity</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="26"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance at December&nbsp;31, 2003</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">168,892</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">396,939</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">39,998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,410,442</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(143,275</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(7,451</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,865,545</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of convertible debt and other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,972</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,966</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,938</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Stock exchanged under exchange offering</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">114</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,805</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital transaction by consolidated subsidiaries and
affiliated companies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(246</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(246</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(52,950</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(52,950</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Transfer to legal reserve</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,202</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss), net of tax <I>(Note 16)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,050</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,050</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net unrealized gains and losses on securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">686</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">686</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net gains and losses on derivative instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(396</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(396</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,623</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">385,307</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Repurchase of treasury stock, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(503</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(503</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance at December&nbsp;31, 2004</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">173,864</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">401,773</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,200</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,699,634</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(101,312</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,263</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,209,896</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of convertible debt and other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">574</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">574</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,148</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital transaction by consolidated subsidiaries and
affiliated companies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">899</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">899</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,310</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,310</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Transfer to legal reserve</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,131</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,131</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss), net of tax <I>(Note 16)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,979</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,979</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net unrealized gains and losses on securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,397</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,397</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net gains and losses on derivative instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(481</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(481</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,999</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,999</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">457,196</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Repurchase of treasury stock, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(147</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance at December&nbsp;31, 2005</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">174,438</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">403,246</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">42,331</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,018,289</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,212</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,410</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,604,682</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Conversion of convertible debt and other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>165</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>264</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>429</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash dividends</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(104,298</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(104,298</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Transfer to legal reserve</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,269</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,269</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Comprehensive income:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>455,325</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>455,325</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other comprehensive income (loss), net of tax <I>(Note 16)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>48,630</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>48,630</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net unrealized gains and losses on securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,992</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,992</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Net gains and losses on derivative instruments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(489</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(489</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(3,575</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(3,575</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total comprehensive income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>501,883</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustment to initially apply SFAS 158,
net of tax <I>(Note 12)</I></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(15,628</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(15,628</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Repurchase of treasury stock, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(462</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(462</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Balance at December&nbsp;31, 2006</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>174,603</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>403,510</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>43,600</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>2,368,047</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>2,718</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(5,872</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>2,986,606</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<P align="left" style="font-size: 10pt">See accompanying notes
consolidated financial statements.


<P align="center" style="font-size: 10pt"><!-- Folio -->73<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>

<DIV align="left">
<A name="194"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Consolidated Statements of Cash Flows
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows from operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>455,325</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Adjustments to reconcile net income to net cash provided by
operating activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Depreciation and amortization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>262,294</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">225,941</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,692</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Loss on disposal of property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>16,182</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,784</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,597</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Deferred income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(6,945</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(766</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,060</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in trade receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(40,969</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(48,391</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(53,595</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">(Increase) decrease in inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(5,542</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">27,558</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,050</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">(Decrease) increase in trade payables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2,313</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,018</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">65,873</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>22,657</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,998</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,689</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>36,165</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">31,241</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,196</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Decrease in accrued pension and severance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(20,309</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,221</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(16,924</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(21,304</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(29,580</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,647</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash provided by operating activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>695,241</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">605,678</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">561,529</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows from investing activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchases of fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(424,862</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(395,055</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(256,714</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Proceeds from sale of fixed assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>12,507</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">14,827</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,431</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchases of available-for-sale securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,768</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,680</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(388</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchases of held-to-maturity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(21,544</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Proceeds from sale of available-for-sale securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>4,047</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,337</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,735</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Increase in time deposits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(35,863</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,090</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Acquisitions of subsidiaries, net of cash acquired</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2,485</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,657</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Proceeds from sale of subsidiary common stock</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,731</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchases of other investments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(8,911</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,531</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,628</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,530</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,410</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in investing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(460,805</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(401,141</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(252,967</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash flows from financing activities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Proceeds from issuance of long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,053</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,716</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,115</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Repayments of long-term debt</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(5,861</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,187</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(43,175</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Decrease in short-term loans</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(828</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,011</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,046</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Dividends paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(104,298</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(64,310</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(52,950</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Purchases of treasury stock, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(462</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(147</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(494</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Other, net</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,909</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,000</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,718</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net cash used in financing activities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(107,487</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(93,939</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(102,268</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of exchange rate changes on cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>23,724</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,581</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,818</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net increase in cash and cash equivalents</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>150,673</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">117,179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">197,476</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,004,953</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">887,774</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">690,298</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Cash and cash equivalents at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>1,155,626</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,004,953</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">887,774</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Supplemental disclosure for cash flow information <I>(Note 21)</I>:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash paid during the year for:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Interest</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>2,146</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,919</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,981</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:60px; text-indent:-15px">Income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>244,236</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">211,540</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">164,450</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><I>See accompanying notes to consolidated financial statements.</I>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->74<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>

<DIV align="left">
<A name="195"></A>
</DIV>

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(a)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Description of Business</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon Inc. (the &#147;Company&#148;) and subsidiaries (collectively &#147;Canon&#148;) is one of the world&#146;s
leading manufacturers in such fields as office imaging products, computer peripherals,
business information products, cameras, and optical related products. Office imaging products
consist mainly of copying machines and digital multifunction devices. Computer peripherals
consist mainly of laser beam and inkjet printers. Business information products consist
mainly of computer information systems, micrographics and calculators. Cameras consist mainly
of single lens reflex (&#147;SLR&#148;) cameras, compact cameras, digital cameras and video camcorders.
Optical related products include steppers and aligners used in semiconductor chip production,
projection aligners used in the production of liquid crystal displays (&#147;LCDs&#148;), broadcasting
lenses and medical equipment. Canon&#146;s consolidated net sales for the years ended December&nbsp;31,
2006, 2005 and 2004 were distributed as follows: office imaging products 28%, 31% and 33%,
computer peripherals 34%, 33% and 33%, business information products 3%, 3% and 3%, cameras
25%, 23% and 22%, and optical and other products 10%, 10% and 9%, respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Sales are made principally under the Canon brand name, almost entirely through sales
subsidiaries. These subsidiaries are responsible for marketing and distribution, and
primarily sell to retail dealers in their geographical area. Approximately 75%, 74% and 73%
of consolidated net sales for the years ended December&nbsp;31, 2006, 2005 and 2004 were generated
outside Japan, with 31%, 30% and 30% in the Americas, 31%, 32% and 31% in Europe, and 13%, 12%
and 12% in other areas, respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales
constituted approximately 22%, 21% and 21% of consolidated net sales for the years ended
December&nbsp;31, 2006, 2005 and 2004, respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon&#146;s manufacturing operations are conducted primarily at 23 plants in Japan and 17 overseas
plants which are located in countries or regions such as the United States, Germany, France,
Taiwan, China, Malaysia, Thailand and Vietnam.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(b)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Basis of Presentation</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The Company and its domestic subsidiaries maintain their books of account in conformity with
financial accounting standards of Japan. Foreign subsidiaries maintain their books of account
in conformity with financial accounting standards of the countries of their domicile.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certain adjustments and reclassifications have been incorporated in the accompanying
consolidated financial statements to conform with U.S. generally accepted accounting
principles. These adjustments were not recorded in the statutory books of account.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->75<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(c)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Principles of Consolidation</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The consolidated financial statements include the accounts of the Company, its majority owned
subsidiaries and those variable interest entities where the Company or its consolidated
subsidiaries are the primary beneficiaries under Financial Accounting Standards Board (&#147;FASB&#148;)
Interpretation No.&nbsp;46 (revised December&nbsp;2003) (&#147;FIN 46R&#148;), &#147;Consolidation of Variable Interest
Entities.&#148; All significant intercompany balances and transactions have been eliminated.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(d)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Use of Estimates</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the period. Significant estimates and assumptions are
reflected in valuation and disclosure of revenue recognition, allowance for doubtful
receivables, valuation of inventories, environmental liabilities, valuation of deferred tax
assets and employee retirement and severance benefit plans. Actual results could differ
materially from those estimates.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(e)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Cash Equivalents and Time Deposits</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>All highly liquid investments acquired with an original maturity of three months or less are
considered to be cash equivalents. Time deposits with an original maturity of more than three
months are &#165;41,953&nbsp;million and &#165;6,090&nbsp;million at December&nbsp;31, 2006 and 2005, respectively, and
are included in prepaid expenses and other current assets in the accompanying consolidated
balance sheets.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(f)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Translation of Foreign Currencies</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Assets and liabilities of the Company&#146;s subsidiaries located outside Japan with functional
currencies other than Japanese yen are translated into Japanese yen at the rates of exchange
in effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are reported in other comprehensive income
(loss).</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Gains and losses resulting from foreign currency transactions, including foreign exchange
contracts, and translation of assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency exchange losses, net were &#165;25,804
million, &#165;3,710&nbsp;million and &#165;17,800&nbsp;million for the years ended December&nbsp;31, 2006, 2005 and
2004, respectively.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->76<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(g)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Marketable Securities and Investments</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon classifies investments in debt and marketable equity securities as available-for-sale,
or held-to-maturity securities. Canon does not hold any trading securities which are bought
and held primarily for the purpose of sale in the near term. Available-for-sale securities
are recorded at fair value. Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of other comprehensive income (loss)&nbsp;until
realized. Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Available-for-sale and held-to-maturity securities are regularly reviewed for
other-than-temporary declines in carrying value based on criteria that include the length of
time and the extent to which the market value has been less than cost, the financial condition
and near-term prospects of the issuer and Canon&#146;s intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated recovery in market value. When
such a decline exists, Canon recognizes an impairment loss to the extent by which the cost
basis of the investment exceeds the fair value of the investment. Fair value is determined
based on quoted market prices, projected discounted cash flows or other valuation techniques
as appropriate.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Realized gains and losses are determined on the average cost method and reflected in earnings.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Other securities are stated at cost and reviewed periodically for impairment.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(h)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Allowance for Doubtful Receivables</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Allowance for doubtful trade and finance receivables is maintained for all customers based on
a combination of factors, including aging analysis, macroeconomic conditions, significant
one-time events, and historical experience. An additional reserve for individual accounts is
recorded when Canon becomes aware of a customer&#146;s inability to meet its financial obligations,
such as in the case of bankruptcy filings. If circumstances related to customers change,
estimates of the recoverability of receivables would be further adjusted. When all collection
options are exhausted including legal recourse, the accounts or portions thereof are deemed to
be uncollectible and charged against the allowance.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(i)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Inventories</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Inventories are stated at the lower of cost or market value. Cost is determined principally
by the average method for domestic inventories and the first-in, first-out method for overseas
inventories.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->77<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(j)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Investments in Affiliated Companies</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Investments in affiliated companies over which Canon has the ability to exercise significant
influence, but does not hold a controlling financial interest, are accounted for by the equity
method.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(k)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Impairment of Long-Lived Assets</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(l)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Property, Plant and Equipment</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Property, plant and equipment are stated at cost. Depreciation is calculated principally by
the declining-balance method, except for certain assets which are depreciated by the
straight-line method over the estimated useful lives of the assets. The depreciation period
ranges from 3&nbsp;years to 60&nbsp;years for buildings and 2&nbsp;years to 20&nbsp;years for machinery and
equipment.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Assets leased to others under operating leases are stated at cost and depreciated to the
estimated residual value of the assets by the straight-line method over the period ranging
from 2&nbsp;years to 5&nbsp;years.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(m)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Goodwill and Other Intangible Assets</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Goodwill and other intangible assets with indefinite useful lives are not amortized, but are
instead tested for impairment annually in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist. Intangible assets with finite useful lives,
consisting primarily of software and license fees, are amortized using the straight-line
method over the estimated useful lives, which range from 3&nbsp;years to 5&nbsp;years for software and 5
years to 10&nbsp;years for license fees. Certain costs incurred in connection with developing or
obtaining internal use software are capitalized. These costs consist of payments made to
third parties and the salaries of employees working on such software development. Costs
incurred in connection with developing internal use software are capitalized at the
application development stage. In addition, Canon develops or obtains certain software to be
sold where related costs are capitalized after establishment of technological feasibility.</TD>
</TR>

</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->78<!-- /Folio -->
</DIV>


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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(n)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Environmental Liabilities</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Liabilities for environmental remediation and other environmental costs are accrued when
environmental assessments or remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present values.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(o)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Income Taxes</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon records a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not realizable.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(p)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Issuance of Stock by Subsidiaries and Equity Investees</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>The change in the Company&#146;s proportionate share of a subsidiary&#146;s or equity investee&#146;s equity
resulting from the issuance of stock by the subsidiary or equity investee is accounted for as
an equity transaction.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(q)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Net Income per Share</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Basic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during each year. Diluted net income per share includes the
effect from potential issuance of common stock based on the assumption that all convertible
debentures were converted into common stock.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(r)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue Recognition</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon generates revenue principally through the sale of consumer products, equipment,
supplies, and related services under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and
risk of loss have been transferred to the customer, the sales price is fixed or determinable,
and collectibility is probable.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->79<!-- /Folio -->
</DIV>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(r)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue Recognition (continued)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative
fair value if such element meets the criteria for treatment as a separate unit of accounting
as prescribed in the Emerging Issues Task Force (&#147;EITF&#148;) Issue No.&nbsp;00-21, &#147;Revenue
Arrangements with Multiple Deliverables.&#148; Otherwise, revenue is deferred until the
undelivered elements are fulfilled as a single unit of accounting.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or
delivery, depending upon when title and risk of loss transfer to the customer.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is
installed at the customer site and the specific criteria of the equipment functionality are
successfully tested and demonstrated by Canon. Service revenue is derived primarily from
maintenance contracts on equipment sold to customers and is recognized as services are
provided.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon offers service maintenance contracts for most office imaging products, for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts is recognized as services are provided.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Revenue from the sale of equipment under sales-type leases is recognized at the inception of
the lease. Income on sales-type leases and direct-financing leases is recognized over the
life of each respective lease using the interest method. Leases not qualifying as sales-type
leases or direct-financing leases are accounted for as operating leases and related revenue is
recognized over the lease term.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other known factors at the time of
sale. In addition, Canon provides price protection to certain resellers of its products, and
records reductions to sales for the estimated impact of price protection obligations when
announced.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Estimated product warranty costs are recorded at the time revenue is recognized and are
included in selling, general and administrative expenses. Estimates for accrued product
warranty costs are based on historical experience, and are affected by ongoing product failure
rates, specific product class failures outside of the baseline experience, material usage and
service delivery costs incurred in correcting a product failure.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->80<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(s)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Research and Development Costs</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Research and development costs are expensed as incurred.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(t)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Advertising Costs</TD>
</TR>

<TR>
    <TD style="font-size: 12pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Advertising costs are expensed as incurred. Advertising
expenses were&nbsp;&#165;116,809&nbsp;million,&nbsp;&#165;106,250&nbsp;million
and&nbsp;&#165;111,770&nbsp;million for the years ended December&nbsp;31, 2006, 2005 and 2004,
respectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(u)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Shipping and Handling Costs</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Shipping and handling costs totaled &#165;62,626&nbsp;million, &#165;50,052&nbsp;million and &#165;46,953&nbsp;million for
the years ended December&nbsp;31, 2006, 2005 and 2004, respectively, and are included in selling,
general and administrative expenses in the consolidated statements of income.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(v)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Derivative Financial Instruments</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>All derivatives are recognized at fair value and are included in prepaid expenses and other
current assets, or other current liabilities in the consolidated balance sheets. On the date
the derivative contract is entered into, Canon designates the derivative as either a hedge of
the fair value of a recognized asset or liability or of an unrecognized firm commitment (&#147;fair
value&#148; hedge), or a hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (&#147;cash flow&#148; hedge). Canon
formally documents all relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various hedge transactions. Canon
also formally assesses, both at the hedge&#146;s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Changes in the fair value of a derivative that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss), until earnings are affected
by the variability in cash flows of the hedged item. Gains and losses from hedging
ineffectiveness are included in other income (deductions). Gains and losses excluded from the
assessment of hedge effectiveness (time value component) are included in other income
(deductions).</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->81<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(v)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Derivative Financial Instruments (continued)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon also uses certain derivative financial instruments which are not designated as hedges.
Canon records these derivative financial instruments in the consolidated balance sheets at
fair value. The changes in fair values are immediately recorded in earnings.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(w)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Guarantees</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Canon recognizes, at the inception of a guarantee, a liability for the fair value of the
obligation it has undertaken in issuing guarantees.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(x)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>New Accounting Standards</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In June&nbsp;2006, the FASB ratified the EITF consensus on EITF Issue No.&nbsp;06-2, &#147;Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No.&nbsp;43&#148; (&#147;EITF 06-2&#148;).
EITF 06-2 provides guidance for an accrual of compensated absences that require a minimum
service period but have no increase in the benefit even with additional years of service.
EITF 06-2 is effective for fiscal years beginning after December&nbsp;15, 2006, and is required to
be adopted by Canon in the first quarter beginning January&nbsp;1, 2007. The adoption of EITF 06-2
will not have a material impact on Canon&#146;s consolidated results of operations and financial
condition.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In June&nbsp;2006, the FASB issued FASB Interpretation No.&nbsp;48, &#147;Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No.&nbsp;109&#148; (&#147;FIN 48&#148;). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December&nbsp;15, 2006 and is required to be adopted by Canon in the first quarter beginning
January&nbsp;1, 2007. The adoption of FIN 48 will not have a material impact on Canon&#146;s
consolidated results of operations and financial condition.</TD>
</TR>

</TABLE>
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->82<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(x)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>New Accounting Standards (continued)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In September&nbsp;2006, the FASB issued Statement of Financial Accounting Standards (&#147;SFAS&#148;) No.
157, &#147;Fair Value Measurements&#148; (&#147;SFAS 157&#148;). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November&nbsp;15, 2007 and is required to be
adopted by Canon in the first quarter beginning January&nbsp;1, 2008. Canon is currently
evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of
operations and financial condition but does not expect SFAS 157 to have a material impact.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In September&nbsp;2006, the FASB issued SFAS No.&nbsp;158, &#147;Employers&#146; Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No.&nbsp;87, 88, 106, and
132(R)&#148; (&#147;SFAS 158&#148;). SFAS 158 requires plan sponsors of defined benefit pension and other
postretirement benefit plans (collectively, &#147;postretirement benefit plans&#148;) to recognize the
funded status of their postretirement benefit plans in the consolidated balance sheet, measure
the fair value of plan assets and benefit obligations as of the date of the fiscal year-end
consolidated balance sheet, and provide additional disclosures. On December&nbsp;31, 2006, Canon
adopted the recognition and disclosure provisions of SFAS 158. The effect of adopting SFAS
158 on Canon&#146;s financial condition at December&nbsp;31, 2006 has been included in the accompanying
consolidated financial statements. SFAS 158 did not have an effect on Canon&#146;s consolidated
financial condition at December&nbsp;31, 2005. SFAS 158&#146;s provisions regarding the change in the
measurement date of postretirement benefit plans will not have a material impact on Canon&#146;s
consolidated results of operations and financial condition as Canon already uses a measurement
date of December&nbsp;31 for the majority of its plans. See Note 12 for further discussion of the
effect of adopting SFAS 158 on Canon&#146;s consolidated financial statements.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In September&nbsp;2006, the Securities and Exchange Commission (&#147;SEC&#148;) staff published Staff
Accounting Bulletin No.&nbsp;108, &#147;Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements&#148; (&#147;SAB 108&#148;). SAB 108 provides
guidance on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108 requires
quantification of the effects of financial statement errors on each of the balance sheets and
statements of income and the related financial statement disclosures. SAB 108 was adopted by
Canon in the year ended December&nbsp;31, 2006. The adoption of SAB 108 did not have a material
impact on Canon&#146;s consolidated results of operations and financial condition.</TD>
</TR>

</TABLE>
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->83<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>

<DIV style="margin-top: 6pt"><TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>1.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Basis of Presentation and Significant Accounting Policies (continued)</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(x)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>New Accounting Standards (continued)</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>In February&nbsp;2007, the FASB issued SFAS No.&nbsp;159, &#147;The Fair Value Option for Financial Assets
and Financial Liabilities-Including an amendment of FASB Statement No.&nbsp;115&#148; (&#147;SFAS 159&#148;).
SFAS 159 provides companies with an option to report selected financial assets and liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning
after November&nbsp;15, 2007 and is required to be adopted by Canon in the first quarter beginning
January&nbsp;1, 2008. Canon is currently evaluating the effect that the adoption of SFAS 159 will
have on its consolidated results of operations and financial condition but does not expect
SFAS 159 to have a material impact.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">(y)</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Reclassification</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Certain reclassifications have been made to the prior years&#146; consolidated financial statements
to conform with the presentation used for the year ended December&nbsp;31, 2006.</TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>2.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Foreign Operations</B></TD>
</TR>

<TR>
    <TD style="font-size: 6pt">&nbsp;</TD>
</TR><TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD>Amounts included in the consolidated financial statements relating to subsidiaries operating in
foreign countries are summarized as follows:</TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>December&nbsp;31:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#165;</B></TD>
    <TD align="right"><B>1,995,927</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">1,751,011</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">1,500,197</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>907,845</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">767,711</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">632,657</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Year ended December&nbsp;31:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net sales</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#165;</B></TD>
    <TD align="right"><B>3,119,102</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD align="right">&#165;</TD>
    <TD align="right">2,774,443</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>

    <TD align="right">&#165;</TD>
    <TD align="right">2,548,700</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>114,916</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">81,916</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70,227</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->84<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>3.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Marketable Securities and Investments</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for
available-for-sale securities and held-to-maturity securities by major security type at December
31, 2006 and 2005 were as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>holding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>holding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Fair</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>gains</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Available-for-sale:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Government bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>224</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>224</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Bank debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>71</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>70</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>295</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>294</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Held-to-maturity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,151</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,151</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,446</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>1</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,445</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Available-for-sale:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Government bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>335</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>15</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>320</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>4,090</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>35</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>4,124</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Fund trusts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>4,072</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,536</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>5,607</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>12,648</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>17,479</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>275</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>29,852</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>21,145</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>19,050</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>292</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>39,903</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Held-to-maturity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,311</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,311</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>31,456</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>19,050</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>292</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>50,214</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->85<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>3.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Marketable Securities and Investments (continued)</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>unrealized</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>holding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>holding</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Fair</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>gains</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>losses</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Current:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Available-for-sale:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Bank debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">71</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">71</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">101</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">101</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Noncurrent:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Available-for-sale:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Government bonds</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">525</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">7</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">532</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">85</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">88</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Fund trusts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,553</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,446</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,999</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,373</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,086</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,449</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,536</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">33,068</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Held-to-maturity:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">Corporate debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,961</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">37,497</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">16,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">10</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">54,029</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->86<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>




<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>3.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Marketable Securities and Investments (continued)</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Maturities of debt securities and fund trusts classified as available-for-sale and held-to-maturity
were as follows at December&nbsp;31, 2006:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
   <TD>&nbsp;</TD>
<TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Available-for-sale securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>295</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>294</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after one year through
five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>5,606</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>7,104</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,891</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,947</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>8,792</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,345</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Held-to-maturity securities</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Cost</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,151</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,151</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Due after one year through
five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,311</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,311</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>20,462</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>20,462</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The gross realized gains for the year ended December&nbsp;31, 2006, 2005 and 2004 were &#165;674&nbsp;million,
&#165;11,049&nbsp;million and &#165;3,867&nbsp;million, respectively. The gross realized losses for the years ended
December&nbsp;31, 2006, 2005 and 2004 were not significant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006, substantially all of the available-for-sale and held-to-maturity securities
with unrealized losses had been in a continuous unrealized loss position for less than 12&nbsp;months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Aggregate cost of non-marketable equity securities accounted for under the cost method totaled
&#165;18,462&nbsp;million and &#165;16,714&nbsp;million at December&nbsp;31, 2006 and 2005, respectively. Investments with
an aggregate cost of &#165;18,429&nbsp;million were not evaluated for impairment because (a)&nbsp;Canon did not
estimate the fair value of those investments as it was not practicable to estimate the fair value
of the investments and (b)&nbsp;Canon did not identify any events or changes in circumstances that might
have had significant adverse effects on the fair value of those investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Investments in affiliated companies accounted for by the equity method amounted to &#165;40,143&nbsp;million
and &#165;31,418&nbsp;million at December&nbsp;31, 2006 and 2005, respectively. Canon&#146;s share of the net earnings
(losses)&nbsp;in affiliated companies accounted for by the equity method, included in other income
(deductions), are earnings of &#165;4,237&nbsp;million, &#165;1,646&nbsp;million and &#165;1,921&nbsp;million for the years ended
December&nbsp;31, 2006, 2005 and 2004, respectively.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->87<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>4.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Trade Receivables</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Trade receivables are summarized as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>24,241</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27,328</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>751,555</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">673,827</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>775,796</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">701,155</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less allowance for doubtful
receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(13,849</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(11,728</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>761,947</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">689,427</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>5.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Inventories</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Inventories are summarized as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Finished goods</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>359,471</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">359,934</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Work in process</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>160,231</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">132,520</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Raw materials</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>19,355</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">17,741</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>539,057</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">510,195</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>6.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Property, Plant and Equipment</B></TD>
</TR>

</TABLE>
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Property, plant and equipment are stated at cost less accumulated depreciation and are summarized
as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="95%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Land</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>231,026</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">199,595</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Buildings</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,077,585</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">997,351</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Machinery and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,261,176</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,164,480</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Construction in progress</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>79,582</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">59,558</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,649,369</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,420,984</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less accumulated depreciation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,382,944</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,272,163</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>1,266,425</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,148,821</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Amounts due for purchases of property, plant and equipment were &#165;122,081&nbsp;million and &#165;116,716
million at December&nbsp;31, 2006 and 2005, respectively, and are included in other current liabilities
in the accompanying consolidated balance sheets.
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->88<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>7. Finance Receivables and Operating Leases</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Finance receivables represent financing leases which consist of sales-type leases and
direct-financing leases resulting from the marketing of Canon&#146;s and complementary third-party
products. These receivables typically have terms ranging from 1 to 6&nbsp;years. The components of the
finance receivables, which are included in prepaid expenses and other current assets, and other
assets in the accompanying consolidated balance sheets, are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total minimum lease payments receivable</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>216,697</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">204,774</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unguaranteed residual values</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>14,377</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,849</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Executory costs</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2,923</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,785</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unearned income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(24,930</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(23,632</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>203,221</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">192,206</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less allowance for doubtful receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,871</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,372</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>195,350</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">183,834</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less amount due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(72,808</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(69,211</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>122,542</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">114,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The cost of equipment leased to customers under operating leases included in property, plant and
equipment, net at December&nbsp;31, 2006 and 2005 was &#165;62,357&nbsp;million and &#165;60,839&nbsp;million, respectively.
Accumulated depreciation on equipment under operating leases at December&nbsp;31, 2006 and 2005 was
&#165;46,092&nbsp;million and &#165;45,285&nbsp;million, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following is a schedule by year of the future minimum lease payments to be received under
financing leases and non-cancelable operating leases at December&nbsp;31, 2006.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="75%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>

</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Financing</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Operating</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>leases</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>leases</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Year ending December&nbsp;31:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">86,961</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,689</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">64,107</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,996</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,212</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,699</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,368</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">770</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,518</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">70</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">531</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">216,697</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,248</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->89<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>8. Acquisitions</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In 2005, the Company acquired two companies for a total cost of &#165;20,205&nbsp;million, which was paid in
cash. Those companies are engaged in the development, manufacturing and sales of semiconductor
manufacturing equipment, factory automation equipment and vacuum equipment for production of
electronic parts, including semiconductors, flat panel displays, magnetic heads and hard disc
drives. In connection with those transactions, the Company recognized goodwill of &#165;4,885&nbsp;million
and intangible assets of &#165;16,382&nbsp;million, which were classified as other assets in the accompanying
consolidated financial statements. Intangible assets consist primarily of developed technology,
and are subject to a weighted average amortization period of approximately 9&nbsp;years.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In 2004, the Company acquired all of the outstanding common shares of a precision plastic mold
manufacturer, in an exchange offering for 866,880 shares of the Company&#146;s common stock. The
aggregate value of the shares exchanged was approximately &#165;2,805&nbsp;million. In connection with this
transaction, the Company recognized goodwill of &#165;1,585&nbsp;million, which was classified as other
assets in the accompanying consolidated financial statements.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon has included the results of operations of these transactions prospectively from the
respective dates of transactions. Canon has not presented the pro forma results of operations of
the acquired businesses because the results are not material to its consolidated results of
operations on either an individual or an aggregate basis.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->90<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>9. Goodwill and Other Intangible Assets</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Intangible assets acquired during the year ended December&nbsp;31, 2006 totaled &#165;46,791&nbsp;million, which
are subject to amortization, and primarily consist of internal use software of &#165;33,996&nbsp;million and
license fees of &#165;5,898&nbsp;million. The weighted average amortization period for internal use software
and license fees is approximately 4&nbsp;years and 8&nbsp;years, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The components of acquired intangible assets subject to amortization included in other assets at
December&nbsp;31, 2006 and 2005 were as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Gross</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Accumulated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amortization</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amortization</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Software</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>140,756</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>76,120</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">121,729</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">70,535</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">License fees</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>23,681</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>11,257</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,567</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,329</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>24,899</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>4,919</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,291</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,997</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>189,336</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>92,296</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">165,587</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">86,861</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->91<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>9. Goodwill and Other Intangible Assets (continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Aggregate amortization expense for the years ended December&nbsp;31, 2006, 2005 and 2004 was &#165;26,490
million, &#165;20,214&nbsp;million and &#165;18,295&nbsp;million, respectively. Estimated amortization expense for
intangible assets currently held for the next five years ending December&nbsp;31 is &#165;29,979&nbsp;million in
2007, &#165;23,033&nbsp;million in 2008, &#165;14,374&nbsp;million in 2009, &#165;8,127&nbsp;million in 2010, and &#165;5,355&nbsp;million
in 2011.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Intangible assets not subject to amortization other than goodwill at December&nbsp;31, 2006 and 2005
were not significant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The changes in the carrying amount of goodwill for the years ended December&nbsp;31, 2006 and 2005 were
as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>40,161</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">24,233</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Goodwill acquired during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,297</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,391</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Recognition of acquired company&#146;s tax benefits</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,038</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Translation adjustments and other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(619</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">537</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>40,801</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">40,161</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">During the year ended December&nbsp;31, 2006, Canon recognized &#165;1,038&nbsp;million of deferred tax benefits
relating to preexisting net operating tax losses of a company acquired in 2005. In connection
therewith, Canon reduced the related goodwill by the same amount.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->92<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>10. Short-Term Loans and Long-Term Debt</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Short-term loans consisting of bank borrowings at December&nbsp;31, 2006 and 2005 were &#165;99&nbsp;million and
&#165;67&nbsp;million, respectively. The weighted average interest rates on short-term loans outstanding at
December&nbsp;31, 2006 and 2005 were 4.91% and 2.14%, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Long-term debt consisted of the following:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Loans, principally from banks, maturing
in installments through 2018; bearing
weighted average interest of 1.34% and
1.40% at December&nbsp;31, 2006 and 2005,
respectively, partially secured by
mortgage of property, plant and
equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>149</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,641</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2.95% Japanese yen notes, due 2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,000</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">2.27% Japanese yen notes, due 2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,000</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,000</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">1.30% Japanese yen convertible
debentures, due 2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>318</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">649</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Capital lease obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,585</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,784</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>31,052</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">32,074</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less amount due within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(15,263</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,992</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>15,789</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">27,082</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The aggregate annual maturities of long-term debt outstanding at December&nbsp;31, 2006 were as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Year ending December&nbsp;31:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">15,263</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">13,450</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,832</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">418</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">31,052</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->93<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>10. Short-Term Loans and Long-Term Debt (continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon entered into an agreement whereby certain assets were deposited into an irrevocable trust to
meet the debt service requirements of the: 2.95% Japanese yen notes; and 2.27% Japanese yen notes
in the aggregate amount of &#165;20,000&nbsp;million. The assets contributed by Canon were debt securities
with carrying amounts of &#165;20,462&nbsp;million at December&nbsp;31, 2006. Cash flows from such investments
will be used solely to satisfy the principal and interest obligations for the debts. Accordingly,
the debt securities are included in the consolidated balance sheets under the captions of
marketable securities and investments.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Both short-term and long-term bank loans are made under general agreements which provide that
security and guarantees for present and future indebtedness will be given upon request of the bank,
and that the bank shall have the right to offset cash deposits against obligations that have become
due or, in the event of default, against all obligations due to the bank.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The 1.30% Japanese yen convertible debentures due 2008 are convertible into approximately 319,000
shares of common stock at a conversion price of &#165;998.00 per share at December&nbsp;31, 2006. The
debentures are redeemable at the option of the Company between January&nbsp;1, 2007 and December&nbsp;31,
2007 at premiums of 1%, and at par thereafter.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>11. Trade Payables</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Trade payables are summarized as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Notes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>15,902</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">17,567</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>477,156</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">487,559</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>493,058</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">505,126</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->94<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>12. Employee Retirement and Severance Benefits</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company and certain of its subsidiaries have contributory and noncontributory defined benefit
plans covering substantially all employees after one year of service. Other subsidiaries sponsor
unfunded retirement and severance plans. Benefits payable under the plans are based on employee
earnings and years of service.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The contributory plans in Japan mainly represented the Employees&#146; Pension Fund plans (&#147;EPFs&#148;),
composed of the substitutional portions based on the pay-related part of the old age pension
benefits prescribed by the Welfare Pension Insurance Law and the corporate portions based on
contributory defined benefit pension arrangements established at the discretion of the Company and
its subsidiaries. The substitutional portions of the EPFs represented welfare pension plans
carried on behalf of the Japanese government. These contributory and noncontributory plans were
funded in conformity with the funding requirements of applicable Japanese governmental regulations.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In January&nbsp;2003, the EITF reached a final consensus on EITF Issue No.&nbsp;03-2, &#147;Accounting for the
Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund
Liabilities&#148; (&#147;EITF 03-2&#148;), which addresses accounting for a transfer to the Japanese government of
a substitutional portion of an EPF. During the year ended December&nbsp;31, 2003, the Company and
certain of its domestic subsidiaries received approval from the government for an exemption from
the obligation to pay benefits for future employee service related to the substitutional portion.
During the year ended December&nbsp;31, 2004, the Company and certain of its domestic subsidiaries
received approval to separate the remaining substitutional portion related to past service by their
employees. During the year ended December&nbsp;31, 2004, the Company and certain of its domestic
subsidiaries also completed the transfer of the substitutional portion of the benefit obligation
and the related government-specified portion of the plan assets which were computed by the
government, and were relieved of all related obligations. Canon accounted for the entire process
at the completion of the transfer to the government of the substitutional portion of the benefit
obligation and the related plan assets as a single settlement transaction in accordance with EITF
03-2. As a result, Canon recognized a settlement loss of &#165;69,651&nbsp;million for the year ended
December&nbsp;31, 2004, which was determined based on the proportion of the projected benefit obligation
settled to the total projected benefit obligation immediately prior to the separation. Canon also
recognized a subsidy from the government of &#165;86,792&nbsp;million, which was calculated as the difference
between the obligation settled and the assets transferred to the government. The net gain of
&#165;17,141&nbsp;million was included in selling, general and administrative expenses for the year ended
December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Effective January&nbsp;1, 2007, Canon and certain of its domestic subsidiaries have amended their
defined benefit pension plans, and the projected benefit obligation has decreased by &#165;101,620
million. In conjunction therewith, Canon and certain of its domestic
subsidiaries also have implemented a defined contribution pension plan for certain future pension
benefits attributable to employees&#146; future services.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->95<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>



<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon uses a measurement date of December&nbsp;31 for the majority of its plans.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On December&nbsp;31, 2006, Canon adopted the recognition and disclosure provisions of SFAS 158. SFAS
158 required Canon to recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension plans in the December&nbsp;31, 2006
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax. The adjustment to accumulated other comprehensive income (loss)&nbsp;at
adoption represents the unrecognized actuarial loss, unrecognized prior service cost, and
unrecognized net transition obligation, all of which were previously netted against the plans&#146;
funded status in the consolidated balance sheet pursuant to the provisions of SFAS 87. These
amounts will be subsequently recognized as net periodic benefit cost pursuant to Canon&#146;s historical
accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic benefit cost in the same periods will be
recognized as a component of other comprehensive income (loss). Those amounts will be subsequently
recognized as a component of net periodic benefit cost on the same basis as the amounts recognized
in accumulated other comprehensive income (loss)&nbsp;at adoption of SFAS 158.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The incremental effects of adopting the provisions of SFAS 158 on the accompanying consolidated
balance sheet at December&nbsp;31, 2006 are presented in the following table. The adoption of SFAS 158
had no effect on the consolidated statement of income for the years ended December&nbsp;31, 2006, or for
any prior period presented, and it will not effect Canon&#146;s operating results in future periods.
Had Canon not been required to adopt SFAS 158 at December&nbsp;31, 2006, it would have recognized an
additional minimum liability pursuant to the provisions of SFAS 87. The effect of recognizing the
additional minimum liability is included in the table below in the column labeled &#147;Before
application of SFAS 158.&#148;
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD align="right">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Before</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>After</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>application of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>application of</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>SFAS 158</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>Adjustments</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>SFAS 158</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11"><B>(Millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">5,230</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&#165;</TD>
    <TD align="right">(2,206</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#165;</TD>
    <TD align="right">3,024</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(90</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(90</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued pension and severance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(57,031</TD>
    <TD align="left">)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(26,845</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">(83,876</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred income taxes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,408</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,516</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,924</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minority interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,517</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,997</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,514</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated other comprehensive
income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,914</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,628</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">26,542</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->96<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Obligations and funded status</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Reconciliations of beginning and ending balances of the benefit obligations and the fair value of
the plan assets are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in benefit obligations:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefit obligations at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>620,493</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">582,212</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>27,399</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">25,801</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Interest cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>17,309</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,172</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Plan participants&#146; contributions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,412</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,161</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amendments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(954</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,212</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Actuarial gain</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>23,586</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,340</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefits paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(13,064</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,239</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>714</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,106</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange rate changes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>11,696</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">167</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><b>&#151;</b></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefit obligations at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>688,591</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">620,493</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Change in plan assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets at beginning
of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>545,518</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">418,798</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Actual return on plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>18,858</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">93,844</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Employer contributions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>44,981</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,059</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Plan participants&#146; contributions</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,412</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,161</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Benefits paid</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(13,064</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(12,239</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Acquisition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>320</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,486</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Foreign currency exchange rate changes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>9,624</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">409</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>607,649</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">545,518</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Funded status at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(80,942</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(74,975</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->97<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>



<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12.
Employee Retirement and Severance Benefits (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Amounts recognized in the consolidated balance sheet at December&nbsp;31, 2006 consist of:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>3,024</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(90</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued pension and severance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(83,876</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(80,942</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Amounts recognized in accumulated other comprehensive income (loss)&nbsp;at December&nbsp;31, 2006 consist
of:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>139,305</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prior service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(94,935</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net transition obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>3,610</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>47,980</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The funded status at December&nbsp;31, 2005, reconciled to the net amount recognized in the consolidated
balance sheet at that date, is summarized as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Funded status</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right">(74,975</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrecognized actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">110,424</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrecognized prior service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(101,552</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Unrecognized net transition obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,955</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net amount recognized</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right">(62,148</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Amounts recognized in the consolidated balance sheet at December&nbsp;31, 2005 consist of:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right">3,089</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accrued pension and severance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(80,430</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated
other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">15,193</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net amount recognized</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right">(62,148</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->98<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The accumulated benefit obligation for all defined benefit plans was as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Accumulated benefit obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>641,199</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">578,627</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The projected benefit obligations and the fair value of plan assets for the pension plans with
projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and
the fair value of plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Plans with projected benefit
obligations in excess of plan assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Projected benefit obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>656,722</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">587,162</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>572,756</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">510,287</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Plans with accumulated benefit
obligations in excess of plan assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accumulated benefit obligations</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>608,812</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">545,375</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Fair value of plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>568,615</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">506,634</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->99<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Components of net periodic benefit cost</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Net periodic benefit cost for Canon&#146;s employee retirement and severance defined benefit plans for
the years ended December&nbsp;31, 2006, 2005 and 2004 consisted of the following components:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>27,399</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">25,801</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">26,571</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Interest cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>17,309</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">16,172</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">19,108</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected return on plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(26,199</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,651</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(17,054</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization of net transition
obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>345</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Amortization of prior service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,549</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(8,007</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,814</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Recognized actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>3,779</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,542</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,505</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Settlement loss resulting from
plan termination</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,784</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Settlement loss resulting from
transfer of substitutional
portion of EPFs to the Japanese
government</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">69,651</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>15,084</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">25,202</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">107,095</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The estimated net transition obligation, prior service cost and actuarial loss for the defined
benefit pension plans that will be amortized from accumulated other comprehensive income (loss)
into net periodic benefit cost over the next year are summarized as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><I>(</I><B>Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net transition obligation</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>345</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prior service cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(13,491</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Actuarial loss</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>6,100</B></TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The above prior service cost that will be amortized over the next year includes amortization
amounting to &#165;5,834&nbsp;million of prior service cost resulting from the plan amendment effective
January&nbsp;1, 2007.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->100<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt"><B><I>Assumptions</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Weighted-average assumptions used to determine benefit obligations are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Discount rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>2.8</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assumed rate of increase in future compensation levels</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>3.4</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.3</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Weighted-average assumptions used to determine net periodic benefit cost are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="11" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Discount rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>2.7</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Assumed rate of increase in future</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">compensation levels</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>3.3</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Expected long-term rate of return on
plan assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>4.8</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">4.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">3.6</TD>
    <TD nowrap>%</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon determines the expected long-term rate of return based on the expected long-term return of
the various asset categories in which it invests. Canon considers the current expectations for
future returns and the actual historical returns of each plan asset category.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Plan assets</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The weighted-average asset allocations of Canon&#146;s benefit plans at December&nbsp;31, 2006 and 2005 and
target asset allocation by asset category are as follows:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="7" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 0px solid #000000"><B>Target</B></TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>allocation</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Asset category:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Equity securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>40.5</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">50.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">37.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Debt securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>40.5</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">34.6</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">44.5</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Cash</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>0.4</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.7</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Life insurance company
general accounts</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>15.9</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">13.5</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">15.7</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>2.7</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">2.2</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right"><B>100.0</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right">&nbsp;</TD>
    <TD align="right">100.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD align="right" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->101<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>12. Employee Retirement and Severance Benefits (continued)</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon&#146;s investment policies are designed to ensure adequate plan assets are available to provide
future payments of pension benefits to eligible participants. Taking into account the expected
long-term rate of return on plan assets, Canon formulates a &#147;model&#148; portfolio comprised of the
optimal combination of equity securities and debt securities. Plan assets are invested in
individual equity and debt securities using the guidelines of the &#147;model&#148; portfolio in order to
produce a total return that will match the expected return on a mid-term to long-term basis. Canon
evaluates the gap between expected return and actual return of invested plan assets on an annual
basis to determine if such differences necessitate a revision in the formulation of the &#147;model&#148;
portfolio. Canon revises the &#147;model&#148; portfolio when and to the extent considered necessary to
achieve the expected long-term rate of return on plan assets.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The plan&#146;s equity securities include common stock of the Company and certain of its subsidiaries in
the amounts of &#165;1,797&nbsp;million and &#165;1,311&nbsp;million at December&nbsp;31, 2006 and 2005, respectively.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Contributions</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon expects to contribute &#165;17,369&nbsp;million to its defined benefit plans for the year ending
December&nbsp;31, 2007.
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Estimated future benefit payments</I></B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 10pt" valign="bottom">
    <TD nowrap align="left"><B>Year ending December 31:</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:52px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>10,709</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:52px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>12,514</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:52px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>13,914</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:52px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>15,216</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:52px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>16,800</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:45px; text-indent:-15px">&nbsp;&nbsp;2012 &#150; 2016</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>109,869</B></TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><!-- Folio -->102<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. Income Taxes</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Domestic and foreign components of income before income taxes and minority interests, and the
current and deferred income tax expense (benefit)&nbsp;attributable to such income are summarized as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31, 2006</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japanese</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Foreign</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income
taxes and minority
interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>556,759</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>162,384</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>719,143</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income taxes:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Current</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>201,022</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>54,156</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>255,178</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(73</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(6,872</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(6,945</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>200,949</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>47,284</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>248,233</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31, 2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japanese</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Foreign</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income
taxes and minority
interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">492,709</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">119,295</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">612,004</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>


<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income taxes:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Current</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">172,595</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">40,956</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">213,551</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,441</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4,207</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(766</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">176,036</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">36,749</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">212,785</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31, 2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Japanese</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Foreign</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>Total</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income before income
taxes and minority
interests</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">447,864</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">104,252</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">552,116</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>


<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Income taxes:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Current</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">162,679</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">22,275</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">184,954</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Deferred</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,065</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">10,125</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,060</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">161,614</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">32,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">194,014</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->103<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. Income Taxes (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the
aggregate, represent a statutory income tax rate of approximately 40% for the years ended December
31, 2006 and 2005, and 42% for the year ended December&nbsp;31, 2004.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Amendments to the Japanese tax regulations were enacted on March&nbsp;24, 2003. As a result of these
amendments, the statutory income tax rate was reduced from approximately 42% to 40% effective from
the year beginning January&nbsp;1, 2005. Consequently, the statutory tax rate utilized for deferred tax
assets and liabilities expected to be settled or realized subsequent to January&nbsp;1, 2005 is
approximately 40%.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a
percentage of income before income taxes and minority interests is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Japanese statutory income tax rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>40.0</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">40.0</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">42.0</TD>
    <TD nowrap>%</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Increase (reduction)&nbsp;in income taxes
resulting from:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Expenses not deductible for tax
purposes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>0.3</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.4</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax benefits not recognized on
operating losses of subsidiaries</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.1</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Income of foreign subsidiaries
taxed at lower than Japanese
statutory tax rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2.1</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2.1</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax credit for research and
development expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(4.1</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3.9</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(4.0</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>0.4</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">0.3</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1.3</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="3" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="3" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="3" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Effective income tax rate</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>34.5</B></TD>
    <TD nowrap><B>%</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">34.8</TD>
    <TD nowrap>%</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">35.1</TD>
    <TD nowrap>%</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="3" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="3" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="3" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->104<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>



<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. Income Taxes (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Net deferred income tax assets and liabilities are included in the accompanying consolidated
balance sheets under the following captions:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Prepaid expenses and other current assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>66,839</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">52,116</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>67,568</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">61,325</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other current liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(4,133</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,500</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other noncurrent liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(39,299</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(36,329</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>90,975</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">73,612</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax
liabilities at December&nbsp;31, 2006 and 2005 are presented below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax assets:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Inventories</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>20,077</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,459</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued business tax</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,654</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,599</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued pension and severance cost</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>33,633</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">34,257</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Research and development &#150; costs
capitalized for tax purposes</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>31,068</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">23,629</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Property, plant and equipment</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>26,577</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">21,839</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Accrued expenses</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>21,277</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,132</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net operating losses carried forward</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,767</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,388</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>28,061</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24,362</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total gross deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>173,114</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">147,665</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Less valuation allowance</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(6,500</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,345</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>166,614</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">144,320</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Deferred tax liabilities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Undistributed earnings of foreign
subsidiaries</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(9,138</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,806</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net unrealized gains on securities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,521</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,480</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Tax deductible reserve</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(11,955</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(14,307</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Financing lease revenue</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(35,990</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(35,395</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(11,035</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,720</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total gross deferred tax liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(75,639</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(70,708</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net deferred tax assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>90,975</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">73,612</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->105<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>13. Income Taxes (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The net changes in the total valuation allowance were an increase of &#165;3,155&nbsp;million for the year
ended December&nbsp;31, 2006, and decreases of &#165;150&nbsp;million and &#165;4,906&nbsp;million for the years ended
December&nbsp;31, 2005 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Based upon the level of historical taxable income and projections for future taxable income over
the periods which the net deductible temporary differences are expected to reverse, management
believes it is more likely than not that Canon will realize the benefits of these deferred tax
assets, net of the existing valuation allowance at December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006, Canon had net operating losses which can be carried forward for income tax
purposes of &#165;5,567&nbsp;million to reduce future taxable income. Periods available to reduce future
taxable income vary in each tax jurisdiction and generally range from one year to ten years as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Within one year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,979</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">After one year through five years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">967</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">After five years through ten years</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">101</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Indefinite period</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,520</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">5,567</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax
law provides a means by which the dividends from a domestic subsidiary can be received tax free.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon has not recognized deferred tax liabilities of &#165;36,568&nbsp;million for a portion of undistributed
earnings of foreign subsidiaries that arose for the year ended December&nbsp;31, 2006 and prior years
because Canon currently does not expect to have such amounts distributed or paid as dividends to
the Company in the foreseeable future. Deferred tax liabilities will be recognized when Canon
expects that it will realize those undistributed earnings in a taxable manner, such as through
receipt of dividends or sale of the investments. At December&nbsp;31, 2006, such undistributed earnings
of these subsidiaries were &#165;597,969&nbsp;million.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->106<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>14. Common Stock</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Based on the resolution of Board of Directors on May&nbsp;11, 2006, the Company made a three-for-two
stock split on July&nbsp;1, 2006, for stockholders recorded in the stockholders&#146; register as of June&nbsp;30,
2006. All share and per share information has been adjusted to reflect the implementation of the
stock split.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For the years ended December&nbsp;31, 2006, 2005 and 2004, the Company issued 331,661 shares, 1,148,292
shares and 9,957,909 shares of common stock, respectively, in connection with the conversion of
convertible debt. In accordance with the Corporation Law of Japan, conversion into common stock of
convertible debt is accounted for by crediting one-half or more of the conversion price to the
common stock account and the remainder to the additional paid-in capital account.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>15. Legal Reserve and Retained Earnings</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained
earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No
further appropriations are required when the total amount of the additional paid-in capital and the
legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also
provides that additional paid-in capital and legal reserve are available for appropriations by the
resolution of the stockholders. Certain foreign subsidiaries are also required to appropriate
their earnings to legal reserves under the laws of the respective countries.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Cash dividends and appropriations to the legal reserve charged to retained earnings for the years
ended December&nbsp;31, 2006, 2005 and 2004 represent dividends paid out during those years and the
related appropriations to the legal reserve. Retained earnings at December&nbsp;31, 2006 do not reflect
current year-end dividends in the amount of &#165;66,583&nbsp;million which will be payable in March&nbsp;2007
upon approval by the stockholders.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The amount available for dividends under the Corporation Law of Japan is based on the amount
recorded in the Company&#146;s nonconsolidated books of account in accordance with financial accounting
standards of Japan. Such amount was &#165;1,494,372&nbsp;million at December&nbsp;31, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Retained earnings at December&nbsp;31, 2006 included Canon&#146;s equity in undistributed earnings of
affiliated companies accounted for by the equity method in the amount of &#165;13,493&nbsp;million.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->107<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16. Other Comprehensive Income (Loss)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Changes in accumulated other comprehensive income (loss)&nbsp;are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation
adjustments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(25,772</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(79,751</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(83,801</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>48,630</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">53,979</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,050</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>22,858</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(25,772</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(79,751</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net unrealized gains and losses on
securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>6,073</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,470</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,784</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,992</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,397</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">686</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>8,065</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">6,073</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">7,470</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net gains and losses on derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,174</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(693</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(297</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(489</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(481</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(396</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,663</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,174</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(693</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minimum pension liability adjustments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,339</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,338</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(65,961</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(3,575</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,999</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustment to initially apply SFAS 158</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>10,914</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>&#151;</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(7,339</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(28,338</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Pension liability adjustments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustment to initially apply SFAS 158</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(26,542</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(26,542</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Total accumulated other comprehensive
income (loss):</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(28,212</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(101,312</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(143,275</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustments for the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>46,558</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">73,100</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">41,963</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Adjustment to initially apply SFAS 158</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(15,628</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>2,718</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(28,212</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(101,312</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->108<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16. Other Comprehensive Income (Loss) (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Tax effects allocated to each component of other comprehensive income (loss)&nbsp;and reclassification
adjustments are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="62%">&nbsp;</TD>

    <TD width="5%">&nbsp;</TD>

    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>

    <TD width="6%">&nbsp;</TD>

    <TD width="1%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>

    <TD width="5%">&nbsp;</TD>

    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Before-tax</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Tax (expense)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Net-of-tax</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3" style="border-bottom: 1px solid #000000"><B>or benefit</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>2006:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>49,518</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(888</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>48,630</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net unrealized gains and losses on securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>3,708</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,502</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,206</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(388</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>174</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(214</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>3,320</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(1,328</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,992</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net gains and losses on derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(7,126</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>2,858</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(4,268</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>6,309</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(2,530</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>3,779</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(817</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>328</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(489</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(4,391</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>816</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(3,575</B></TD>
    <TD nowrap><B>)</B></TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>47,630</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(1,072</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>46,558</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>2005:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">55,345</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(1,366</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">53,979</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net unrealized gains and losses on securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,005</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,892</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,113</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,793</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,283</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(6,510</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,788</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">391</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,397</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net gains and losses on derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(9,137</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,658</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(5,479</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">8,333</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,335</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,998</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(804</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">323</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(481</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">40,364</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(19,365</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">20,999</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">93,117</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(20,017</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">73,100</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->109<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>16. Other Comprehensive Income (Loss) (continued)</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Before-tax</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Tax (expense)</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Net-of-tax</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>or benefit</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>2004:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign currency translation adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,400</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(350</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">4,050</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net unrealized gains and losses on securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,022</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,202</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,820</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(3,698</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,564</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(2,134</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,324</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(638</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">686</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net gains and losses on derivative
instruments:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Amount arising during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(1,673</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">708</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(965</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Reclassification adjustments for gains
and losses realized in net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">929</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(360</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">569</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Net change during the year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(744</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">348</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(396</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Minimum pension liability adjustments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">78,179</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(40,556</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">37,623</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other comprehensive income (loss)</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">83,159</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(41,196</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">41,963</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->110<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>17. Net Income per Share</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The basic and diluted net income per share as well as the number of shares has been calculated to
reflect the three-for-two stock split that was completed on July&nbsp;1, 2006.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">A reconciliation of the numerators and denominators of basic and diluted net income per share
computations is as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="64%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2004</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="10"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>455,325</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">384,096</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">343,344</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of dilutive securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">1.20% Japanese yen
convertible debentures, due 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">24</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">1.30% Japanese yen
convertible debentures, due 2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>8</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">72</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted net income</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>455,333</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">384,119</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">343,440</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center"><B>(Number of shares)</B><BR></TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Average common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,331,542,074</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,330,760,715</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,328,047,686</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Effect of dilutive securities:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">1.20% Japanese yen
convertible debentures, due 2005</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">&#151;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">185,755</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">694,235</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">1.30% Japanese yen
convertible debentures, due 2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>474,796</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,118,931</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">3,187,917</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Diluted common shares outstanding</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>1,332,016,870</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,332,065,401</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">1,331,929,838</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="center"><B>(Yen)</B><BR></TD>
</TR>
<TR style="font-size: 1px">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="11" align="left" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Net income per share:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Basic</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>341.95</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">288.63</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">258.53</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Diluted</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>341.84</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">288.36</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">257.85</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->111<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>18. Derivatives and Hedging Activities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Risk management policy</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon operates internationally, exposing it to the risk of changes in foreign currency exchange
rates and interest rates. Derivative financial instruments are comprised principally of foreign
exchange contracts and interest rate swaps utilized by the Company and certain of its subsidiaries
to reduce these risks. Canon assesses foreign currency exchange rate risk and interest rate risk
by continually monitoring changes in these exposures and by evaluating hedging opportunities.
Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also
exposed to credit-related losses in the event of non-performance by counterparties to derivative
financial instruments, but it is not expected that any counterparties will fail to meet their
obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Foreign currency exchange rate risk management</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon&#146;s international operations expose Canon to the risk of changes in foreign currency exchange
rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures
principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canon&#146;s policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Interest rate risk management</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon&#146;s exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Fair value hedge</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Derivative financial instruments designated as fair value hedges principally relate to interest
rate swaps associated with fixed rate debt obligations. Changes in fair values of the hedged debt
obligations and derivative financial instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or
net gains or losses excluded from the assessment of hedge effectiveness for the year ended December
31, 2004 as the critical terms of the interest rate swaps match the terms of the hedged debt
obligations.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->112<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>18. Derivatives and Hedging Activities (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Cash flow hedge</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Changes in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted intercompany sales and interest
rate swaps associated with variable rate debt obligations, are reported in accumulated other
comprehensive income (loss). These amounts are subsequently reclassified into earnings through
other income (deductions)&nbsp;in the same period as the hedged items affect earnings. Substantially
all amounts recorded in accumulated other comprehensive income (loss)&nbsp;at year-end are expected to
be recognized in earnings over the next twelve months. Canon excludes the time value component
from the assessment of hedge effectiveness.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The amount of the hedging ineffectiveness was not material for the years ended December&nbsp;31, 2006,
2005 and 2004. The amount of net gains or losses excluded from the assessment of hedge
effectiveness (time value component) which was recorded in other income (deductions)&nbsp;was net losses
of &#165;5,917&nbsp;million, &#165;3,725&nbsp;million and &#165;2,096&nbsp;million for the years ended December&nbsp;31, 2006, 2005
and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Derivatives not designated as hedges</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon has entered into certain foreign exchange contracts to manage its foreign currency exposures.
These foreign exchange contracts have not been designated as hedges. Accordingly, the changes in
fair value of the contracts are recorded in earnings immediately.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Contract amounts of foreign exchange contracts at December&nbsp;31, 2006 and 2005 are set forth below:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">To sell foreign currencies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>717,136</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">645,188</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">To buy foreign currencies</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>51,189</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">46,424</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->113<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19. Commitments and Contingent Liabilities</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Commitments</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006, commitments outstanding for the purchase of property, plant and equipment
approximated &#165;107,685&nbsp;million, and commitments outstanding for the purchase of parts and raw
materials approximated &#165;85,403&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon occupies sales offices and other facilities under lease arrangements accounted for as
operating leases. Deposits made under such arrangements aggregated &#165;13,648&nbsp;million and &#165;13,790
million at December&nbsp;31, 2006 and 2005, respectively, and are included in noncurrent receivables in
the accompanying consolidated balance sheets. Rental expenses under the operating lease
arrangements amounted to &#165;36,157&nbsp;million, &#165;38,297&nbsp;million and &#165;41,381&nbsp;million for the years ended
December&nbsp;31, 2006, 2005 and 2004, respectively.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Future minimum lease payments required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year at December&nbsp;31, 2006 are as follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="88%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px"><B>Year ending December&nbsp;31:</B></DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2007</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">16,025</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2008</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">12,975</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2009</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">9,590</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2010</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">5,962</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">2011</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">4,570</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Thereafter</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">11,256</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Total future minimum lease payments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">60,378</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:30px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->114<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19. Commitments and Contingent Liabilities (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Guarantees</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon provides guarantees for bank loans of its employees, affiliates and other companies. The
guarantees for the employees are principally made for their housing loans. The guarantees of loans
of its affiliates and other companies are made to ensure that those companies operate with less
financial risk.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults
on a payment within the contract periods of 1&nbsp;year to 30&nbsp;years, in the case of employees with
housing loans, and of 1&nbsp;year to 10&nbsp;years, in the case of affiliates and other companies. The
maximum amount of undiscounted payments Canon would have had to make in the event of default is
&#165;30,051&nbsp;million at December&nbsp;31, 2006. The carrying amounts of the liabilities recognized for
Canon&#146;s obligations as a guarantor under those guarantees at December&nbsp;31, 2006 were not
significant.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon also issues contractual product warranties under which it generally guarantees the
performance of products delivered and services rendered for a certain period or term. Changes in
accrued product warranty cost for the years ended December&nbsp;31, 2006 and 2005 are summarized as
follows:
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="76%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>Year ended December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at beginning of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>16,746</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">14,264</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Addition</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>15,213</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">18,510</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Utilization</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(14,266</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(15,580</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Other</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>451</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(448</TD>
    <TD nowrap>)</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 1px solid #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Balance at end of year</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left"><B>&#165;</B></TD>
    <TD align="right"><B>18,144</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">16,746</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Legal proceedings</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In February&nbsp;2003, a lawsuit was filed by St. Clair Intellectual Property Consultants, Inc. (&#147;St.
Clair&#148;) against the Company and one of its subsidiaries in the United States District Court of
Delaware, which accused the Company of infringement of patents related to certain technology. In
connection with this case, in October&nbsp;2004, a jury preliminarily found damages against the Company
of approximately &#165;4,000&nbsp;million based on a percentage of certain product sales in the United States
through 2003. Subsequent to this jury finding, St. Clair also made a motion to the court for
damages relating to certain 2004 sales, using the same royalty rate awarded by the jury. In March
2006, the Company and St. Clair entered into a settlement agreement, pursuant to which the lawsuit
was withdrawn in July&nbsp;2006.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->115<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19. Commitments and Contingent Liabilities (continued)</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In October&nbsp;2003, a lawsuit was filed by a former employee against the Company at the Tokyo
District Court in Japan. The lawsuit alleges that the former employee is entitled to &#165;45,872
million as compensation for an invention related to certain technology used by the Company, and the
former employee has sued for a partial payment of &#165;1,000&nbsp;million and interest thereon. On January
30, 2007, the Tokyo District Court in Japan ordered the Company to pay the former employee
approximately &#165;33.5&nbsp;million and interest thereon. On the same day, the Company appealed the
decision.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In Germany, Verwertungsgesellschaft Wort (&#147;VG Wort&#148;), a collecting agency representing certain
copyright holders, has filed a series of lawsuits seeking to impose copyright levies upon digital
products such as PCs and printers, that allegedly enable the reproduction of copyrighted materials,
against the companies importing and distributing these digital products. In May&nbsp;2004, VG Wort
filed a civil lawsuit against Hewlett-Packard GmbH seeking levies on multi-function printers. This
is an industry test case under which Hewlett-Packard GmbH represents other companies sharing common
interests, and Canon has undertaken to be bound by the final decision of this court case. The
court of first instance and the court of appeals held that the multi-function printers were subject
to a levy. In particular, the court of appeals ordered Hewlett-Packard GmbH to pay the amount
equivalent to the levies imposed on photocopiers (EUR 38.35 to EUR 613.56 per unit, depending on
printing speed and color printing capability). This lawsuit is currently under appeal before the
German Federal Supreme Court. With regard to single-function printers, VG Wort filed a separate
lawsuit in January&nbsp;2006 against Canon seeking payment of copyright levies, and the court of first
instance in D&#252;sseldorf ruled in favor of the claim by VG Wort in November&nbsp;2006. Canon lodged an
appeal against such decision in December&nbsp;2006. In a similar court case, which does not include
Canon, seeking copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH
and Kyocera Mita Deutschland GmbH, the court of appeals in D&#252;sseldorf rejected such alleged levies
on January&nbsp;23, 2007. Canon, other companies and the industry associations have expressed opposition
to such extension of the levy scope and the final conclusion of these court cases including the
amount of levies to be imposed, remains uncertain.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">In April&nbsp;2005, a lawsuit was filed by Nano-Proprietary Inc. (&#147;NPI&#148;) against the Company and Canon
U.S.A. Inc. in the United States District Court of Texas alleging that SED Inc., a joint venture
company established by the Company and Toshiba Corporation, is not regarded as a &#147;Subsidiary&#148; under
the Patent License Agreement between the Company and NPI (the &#147;Agreement&#148;) and that the extension
of the license to SED Inc. constitutes a breach of the Agreement. NPI also alleges that there was
fraudulent conduct by the Company in executing the Agreement, and requests rescission of the
Agreement and compensatory damages. This case is still pending and the final outcome, including
any liability to the Company, is not yet determined, but in November&nbsp;2006, the Court denied the
Company&#146;s Motion for a summary judgment that SED Inc. is a Subsidiary of the Company. In January
2007, the Company purchased all the shares of SED Inc. owned by Toshiba Corporation, making SED
Inc. a 100% owned subsidiary of the Company. However, on February&nbsp;22, 2007, the court issued a
summary judgment stating that SED Inc.(before the above stock purchase) was not a Subsidiary of the Company, and that the Agreement has been
terminated due to a material breach of the Agreement by the Company. The remaining pending issues
at the district court are whether the Company was engaged in fraudulent conduct and whether
compensatory damages should be granted. The Company will appeal to the appellate court immediately
after the current proceeding at the district court has been concluded regardless of any judgments
rendered by the district court.
</DIV>
<P align="center" style="font-size: 10pt"><!-- Folio -->116<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>19. Commitments and Contingent Liabilities (continued)</B>
</DIV>




<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Canon is involved in various claims and legal actions, including those noted above, arising in the
ordinary course of business. In accordance with SFAS No.&nbsp;5, &#147;Accounting for Contingencies,&#148; Canon
has recorded provisions for liabilities when it is probable that liabilities have been incurred and
the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly
and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a particular case. Based on
its experience, Canon believes that any damage amounts claimed in the specific matters discussed
above are not a meaningful indicator of Canon&#146;s potential liability. In the opinion of management,
the ultimate disposition of the above mentioned matters will not have a material adverse effect on
Canon&#146;s consolidated financial position, results of operations, or cash flows. However, litigation
is inherently unpredictable. While Canon believes that it has valid defenses with respect to legal
matters pending against it, it is possible that Canon&#146;s consolidated financial position, results of
operations, or cash flows could be materially affected in any particular period by the unfavorable
resolution of one or more of these matters.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>20. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Fair value of financial instruments</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The estimated fair values of Canon&#146;s financial instruments at December&nbsp;31, 2006 and 2005 are set
forth below. The following summary excludes cash and cash equivalents, trade receivables, finance
receivables, noncurrent receivables, short-term loans, trade payables, accrued expenses for which
fair values approximate their carrying amounts. The summary also excludes marketable securities
and investments which are disclosed in Note 3.
</DIV>
<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="52%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14" style="border-bottom: 1px solid #000000"><B>December 31</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2006</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="6" style="border-bottom: 1px solid #000000"><B>2005</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Carrying</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Estimated</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>fair value</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>amount</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>fair value</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="14"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Long-term debt, including
current installments</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(31,052</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left"><B>&#165;</B></TD>
    <TD align="right"><B>(32,795</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(32,074</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&#165;</TD>
    <TD align="right">(35,194</TD>
    <TD nowrap>)</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Foreign exchange contracts:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Assets</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>307</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right"><B>307</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,250</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="right">2,250</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Liabilities</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(17,534</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right"><B>(17,534</B></TD>
    <TD nowrap><B>)</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,062</TD>
    <TD nowrap>)</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="left">&nbsp;</TD>
    <TD align="right">(10,062</TD>
    <TD nowrap>)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The following methods and assumptions are used to estimate the fair value in the above table.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->117<!-- /Folio -->
</DIV>

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<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>


<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV style="margin-top: 6pt">
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0" style="font-size: 10pt">

<TR valign="top" style="font-size: 10pt; color: #000000; background: transparent">
    <TD width="1%" nowrap align="left"><B>20.</B></TD>
    <TD width="1%">&nbsp;</TD>
    <TD><B>Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
(continued)</B></TD>
</TR>

</TABLE>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Long-term debt</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The fair values of Canon&#146;s long-term debt instruments are based on the quoted price in the most
active market or the present value of future cash flows associated with each instrument discounted
using Canon&#146;s current borrowing rate for similar debt instruments of comparable maturity.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Foreign exchange contracts</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">The fair values of foreign exchange contracts, all of which are used for purposes other than
trading, are estimated by obtaining quotes from brokers.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><U>Limitations</U>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B><I>Concentrations of credit risk</I></B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">At December&nbsp;31, 2006 and 2005, one customer accounted for approximately 14% and 12% of consolidated
trade receivables, respectively. Although Canon does not expect that the customer will fail to
meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer
failed to perform according to the terms of the contracts.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>21. Supplemental Cash Flow Information</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">For the years ended December&nbsp;31, 2006, 2005 and 2004, aggregate common stock and additional paid-in
capital arising from conversion of convertible debt amounted to &#165;331&nbsp;million, &#165;1,147&nbsp;million and
&#165;9,938&nbsp;million, respectively.
</DIV>

<P align="center" style="font-size: 10pt"><!-- Folio -->118<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">

<DIV align="center" style="font-size: 12pt; margin-top: 18pt">Canon Inc. and Subsidiaries
</DIV>


<DIV align="Center" style="font-size: 12pt; margin-top: 18pt">Notes to Consolidated Financial Statements (continued)

</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>22. Subsequent Event</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On February&nbsp;15, 2007, the Board of Directors of the Company approved a plan to repurchase up to 17
million shares of the Company&#146;s common stock at a cost of up to &#165;100,000&nbsp;million for the period
from February&nbsp;16, 2007 to March&nbsp;16, 2007. Such repurchases are intended to improve capital
efficiency and ensure flexible capital strategy. Common stock repurchased in the Tokyo Stock
Exchange between February&nbsp;16, 2007 and March&nbsp;6, 2007 under the aforementioned plan was 15,423,300
shares at a cost of &#165;100,000&nbsp;million.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">On March&nbsp;8, 2007, the Board of Directors of the Company approved an additional plan to repurchase
up to 17&nbsp;million shares of the Company&#146;s common stock at a cost of up to &#165;100,000&nbsp;million for the
period from March&nbsp;9, 2007 to April&nbsp;9, 2007.
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>23. Event (Unaudited) Subsequent to the Date of the Report of Independent Registered Public
Accounting Firm</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Common stock repurchased in the Tokyo Stock Exchange through March&nbsp;23, 2007 under the plan approved
by the Board of Directors of the Company on March&nbsp;8, 2007 mentioned in Note 22 was 15,742,200 shares at a
cost of &#165;100,000 million.
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->119<!-- /Folio -->
</DIV>

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<DIV style="font-family: 'Times New Roman',Times,serif">


<DIV align="center" style="font-size: 12pt; margin-top: 18pt">CANON INC. AND SUBSIDIARIES
</DIV>

<DIV align="left">
<A name="196"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Valuation and Qualifying Accounts
</DIV>


<DIV align="center" style="font-size: 10pt; margin-top: 18pt">Years ended December&nbsp;31, 2006, 2005 and 2004
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="40%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Balance at</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Add</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Deduct</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Add</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>Balance</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>beginning of</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>charge to</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>bad debts</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>translation</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2"><B>at end of</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>period</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>income</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>written off</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>adjustments</B></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="2" style="border-bottom: 1px solid #000000"><B>period</B></TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="18"><B>(Millions of yen)</B></TD>
    <TD>&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2006:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Allowance for doubtful receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,728</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,384</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">2,058</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">795</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">13,849</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2005:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Allowance for doubtful receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,657</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">560</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">1,180</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">691</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,728</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>

<TR valign="bottom" style="background: #cceeff">
    <TD><DIV style="margin-left:15px; text-indent:-15px">Year ended December&nbsp;31, 2004:</DIV></TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD><DIV style="margin-left:30px; text-indent:-15px">Allowance for doubtful receivables</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">14,423</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">449</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">3,515</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">300</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left">&#165;</TD>
    <TD align="right">11,657</TD>
    <TD>&nbsp;</TD>
</TR>
<TR style="font-size: 1px">
    <TD><DIV style="margin-left:15px; text-indent:-15px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
        <TD nowrap colspan="2" align="right" style="border-top: 3px double #000000">&nbsp;</TD>
    <TD>&nbsp;</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<P align="center" style="font-size: 10pt"><!-- Folio -->120<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">
<DIV align="left">
<A name="197"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;18. Financial Statements</B>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Not applicable.
</DIV>

<DIV align="left">
<A name="198"></A>
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 12pt"><B>Item&nbsp;19. Financial Statements and Exhibits</B>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(a)&nbsp;The following consolidated financial statements and schedule II included in
Item&nbsp;17. &#147;Financial Statements.&#148;
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Consolidated financial statements of Canon Inc. and Subsidiaries:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Report of Independent Registered Public
Accounting Firm
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Balance Sheets as of December&nbsp;31, 2006 and 2005
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Statements of Income for the years ended December&nbsp;31, 2006,
2005 and 2004
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Statements of Stockholders&#146; Equity for the years ended
December&nbsp;31, 2006, 2005 and 2004
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Consolidated Statements of Cash Flows for the years ended December&nbsp;31,
2006, 2005 and 2004
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Notes to Consolidated Financial Statements
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Schedule:
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Schedule&nbsp;II Valuation and Qualifying Accounts for the years ended
December&nbsp;31, 2006, 2005 and 2004
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 6pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(b)&nbsp;List of exhibits
</DIV>
<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Exhibit:
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="95%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1.1
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Articles of Incorporation of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">1.2
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations Of the Board of Directors of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">2
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations for Handling of Shares of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">8
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">List of Significant Subsidiaries (See &#147;Organizational Structure&#148; in Item&nbsp;4.C. of this
Form&nbsp;20-F)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">11.1
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Canon Group Code of Conduct (Translation) , incorporated by reference from the annual
report on Form20-F (Commission file number 0-15122) filed on June&nbsp;10, 2004</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">11.2
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation), incorporated by
reference from the annual report on Form20-F (Commission file number 0-15122) filed on June&nbsp;10, 2004</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">12
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">302 Certifications</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">13
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">906 Certification</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>





<P align="center" style="font-size: 10pt"><!-- Folio -->121<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="199"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt">SIGNATURES
</DIV>

<DIV align="left" style="font-size: 10pt; margin-top: 6pt">Pursuant to the requirements of Section&nbsp;12 of the Securities Exchange Act of
1934, as amended, the registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="60%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="36%">&nbsp;</TD>
</TR>
<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">CANON INC.<br>
(Registrant)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">/s/ Toshizo Tanaka</TD>
</TR>
<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top" style="border-top: 1px solid #000000">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">(Executive Vice President &#038; CFO)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="top" align="left">Canon INC.<br>
30-2, Shimomaruko 3-chome,<br>
Ohta-ku, Tokyo 146-8501, Japan</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>


<DIV align="left" style="font-size: 10pt; margin-top: 12pt">Date
April 4, 2007
</DIV>




<P align="center" style="font-size: 10pt"><!-- Folio -->122<!-- /Folio -->
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#tocpage">Table of Contents</A></H5><P>

<DIV style="font-family: 'Times New Roman',Times,serif">



<DIV align="left">
<A name="200"></A>
</DIV>

<DIV align="center" style="font-size: 10pt; margin-top: 18pt"><B>EXHIBIT INDEX</B>
</DIV>

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="14%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="89%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD nowrap align="left" style="border-bottom: 1px solid #000000"><B>Exhibit number</B></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" style="border-bottom: 1px solid #000000"><B>Title</B></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;1.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Articles of Incorporation of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;1.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations of the Board of Directors of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Regulations for Handling of Shares of Canon Inc. (Translation)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;8
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">List of Significant Subsidiaries (See &#147;Organizational Structure&#148; in Item
4.C. of this Form&nbsp;20-F)</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;11.1
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Canon Group Code of Conduct (Translation) , incorporated by reference from
the annual report on Form20-F (Commission file number 0-15122) filed on June&nbsp;10, 2004</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;11.2
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Code of Ethics (Supplement to The Canon Group Code of Conduct)
(Translation), incorporated by reference from the annual report on Form20-F (Commission file number 0-15122) filed on June&nbsp;10, 2004</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;12
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">302 Certifications</TD>
</TR>
<TR valign="bottom"><!-- Blank Space -->
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Exhibit&nbsp;13
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">906 Certification</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



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CANON INC.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
o
REGISTRATION STATEMENT PURSUANT TO
SECTION
12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
OR
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number 001-15122
CANON KABUSHIKI KAISHA
(Name of Registrant in Japanese as specified in its charter)
CANON INC.
(Name of Registrant in English as specified in its charter)
JAPAN
(Jurisdiction of incorporation or organization)
30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class
Name of each exchange on which registered
(1) Common Stock (the "shares")
New York Stock Exchange*
(2) American Depositary Shares ("ADSs"), each of which represents one share
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
(Title of Class)
* Not for trading, but only for technical purposes in connection with the registration of ADSs.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the
annual report.
As of December 31, 2006, 1,333,445,830 shares of common stock, including 68,908,753
ADSs, were outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
þ
No
o
If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17
þ
Item 18
o
If this is an annual report, indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
þ
TABLE OF CONTENTS
Page number
CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
1
FORWARD-LOOKING INFORMATION
1
PART I
Item 1.     Identity of Directors, Senior Management and Advisers
2
Item 2.     Offer Statistics and Expected Timetable
2
Item 3.     Key Information
2
A.
Selected financial data
2
B.
Capitalization and indebtedness
3
C.
Reasons for the offer and use of proceeds
3
D.
Risk factors
3
Item 4.     Information on the Company
9
A.
History and development of the Company
9
B.
Business overview
10
Products
10
Marketing and distribution
13
Service
13
Net sales by product group and geographic area
14
Seasonality
15
Sources of supply
15
Competition
15
Patents and licenses
16
Environmental regulations
17
C.
Organizational structure
19
D.
Property, plants and equipment
20
Item 5.     Operating and Financial Review and Prospects
23
A.
Operating results
23
Overview
23
Critical accounting policies and estimates
24
Consolidated result of operations
26
Fiscal 2006 compared with fiscal 2005
26
Fiscal 2005 compared with fiscal 2004
29
Foreign operations and foreign currency transactions
34
Recent developments
34
B.
Liquidity and capital resources
34
C.
Research and development, patents and licenses
35
D.
Trend information
36
Trend information
36
Forward looking statements
37
E.
Off-balance sheet arrangements
38
F.
Contractual obligations
38
Item 6.     Directors, Senior Management and Employees
39
A.
Directors and senior management
39
B.
Compensation
44
C.
Board practices
44
D.
Employees
45
E.
Share ownership
46
Item 7.     Major Shareholders and Related Party Transactions
47
A.
Major shareholders
47
B.
Related party transactions
47
C.
Interests of experts and counsel
47
i
Table of Contents
Page number
Item 8.
Financial Information
48
A.
Consolidated financial statements and other financial information
48
Consolidated financial statements
48
Legal proceedings
48
Dividend policy
49
B.
Significant changes
49
Item 9.
The Offer and Listing
50
A.
Offer and listing details
50
Trading in domestic markets
50
Trading in foreign markets
51
B.
Plan of distribution
51
C.
Markets
51
Item 10.
Additional Information
52
A.
Share capital
52
B.
Memorandum and articles of association
52
C.
Material contracts
57
D.
Exchange controls
57
E.
Taxation
58
F.
Dividends and paying agents
60
G.
Statement by experts
60
H.
Documents on display
60
I.
Subsidiary information
60
Item 11.
Quantitative and Qualitative Disclosures about Market Risk
60
Market risk exposures
60
Equity price risk
60
Foreign currency exchange rate and interest rate risk
61
Item 12.
Description of Securities Other than Equity Securities
62
PART II
Item 13.
Defaults, Dividend Arrearages and Delinquencies
63
Item 14.
Material Modifications to the Rights of Security Holders and Use of Proceeds
63
Item 15.
Controls and Procedures
63
Item 16A.
Audit Committee Financial Expert
64
Item 16B.
Code of Ethics
64
Item 16C.
Principal Accountant Fees and Services
64
Item 16D.
Exemptions from the Listing Standards for Audit Committees
66
Item 16E.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
67
PART III
Item 17.
Financial Statements
68
Report of Independent Registered Public Accounting Firm
69
Consolidated Balance Sheets
71
Consolidated Statements of Income
72
Consolidated Statements of Stockholders' Equity
73
Consolidated Statements of Cash Flows
74
Notes to Consolidated Financial Statements
75
Valuation and Qualifying Accounts
120
Item 18.
Financial Statements
121
Item 19.
Financial Statements and Exhibits
121
SIGNATURES
122
EXHIBIT INDEX
123
ii
Table of Contents
CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
All information contained in this Annual Report is as of December 31, 2006 unless otherwise
specified.
References in this discussion to the "Company" are to Canon Inc. and, unless otherwise indicated,
references to the financial condition or operating results of "Canon" refer to Canon Inc. and its consolidated subsidiaries.
On
March 30, 2007, the noon buying rate for yen in New York City as reported by the Federal Reserve
Bank of New York was ¥117.56 = U.S.$1.
The Company's fiscal year end is December 31. In this Annual Report "fiscal 2006" refers to the
Company's fiscal year ended December 31, 2006, and other fiscal years of the Company are referred to in a corresponding manner.
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements and information relating to Canon that are
based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual
Report, the words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "project" and "should" and similar expressions, as they relate
to Canon or its management, are intended to identify forward-looking statements. Such statements reflect the current views and assumptions of
the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements
of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such
forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates,
introduction of competing products by other companies, lack of acceptance of new products or services by Canon's targeted customers, inability to meet
efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual
Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume
any obligation to update these forward-looking statements.
1
Table of Contents
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected financial data
The following selected consolidated financial data has been derived from the consolidated
financial statements of Canon as of each of the dates and
for each of the periods indicated below. This information should be read in conjunction with and
qualified in its entirety by reference to the Consolidated
Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this
Annual Report. These financial statements have been audited by Ernst & Young ShinNihon, Independent
Registered Public Accounting Firm as of and for the years ended December 31, 2006, 2005 and 2004.
The financial statements for periods prior to the year ended December 31, 2004 were audited by KPMG
AZSA & Co., Independent Registered Public Accounting Firm.
Selected financial data *1:
2006
2005
2004
2003
2002
(Millions of yen except average number of shares and per share data)
Net sales
¥
4,156,759
¥
3,754,191
¥
3,467,853
¥
3,198,072
¥
2,940,128
Operating
profit
707,033
583,043
543,793
454,424
346,359
Net income
455,325
384,096
343,344
275,730
190,737
Advertising
expenses .
116,809
106,250
111,770
100,278
71,725
Research and
development
expenses
308,307
286,476
275,300
259,140
233,669
Depreciation of
property,
plant and equipment
235,804
205,727
174,397
168,636
158,469
Capital
expenditures
379,657
383,784
318,730
210,038
198,702
Long-term debt,
excluding current
installments
15,789
27,082
28,651
59,260
81,349
Common
stock
174,603
174,438
173,864
168,892
167,242
Stockholders'
equity
2,986,606
2,604,682
2,209,896
1,865,545
1,591,950
Total assets
4,521,915
4,043,553
3,587,021
3,182,148
2,942,706
Average number of
common shares
in thousands *3
1,331,542
1,330,761
1,328,048
1,317,974
1,315,074
Per share data *3:
Net income:
Basic
¥
341.95
¥
288.63
¥
258.53
¥
209.21
¥
145.04
Diluted
341.84
288.36
257.85
207.17
143.20
Cash dividends
declared
83.33
66.67
43.33
33.33
20.00
Cash dividends
declared (U.S.$)*2
$
0.709
$
0.580
$
0.401
$
0.309
$
0.169
Notes:
1.
The above financial data are prepared in accordance with U.S. generally accepted accounting
principles.
2.
Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average
of the noon buying rates for yen in New York city as reported by the Federal Reserve Bank of New York
in effect on the date of each semiannual dividend payment.
3.
The Company has made a three-for-two stock split on July 1, 2006. The average number of common shares and the
per share data have been adjusted to reflect the stock split.
2
Table of Contents
The following table provides the noon buying rates for Japanese yen in New York City as
reported by the Federal Reserve Bank of New York expressed in
Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for
Japanese yen per U.S.$1 during the months indicated.
Yen exchange rates per U.S. dollar:
Average
Term end
High
Low
2002
124.81
118.75
115.71
134.77
2003
115.83
107.13
106.93
121.42
2004
107.63
102.68
102.56
114.30
2005 -
110.74
117.88
120.93
102.26
2006 - Year
115.99
119.02
119.81
110.07
- 1(st) half
114.51
119.07
110.07
- July
114.44
117.44
113.97
- August
117.35
117.35
114.21
- September
117.99
118.02
116.04
- October
116.82
119.81
116.82
- November
115.55
118.40
115.55
- December
119.02
119.02
114.98
2007 - January
121.02
121.81
118.49
- February
118.33
121.77
118.33
-
March
117.56
118.15
116.01
B. Capitalization and indebtedness
Not applicable.
C. Reasons for the offer and use of proceeds
Not applicable.
D. Risk Factors
Canon is one of the world's leading manufacturers of plain paper copying machines, digital
multifunction devices, laser beam printers, bubble jet printers, cameras, steppers and aligners.
Primarily because of the nature of the business areas and geographical areas in which Canon
operates and the highly competitive nature of the industries to which it belongs, Canon is exposed
to a variety of risks and uncertainties in carrying out its businesses, including, but not limited
to, the following:
Risks Related to Canon's Industries
Canon has invested and will continue to invest heavily in next-generation technologies. If the
market for these technologies does not develop as Canon expects or if its competitors produce these
or competing technologies in a more timely or effective manner, Canon's operating results could be
materially adversely affected.
Canon has made and will continue to make investments in next-generation technology research
and development initiatives. Canon's competitors may achieve research and development breakthroughs
in these technologies more quickly than Canon, or may achieve advances in competing technologies
that render products under development by Canon uncompetitive. In step with the continuous
evolution in technologies, Canon has increased the size of its investment in development and
manufacturing. If Canon's business strategies diverge from market needs, Canon may not recover some
or all of its investment, lose business opportunities, or both, which may materially adversely
affect Canon's operating results. While differentiation in technology and product development is an
important part of Canon's strategy, Canon must also accurately assess the demand for and perceived
market acceptance of new technologies and products that it develops. If Canon pursues technologies
or develops products that do not become commercially accepted, its operating results could be
adversely affected.
It is assumed that Canon as a matter of corporate strategy seeks to enter into new business
fields by developing next-generation technologies . If Canon enters new business field, Canon may
not be able to establish a successful business model, or may face severe competition with new
competitors. If such risks arise, Canon's operating results may be adversely affected.
If Canon does not effectively manage transitions in its products and services, its operating
results may decline.
Many of the businesses in which Canon competes are characterized by rapid technological
advances in hardware performance, software functionality and product features, the frequent
introduction of new products, short product life cycles, and continual improvement in product price
characteristics relative to product performance. If Canon does not make an effective transition
from existing products and services to new offerings, its revenue and profits may decline. Among
the risks associated with the introduction of new products and services are delays in development
or manufacturing, low product marketability due to poor product quality, variations in
manufacturing costs, delays in customer purchases in anticipation of new introductions, difficulty
in predicting customer demand for new product offerings and difficulty in effective management of
inventory levels in line with anticipated demand. Canon's revenue and gross margin also may suffer
due to the timing of product or service introductions by its competitors. This risk is exacerbated
when a product has a short life cycle or a competitor introduces a new product just before Canon's
introduction of a similar product. Furthermore, sales of Canon's new products and services may
replace sales of, or result in discounting of, some of its current product offerings, sometimes
offsetting the benefits derived from the introduction of a successful new product or service. Canon
must also ensure that its new products are not duplicative and do not overlap with existing
products and operations. Given the competitive nature of Canon's businesses, if any of these risks
materialize, future demand for its products and services will be reduced and its results of
operations may decline.
3
Table of Contents
Canon's digital camera business operates in a highly competitive environment.
The recent accelerated trend towards digitalization has resulted in the entry of new
competitors, such as electronics manufacturers and other specialized companies which were not
active during the analog camera era. If this industry develops more rapidly than initially
anticipated by Canon, it may not be able to maintain its position as an industry leader in many of
its business categories. Canon's success in this increasingly competitive environment will depend
on its investments in research and development, ability to cut costs and commitment to continuously
providing the market with attractive products offering high added-value.
Because the semiconductor industry is highly cyclical, Canon may be adversely affected by any
downturn in the industry.
The semiconductor industry is characterized by up and down business cycles, the timing, length
and volatility of which are difficult to predict. Recurring periods of oversupply of integrated
circuits have at times led to significantly reduced demand for capital equipment, including the
steppers and aligners Canon produces. Despite this cyclicality, Canon must maintain significant
levels of research and development expenditure in order to maintain its competitiveness. Canon's
business and operating results could be materially adversely affected by future downturns in the
semiconductor industry and related fluctuations in the demand for capital equipment in general, and
particularly by memory manufacturers.
In addition, liquid crystal display ( "LCD") panel manufacturers are facing severe price
reductions of LCD panels as a result of intense competition among makers of LCD televisions and LCD
monitors used in personal computers ("PC")s. As a result, panel manufacturers may reduce equipment
investment, which may adversely affect Canon's business operations.
Downturns in the semiconductor industry have caused Canon's customers to change their
operating strategies, which in turn may affect Canon's business.
Many device manufacturers have changed their business models to focus on the design of
semiconductors, while consigning the production of semiconductors to lower-cost foundries. Canon
cannot accurately predict the future effect of these trends on its business. However, as research
and development, manufacturing and sales activities become increasingly globalized in response to
these trends, shifting particularly to emerging markets, unexpected global developments, such as
adverse regulatory or legal changes, and unanticipated events, such as natural disasters, may
adversely affect Canon's business operations.
In addition, there are only approximately ten companies in the world which produce large-sized
LCD panels. If Canon is insufficiently responsive to market trends in the LCD panel
industry base, including market reorganization, Canon may not be able to maintain its customer base
which may materially adversely affect Canon's business operations.
The semiconductor equipment industry is characterized by rapid technological change. If Canon
does not constantly develop new products to keep pace with technological change and meet its
customer requirements, Canon may lose customers and its business may suffer.
Canon's steppers and mask aligners are affected by rapid technological change and can quickly
become obsolete. Canon believes its future success in the stepper and aligner business depends on its ability to continue to enhance its existing products
and develop new products using new and more advanced technologies. In particular, as semiconductor
pattern sizes continue to decrease, the demand for more technologically advanced steppers is likely
to increase. Although Canon will continue to offer cost effective products by managing
manufacturing costs through its technology, Canon's existing stepper and mask aligner products
could become obsolete sooner than anticipated because of faster than anticipated changes in one or
more of the technologies related to Canon's products or in the market demand for products based on
a particular technology. Any failure by Canon to develop the advanced technologies required by its
customers at progressively lower costs and to supply sufficient quantities to a worldwide customer
base could adversely affect Canon's net sales and profitability.
Growing popularity of High Definition (HD) and increased diversification of recording media
may adversely affect Canon's video camcorder business.
The video camcorder market is now almost entirely based on digital formats and the increase in
High-Definition television broadcasts has led to a gradual shift from the SD (Standard Definition)
format to the HD (High Definition) format. At the same time many products using new types of media
such as MiniDV tapes, DVD (Digital Versatile Drive), HDD (Hard Disk Drive) and SD (Secure Digital)
cards, have appeared at a rate that outpaces the proliferation of HD. Failure by Canon accurately to
forecast demand in these increasingly diversified markets could have an adverse affect on Canon's
operating results.
If
the market demands shift to new product using a new type of recording media unexpected by
Canon, Canon may be required to increase the size of its investments in research and development. It could have
an adverse affect on Canon's business and operating results.
Risks Related to Canon's Business
Canon derives a significant percentage of its revenues from Hewlett-Packard.
Canon depends on Hewlett-Packard for a significant part of its business. For fiscal 2006,
approximately 22% of Canon's net sales were to Hewlett-Packard. As a result, Canon's business and
results of operations may be affected by the policies, business and results of operations of
Hewlett-Packard. Any decision by Hewlett-Packard management to limit or reduce the scope of its
relationship with Canon would adversely affect Canon's business and results of operations.
Canon depends on a limited number of suppliers for certain key components.
Canon relies on a limited number of outside vendors which meet Canon's strict criteria for
quality, efficiency and environmental friendliness for certain critical components used in its
products. In some cases, Canon may be forced to discontinue its production of some or all of its
products if certain vendors that supply key components across Canon's product lines experience
unforeseen difficulties, or if such parts experience quality problems or are in short supply.
Canon's reliance on a limited number of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, the risk of untimely delivery of
these subassemblies and components and the risk for a substantial increase in price of these
components to occur. If such problems arise, Canon's operating results will be adversely affected.
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Although competition is increasing in the market for sales of supplies and services following
initial product placement, Canon maintains a high market share in sales of such supplies. As a
result, Canon may be subject to antitrust-related suits, investigations or proceedings which may
adversely affect its operating results or reputation.
A portion of Canon's net sales consists of sales of supplies and the provision of services
occurring after the initial equipment placement. As these supplies and services have become more
commoditized, the number of competitors in these markets has increased. Canon's success in
maintaining these post-placement sales will depend on its ability to compete successfully with
these competitors, some of which may offer lower-priced products or services. Despite the increase
in competitors, however, Canon currently maintains high market shares in the market for supplies.
Accordingly, Canon may be subject to suits, investigations or proceedings under relevant antitrust
laws and regulations. Any such suits, investigations or proceedings may lead to substantial costs
and have an adverse effect on Canon's operating results or reputation.
Increases in counterfeit Canon products may adversely affect Canon's brand image and its
operating results.
In recent years, Canon has experienced a worldwide increase in the emergence of counterfeit
Canon products. Such counterfeit products may diminish Canon's brand image, particularly if
purchasers of such products are unaware of their counterfeit status and attribute the counterfeit
products' poor product quality to Canon. Canon has been taking measures to halt the spread of
counterfeit products. However, there can be no assurance that such measures will be successful, and
the continued production and sale of such products could adversely affect Canon's brand image as
well as its operating results.
Per unit production costs are highest when a new product is introduced, and if such new
products are not successful or if Canon fails to achieve cost reductions over time, Canon's gross
profits may be adversely affected.
The unit cost of Canon's products has historically been highest when they are newly introduced
into production. New products have at times had a negative impact on its gross profit, operating
results and cash flow. Cost reductions and enhancements typically come over time through:
•
engineering improvements;
•
economies of scale;
•
improvements in manufacturing processes;
•
improved serviceability of products; and
•
reduced inventories of parts and products
Initial shipments of Canon's new products adversely affect its profit or cash flow, and if
sales of such new products are not successful, Canon may be unable therefore to improve its gross
profit, operating results and cash flow.
Cyclical patters in sales of Canon's products make planning and inventory management difficult
and future financial results less predictable.
Canon generally experiences variable seasonal trends in the sale of its consumer- oriented
products, which results in sales fluctuations. Canon has little to no control over the various
factors that produce these seasonal trends. Accordingly, it is difficult to predict near-term
demand which as a result places pressure on Canon's inventory management and logistics systems. If
product supply from Canon is substantially greater than actual demand, there will be excess
inventory, thereby putting downward pressure on selling prices and reducing Canon's revenue.
Alternatively, if demand substantially exceeds the supply of products from Canon, its ability to
fulfill orders may be limited, which could adversely affect net sales and increase the risk of
unanticipated variations in its results of operation.
Canon's business is subject to changes in the sales environment.
Particularly in Europe and the United States, a substantial portion of market share is
concentrated in a relatively small number of large distributors. Canon's sales of products to these
distributors constitute a significant percentage of Canon's overall sales. As a result, any
disruptions in its relationships with these large distributors in specific sales territories could
adversely affect Canon's ability to meet its sales targets. Any increase in concentration of
Canon's sales to in these large distributors could result in a reduction of Canon's pricing power
and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses
may render conventional distribution channels obsolete. These and other changes in Canon's sales
environment could adversely affect Canon's results of operations.
Canon is subject to financial and reputational risks due to product quality and liability
issues.
Although Canon works to minimize risks that may arise from product quality and liability
issues, there can be no assurance that Canon will be able to eliminate or mitigate occurrences of
these issues and consequent damages. If such factors adversely affect Canon's operating activities,
generate expenses such as those for product recalls, service and compensation, or hurt its brand
image, its operating results or reputation for quality products may be adversely affected.
Canon's success depends on the value of its brand name, and if the value of the brand name is
diminished, operating results and prospects will be adversely affected.
Canon's success in its markets depends in part on its brand name and its value. Any negative
publicity regarding the quality of our products could have an adverse impact on operations,
especially those involving consumer products. There can be no assurance that such adverse
publicity will not occur or that such claims will not be made in the future. Furthermore, Canon
cannot predict the impact of such adverse publicity on its business and results of operations.
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A substantial portion of Canon's business activity is conducted outside Japan, exposing Canon
to the risks of international operations.
A substantial portion of Canon's business activity is conducted outside Japan, which includes
in developing and emerging markets in Asia. There are a number of risks inherent in doing business
in those markets, including the following:
•
less developed technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canon's services;
•
difficulties in recruiting and retaining personnel;
•
potentially adverse tax consequences;
•
longer payment cycles;
•
unfavorable political or economic factors; and
•
unexpected legal or regulatory changes.
Canon's inability to manage successfully the risks inherent in its international activities
could adversely affect its business and operating results.
In order to produce Canon's products competitively and to reduce costs, Canon has established
new production facilities in China and other countries. Canon has more than ten sales offices which
support its sales activity in China. However, with China's entry into the WTO, conditions within
China are continuing to change. For example, unexpected events, including political or legal
change, labor shortage or strikes, increased personnel costs or changes in economic conditions, may
occur. In particular, a large revaluation of the yuan, or a sudden change in the tax system or
other regulatory regimes of a significant magnitude could adversely affect Canon's overall
performance.
The spread of an epidemic disease, such as the avian flu transmitting to humans, in China or
elsewhere in Asia could also have a negative effect on Canon's business. Canon has previously
imposed on its personnel travel restrictions to and from certain countries affected by severe acute respiratory syndrome (SARS) and similar medical crises in the future may disrupt manufacturing processes and markets for Canon's
products. Given the importance of Canon's Asian sales, production facilities and supply
relationships, especially in China, Canon's business may be more exposed to this risk than to the
global economy generally.
Canon may unintentionally infringe international trade laws and regulations, and any such
infringement may lead to an adverse effect on its business. The extent of the effect on Canon's
business will depend upon the nature of the infringement and the severity of fines or other
sanctions imposed upon Canon. A major infringement could result in suspension of Canon's trading
rights in one or more jurisdictions. In addition to any sanctions prescribed by law, adverse
publicity regarding an alleged infringement of trade laws and regulations by Canon may also have a
negative effect on the Canon brand and image.
All of the above factors regarding international operations could have an adverse impact on
Canon's business results.
Canon depends on efficient logistics services to distribute its products worldwide.
Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon's computerized logistics system, or regional disputes or labor disputes, such as a
dockworker's strike, could lead to a disruption of Canon's operations and result not only in
increased logistical costs, but also in loss of sales opportunities due to delays in delivery.
Also, because demand for Canon's consumer products can fluctuate throughout the year, the failure
to adjust bookings of vessels and the preparation of warehouse space to reflect such fluctuations
could result in either a loss of sales opportunities or the incurrence of unnecessary costs.
In addition, the increasingly higher levels of precision required of semiconductor production
equipment like steppers and mask aligners and the resulting increase in the value of this equipment
in recent years have resulted in a concurrent increase in the need for sensitive handling and
transportation of these products. Due to their precision nature, even a very trivial shock to these
products during the handling and transportation process could disable the entire product. If
unforeseen accidents during the handling and transportation process render a significant portion of
Canon's higher-end precision products unmarketable, Canon may not be able to fully recover its
investment in the research, development and production of these precision products.
Substantially higher crude oil prices have lead to increases in the cost of airfreight in the
form of fuel surcharge. Continued or further increases in crude oil prices could adversely affect
Canon's results of operations.
Canon is endeavoring to reduce carbon dioxide emissions by implementing such measures as a new
transportation system, including an efficient new rail container system. Failure by Canon to meet
its targets may have a negative effect on Canon's brand and image and its business.
Economic trends in Canon's major markets may adversely affect its results of operations.
Economic downturns and declines in consumption in Canon's major markets, including Japan, the
United States and Europe, may affect the levels of both corporate and consumer sales. Demand of
Canon's consumer products, such as cameras and printers, is to a very significant degree
discretionary. A decline in the level of consumption caused by the weakening of general economic
conditions could adversely affect Canon's results of operations.
Canon's operating results are also affected by levels of business activity of its customers,
which in turn are affected by levels of economic activity in the industries and markets that they
serve. Declines in levels of business activity of Canon's customers caused by the weakening of the
global economy could adversely affect Canon's results of operations.
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Risks Related to Environmental Issues
Canon's business is subject to environmental laws and regulations.
Canon is subject to certain Japanese and foreign environmental requirements in areas such as
energy resource conservation, reduction of hazardous substances, collection and recycling of
products, clean air, water protection and waste disposal. A violation of these regulations by Canon
could have an adverse affect on Canon's operating results. Canon cannot predict whether any
pending or future legislation will be adopted or what effect such legislation would have on it.
In some cases, mainly in the European Union, such as with the Directive on the Restriction of
the Use of Certain Hazardous Substances in Electrical and Electronic Equipment or the Directive
establishing a framework for the setting of EcoDesign requirements for Energy-using Products,
detailed implementation standards have not yet been determined. Canon intends to implement such
standards as they are determined and adopted. If Canon's measures do not meet such standards when
they are adopted, however, Canon may be required to take further action and incur additional costs
to comply with these regulations.
Environmental clean-up and remediation costs relating to Canon's properties and associated
litigation could decrease Canon's net cash flow, adversely affect its results of operations and
impair its financial condition.
Canon is subject to potential liability for the investigation and clean-up of environmental
contamination at each of the properties that it owns or operates, at certain properties Canon
formerly owned or operated and at off-site locations where Canon arranged for the disposal of
hazardous substances. If Canon is held responsible for such costs in any future litigation or
proceedings, such costs may not be covered by insurance and may be material.
In addition, Canon may face liability for alleged personal injury or property damage due to
exposure to chemicals or other hazardous substances from its facilities. Canon may also face
liability for personal injury, property damage or natural resource damage, or for clean-up costs
for the alleged migration of contamination or other hazardous substances from its facilities. A
significant increase in the number or success of these claims and costs could adversely affect
Canon's results of operations.
Risks Related to Intellectual Property
Canon may be subject to intellectual property litigation and infringement claims, which could
cause it to incur significant expenses or prevent it from selling its products.
Because of the emphasis on product innovation in the markets for Canon's products, many of
which are subject to frequent technological innovations, patents and other intellectual property
are an important competitive factor. Canon relies primarily on technology it has developed, and
Canon seeks to protect such technology through a combination of patents, trademarks and other
intellectual property rights.
Canon faces the risks that:
•
competitors will be able to develop similar technology independently;
•
Canon's pending patent applications may not be issued;
•
the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and
•
intellectual property laws may not adequately protect Canon's intellectual property, particularly in some emerging markets.
In case Canon is not aware of actual or potential infringement of, or adverse claim to, its
rights in such technologies, any interference in Canon's rights to use such technologies could
adversely affect its operating results.
In addition, Canon may need to litigate in order to enforce its patents, copyrights or other
intellectual property rights, to protect its trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement, which can be
expensive and time-consuming. In the event any government agency or third party were adjudicated to
have a valid claim against Canon, Canon could be required to:
•
refrain from selling the affected product in certain markets;
•
make royalty payments or pay monetary damages;
•
seek to develop non-infringing technologies, which may not be feasible; or
•
seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.
Canon also licenses its patents to third parties in exchange for payment or cross-licensing.
The terms and conditions of such licensing or changes in the conditions for renewals of such
licenses could affect Canon's business.
Canon's businesses, company image and result of operations could be adversely affected by any
of these developments.
Disputes involving payment of remuneration for employee inventions may materially affect
Canon's brand image as well as its business.
Canon may face disputes involving payment of remuneration given to employee inventions for
which the rights have been succeeded by Canon. This risk is particularly relevant in countries such
as Japan and Germany, where patent laws require companies to pay remuneration to employees for the
succession of the employee's invention to the company. Canon maintains company rules on and an
evaluation system for employee inventions. Canon believes it has been making adequate payments to
employees for assignment of inventions based on these rules and a fair and objective succession of
amounts to be paid. There can be no assurance, however, that disputes will not arise with respect
to the amount of payments to employees.
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Other Risks
Canon must attract and retain  highly qualified professionals.
Canon's future operating results depend in significant part upon the continued contributions
of its employees. In addition, Canon's future operating results depend in part on its ability to
attract, train and retain other qualified personnel in development, production, sales and
management for Canon's operations. The competition for these human resources in the high-tech
industries in which Canon competes has been increasingly intense in recent years. Moreover, due to
the accelerating pace of technological change, the importance of training new personnel in a timely
manner to meet product research and development requirements will increase. Failure by Canon to
recruit and train qualified personnel or the loss of key employees could adversely affect Canon's
business and results of operations.
Maintaining a high level of expertise in Canon's manufacturing technology is critical to
Canon's business. However, it is difficult to secure the expertise required for a special skills
area, such as lens processing, in a short time period. While Canon is currently undertaking a
series of planning exercises in order to obtain the expertise needed for each skills area, Canon
cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure
to do so may adversely affect Canon's business and results of operations.
Canon's physical facilities, information systems and information security systems are subject
to damage as a result of disasters, outages or similar events.
Canon's headquarters functions, its information systems and its research and development
centers are located in or near Tokyo, Japan, where the possibility of disaster or damage from
earthquakes is generally higher than in other parts of the world. In addition, Canon's facilities
or offices, including those for research and development, material procurement, manufacturing,
logistics, sales, and services are located throughout the world and subject to the possibility of
disaster or outage or similar disruption as a result of any of a number of events, including
natural disasters, computer viruses and terrorist attacks. Although Canon is working to establish
appropriate backup structures for its facilities and information systems, there can be no assurance
that Canon will be able to completely prevent or mitigate the effect of events or developments such
as the aforementioned disasters, leakage of harmful substances, shutdowns of information systems,
and leakage, falsification, and disappearances of internal databases. Although Canon has
implemented backup plans to permit the production of products at multiple production facilities,
such plans do not cover all product models. In addition, such backup arrangements may not be
adequate to maintain production quantity levels. Such factors may adversely affect Canon's
operating activities, generate expenses relating to physical or personal damage, or hurt Canon's
brand image, and its operating results may be adversely affected.
Canon's operating and financing activities expose Canon to foreign currency exchange and
interest rate risks that may adversely affect its revenues and profitability.
Canon is exposed to the risks of foreign currency exchange rate fluctuations. Canon's
consolidated financial statements, which are presented in Japanese yen, are affected by foreign
exchange rate fluctuations. These fluctuations can affect the yen value of Canon's equity
investments denominated in foreign currencies and monetary assets and liabilities arising from
business transactions in foreign currencies. They can also affect the costs and sales proceeds of
products that are denominated in foreign currencies. In addition, as a result of translating
foreign currency financial statements of Canon's foreign subsidiaries into Japanese yen, its
reporting currency, assets and liabilities, and revenues and expenses will fluctuate. Canon is also
exposed to the risk of interest rate fluctuations, which may affect the value of Canon's financial
assets and liabilities, long-term debt in particular.
The cooperation and alliances with, and strategic investments in, third parties undertaken by
Canon may not produce successful results. Also, unexpected emergence of strong competitors through
mergers and acquisitions, may affect Canon's business environment.
Canon carries out many activities with other companies in the form of alliances, joint
ventures, and strategic investments. These activities help Canon's technological development
process. However, weak business trends or disappointing performance by partners may adversely
affect the success of these activities. In addition, the success of these activities may be
adversely affected by the inability of Canon and its partners to successfully define and reach
common objectives. An unexpected cancellation of a major business alliance may disrupt Canon's
overall business plans and may also result in a delayed return-on-investment.
In addition, the unexpected emergence of strong competitors through mergers and acquisitions
or the formation of business alliances may change the competitive environment of the businesses in
which Canon engages, thereby affecting Canon's future results of operations.
Canon may be adversely affected by fluctuations in the stock and bond markets.
Canon's assets include investments in publicly traded securities. As a result, Canon's
operating results and general financial position may be affected by price fluctuations in the stock
and bond markets. In addition, if valuations of investment assets decrease due to conditions in,
for example, stock or bond markets, additional funding and accruals with respect to Canon's pension
and other obligations may be required, and such funding and accruals may adversely affect Canon's
operating results and consolidated financial condition.
Confidential information may be inadvertently disclosed which could lead to damage claims or
harm Canon's reputation, and may have an adverse effect upon
Canon' s business.
In connection with certain projects, Canon may receive confidential or sensitive information
(such as personal information) from its customers relating to these customers or to other parties. In addition, Canon uses computer systems and electronic
data in managing information relating to its employees. Although Canon makes every effort to keep
this information confidential through procedures designed to prevent accidental release of
confidential or sensitive information, such information may be inadvertently disclosed without
Canon's knowledge. If this occurs, Canon may be subject to claims for damages from the parties or
the employees affected, suffer harm to its reputation or be subject to liabilities and/or penalties
under applicable statutes.
Inadvertent disclosure of secret information regarding new technology, would also have a
material adverse effect upon Canon's business.
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Item 4. Information on the Company
A. History and development of the Company
Canon
Inc. is a joint stock corporation (KABUSHIKI KAISHA) formed under the Corporation Law of
Japan. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501,
Japan. The telephone number is +81-3-3758-2111.
The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell
Japan's first focal plane shutter 35mm still camera, which was developed by its predecessor
company, Precision Optical Research Laboratories, which was organized in 1933.
In the late 1950s, Canon entered the business machines field utilizing technology obtained
through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to
expand its operations to include plain paper copying machines, faxes, laser beam printers, bubble jet printers, computers, video camcorders and digital
cameras.
The following are important events in the development of Canon's business in recent years.
•
In 2001, Canon Vietnam Co., Ltd. was established in Hanoi, Vietnam as a production site
for bubble jet printers.
•
In 2001, Canon Zhongshan Business Machines Co., Ltd. was established in Zhongshan, China
as a production site for laser beam printers.
•
In 2001, Canon (Suzhou) Inc. was established in Suzhou, China as a production site for
digital copying machines and digital multifunction devices.
•
In January 2003, Canon Aptex Inc. and Copyer Co., Ltd., two of Canon Inc.'s
manufacturing subsidiaries in Japan, merged to become Canon Finetech Inc. The merger was
conducted with the aim of concentrating and further strengthening the core competencies of
the two merged companies in office equipment-related technologies.
•
In April 2003, Fukushima Canon Inc. was established as a wholly-owned subsidiary through
the spin-off of Fukushima Plant, with the aim of establishing a high value-added
manufacturing company equipped with product-launching capability.
•
In April 2003, Canon N.T.C.'s marketing operations were spun off and merged with
Canon System & Support Inc., and its real estate operations were spun off into Canon
Facility Management, Inc. Following the corporate spin-offs, Canon N.T.C.'s operations
focuses on development and manufacturing.
•
In January, 2004, Canon Precision Inc., or Canon Precision, a wholly-owned subsidiary
of Canon Inc., merged with Hirosaki Precision, Inc., or Hirosaki Precision, a wholly-owned
subsidiary of Canon Precision. Hirosaki Precision was merged into Canon Precision, the
surviving company. Canon Precision targets the improved efficiency and specialization of
business operations. Since both Canon Precision and Hirosaki Precision were consolidated
subsidiaries of Canon Inc., the merger has no impact on Canon's current or future business
results.
•
On October 15, 2004, the Company entered into an agreement with Canon Sales Co., Inc. and
Canotec Co., Inc., or Canotec, joint equity shareholders of Niigata Canotec Co., Inc., or
Niigata Canotec, to acquire all outstanding shares of Niigata Canotec. Therefore, on
January 1, 2005, Niigata Canotec became a wholly-owned subsidiary of the Company and
changed its name to Canon Imaging System Technologies Inc. By making Canon Imaging System
Technologies, Inc. a wholly-owned subsidiary of the Company, Canon aims to raise the level
of its technical capacity and improve development efficiency by enabling closer
coordination.
•
On January 1, 2005, Canotec and FastNet, Inc. merged, and the merged entity changed
its name to Canon Network Communications, Inc. The purpose of the merger was to increase
management efficiency by consolidating the Canon Group's network and Internet service
operations. Canon Network Communications, Inc. aims to strengthen Information Technology
Management Services, dealing with all stages from the establishment of comprehensive
network systems to their operation and management.
•
On September 30, 2005, Canon acquired all of the issued and outstanding shares of
ANELVA Corporation, which possesses advanced vacuum technology, and made it into a
subsidiary. ANELVA Corporation's corporate name was changed to Canon ANELVA Corporation as
of October 1, 2005. By making Canon ANELVA Corporation a subsidiary of the Company, Canon
aims to promote the in-house production of manufacturing equipment which is indispensable
to differentiate Canon products from the competitions in various fields, including Canon's
new display business.
•
On October 19, 2005, Canon acquired the share of NEC Machinery Corporation (listed on
the Second Section of the Osaka Securities Exchange Co.,Ltd.), which possesses advanced
automation technologies, through tender offer and made it into a subsidiary. NEC Machinery
Corporation's corporate name was changed to Canon Machinery Inc. as of December 17, 2005.
By making Canon Machinery Inc. a subsidiary of the Company, Canon aims to make further
advance in its production reform activities, including the automation of production
processes for Canon products.
•
On December 27, 2006, Canon Electronics Inc. acquired shares of e-System Corporation
(listed on the Hercules Section of the Osaka Securities Exchange) through a third party
distribution in order to strengthen its group's information-related business and develop
it into a core business, and made that company its subsidiary.
In
fiscal 2006, 2005 and 2004, Canon's capital expenditures were
¥ 379,657 million, ¥ 383,784
million and ¥ 318,730 million, respectively. In fiscal 2006, capital expenditures were mainly used
to expand production capabilities in both domestic and overseas regions, and to bolster Canon's
R&D-related infrastructure. In addition, Canon has been continually investing in tools and dies for
business machines, in which the amount invested is generally the same each year.
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For
fiscal 2007, Canon projects its capital expenditures will be
approximately ¥ 480,000
million. This amount is expected to be spent for investments in new production plants and new
facilities of Canon. Canon anticipates that the funds needed for these capital expenditures will be
generated internally through operations.
B. Business overview
Canon is one of the world's leading manufacturers of plain paper copying machines, digital
multifunction devices, or MFDs, laser beam printers, bubble jet printers, cameras and steppers.
Canon sells its products principally under the Canon brand name and through sales
subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail
dealers in an assigned territory. Approximately 75% of consolidated net sales in fiscal 2006 were
generated outside Japan; approximately 31% in the Americas, 31% in Europe and 13% in other areas
including Asia.
Canon's strategy is to develop innovative, high value-added products which incorporate
advanced technologies.
Canon's research and development activities range from basic research to product-oriented
research directed at keeping and increasing the technological leadership of Canon's products in the
market.
Canon manufactures the majority of its products in Japan, but in an effort to reduce currency
exchange risks and production cost, Canon has increased overseas production and the use of local
parts. Canon has manufacturing subsidiaries in countries and regions such as the United States,
Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam.
As a concerned member of the world community, Canon emphasizes recycling, and has increased
its use of clean energy sources and cleaner manufacturing processes. Canon has also adopted
programs to collect and recycle used cartridges and to refurbish used copy machines. In addition,
Canon has virtually removed all environmentally unfriendly chemicals from its manufacturing
processes.
Products
Canon's products are divided into the following three product groups: business machines,
cameras, and optical and other products.
-
Business machines -
The business machines product group is divided into three sub-groups consisting of office
imaging products, computer peripherals and business information products.
Office
imaging products
Canon manufactures, markets and services a wide range of office network digital MFDs, color
network digital MFD's, office copying machines, personal-use copying machines.
The office-use market is subject to rapid change, and customer preferences have been shifting
from copying machines to digital MFDs, as well as from monochrome to color products. To respond to
these trends, Canon has been strengthening its lineup of digital MFDs in the imageRUNNER (iR)
series, which have versatile functions, such as copying, printing, scanning, faxing and
data-sharing functions on the Internet and intranets. Canon is also marketing diverse expansion
modules, software and business solutions to increase customer value. For the development of MFDs,
Canon makes effective use of a wide range of technologies from the fields of optics, mechatronics,
electrophotography, chemistry and image processing. Canon has developed a high-performance image
processing chip called "Third color iR controller" and an expandable and functional platform called
"MEAP", multifunctional embedded application platform. This controller provides easy integration
with customers' IT environments together with speedy, high-quality image processing. This boosts
office productivity, thereby garnering acclaim from business customers.
In 2006, sales of color office imaging products continued solid growth as the office color
market continued to expand and sales of monochrome digital devices were stable. Canon has expanded
its color office imaging products lineups by introducing the iRC5180/4580 and iRC3380/2880 series
worldwide to further increase color MFD sales. Canon has also introduced new monochrome MFD models
to strengthen its industry leading monochrome MFD product lineup.
Canon has a powerful line of full- color digital MFDs for users ranging from professional
graphic designers to business offices. The trend in the printing industry is gradually moving away
from long run printing using expensive machinery to short run printing-on-demand and variable data
printing. Canon's high-end MFDs and color digital MFDs can be applied to the print on demand
market. Canon aims to respond to the growing demand for digital color imaging in the commercial
print market with products using its renowned V Toner, featuring broad color space and a
microscopic wax-based structure, and its oil-less fixing system.
Canon has a leading market share in monochrome MFDs and copying machines including machines
for personal use. While the shift to color has been in progress, especially in Japan, the demand
for monochrome machines has been stable accompanying with the expansion of their multifunction
capabilities and software development.
With the evolution of digital technology and communication, MFDs that enable seamless
conversion between paper documents and electronic documents have also evolved from being
input-output devices to a sophisticated information systems. To deliver solutions that meet the
diversifying needs of customers in various industries and niche, Canon has brought to market a full
offering of MEAP-enabled office MFD lines both in monochrome and color as well as software
products.
The office imaging products category also includes the related sales of paper and chemicals,
service and replacement parts.
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Computer
peripherals
Computer peripherals include laser beam printers, inkjet printers and scanners.
Developed and fostered by Canon, laser beam printers are standard output peripherals for
offices. Canon's laser beam printers are relatively small in size and have high-quality printing
capabilities attributable to Canon's expertise in laser beam printing and plain paper copying
technologies. Canon's adoption of a user-replaceable toner cartridge system containing optical
components makes its laser beam printers easy to maintain. Most of Canon's laser beam printer sales
are on an OEM basis.
As for the monochrome laser beam printer, Canon has started to produce and sell sub-L products
that belong to the lower segment of low-end products in Southern China. The unexpected expansion production and selling has caused Canon to expand production in the laser beam printers
business.
As the inventor of bubble jet printing technology, Canon believes it continues to provide
customers with the best performance the technology has to offer. Canon provides high-performance
and high value added models both in single-function printers and multi function printers. In
response to intense competition in the inkjet printer segment, Canon launched new lineup of
multifunction printers and single function printers from flagship to entry models in 2006. All new
model feature a print head called Canon Full-photolithography Inkjet Nozzle Engineering ("FINE"),
which boosts print speed and image quality up to 9600 x 2400 dpi with microscopic droplets as small
as one picoliter, and ChromaLife100 system, which provides high quality and long-lasting photo
images. In addition to high-quality images, Canon PIXMA branded photo printers offer advanced
paper handling, such as dual paper path and two-sided duplex printing and new Easy-Scroll Wheel
makes operation much easier. With these advanced printer line-ups, Canon has expanded its sales
volume and expects the consumables business will expand accordingly.
Canon markets a wide variety of scanners for a spectrum of user needs, including image
scanners in the CanoScan LiDE series using Contact Image Sensor (CIS), and scanners with
Charge-Coupled Devices (CCD) for high resolution in the CanoScan series. CIS is a close-contact
method that allows a significant reduction in scanner weight and size. Canon has deployed its
expertise to develop space-saving, energy-efficient scanners, as well as easy personal computer
("PC") connection via universal serial bus interface. Although the scanner market has continued to
shrink and shift to multi-function printers, Canon has successfully introduced new scanner models
to attain a high market share.
Business
information products
Business information products primarily consist of micrographic equipment, personal computers,
calculators, document scanners and work stations.
With the movement toward digitalization, the need to scan documents into text data or image
data is expanding. Canon's document scanners rapidly and efficiently digitize large volumes of
information on paper. Canon offers a wide range of scanner models, including color capable compact
sheet-fed types and a flatbed model suitable for book-type documents. Canon also offers a hybrid
model that can create microfilm records while digitizing the information. Canon's diverse lineup
seeks to meet increased demands for digitizing office documents to share across Internet or
intranet platforms or to capture data from forms with optical character recognition.
Canon's calculator operations, from development to production and marketing, are centered in
Hong Kong. Canon's tradition of technological innovation has been inherited by its personal
information products, from calculators with printers to electronic dictionaries. Canon continues to
develop distinct, appealing personal information products that reflect trends and demand.
The work stations and personal computers sold by Canon are manufactured by third parties under
the manufacturers' own brand names.
-
Cameras
-
Canon manufactures and markets digital cameras and film cameras. Canon also manufactures and
markets digital video camcorders, lenses, and various camera accessories.
DIGIC III, an improved and upgraded new image processor, features face detection system, and
this is the distinguishing feature of Canon's compact digital cameras. DIGIC III and DIGIC II, both
of them have enhanced capabilities for high-quality image reproduction, high-speed data processing,
and high quality movie image processing.
In addition to aiming for the best possible image quality throughout its product lineup, Canon
offers digital compact cameras that are easy to use with highly sophisticated product design. The
compact digital camera market continued to grow in 2006. Canon increased sales of compact digital
cameras through the introduction of 16 new compact digital camera models in 2006. In 2006, new
products, such as the Digital Elph SD800 IS (IXY 900 IS in Japan) and PowerShot A530, were
well-received in the market worldwide, and Canon increased its market shares and remained a leader
in sales of compact digital cameras.
In the Compact Photo Printer segment Canon has shown significant leadership in this market.
Although the majority of the compact photo printer purchasers are considered "early adopters", as
market growth doubled in 2005, and retailers are now realizing the importance of this new business
segment. In 2006, Canon introduced three new compact photo printers, one of which is under the
brand-new ES series. Canon has been able to leverage the brand recognition of its cameras to
attract new customers for its compact photo printers. In addition, Canon is starting to realize
profits from sales of consumables, such as paper and ink cartridges related to compact photo
printers.
While the digital SLR market continues its healthy growth, Canon introduced two new digital
SLRs in 2006 to keep refreshing its complete lineup. With its unique, and leading digital imaging
technology, such as its own Complementary Metal Oxide Semiconductor (CMOS) imaging sensors, Canon
has the capability of meeting the requirement of various photographers ranging from professional
photographers to the entry-level users.
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In response to the strong increase in unit sales of digital cameras, Canon expanded its
internet-based customer support service system in order to strengthen customer services.
Although the conventional film camera market continues to decline, Canon intends to maintain
its firm commitment to lead the film camera business, while closely monitoring the market trends.
In the camera lens segment, technological developments, including diffractive optical
elements, image stabilizers and ultrasonic motors, have helped Canon to maintain a technical lead
over other makers. Canon offers over 60 lenses in the EF series. These high-quality,
high-performance lenses provide outstanding performance with digital cameras as well as
silver-halide cameras, greatly contributing to Canon's sales. The market for interchangeable
lenses, which are used for SLR cameras, has grown and aggregate sales of the interchangeable lens
have increased every year for the past four years. In 2006, Canon launched a total of four new
interchangeable lens models to the market, two of these were launched in the first half of 2006. In
response to the increasing demand of the digital SLR, Canon intends to expand its lens sales and
market share by introducing interchangeable lenses especially designed for digital SLR cameras, the
market of which Canon expects to expand.
Canon also provides a full line-up of digital video camcorders from versatile, compact and
stylish models to its flagship models for professionals. In 2006, Canon finally developed an
original imaging sensor for full HD video images, a Complementary Metal Oxide Semiconductor (CMOS)
sensor. Together with Canon's CMOS sensor, HD lens and digital imaging processor (DIGIC DV II),
Canon can offer the best quality HD movie in the market.
The digital camcorder market continues to diversify. In the autumn of 2005 Canon began
offering camcorders using DVD and camcorders with HD picture quality in addition to a full line-up
of conventional MiniDV products. And in 2006, Canon further strengthened its line-up by introducing a variety of DVD and HDV products. DC40 with 4M pixel CCD brings the "movie and still" concept into DVD
camcorder category. HV10 is Canon's first compact HD camcorder for consumers, equipped with a
Canon original HD CMOS sensor, which ensures best quality high definition movie image.
Quality
and performance measures such as high resolution, high brightness, and greater detail
or sharpness are the key competitive factors in the market for projectors. In addition to Canon's
independently developed high-resolution projector SX50 launched at the end of 2004, Canon launched
three new models SX6, SX60, and X600 in the first half of 2006. The high image quality and high
resolution of these products has been well received by system integrators, and these products are
capturing high market shares. Canon intends to introduce more new products, differentiated by
higher image quality, resolution, and brightness.
-
Optical and other products
-
Canon's optical and other products includes semiconductor production equipment, medical
equipment and electronic components.
Semiconductor production equipment includes steppers and mask aligners. Steppers are used
to expose circuits on silicon substrates. Canon has commercialized Krypton Fluoride excimer-laser
steppers, Argon Fluoride excimer-laser steppers and i-line steppers. In fiscal 2006, the semiconductor
production equipment market expanded, mainly supported by the strong demand from memory
manufacturers in Japan, Korea and Taiwan.
To respond to the demand, Canon accelerated its related activities, including improving the quality
of its products and shortening the lead time. As a result, Canon expanded its sales volume. In
particular, FPA-6000 ES6a / ES5a (KrF scanning stepper) and FPA-5500 iZa (i-line stepper) made a
large contribution to its sales.
Mask aligners are used to produce liquid crystal displays, or LCDs. The LCD market recently
faced an oversupply of LCD panels, which led to severe price-reduction of LCD panels. As a result,
Canon was affected by the reduction of equipment investment by panel manufacturers.
Canon believes that, based on global units, it is the world leader in television broadcasting
lenses, which are used to capture images from sports and news events, concerts and studio
broadcasts. In fiscal 2006, the market for television broadcasting lenses grew, as a result of a
global trend to introduce digital broadcasting equipment. In fiscal 2006, Canon launched a series
of cost-effective HD lenses that match both the performance and the costs of the new HD acquisition
systems, developed in response to the transitioning to HDTV Newsgathering, HD reality shows, and
other lower-budget HD productions. Canon maintained its position as the market leader for
television broadcasting lenses.
Medical equipment sold by Canon includes X-ray cameras, retinal cameras, autofractmeters and
image-processing equipments for computerized diagnostic systems. Canon's pioneering digital
radiography system takes X-ray photography and medical diagnosis into the digital age.
Other products sold by Canon include electronic components, such as magnetic heads for audio
and video tape recorders and micro-motors for printers and other components, which are sold
primarily to equipment manufacturers.
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Marketing and distribution
Canon sells its products primarily through subsidiaries with responsibility for specific
geographic areas. Each subsidiary is responsible for its own market research and for determining
its sales channels, advertising and promotional activities.
In Japan, Canon sells its products primarily through Canon Marketing Japan Co., Inc., mainly
to dealers and retail outlets.
In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., Canon Canada,
Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.
In Europe, Canon sells its products primarily through Canon Europa N.V., which sells primarily
through subsidiaries or independent distributors to dealers and retail outlets in each locality. In
addition, copying machines are sold directly to end-users by Canon (U.K.) Ltd. in the United
Kingdom, and by Canon France S.A.S. in France.
In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those
areas. In addition, copying machines are sold directly to end-users by Canon Australia Pty. Ltd. in
Australia.
Canon also sells laser beam printers on an OEM basis to Hewlett-Packard Company.
Hewlett-Packard Company resells these printers under the "HP LaserJet Printers" name. During fiscal
2006, such sales constituted approximately 22% of Canon's consolidated net sales, as compared to
21% in the previous fiscal year.
Canon continues to enhance its distribution system by promoting continuing education of its
sales personnel and improving inventory management and business planning through the weekly
analysis of Canon's sales data.
Service
In Japan and overseas, product service is provided in part by independent retail outlets and
designated service centers that receive technical training assistance from Canon. Canon also
services its products directly.
Most of Canon's business machines carry warranties of varying terms depending upon the model
and the country of sale. Cameras and camera accessories carry a one-year warranty based on normal
use.
Canon services its copying machines and supplies replacement drums, parts, toner and paper. In
Japan, most customers enter into a maintenance service contract under which Canon provides
maintenance services, replacement drums and parts in return for a per-copy charge. Copying machines
which are not covered by a service contract may be serviced from time to time by Canon or local
dealers for a fee.
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Table of Contents
NET SALES BY PRODUCT GROUP
Years ended December 31
2006
change
2005
change
2004
(Millions of yen except percentage data)
Business machines:
Office imaging products
¥
1,185,925
2.8
%
¥
1,153,240
2.9
%
¥
1,120,972
Computer peripherals
1,398,408
12.3
1,244,906
8.3
1,149,914
Business information products
106,754
2.4
104,255
-10.9
117,067
2,691,087
7.5
2,502,401
4.8
2,387,953
Cameras
1,041,865
18.5
879,186
15.2
763,079
Optical and other products
423,807
13.7
372,604
17.6
316,821
Total
¥
4,156,759
10.7
¥
3,754,191
8.3
¥
3,467,853
NET SALES BY GEOGRAPHIC AREA
Years ended December 31
2006
change
2005
Change
2004
(Millions of yen except percentage data)
Japan
Unaffiliated customers
¥
1,037,657
5.9
%
¥
979,748
6.6
%
¥
919,153
Intersegment
2,311,482
13.0
2,046,173
8.7
1,882,973
Total
3,349,139
10.7
3,025,921
8.0
2,802,126
Americas
Unaffiliated customers
¥
1,277,867
12.1
%
¥
1,139,784
7.8
%
¥
1,057,066
Intersegment
4,764
-35.8
7,424
-16.2
8,863
Total
1,282,631
11.8
1,147,208
7.6
1,065,929
Europe
Unaffiliated customers
¥
1,313,919
11.5
%
¥
1,178,672
8.1
%
¥
1,090,712
Intersegment
3,586
62.6
2,206
-47.0
4,161
Total
1,317,505
11.6
1,180,878
7.9
1,094,873
Others
Unaffiliated customers
¥
527,316
15.6
%
¥
455,987
13.7
%
¥
400,922
Intersegment
792,018
22.5
646,530
9.3
591,677
Total
1,319,334
19.7
1,102,517
11.1
992,599
Eliminations
Unaffiliated customers
¥
—
—
%
¥
—
—
%
¥
—
Intersegment
-3,111,850
—
-2,702,333
—
-2,487,674
Total
-3,111,850
—
-2,702,333
—
-2,487,674
Consolidated
Unaffiliated customers
¥
4,156,759
10.7
%
¥
3,754,191
8.3
%
¥
3,467,853
Intersegment
—
—
—
—
—
Total
4,156,759
10.7
3,754,191
8.3
3,467,853
Note:
The segments are defined under Japanese GAAP. In grouping of segment information by product, Japanese GAAP requires that consideration be given to similarities of
product types and characteristics, manufacturing methods, sales markets, and other factors that are similar. In grouping of segment information by geographic area, Japanese
GAAP requires that consideration be given to geographic proximity, as well as similarities of economic activities, interrelationships of business activities and other similar
factors. Segment information by geographic area is determined by the location of the Company or its relevant subsidiary making the sale.
Total operating profit by category is discussed in Item 5A "Operating Results".
14
Table of Contents
Seasonality
Canon's sales for the 4th quarter are usually higher than those in the other three quarters,
mainly owing to strong demand for consumer products, such as cameras and bubble jet printers,
during the year-end holiday season. In Japan, corporate demand for office products peaks in the 1st
quarter, as many Japanese companies close their books in March. Sales also tend to increase at the
start of the new school year in each of the respective regions.
Sources of supply
Canon purchases materials such as glass, aluminums, plastics, steels, and chemicals for
using it for various product parts and in the manufacturing of products. With the development of
globalization in production, Canon procures raw materials from all over the world, and selects
suppliers based on a number of criteria, including environmental friendliness, quality, cost,
supply stability, and financial condition.
Prices of some raw materials fluctuate according to the market. Due to the high price of crude
oil and increase in demand toward China, the market place is tight since the beginning of last
year. However, Canon believes it will be able to continue to obtain sufficient quantities of raw
materials to meet its needs.
Canon also places significant emphasis on in-house development of production tools. Canon also
produces many of the tuning and measuring tools needed for the development, maintenance and repair
of its production equipment. Key tools such as these are not marketed for sale; they are reserved
for use within the Canon Group. Canon's ability to develop its own production tools helps establish
quality control and allows for speed and flexibility when retooling is necessary — a crucial
advantage in its cell production processes. Cell production is the production system in which the
entire production process is undertaken by small groups of employees. In-house tool development may
also help cut costs over time and prevent the leakage of Canon's core proprietary technologies.
Competition
Canon encounters intense competition in all areas of its business activity throughout the
world. Canon's competitors range from some of the world's major multinational corporations to
smaller, highly specialized companies. Canon competes in a number of different business areas,
whereas many of its competitors are relatively more focused on one or more individual industries.
Consequently, Canon may face significant competition from entities that apply greater financial,
technological, sales and marketing or other resources than Canon to their activities in a
particular market segment.
The principal elements of competition which Canon faces in each of its markets are technology,
quality, reliability, performance, price and customer service and support. Canon believes that much
of its ability to compete effectively depends on conducting successful research and development
activities that enable it to create new or improved products and release them on a timely basis and
at commercially attractive prices.
The competitive environments in which each product group operates are described below:
•
Business machines
The markets for office imaging products, computer peripherals and business information
products are highly competitive.
Canon's primary competitors in these markets are Xerox Corporation/ Fuji Xerox Co., Ltd.,
Hewlett-Packard Company, Lexmark International Inc., Ricoh Company, Ltd., Konica Minolta Holdings,
Inc. and Seiko Epson Corporation. Canon believes that it is one of the leading global manufacturers
of copying machines, digital MFDs, laser beam printers, bubble jet printers, image scanners and
facsimile machines. In addition to the general elements of competition described above, Canon's
ability to compete successfully in these markets also depends significantly on whether it can
provide effective, broad-based "business solutions" to its customers that solve multiple
interrelated client needs. In particular, the ability to provide equipment and software that
connect effectively to networks (ranging in scope from local area networks to the Internet) is
often a key to Canon's competitive strength in these markets. In China, the current market
leaders for business machines are Toshiba Tec Corporation, Sharp Corporation and Konica Minolta
Holdings, Inc. Canon hopes to join this group by introducing products tailored to the market and by
strengthening sales and service channels. Also in regards to the office color market, in addition
to Ricoh and Xerox, Konica Minolta has been very aggressive with its color strategy especially in
Europe and the US, and competition in this market has become fierce.
Also, as a recent trend, convergence of the copier industry and the printer industry has
become apparent. Competition at the low-end segment has turned especially fierce by the impact of
printer-based MFDs on copier market. Canon sees this market convergence as a growth opportunity and
has enhanced our printer and printer-
based MFP lineups. Canon also ensures to differentiate itself from other competitors by offering
comprehensive solutions to customers.
•
Cameras
Competition in the camera industry is intense, with many established market participants
offering excellent products with competitive pricing. Canon's primary competitors in digital
cameras are Sony Corporation, Fujifilm Imaging Co., Ltd., Olympus Corporation, Nikon Corporation,
Casio Computer Co., Ltd., Matsushita Electric Industrial Co., Ltd., Samsung Electronics Co., Ltd.
and Eastman Kodak Company.
In the digital SLR market, competition has become tougher in 2006, with more newcomers with
aggressive approach into the growing market. Canon is committed to keep leading the digital SLR
market, with aggressive investment to develop new models.
Canon's primary competitor in the lens market is Nikon Corporation whose popular class digital
SLR cameras are selling well. Another major competitor is Sigma Corporation, which sells products
that are compatible with Canon's SLR camera lens.
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Table of Contents
In the compact digital cameras, the segment industry's trend of declining prices will continue
in 2007, and it will become tougher to maintain current profit levels. Also, the market in the economically
developed countries could be peaking due to high household penetration.
While we see the above-mentioned tough signs, we also see many positive signs as well. For
instance, as China and Eastern Europe including Russia have shown significant growth, Canon has
achieved the leading market share in China and Russia. Also, Canon's cost reduction efforts have
shown very positive progress utilizing the advantages of significant economies of scale. We believe
Canon's compact Digital Steel Camera ("DSC") business will continue to benefit from these conditions.
Canon's primary competitors in digital video camcorders are Sony Corporation, Matsushita
Electric Industrial Co., Ltd., Victor Company of Japan Ltd., Hitachi Ltd. and Samsung Electronics
Co., Ltd. In fiscal 2006, Canon expanded its line-up of DVD and HDV camcorders.
•
Steppers and Aligners
The market for steppers and aligners, used in the manufacture of semiconductor devices and
LCDs, is highly competitive. The market is characterized by a relatively small number of dominant
suppliers, since the development of steppers and aligners requires extremely precise design and
manufacturing techniques and, as a result, very high levels of capital investment.
Canon's primary competitors in the market for steppers and aligners are Nikon Corporation and
ASML Holding N.V., ("ASML"). Nikon Corporation has a reputation for its excellent technology,
especially optical lenses, and Intel Corporation, the world's leading semiconductor manufacturer,
is one of their major customers. ASML has in recent years improved its competitive position by
taking advantage of government subsidies and by focusing on the rapidly growing foundry
manufacturer industry. In fiscal 2002, ASML further increased its competitive position by acquiring
SVG Lithography Systems Inc. As a result of the acquisition, ASML is now one of the largest
semiconductor manufacturing equipment companies in Europe.
Because of the substantial capital expenditures required to install and integrate equipment
into a semiconductor production line, semiconductor manufacturers tend to purchase their stepper
and aligner production equipment from the vendor that originally supplied the chip fabrication
equipment. Canon competes principally on its ability to meet and exceed product specifications,
including resolution and throughput, quality, reliability and system maintenance cost. Because of
the very rapid pace of technological innovation in the semiconductor industry, Canon believes
that its ability to provide new products on a timely basis is also a key competitive consideration
for customers seeking to integrate stepper and aligner production systems into the planning and
design of their new facilities.
Patents and licenses
Canon holds a large number of patents (including utility model rights), design rights and
trademarks in Japan and abroad to protect its technology products that arise from its research and
development and utilizes these intellectual property rights as important strategic management
tools. For instance, Canon has been utilizing its intellectual property rights, such as patents, to
expand its product lines and business operations and to form alliances and exchange technologies
with other companies.
According to the United States patent annual list, which IFI CLAIMS® Patent Services have
released, Canon has been consistently ranked as second or third in recent years in terms of the
number of patents issued in the United States, as Canon maintained reputation as a famous
technology-oriented company.
Canon has granted licenses with respect to its patents to various Japanese and foreign
companies, particularly in areas such as electrophotography, laser beam printers, multifunction
printers, facsimiles and cameras.
Some examples include:
Oki Electric Industry Co., Ltd.
(LED printers, multifunction printers and facsimiles)
Matsushita Electric Industrial Co., Ltd.
(electrophotography)
Ricoh Company, Ltd.
(electrophotography)
Sanyo Electric Co., Ltd.
(electronic still camera)
Samsung Electronics Co., Ltd.
(laser beam printers, multifunction printers and facsimiles)
Brother Industries, Ltd.
(electrophotography and facsimiles)
Kyocera Mita Corporation
(electrophotography)
Konica Minolta Holding Co.,Ltd.
(business machines)
Toshiba Corporation
(business machines)
Sharp Corporation
(electrophotography)
Canon has also been granted licenses with respect to patents held by other companies.
Some examples include:
Jerome H. Lemelson Patent Incentives, Inc.
(computer systems, image recording apparatus, and communication apparatus)
Energy Conversion Devices, Inc.
(solar battery)
Honeywell Inc.
(camera and video products)
Gilbert P. Hyatt U.S. Philips Corporation
(microcomputer)
Nano-Proprietary Inc.
(FED technology)
St. Clair Intellectual Property Consultants, Inc.
(Selection of digital camera's image format)
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Canon has also entered into cross-licensing agreements with other major industry participants.
Some examples include:
International Business Machines Corporation
(information handling systems)
Hewlett-Packard Company
(bubble jet printers)
Xerox Corporation
(business machines)
Matsushita Electric Industrial Co., Ltd.
(video tape recorders and video cameras)
Eastman Kodak Co.
(electrophotography and image processing technology)
Ricoh Company, Ltd.
(electrophotography products, facsimiles and word processors)
Canon has placed high priority on the management of its intellectual property as part of its
management strategies to enhance its global business operations. Some products which are material
to Canon's operating results, incorporate patented technology which is critical to the continued
success of these products. Typically, these products incorporate technology reflected in dozens of
different patents. Canon does not believe that its business, as a whole, is dependent on, or that
its profitability would be materially affected by the revocation, termination, expiration or
infringement upon, any particular patent, copyright, license or intellectual property rights or
group thereof.
Environmental regulations
Canon is subject to a wide variety of laws and regulations as well as industry standards
relating to energy and resource conservation, recycling, global warming, pollution prevention,
pollution remediation, and environmental health and safety. Some of the environmental laws which
affect Canon's businesses are summarized below.
1.
European Union Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment ("the RoHS Directive"), and Directive on Waste Electrical and
Electronic Equipment ("theWEEE Directive").
These directives were published in the European Union's Official Journal on February 13, 2003.
Member states were required to bring into force the laws necessary to comply with these directives
by August 13, 2004. Beginning July 1, 2006, companies must ensure that their electrical and
electronic equipment sold in the European Union does not contain lead, cadmium, hexavalent
chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers if placed on the
market after that date. Pursuant to the RoHS Directive, Canon adapted its products so that they do
not contain the prohibited hazardous substances.
The WEEE Directive requires that after August 13, 2005, companies that sell electrical and
electronic equipment bearing their trade names in the European Union must arrange and pay for the
collection, treatment, recycling, recovery and disposal of their equipment and achieve designated
recycling rates by December 31, 2006. Pursuant to the WEEE Directive, Canon is joining a collective
compliance scheme for WEEE Directive in each member state, and will achieve the recycling ratio of
waste electrical and electronic equipment through these schemes by the target date.
2.
Soil Pollution Prevention Law of Japan
The Soil Pollution Prevention Law of Japan , administered by the Japanese Ministry of the
Environment, went into effect in February 2003. The law requires an owner of land to have the soil
investigated by a designated organization for the purpose of measuring the level of soil pollution
when the land is to be transferred or to be used for another purpose. The results of such
investigation are reported to the prefectural governor. If the soil pollution is not within
standards specified in the law, the governor will designate the land as "a designated area",
publicly announce such designation and make available upon request the investigation report. The
substances designated in the law consist of 25 chemical groups, including substances such as lead,
arsenic, and trichloro ethylene. If there is a possibility that the soil pollution of the
designated area may affect human health, the governor will issue an order to the landowner to take
remedial actions.
In response to the law, Canon has commenced a detailed survey and measurement of soil and
groundwater to determine the existence of pollution at all of Canon Group's operational sites in
Japan. Additional costs may arise as remedial measures become necessary. These factors may
adversely affect Canon's results of operations and financial conditions.
See "Risk Factors—Risks Related to Environmental Issues —Environmental clean-up and remediation
costs relating to Canon's properties and associated litigation could decrease Canon's net cash
flow, adversely affect its results of operations and impair its financial condition."
3.
Law for Promotion of Effective Utilization of Resources of Japan
The Law for Promotion of Effective Utilization of Resources of Japan, administered by the Japanese
Ministry of Economy, Trade and Industry, was enacted in April 2001. This Law requires manufacturers
of "specified reuse-promoted products", including copiers, to promote the use of recyclable
resources and recovered products (designing and manufacturing products that can be easily reused or
recycled). The coverage and requirements of the law may be expanded in the future, and may have an
adverse affect on its results of operations.
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Table of Contents
4.
Law on Promoting Green Purchasing of Japan
The Law on Promoting Green Purchasing of Japan, administered by the Japanese Ministry of the
Environment, took effect in April 2001. The law encourages both national and local governments to
procure products with low environmental burdens. Businesses are required to provide information
that is necessary to determine the environmental impact of products that they manufacture.
In response to the law, Canon now promotes :
•
manufacture of products that consume less electricity to prevent global warming and to conserve energy,
•
use of recycled parts and recycled materials,
•
reduction of the types of raw materials used in order to conserve resources, and
•
acceleration of the date by which the requirements of the law are implemented to promote the elimination of hazardous substances.
The law also requires Canon to collect its used products and recycle them, establish alternative
technologies for hazardous substances used in products and standardize the substances used in its
products. These measures will entail additional costs and may adversely affect its results of
operations and financial conditions.
5.    European Union Directive on Batteries and Accumulators and Waste Batteries and Accumulators
On September 26, 2006, a new directive on batteries and accumulators and waste batteries and
accumulators was published in the EU Official Journal to replace a similar existing directive. EU member
states must implement the directive by September 26, 2008, and manufacturers and sellers must
comply with these laws based on the new directive. Whereas the existing directive applies only to
batteries with a certain mercury, cadmium and lead content, the new directive applies to all
batteries and accumulators placed on the European Community market. When enacted, the new
directive will require specified labels on all batteries (The deadline differs from country to
country). In addition, it establishes specific targets for collection, treatment and recycling of
batteries and accumulators. Canon expects that compliance with the new directive will increase its
financial costs such as recycling fees and guarantees of products placed on the market.
6.    Administrative Measures on the Control of Pollution Caused by Electronic Information Products
of China
Modeled on the European Union RoHS Directive described above, the Chinese Ministry of Information
Industry published Administrative Measures on the Control of Pollution Caused by Electronic
Information Products on February 28, 2006. These measures regulate the content of electronic
information products. Step 1 was implemented for the products manufactured on and after March
1, 2007. Almost all the Canon products will be covered by this regulation. The regulation targets
electronic information products however, it also covers medical equipments, semi-conductor
manufacturing equipments and consumables such as cartridges, as well as component, parts and
materials of such products, which are not covered by EU RoHS Directive.
To comply with Step 1 requirements, a specified China specific mark shall be put on all the covered
products, and their use of the six substances same as those regulated by the EU RoHS must be shown
on product manuals. In addition, product's environmental protection use period (EPUP) must be
described on its recycling mark with the production date, and packaging materials shall be shown on
the boxes, etc. that pack the covered products.
As Step 2 requirements, the content of six substances in specific electronic information products
(those specified in the "list for emphasized management") would be restricted by the similar
limitation of the EU RoHS Directive, and a China-specific compulsory products certification system
will be introduced for such products. However, the publication of the standards to implement these
measures has been delayed, and the "emphatic management list" has not been published.
These requirements will increase Canon's costs and may have an adverse affect on its results of
operations and financial conditions.
7.    U.S. States' Legislations concerning Waste Electric and Electronic Products and RoHS-like
Regulations
The electric and electronic equipment recycling laws have been enacted in some states such as
California or Washington, and more draft recycling laws are now being discussed in about 20 states.
Most states' laws cover only displays or TVs, so the impact on Canon has not been significant to
date. However, there are some state laws, like the law of Massachusetts, which require
manufacturers to bear the costs of collection and recycling of printers and fax, and some other
products made by Canon. Canon expects that compliance with the state requirements might increase
its costs such as recycling fees and guarantees of products sold there.
Some drafts state laws are being considered in California and other states., which would restrict a
certain hazardous substances in the electric and electronic equipments in a manner similar to the
EU RoHS Directive. If such requirements are enacted, they might increase Canon's costs .
8.    The European Framework for the management of chemical substances, or REACH Regulations
On Dec. 18, 2006, the European Union has approved the draft REACH Regulations which would establish
a framework for the management scheme for all the commercial chemical substances. After publication
in the Official Journal, it will be implemented on June 1, 2007. This framework, if adopted, would
apply to almost all the chemicals (that is, products in gaseous, liquid, paste or powdery form) and
the "articles" (products in solid state) manufactured in or imported into the European Union. All
the chemicals manufactured/ imported over specific thresholds shall be registered in the European
Union with information about its usage or chemical characters, etc., and authorization shall be
required when using certain substances. Moreover, the use of substances regarded as "dangerous"
might be prohibited. The suppliers of the "articles" will have to report to the EU when certain
substances are contained in them, and to provide information about such substances to consumers
upon its requests. When such requirements are enacted, they might increase Canon's costs to comply
with them.
9.    The European Framework for the Setting of Requirements for Energy-Using Products (so-called
"EuP directive")
The European Union published a directive that establishes a framework for the setting of
environmental requirements for energy-using products, the "EuP directive", on July 22, 2005.
Member states are required to bring into force the laws necessary to comply with the directive
concerning eco-design by August 11, 2007. This framework directive applies to all products that use
energy, and under this directive, implementing measures for specific product categories must be
adopted by the European Commission and the member states. Until these implementing measures are
clarified, it is difficult to predict the effects of the EuP directive. However, one of the first
implement measures is expected to require that covered products should not use more than 1 watt (2
watts for a product with a facsimile function) in their standby mode.
18
Table of Contents
10.    Kyoto Protocol to the United Nations Framework Convention on Climate Change
The Kyoto Protocol to the United Nations Framework Convention on Climate Change entered into
force on February 16, 2005. In order for the Japanese Government to achieve a goal set in the Kyoto
Protocol, a Kyoto Protocol Target Achievement Plan was issued and decided at a Cabinet Meeting in
April, 2005, and the related revisions of the Energy Conservation Law as well as the Global Warming
Prevention Promotion Law came into force in April, 2006. Since CO
2
emissions in Japan
have been increasing each year, the Japanese Government is required to include stricter measures
for significant CO
2
emission reductions in a revised Kyoto Protocol Target Achievement
Plan which will be reviewed and decided sometime early in 2008.
Canon will try to achieve its voluntary action plan that corresponds to voluntary action
plans of the Japan Business Federation (Nihon Keidanren) and the Electric & Electronic Industries Four
Associations to which Canon belongs, and to comply with the revised regulations. Canon will
carefully monitor the Japanese Government's actions as well as activities of industrial sectors and
consider a contingency plan, if necessary, such as the Kyoto Mechanism.
From product planning stage, Canon places considerable emphasis on meeting requirements of green
purchasing laws, international ENERGY STAR Program, and other standards. Canon is also actively
promoting to acquire certification for all major eco-labels.
Canon is promoting to grasp and establish management of the environmental impact of chemical
substances in products , and to limit use of products in line with the EU's RoHS Directive, which
requires makers to eliminate or replace six hazardous substances from a very early stage.
Along with the global movement to establish a green purchasing network, Canon has built an
assurance system for chemical substances contained in its products under which Canon will only buy
from those suppliers that comply with the Green Procurement Standards.
Canon is establishing the infrastructure for recycling and reduced waste generation in line with
the concepts of Extended Producer Responsibility, which is achieving greater acceptance worldwide.
C. Organizational structure
Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent
company. As of December 31, 2006, Canon had 219 consolidated subsidiaries and 14 affiliated
companies accounted for by the equity method.
The following table lists the significant subsidiaries owned by Canon Inc., all of which are
consolidated, as of December 31, 2006.
Proportion of
Proportion of
ownership interest
voting power
Name of company
Head office location
owned
held
Canon Marketing Japan Inc.
Tokyo, Japan
50.3
%
50.7
%
Canon U.S.A., Inc.
New York, U.S.A.
100.0
%
100.0
%
Canon Europa N.V.
Amstelveen, The Netherlands
100.0
%
100.0
%
19
Table of Contents
D. Property, plants and equipment
Canon's manufacturing is conducted primarily at 23 plants in Japan and 17 plants in other
countries. Canon owns all of the buildings and the land on which its plants are located, with the
exception of certain leases of land and floor space of certain of its subsidiaries. The names and
locations of Canon's plants and other facilities, their approximate floor space and the principal activities and products
manufactured therein as at December 31, 2006 are as follows:
Floor space
(including
Name and location
leased space)
Principal activities and products manufactured
Domestic
(Thousands of
square feet)
Headquarters, Tokyo
2,468
R&D, corporate administration, other functions
Canon
Global Management Institute, Tokyo
100
HRD Training & administration
Mizonokuchi HRD center, Kanagawa
78
HRD Training & administration
Kosugi Office, Kanagawa
398
Development of software for office imaging products
Fuji-Susono Research Park, Shizuoka
1,039
R&D in electrophotographic technologies
Hiratsuka
Development Center, Kanagawa
348
Development of displays, electronic devices
Ayase Office, Kanagawa
394
R&D and manufacturing of semiconductor devices
Optics R&D Center, Tochigi
473
R&D in optical technologies, development and sales of
broadcasting equipment
Tamagawa Office, Kanagawa
95
Quality Engineering Division
Yako Development Center, Kanagawa
902
Development of inkjet printers, Ink Jet chemical products
Utsunomiya Plant, Tochigi
857
Manufacturing of EF lenses, video camcorder lenses,
broadcasting lenses, lenses for business machines, other
specialized optical lenses
Toride Plant, Ibaraki
2,914
R&D in electrophotographic technologies, mass-production
trials and support; manufacturing of office imaging
products,chemical products
Ami Plant, Ibaraki
1,252
semiconductor production equipment; design and
manufacturing of factory automation equipment and metal
molds
Utsunomiya
Optical Products Plant, Tochigi
1,420
R&D, manufacturing, sales and servicing of semiconductor
equipment; sales of broadcasting equipment; R&D and
sales of medical equipment
Canon
Electronics Inc.,Saitama and Gunma
1,153
Development, production and sales of camera components,
magnetic heads, sensors, micrographics, document
scanners, LBPs, laser scanner units, portable data
terminals, semiconductor equipment
Canon Finetech Inc, , Ibaraki, Tokyo,
Yamanashi, and Fukui
763
Production and sales of business machines, business
machine peripherals, chemical products, business-use
printers
Canon Precision Inc.,Aomori
1,089
Development, production and sales of motors; production
of toner cartridges, sensors
Optron Inc., Ibaraki
143
Polishing of optical crystals (for steppers, cameras,
telescopes), vapor deposition materials
20
Table of Contents
Floor space
(including
Name and location
leased space)
Principal activities and products manufactured
Domestic
(Thousands of
square feet)
Canon Chemicals Inc.,Ibaraki
1,783
Toner cartridges and advanced-function parts, plastic precision-molded parts, metal molds
Canon Components Inc.,Saitama
602
Image sensor units, printed circuit boards, Ink Jet print heads/ink tanks
Oita Canon Inc., Oita
1,344
SLR cameras, digital SLR and compact cameras, digital video camcorders, visual communication cameras
Nagahama Canon Inc., Shiga
1,100
LBPs, toner cartridges, a-si drums
Oita Canon Materials Inc., Oita
1,200
Chemical products for copying machines and printers
Ueno Canon Materials Inc., Mie
632
Chemical products for copying machines and printers
Fukushima Canon Inc., Fukushima
971
Production of inkjet printers, Ink Jet print heads/ink tanks; analysis of software and fonts
Canon Semiconductor Equipment Inc., Ibaraki
495
Development and production of semiconductor production-related equipment; production of small-sized copying machines and copying units
Canon Ecology
Industry Inc., Ibaraki and Saitama
369
Recycling of toner cartridges; business machine repair
Nisca Corporation, Yamanashi
465
Development, design, production and sales of business machines, information products, optical equipment
Miyazaki Daishin Canon Co., Ltd., Miyazaki
130
Digital video camcorders, digital cameras, electronics packaging
Canon ANELVA Corporation
490
Electron devices, panel devices, electronic components, for R&D
Canon Machinery Inc.
293
Semiconductor, electronic components, energy relation
SED Inc.
739
Flat-screen SED(Surface-conduction Electron-emitter Display)panels
21
Table of Contents
Floor space
(including
Name and location
leased space)
Principal activities and products manufactured
Overseas
(Thousands of
square feet)
[Europe]
Canon Giessen GmbH, Giessen, Germany
362
Production and remanufacturing of copying machines; refilling of toner cartridges; remanufacturing of semiconductor production equipment
Canon Bretagne S.A.S., Liffre, France
506
Production of low-speed copying machines and toner cartridges; recycling of toner cartridges
[America]
Canon Virginia, Inc.,Virginia, U.S.
828
Production of toner cartridges, toner for copying machines
[Asia]
Canon Inc., Taiwan, Taiwan
415
Production of SLR and compact cameras, EFS and other lenses, precision-metal molds
Canon Opto (Malaysia) Sdn. Bhd., Selangor,
Malaysia
561
Production of Digital cameras, EF lenses, optical lens parts
Canon Dalian
Business Machines, Inc. , Dalian
China
1,250
Production and recycling of toner cartridges; production of LBPs, MFDs
Canon Zhuhai, Inc., Zhuhai, China
836
Production of Compact cameras, digital cameras, LBPs, MFDs, image scanners, contact image sensors
Tianjin Canon Inc., Tianjin, China
148
Production and sales of copying machines
Canon
Hi-Tech Thailand Ltd., Ayutthaya,
Thailand
1,301
Ink Jet printers, personal-use copying machines, facsimile machines, MFDs
Canon
Ayutthaya Thailand Ltd.,
Thailand
182
Ink Jet printers, personal-use copying machines, facsimile machines, MFDs
Canon
Engineering Thailand Ltd., Ayutthaya,
Thailand
130
Metal molds, plastic injection mold parts
Canon
Zhougshan Business Machines Co.,
Ltd., Zhougshan, China
729
Production of LBPs
Canon
Vietnam Co., Ltd., Hanoi, Vietnam
1,772
Production of Ink Jet printers, LBPs
Canon
(Suzhou) Inc., Suzhou, China
805
Production of Color and monochrome digital copying machines
Canon
Finetech(Suzhou) Business Machines
Inc.
, Suzhou, China
351
Production of digital printers, peripherals, service parts
Thai Nisca Co.Ltd., Ayutthaya, Thailand
190
Production and sales of optical equipment and OA equipment
Canon
Finetech Industries Development Co.,
Ltd., Shenzhen, China
216
Production and sales of copying machines, semi-finished products, parts
Canon considers its manufacturing and other facilities to be well maintained and
believes that its
plant capacity is adequate for its current requirements.
22
Table of Contents
Item 5. Operating and Financial Review and Prospects
A. Operating Results
The following discussion and analysis provides information that management believes to be
relevant to understanding Canon's consolidated financial condition and results of operations.
Overview
Canon is one of the world's leading manufacturers of copying machines, laser beam printers,
inkjet printers, cameras, steppers and aligners. Canon earns revenues primarily from the
manufacture and sale of these products domestically and internationally. Canon's basic management
policy is to contribute to the prosperity and well-being of the world while endeavoring to become a
truly excellent global corporate group targeting continued growth and development.
Canon divides its businesses into three product groups: business machines, cameras, and
optical and other products. The business machines product group has three sub-groups: office
imaging products, computer peripherals and business information products.
Economic environment
Looking back at the global economy in 2006, in the United States, despite a decrease in
housing investment, the economy continued to display growth with healthy employment conditions and
continued growth in consumer spending, along with an increase in corporate capital investment. In
Europe, while exports appeared somewhat sluggish due to the appreciation of the euro, the region
indicated a trend toward moderate recovery as domestic demand expanded in major European countries,
boosted by such factors as increased consumer spending owing to improvements in the employment
environment. Within Asia, the Chinese economy maintained a high growth rate while other economies
in the region also enjoyed generally favorable conditions. In Japan, although consumer spending has
yet to fully regain its strength, the economy maintained a trend toward recovery amid increased
capital spending fueled by strong corporate performances.
Market environment
With respect to the markets in which the Canon Group operates, within the camera segment demand for
digital single-lens reflex (SLR) cameras and compact digital cameras continued to realize healthy
growth during the term. Within the office imaging product market, demand for network digital
multifunction devices (MFDs) remained solid as the office market moved toward color and
multifunctionality. As for computer peripherals, including printers, although demand grew for color
as well as monochrome laser beam printers, and shifted rapidly within the inkjet printer market
from single-function to multifunction models, the segment suffered amid severe price competition.
In the optical equipment segment, although demand for projection aligners, which are used to
produce liquid crystal display (LCD) panels, declined due to restrained investment by LCD
manufacturers, demand for steppers, used in the production of semiconductors, was strong, supported
by increased investment by manufacturers. The average value of the yen for the year was ¥116.43 to
the U.S. dollar and ¥146.51 to the euro, representing year-on-year decreases of about 5% against
the U.S. dollar, and 7% against the euro.
Summary of operations
In 2006, the first year of a new five-year management plan—Phase III of Canon's Excellent
Global Corporation Plan—Canon achieved record highs in both consolidated net sales and net income,
and a seventh consecutive year of sales and profit growth, mainly due to a solid rise in sales of
digital cameras and color network digital MFDs, and laser beam printers, along with the positive
effects of the depreciation of the yen.In fiscal 2006, Canon achieved 10.7% growth in net sales,
to ¥4,156,759 million, and an 18.5% increase in net income, to ¥455,325 million. Canon's gross
profit increased by 13.3%, to ¥2,060,480 million.
Key performance indicators
Following are the key performance indicators (KPIs) that Canon uses in managing its business.
The changes from year to year in these KPIs are set forth in the table shown below.
KEY PERFORMANCE INDICATORS
2006
2005
2004
2003
2002
Net sales (Millions of yen)
¥
4,156,759
¥
3,754,191
¥
3,467,853
¥
3,198,072
¥
2,940,128
Gross profit to net sales ratio
49.6
%
48.5
%
49.4
%
50.3
%
47.6
%
R&D expense to net sales ratio
7.4
%
7.6
%
7.9
%
8.1
%
7.9
%
Operating profit to net sales ratio
17.0
%
15.5
%
15.7
%
14.2
%
11.8
%
Inventory turnover within days
45 days
47 days
49 days
49 days
51 days
Debt to total assets ratio
0.7
%
0.8
%
1.1
%
3.1
%
5.0
%
Stockholders' equity to total assets ratio
66.0
%
64.4
%
61.6
%
58.6
%
54.1
%
Note: Inventory turnover within days; Inventory divided by net sales for the previous six months,
multiplied by 182.5.
23
Table of Contents
-Revenues-
As Canon seeks to become a truly excellent global company, one indicator upon which Canon's
management places strong emphasis is revenue. Following are some of the KPIs relating to revenue
that management considers to be important.
Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to
a much lesser extent, provision of services relating to its products. Sales vary based on such
factors as product demand, the number and size of transactions within the reporting period, product
reputation for new products, and changes in sales prices. Other factors involved are market share
and market environment. In addition, management considers an evaluation of net sales by product
group important to assessing Canon's performance in sales in various product groups in light of
market trends.
Gross profit ratio (ratio of gross profit to net sales) is another KPIs for Canon. Through its
reforms in product development, Canon has been striving to shorten product development lead times
in order to launch new, competitively priced products at a faster pace. In addition, Canon has
achieved cost reductions through efficiency enhancements in production. Canon believes that these
achievements have contributed to improving Canon's gross profit ratio, and Canon intends to
continue to pursue further shortening of product development lead times and reductions in
production costs.
Operating profit ratio (ratio of operating profit to net sales) and research and development
("R&D") expense to net sales ratio are considered by Canon to be KPIs. Canon is focusing on two
areas for improvement. On one hand, Canon strives to control and reduce its selling, general and
administrative expenses. On the other hand, Canon's R&D policy is designed to maintain a high level
of spending in core technology in order to sustain Canon's leading position in its current fields
of business, and to explore possibilities in other markets. Canon believes such investments will be
the basis for future success in its business and operations.
-Cash Flow Management-
Canon also places significant emphasis on cash flow management. The following are the KPI
relating to cash flow management that management believes to be important.
Inventory turnover within days is a KPI because it is a measure of supply-chain management
efficiency. Inventories have inherent risks of becoming obsolete, deteriorating or otherwise
decreasing in value significantly, which may adversely affect Canon's operating results. To
mitigate these risks, management believes that it is important to continue reducing inventories and
shortening production lead times in order to achieve early recovery of related product expenses by
strengthening supply-chain management.
Canon's management seeks to meet its liquidity and capital requirements primarily with cash
flow from operations. Management also seeks debt-free operations. For a manufacturing company such
as Canon, the process for realizing profit on any endeavor can be lengthy, involving as it does
R&D, manufacturing, and sales activities. Management, therefore, believes that it is important to
have sufficient financial strength so that it does not have to rely on external funding. Canon has
continued to reduce its reliance on external funding for capital investments in favor of generating
the necessary funds from its own operations.
Stockholders' equity to total assets ratio (ratio of total stockholder's equity to total assets)
is another KPI for Canon. Canon believes the stockholders' equity to total asset ratio measures its
long-term viability. Canon believes that a high or increasing stockholders' equity ratio usually
indicates that Canon has a good, or improving ability to fund debt obligations and other unexpected
expenses, which means in the long-term that Canon is better able to maintain a high level of stable
investments for its future operations and development. As Canon puts a strong emphasis on its
research and development activities, management believes that it is important to maintain a stable
financial base and, accordingly, a high level of stockholders' equity to total assets ratio.
Critical accounting policies and estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles and based on the selection and application of significant accounting policies
which require management to make significant estimates and assumptions. Canon believes that the
following are the more critical judgment areas in the application of its accounting policies that
currently affect its financial condition and results of operations.
Revenue recognition
Canon generates revenue principally through the sale of consumer products, equipment, supplies, and
related services under separate contractual arrangements. Canon recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred and title and risk of loss have been
transferred to the customer, the sales price is fixed or determinable, and collectibility is
probable.
For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative fair
value if such element meets the criteria for treatment as a separate unit of accounting as
prescribed in the Emerging Issues Task Force Issue 00-21 ("EITF 00-21"), "Revenue Arrangements with
Multiple Deliverables." Otherwise, revenue is deferred until the undelivered elements are
fulfilled as a single unit of accounting.
Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the customer.
Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is installed
at the customer site and the specific criteria of the equipment functionality are successfully
tested and demonstrated by Canon. Service revenue is derived primarily from maintenance contracts
on equipment sold to customers and is recognized over the term of the contract.
Canon offers service maintenance contracts for most office imaging products for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue from
these service maintenance contracts is recognized as services are provided.
Revenue from the sale of equipment under sales-type leases is recognized at the inception of
the lease. Income on sales-type leases and direct-financing leases is recognized over the life of
each respective lease using the interest method. Leases not qualifying as sales-type leases or
direct-financing leases are accounted for as operating leases and related revenue is recognized
over the lease term.
Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated reductions in
sales are based upon historical trends and other known factors at the time of sale. In addition,
Canon provides price protection to certain resellers of its products, and records reductions to
sales for the estimated impact of price protection obligations when announced.
Estimated product warranty costs are recorded at the time revenue is recognized and is
included in selling, general and administrative expenses. Estimates for accrued product warranty
costs are based on historical experience, and are affected by ongoing product failure rates,
specific product class failures outside of the baseline experience, material usage and service
delivery costs incurred in correcting a product failure.
24
Table of Contents
Allowance for doubtful receivables
Allowance for doubtful receivables is determined using a combination of factors to ensure that
Canon's trade and financing receivables are not overstated due to uncollectibility. Canon maintains
an allowance for doubtful receivables for all customers based on a variety of factors, including
the length of time receivables are past due, trends in overall weighted average risk rating of the
total portfolio, macroeconomic conditions, significant one-time events and historical experience.
Also, Canon records specific reserves for individual accounts when Canon becomes aware of a
customer's inability to meet its financial obligations to Canon, such as in the case of bankruptcy
filings or deterioration in the customer's operating results or financial position. If
circumstances related to customers change, estimates of the recoverability of receivables would be
further adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally by the
average method for domestic inventories and the first-in, first-out method for overseas
inventories. Market value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely
reviews its inventories for their salability and for indications of obsolescence to determine if
inventories should be written-down to market value. Judgments and estimates must be made and used
in connection with establishing such allowances in any accounting period. In estimating the market
value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage
or changes in market demand for its inventories.
Environmental liabilities
Canon is subject to liability for the investigation and clean-up of environmental contamination at
each of the properties that Canon owns or operates, as well as at certain properties Canon formerly
owned or operated. Canon employs extensive internal environmental protection programs that focus on
preventive measures. Canon conducts environmental assessments for a number of its locations and
operating facilities. If Canon was to be held responsible for damages in any future litigation or
proceedings, such costs may not be covered by insurance and may be material. The liability for
environmental remediation and other environmental costs is accrued when it is considered probable
and costs can be reasonably estimated.
Valuation of deferred tax assets
Canon currently has significant deferred tax assets, which are subject to periodic recoverability
assessments. Realization of Canon's deferred tax assets is principally dependent upon its
achievement of projected future taxable income. Canon's judgments regarding future profitability
may change due to future market conditions, its ability to continue to successfully execute its
operating restructuring activities and other factors. Any changes in any of these factors may
require possible recognition of significant valuation allowances to these deferred tax asset
balances. When Canon determines that certain deferred tax assets may not be recoverable, the
amounts which may not be realized are charged to income tax expense and will adversely affect net
income.
Employee retirement and severance benefit plans
Canon has significant employee retirement and severance benefit obligations which are recognized
based on actuarial valuations. Inherent in these valuations are key assumptions, including discount
rates and expected return on plan assets. Management must consider current market conditions,
including changes in interest rates, in selecting these assumptions. Other assumptions include
assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in
these assumptions inherent in the valuation are reasonably likely to occur from period to period.
These changes in assumptions may lead to changes in related employee retirement and severance
benefit costs in the future.
Actual results that differ from the assumptions are accumulated and amortized over future
periods and, therefore, generally affect future pension expenses. While management believes that
the assumptions used are appropriate, the differences may affect employee retirement and severance
benefit costs in the future.
In preparing its financial statements for fiscal 2006, Canon estimated a discount rate of 2.7%
and an expected long-term rate of return on plan assets of 4.8%. In estimating the discount rate,
Canon uses available information about rates of return on high-quality fixed-income governmental
and corporate bonds currently available and expected to be available during the period to the
maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan
assets based on management's expectations of the long-term return of the various plan asset
categories in which it invests. Management develops expectations with respect to each plan asset
category based on actual historical returns and its current expectations for future returns.
Decreases in discount rates lead to increases in actuarial pension benefit obligations which,
in turn, could lead to an increase in service cost and amortization cost through amortization of
actuarial gain or loss, a decrease in interest cost, and vice versa. A decrease of 50 basis points
in the discount rate increases the projected benefit obligation by approximately 11%. The net
effect of changes in the discount rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent periods, as permitted by the Statement of
Financial Accounting Standards ("SFAS") No. 87, "Employers' Accounting for Pensions."
Decrease in expected return on plan assets may increase net periodic benefit cost by
decreasing expected return amounts, while differences between expected value and actual fair value
of those assets could affect pension expense in the following years, and vice versa. For fiscal
2007, if a change of 50 basis points in the expected long-term rate of return on plan assets is to
occur, that may cause a change of approximately ¥3,040 million in net periodic benefit cost. Canon
multiplies management's expected long-term rate of return on plan assets by the value of its plan
assets, to arrive at the expected return on plan assets that is included in pension income
(expense). Canon defers recognition of the difference between this expected return on plan assets
and the actual return on plan assets. The net deferral affects the value of plan assets in future
fiscal years and, ultimately, future pension income (expense).
On December 31, 2006, Canon adopted the recognition and disclosure provisions of
SFAS 158.
SFAS 158 required Canon to recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension plans in the December 31, 2006
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax.
Effective January 1, 2007, Canon and certain of its domestic subsidiaries have amended their
defined benefit pension plans, and the projected benefit obligation has decreased by ¥101,620
million. This decrease will be amortized as a reduction of net periodic benefit cost over the
employees' average remaining service period. The amount will be approximately ¥5,834 million per
year. In conjunction therewith, Canon and certain of its domestic subsidiaries have implemented a
defined contribution pension plan for certain future pension benefits
attributable to employees'
future services.
25
Table of Contents
Consolidated result of operations
Fiscal 2006 compared with fiscal 2005
Summarized results of operations for fiscal 2006 and fiscal 2005 are as follows:
2006
Change
2005
(Millions of yen, except per share
amounts and percentage data)
Net sales
¥
4,156,759
+10.7
%
¥
3,754,191
Operating profit
707,033
+21.3
583,043
Income before income taxes
and minority interests
719,143
+17.5
612,004
Net income
455,325
+18.5
384,096
Net income per share:
Basic
341.95
+18.5
288.63
Diluted
341.84
+18.5
288.36
Note: See note of Item 3A "Selected Financial Data".
Sales
Canon's consolidated net sales in fiscal 2006 totaled ¥ 4,156,759 million. This represents a 10.7%
increase from the previous fiscal year, reflecting solid rises in sales of digital cameras and
color network digital MFDs, and laser beam printers, along with the positive effects of the
depreciation of the yen.
Overseas operations are significant to Canon's operating results and generated approximately
75% of total net sales in fiscal 2006. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations.
The average value of the yen in fiscal 2006 was ¥ 116.43 to the U.S. dollar, and ¥ 146.51 to the
euro, representing depreciation of about 5% against the U.S. dollar, and 7% against the euro,
compared with the previous year. The effects of foreign exchange rate fluctuations favorably
impacted net sales by approximately ¥ 138,700 million. This
favorable impact was comprised of approximately
¥ 67,800 million for U.S. dollar denominated
sales, ¥ 65,900 million for euro-denominated sales and
¥ 5,000 million for other foreign currency-denominated
sales.
Cost of sales
Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the
manufacture of its products. A portion of the raw materials used by Canon is imported or includes
imported materials. Such raw materials are subject to fluctuations in world market prices and
exchange rates that may affect Canon's cost of sales. Other components of cost of sales include
depreciation expenses from plants, maintenance expenses, light and fuel expenses and rent expenses.
The ratio of cost of sales to net sales for fiscal 2006, 2005 and 2004 was 50.4%, 51.5% and 50.6%,
respectively.
Gross profit
Canon's gross profit in fiscal 2006 increased by 13.3% to ¥ 2,060,480 million from fiscal 2005. The
gross profit ratio improved 1.1 points year on year to reach 49.6%. The improved gross profit ratio
was mainly the result of such factors as the introduction of automated production lines, and the
in-house manufacturing of key components and key devices, in addition to cost-reduction efforts
realized through ongoing production-reform and procurement-reform activities, which absorbed the
negative effects of severe price competition in the consumer product market.
Operating expenses
The major components of operating expenses are payroll, R&D, advertising expenses and other
marketing expenses. Although R&D expenditures grew 7.6% in fiscal 2006 from the previous year to
¥ 308,307 million, the operating expenses to net sales ratio improved 0.4 points. This was achieved
by limiting growth in selling, general and administrative expenses, with the exception of a
temporary increase in expenses related to the relocation of operation bases, below the growth rate
for net sales. In general, Canon maintains a high level of R&D expenditure to strengthen its R&D
capabilities. R&D expenditures grew in fiscal 2006 from the previous year, resulting from increased
R&D activities.
Operating profit
Operating profit in fiscal 2006 increased by 21.3% to ¥ 707,033 million from fiscal 2005. Operating
profit in fiscal 2006 was 17.0% of net sales, compared with 15.5% in fiscal 2005.
Other income (deductions)
Other income (deductions) declined ¥ 16,851 million, attributable to an increase of currency
exchange losses and a decrease in gains on sales of securities, although interest income grew in
line with the rise in the interest rate.
Income before income taxes and minority interests
Income before income taxes and minority interests in fiscal 2006 was ¥ 719,143 million, a 17.5%
increase from fiscal 2005, and constituted 17.3% of net sales.
26
Table of Contents
Income taxes
Provision for income taxes increased by ¥ 35,448 million from fiscal 2005, primarily as a result of
the increase in income before income taxes and minority interests. The effective tax rate during
fiscal 2006 declined by 0.3% compared with fiscal 2005.
Net income
As a result of factors offerings above, net income in fiscal 2006 increased by 18.5% to ¥ 455,325
million, which exceeds the growth rate of income before income taxes and minority interests. This
represents an 11.0% return on net sales.
Product information
Canon divides its businesses into three product groups: business machines, cameras and optical and
other products.
•
The business machines product group
includes office imaging products, computer
peripherals and business information products.
•
Office imaging products include office network digital MFDs, color
network digital MFDs, office copying machines, personal-use copying machines and
full-color copying machines.
•
Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.
•
Business information products include micrographic equipment, personal computers and
calculators.
•
The cameras product group
includes single lens reflex
("SLR") cameras, compact cameras, digital cameras and
digital video camcorders.
•
The optical and other products product group
includes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.
Sales by product
Canon's sales by product group are summarized as follows:
2006
Change
2005
(Millions of yen, except percentage data)
Business machines:
Office imaging products
¥
1,185,925
+2.8
%
¥
1,153,240
Computer peripherals
1,398,408
+12.3
1,244,906
Business information products
106,754
+2.4
104,255
Total business machines
2,691,087
+7.5
2,502,401
Cameras
1,041,865
+18.5
879,186
Optical and other products
423,807
+13.7
372,604
Total
¥
4,156,759
+10.7
%
¥
3,754,191
Sales of business machines, constituting 64.7% of consolidated net sales, increased 7.5%, to
¥ 2,691,087 million in fiscal 2006.
Sales of office imaging products increased 2.8% in fiscal 2006, to ¥ 1,185,925 million. In the
business machine segment, sales of color network digital MFDs, which are grouped in the office
imaging products sub-segment, recorded significant growth with the launch of such new models as the
mid to high-speed office-use iR C5180 series, the low-power-consumption iR C3380 series, and the
high-image-quality imagePRESS C1 for commercial printing. Among monochrome network digital MFDs,
while the sales increased in the Asian
market, sales of monochrome models declined in other markets as demand shifted toward color models. Color office imaging products accounted for 31% and 28% and monochrome office
imaging products accounted for 52% and 56% of office imaging products sales in fiscal 2006 and
2005, respectively. Sales of facsimiles and information system business accounted for 17% and 16%
of sales of office imaging products in both fiscal 2006 and 2005, respectively.
Sales of computer peripherals increased 12.3% in fiscal 2006 to ¥ 1,398,408 million. Laser beam
printers enjoyed a year-on-year increase in unit sales, with color models growing more than 50% and
monochrome machines, particularly low-end models, also recording healthy growth of over 10%. Sales
in value terms also rose significantly. As for inkjet printers, despite a decline in demand for
single-function models and severe price competition in the market, sales in value terms increased
along with unit sales. Sales performance was boosted by the introduction of 24 new models—13
single-function models and 11 multifunction models—including the high-speed user-friendly PIXMA
MP600 and overseas entry-level-model PIXMA MP160 all-in-ones, which contributed to a stronger
product lineup while also supporting favorable sales growth for consumables.
Sales of business information products increased 2.4%, to ¥ 106,754 million in fiscal 2006,
mainly due to the growth in the demand for document scanner.
27
Table of Contents
Sales of cameras continued to achieve significant sales growth of 18.5% in fiscal 2006, totaling
¥ 1,041,865 million. The continued strong demand for digital SLR cameras has fueled continued
growth with particularly strong sales for the advanced-amateur-model EOS 30D, launched in the first
half of 2006, and the EOS DIGITAL REBEL XTi, launched in the second half. This, in turn, led to
expanded sales of interchangeable lenses for SLR cameras. Sales of compact digital cameras also
continued to expand steadily with the introduction of 16 new models in 2006, including six stylish
ELPH-series models and 10 PowerShot-series models that cater to a diverse range of shooting styles.
As a result, unit sales of digital cameras grew by more than 20% compared with the previous year.
Digital cameras accounted for 75% and 72% and conventional film cameras accounted for 15% and 16%
of camera sales in fiscal 2006 and 2005, respectively. In the field of digital video camcorders,
the launch of consumer-market HDV models equipped with Canon HD CMOS sensors contributed to
expanded sales, filling out the company's digital camcorder lineup along with MiniDV and DVD
models. Video camcorders accounted for the remaining 10% and 12% of camera sales in fiscal 2006 and
2005, respectively. Sales of cameras constituted 25.1% of consolidated net sales in fiscal 2006.
Sales of optical and other products increased 13.7% in fiscal 2006, to ¥ 423,807 million. In the
optical and other products segment, while steppers, used in the production of semiconductors,
enjoyed steady demand due to a significant increase in investment by manufacturers, sales of
optical products decreased amid declining demand for aligners, used to produce LCD panels, due to
restrained investment by LCD manufacturers. As for the other products included in the segment, the
newly consolidated subsidiaries last year contributed to significant sales growth. Sales of optical
and other products constituted 10.2% of consolidated net sales in fiscal 2006.
Sales by region
A summary of net sales by region in fiscal 2006 and fiscal 2005 is provided below:
2006
Change
2005
(Millions of yen, except percentage data)
Japan
¥
932,290
+8.9
%
¥
856,205
Americas
1,283,646
+12.0
1,145,950
Europe
1,314,305
+11.3
1,181,258
Others
626,518
+9.8
570,778
Total
¥
4,156,759
+10.7
%
¥
3,754,191
Note: This summary of net sales by region of destination is determined by the location of the
customer.
A geographical analysis indicates that net sales in fiscal 2006 increased in every region.
In Japan, net sales increased by 8.9% in fiscal 2006 from fiscal 2005. The results were mainly
attributable to increased sales of digital cameras and steppers, used in the production of
semiconductors and the significant sales growth of the newly consolidated subsidiaries acquired
last year.
In the Americas, net sales increased by 6.6% on a local currency basis, mainly due to
increased sales of digital cameras and laser beam printers. Sales of digital cameras experienced
continued strong demand and benefited from the effect of newly-launched products such as the EOS
30D, advanced-amateur-model, and the EOS DIGITAL REBEL XTi. On a yen basis, after accounting for
the depreciation of the yen against the U.S. dollar, net sales in the Americas increased by 12.0%.
In Europe, net sales increased by 4.3% on a local currency basis mainly due to increased sales
of digital cameras and laser beam printers. On a yen basis, after accounting for the depreciation
of the yen against the euro, net sales in Europe grew 11.3% in fiscal 2006.
Sales in other areas increased by 9.8% on a yen basis in fiscal 2006, reflecting overall sales
growth, particularly in digital cameras.
Operating profit by product
Operating profit for business machines in fiscal 2006 increased ¥ 57,201 million to ¥ 599,229
million. The gross profit ratio improved compared to the previous year, due to cost reduction
efforts, and the sales-to-expense ratio declined, contributing to an increase in operating profit.
Operating profit for cameras increased ¥ 95,032 million to ¥ 268,738 million. The gross profit
ratio for the camera segment improved, due to such factors as increased sales of new products and
cost reduction efforts.
Operating profit for optical and other products in fiscal 2006 increased ¥ 2,655 million to
¥ 41,475 million. The gross profit ratio increased compared to the previous year, due to an increase
in sales of steppers.
28
Table of Contents
Fiscal 2005 compared with fiscal 2004
Summarized results of operations for fiscal 2005 and fiscal 2004 are as follows:
2005
Change
2004
(Millions of yen, except per share
amounts and percentage data)
Net sales
¥
3,754,191
+   8.3
%
¥
3,467,853
Operating profit
583,043
+   7.2
543,793
Income before income taxes and minority interests
612,004
+  10.8
552,116
Net income
384,096
+  11.9
343,344
Net income per share:
Basic
288.63
+  11.6
258.53
Diluted
288.36
+  11.8
257.85
Note: See note of Item 3A "Selected Financial Data".
Sales
Canon's consolidated net sales in fiscal 2005 totaled ¥ 3,754,191 million. This represents an
8.3% increase from the previous fiscal year, reflecting significant growth in sales of digital
cameras, color network digital MFDs and projection aligners.
Overseas operations are significant to Canon's operating results and generated approximately
74% of total net sales in fiscal 2005. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations.
The average value of the yen in fiscal 2005 was ¥ 110.58 to the U.S. dollar, and ¥ 137.04 to
the euro, representing a depreciation of 2% against both currencies, compared with the previous
year. The effects of foreign exchange rate fluctuations favorably impacted net sales by
approximately ¥ 66,400 million. Net sales denominated in foreign currency increased by approximately
¥ 41,500 million in U.S. dollars, increased by ¥ 16,300 million in euro, and increased by ¥ 8,600
million in other foreign currencies.
Cost of sales
Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the
manufacture of its products. A portion of the raw materials used by Canon is imported or includes
imported materials. Such raw materials are subject to fluctuations in world market prices and
exchange rates that may affect Canon's cost of sales. Other components of cost of sales include
depreciation expenses from plants, maintenance expenses, light and fuel expenses and rent expenses.
The ratio of cost of sales to net sales for fiscal 2005, 2004 and 2003 was 51.5%, 50.6% and 49.7%,
respectively.
Gross profit
Canon's gross profit in fiscal 2005 increased by 6.2% to ¥ 1,819,043 million from fiscal 2004.
Despite such negative factors as escalating prices of raw materials and a severe price competition,
the gross profit ratio for the year remained at high, with a decrease of 0.9 points from the
previous year, owing to cost reductions realized through ongoing production-reform and
procurement-reform efforts.
Operating expenses
The major components of operating expenses are payroll, R&D, advertising expenses and other
marketing expenses. Although R&D expenses grew 4.1% from the previous year to ¥ 286,476 million,
keeping spending growth below the growth rate for net sales, the operating expenses to net sales
ratio improved 0.7 points. In general, Canon maintains a high level of R&D expenditure to
strengthen its R&D capabilities. R&D expenditures grew in fiscal 2005 from the previous year,
resulting from increased R&D activities.
Operating profit
Operating profit in fiscal 2005 increased by 7.2% to ¥ 583,043 million from fiscal 2004.
Operating profit in fiscal 2005 was 15.5% of net sales, compared with 15.7% in fiscal 2004.
Other income (deductions)
Other income (deductions) improved by ¥ 20,638 million, attributable to an increase of
interest revenue, resulting from such factors as an increase in surplus funds accompanying the
improved balance sheet and a rise in interest rates in the United States, along with a decrease in
currency exchange losses.
Income before income taxes and minority interests
Income before income taxes and minority interests in fiscal 2005 was ¥ 612,004 million, a
10.8% increase from fiscal 2004, and constituted 16.3% of net sales.
29
Table of Contents
Income taxes
Provision for income taxes increased by ¥ 18,771 million from fiscal 2004, primarily as a
result of the increase in income before income taxes and minority interests. The effective tax rate
during fiscal 2005 declined by 0.3% compared with fiscal 2004.
Net income
Net income in fiscal 2005 increased by 11.9% to ¥ 384,096 million, which exceeds the growth
rate of income before income taxes and minority interests. This represents a 10.2% return on net
sales.
Product information
Canon divides its businesses into three product groups: business machines, cameras and optical and
other products.
•
The business machines product group
includes office imaging products, computer
peripherals and business information products.
•
Office imaging products include office network digital MFDs, color network digital
MFDs, office copying machines, personal-use copying machines and full-color copying
machines.
•
Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.
•
Business information products include micrographic equipment, personal computers and
calculators.
•
The cameras product group
includes SLR cameras, compact cameras, digital cameras and
digital video camcorders.
•
The optical and other products product group
includes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.
Effective January 2004, Canon has changed classification of product categories with regards to
information system business, which had been classified in "Optical and other products," to
"Business machines (Office imaging products)" in order to better reflect the current relation with
those products. Accordingly, information for previous fiscal years has been reclassified to conform
with the current classification.
Sales by product
Canon's sales by product group are summarized as follows:
2005
Change
2004
(Millions of yen, except percentage data)
Business machines:
Office imaging products
¥
1,153,240
+ 2.9
%
¥
1,120,972
Computer peripherals
1,244,906
+ 8.3
1,149,914
Business information products
104,255
-10.9
117,067
Total business machines
2,502,401
+4.8
2,387,953
Cameras
879,186
+ 15.2
763,079
Optical and other products.
372,604
+17.6
316,821
Total
¥
3,754,191
+8.3
%
¥
3,467,853
Sales of business machines, constituting 66.7% of consolidated net sales, increased 4.8%, to ¥ 2,502,401 million
in fiscal 2005.
Sales of office imaging products increased 2.9%, to ¥ 1,153,240 million. Demand for network
digital MFDs continues to shift from monochrome machines to color models, as well as towards
higher-end features. The Color imagingRunner("iR") C3170/2570 series, equipped with a new
high-speed image-processing chip, and the iR C3220/2620 series continued to sell well in both Japan
and European markets, as did the new high-speed iR C6870/5870 series models. Among monochrome
network digital MFDs, mid-level models such as the iR4570/3570/2870/2270 series contributed to
expanded sales, along with the iR6570/5570, featuring energy-saving performance and high
productivity, and the iR2020/2016 series, with enhanced networking features. Color office imaging
products accounted for 28% and 24% and monochrome office imaging products accounted for 56% and 62%
of office imaging products sales in fiscal 2005 and 2004, respectively. Sales of facsimiles and
information system business accounted for 16% and 14% of sales of office imaging products in both
fiscal 2005 and 2004, respectively.
Sales of computer peripherals increased 8.3% to ¥ 1,244,906 million. Laser beam printers
enjoyed a year-on-year increase in unit sales, with color models growing more than 30% and
monochrome machines, particularly low-end models, also recording healthy growth. Sales in value
terms also rose despite the effect of the shift in market demand toward lower priced models. Inkjet
printers recorded an increase in unit sales of more than 10%, with the PIXMA iP3000/4000 and, in
markets outside of Japan, the PIXMA MP110/130 maintaining brisk sales. Additionally, newly
introduced models, including the PIXMA iP4200, the PIXMA iP1600 in overseas markets, and high-speed
all-in-one models such as the PIXMA MP500, contributed to a stronger product lineup, which also
fueled sales growth in value terms.
Sales of business information products decreased 10.9%, to ¥ 104,255 million in fiscal 2005,
mainly due to the intentional curtailing of personal computer sales in the domestic market.
30
Table of Contents
Sales of cameras continued to achieve significant sales growth of 15.2%, totaling ¥ 879,186
million. The continued strong demand for digital SLR cameras has fueled robust growth, with the
EOS DIGITAL REBEL XT, launched in the first half of 2005, and the EOS 5D, launched in the second
half, recording particularly strong sales along with continued healthy sales of the EOS 20D,
launched in the previous period. This, in turn, has led to expanded sales of interchangeable lenses
for SLR cameras. Sales of compact-model digital cameras also continued to expand steadily, with
healthy demand for the PowerShot SD400 and PowerShot A520, launched in the first half of 2005, as
well as the PowerShot SD550 and PowerShot SD450 models, introduced in the second half. As a
result, unit sales of digital cameras grew by more than 20% compared with the previous year.
Digital cameras accounted for 72% and 69% and conventional film cameras accounted for 17% and 16%
of camera sales in fiscal 2005 and 2004, respectively. In the field of digital video camcorders,
newly introduced Mini DV, DVD, and HDV models, including the Optura 600, the DC20/10, and the XL H1
registered strong performances. Video camcorders accounted for the remaining 11% and 15% of camera
sales in fiscal 2005 and 2004, respectively. Sales of cameras constituted 23.4% of consolidated net
sales in fiscal 2005.
Sales of optical and other products increased 17.6%, to ¥ 372,604 million. In the optical and
other products segment, demand for steppers, used in the production of semiconductors, has
continued to lag since the summer of 2004, resulting in a drop in the number of units sold and,
consequently, a decrease in sales value. Sales of aligners, however, which are used in the
production of LCD panels realized notable growth in terms of both volume and value owing to
increased investments by LCD manufacturers in response to the rapidly expanding LCD television
market. Additionally, the vacuum thin-film deposition and processing equipment produced by the
Company's newly consolidated subsidiaries contributed to expanded sales. Sales of optical and
other products constituted 9.9% of consolidated net sales in fiscal 2005.
Sales by region
A summary of net sales by region in fiscal 2005 and fiscal 2004 is provided below:
2005
Change
2004
(Millions of yen, except percentage data)
Japan
¥
856,205
+  0.8
%
¥
849,734
Americas
1,145,950
+  8.2
1,059,425
Europe
1,181,258
+  8.0
1,093,295
Others
570,778
+  22.6
465,399
Total
¥
3,754,191
+  8.3
%
¥
3,467,853
Note: This summary of net sales by region of destination is determined by the location of the
customer.
A geographical analysis indicates that net sales in fiscal 2005 increased in every region.
In Japan, net sales increased by 0.8% in fiscal 2005 from fiscal 2004. The results were mainly
attributable to increased sales of office imaging products, computer peripherals, and digital
cameras. Color network digital MFDs which include the Color imageRUNNER(iR) C3170/2570 series,
equipped with a new high-speed image-processing chip, and the iR C3220/2620 series lineup, have
contributed to increased sales of office imaging products.
In the Americas, net sales increased by 5.7% on a local currency basis, mainly due to
increased sales of digital cameras, and laser beam printers. Sales of digital cameras experienced
continued strong demand and benefited from the effect of newly-launched products such as
PowerShot-series models and Canon's digital SLR. On a yen basis, after accounting for the
appreciation of the yen against the U.S. dollar, net sales in the Americas increased by 8.2%.
In Europe, net sales increased by 6.1% on a local currency basis mainly due to increased sales
of digital cameras and laser beam printers. On a yen basis, after accounting for the depreciation
of the yen against the euro, net sales in Europe grew 8.0% in fiscal 2005.
Sales in other areas increased by 22.6% on a yen basis in fiscal 2005, reflecting overall
sales growth, particularly in digital cameras and semiconductor equipment.
Operating profit by product
Operating profit for business machines in fiscal 2005 increased ¥ 20,944 million to ¥ 542,028
million. The gross profit ratio remained at a previous year level, due to cost reduction efforts,
and the sales-to-expense ratio declined, contributing to an increase in operating profit.
Operating
profit for cameras increased ¥ 42,908 million to ¥ 173,706 million. The gross profit
ratio improved, due to an increase in unit sales of digital cameras.
Optical and other products in fiscal 2005 increased ¥ 9,988 million to ¥ 38,820 million. The
gross profit ratio increased compared to the previous year, due to an increase in sales of
aligners.
31
Table of Contents
Segment information by product and geographic area
Segment information by product and by geographic area for the years ended December 31, 2006,
2005 and 2004 are shown below.
The following table provides segment information by product:
As of/for the year ended December 31, 2006
Optical
Business
and other
Corporate and
machines
Cameras
products
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
2,691,087
¥
1,041,865
¥
423,807
—
¥
4,156,759
Intersegment
—
—
190,687
¥
(190,687
)
—
Total
2,691,087
1,041,865
614,494
(190,687
)
4,156,759
Operating cost and expenses
2,091,858
773,127
573,019
11,722
3,449,726
Operating profit
¥
599,229
¥
268,738
¥
41,475
¥
(202,409
)
¥
707,033
Assets
¥
1,617,198
¥
542,866
¥
501,008
¥
1,860,843
¥
4,521,915
Depreciation and amortization
127,873
28,756
37,018
68,647
262,294
Capital expenditure
154,259
31,517
36,272
157,609
379,657
As of/for the year ended December 31, 2005
Optical
Business
and other
Corporate and
machines
Cameras
products
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
2,502,401
¥
879,186
¥
372,604
—
¥
3,754,191
Intersegment
—
—
158,114
¥
(158,114
)
—
Total
2,502,401
879,186
530,718
(158,114
)
3,754,191
Operating cost and expenses
1,960,373
705,480
491,898
13,397
3,171,148
Operating profit
¥
542,028
¥
173,706
¥
38,820
¥
(171,511
)
¥
583,043
Assets
¥
1,427,277
¥
480,957
¥
517,527
¥
1,617,792
¥
4,043,553
Depreciation and amortization
123,037
27,662
28,011
47,231
225,941
Capital expenditure
201,887
57,678
15,955
108,264
383,784
As of/for the year ended December 31, 2004
Optical
Business
and other
Corporate and
machines
Cameras
products
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
2,387,953
¥
763,079
¥
316,821
—
¥
3,467,853
Intersegment
—
—
138,419
¥
(138,419
)
—
Total
2,387,953
763,079
455,240
(138,419
)
3,467,853
Operating cost and expenses
1,866,869
632,281
426,408
(1,498
)
2,924,060
Operating profit
¥
521,084
¥
130,798
¥
28,832
¥
(136,921
)
¥
543,793
Assets
¥
1,338,817
¥
399,207
¥
418,418
¥
1,430,579
¥
3,587,021
Depreciation and amortization
115,830
21,880
24,895
30,087
192,692
Capital expenditure
134,128
39,783
52,264
92,555
318,730
Notes:
(1)
General corporate expenses of ¥ 202,328 million, ¥ 171,522 million and ¥ 136,929 million in
the years ended December 31, 2006, 2005 and 2004, respectively, are included in "Corporate and
Eliminations." For the fiscal year ended December 31, 2004, a gain of ¥ 17,141 million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.
(2)
Corporate assets of ¥ 1,860,933 million, ¥ 1,239,255 million and ¥ 1,430,599 million as of
December 31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
"Corporate and Eliminations."
(3)
The segments are defined under Japanese GAAP. In grouping of segment information by product,
Japanese GAAP requires that consideration be given to similarities of product types and
characteristics, manufacturing methods, sales markets, and other factors that are similar.
32
Table of Contents
The following table provides segment information by geographic area:
As of/for the year ended December 31, 2006
Corporate and
Japan
Americas
Europe
Others
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
1,037,657
¥
1,277,867
¥
1,313,919
¥
527,316
—
¥
4,156,759
Intersegment
2,311,482
4,764
3,586
792,018
¥
(3,111,850
)
—
Total
3,349,139
1,282,631
1,317,505
1,319,334
(3,111,850
)
4,156,759
Operating cost and expenses
2,558,685
1,236,138
1,272,463
1,275,817
(2,893,377
)
3,449,726
Operating profit
¥
790,454
¥
46,493
¥
45,042
¥
43,517
¥
(218,473
)
¥
707,033
Assets
¥
2,644,116
¥
432,001
¥
682,381
¥
339,314
¥
424,103
¥
4,521,915
As of/for the year ended December 31, 2005
Corporate and
Japan
Americas
Europe
Others
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
979,748
¥
1,139,784
¥
1,178,672
¥
455,987
—
¥
3,754,191
Intersegment
2,046,173
7,424
2,206
646,530
¥
(2,702,333
)
—
Total
3,025,921
1,147,208
1,180,878
1,102,517
(2,702,333
)
3,754,191
Operating cost and expenses
2,362,019
1,110,415
1,147,658
1,071,155
(2,520,099
)
3,171,148
Operating profit
¥
663,902
¥
36,793
¥
33,220
¥
31,362
¥
(182,234
)
¥
583,043
Assets
¥
2,419,012
¥
406,101
¥
569,750
¥
312,472
¥
336,218
¥
4,043,553
As of/for the year ended December 31, 2004
Corporate and
Japan
Americas
Europe
Others
Eliminations
Consolidated
(Millions of yen)
Net sales:
Unaffiliated customers
¥
919,153
¥
1,057,066
¥
1,090,712
¥
400,922
—
¥
3,467,853
Intersegment
1,882,973
8,863
4,161
591,677
¥
(2,487,674
)
—
Total
2,802,126
1,065,929
1,094,873
992,599
(2,487,674
)
3,467,853
Operating cost and expenses
2,206,141
1,025,628
1,071,552
965,080
(2,344,341
)
2,924,060
Operating profit
¥
595,985
¥
40,301
¥
23,321
¥
27,519
¥
(143,333
)
¥
543,793
Assets
¥
1,793,679
¥
341,616
¥
533,865
¥
271,566
¥
646,295
¥
3,587,021
Notes:
(1)
General corporate expenses of ¥ 202,328 million, ¥ 171,522 million and ¥ 136,929 million in
the years ended December 31, 2006, 2005 and 2004, respectively, are included in "Corporate and
Eliminations." For the fiscal year ended December 31, 2004, a gain of ¥ 17,141 million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.
(2)
Corporate assets of ¥ 1,860,933 million, ¥ 1,239,255 million and ¥ 1,430,599 million as of
December 31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
"Corporate and Eliminations."
(3)
Segment information by geographic area is determined by the location of the Company or its
relevant subsidiary making the sale. The segments are defined under Japanese GAAP. In grouping
of segment information by geographic area, Japanese GAAP requires that consideration be given
to geographic proximity, as well as similarities of economic activities, interrelationships of
business activities and other similar factors.
33
Table of Contents
Foreign operations and foreign currency transactions
Canon's marketing activities are performed by subsidiaries in various regions in local currencies,
while the cost of sales is generally in yen. Given Canon's current operating structure,
appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce
the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial
instruments, which are comprised principally of forward currency exchange contracts.
The return on foreign operation sales is usually lower than that from domestic operations
because foreign operations consist mainly of marketing activities. Return on foreign operation
sales is calculated by dividing net income of foreign subsidiaries, after factoring in
consolidation adjustments between foreign subsidiaries, by net sales of foreign subsidiaries.
Marketing activities are generally less profitable than production activities, which are mainly
conducted by the Company and its domestic subsidiaries. The returns on foreign operation sales in
fiscal 2006, 2005 and 2004 were 3.7%, 3.0% and 2.8%, respectively. This compares with returns of
11.0%, 10.2% and 9.9% on total operations for the respective years.
Recent developments
Canon has decided to purchase from Toshiba Corporation ("Toshiba") all of Toshiba's
outstanding shares of SED Inc., a Canon subsidiary. On completion of the purchase, SED Inc. became
a wholly owned subsidiary of Canon, effective January 29, 2007. In accordance with this decision,
which was based on the assumption of prolonged litigation pending against Canon in the United
States with respect to SED technology, Canon will carry out the SED panel business independently in
order to facilitate the earliest possible launch of a commercial SED television business. Canon,
with the necessary cooperation from Toshiba, will make every effort for the smooth launch of its
television business based on the high image quality achieved by SED technology.
Canon Electronics Inc. acquired the shares of e-System Corporation (listed on the Hercules
Section of the Osaka Securities Exchange) through a third-party distribution and made it into a
subsidiary as of December 27, 2006. By making e-System Corporation a subsidiary, Canon Electronics
Inc. aims to make further advances in its group's information-related business and develop it into
a core business.
B. Liquidity and capital resources
Cash and cash equivalents in fiscal 2006 increased ¥150,673 million to ¥1,155,626 million,
compared with ¥1,004,953 million in fiscal 2005 and ¥887,774 million in fiscal 2004. Canon's cash
and cash equivalents are typically denominated in Japanese yen, with the remainder denominated in
foreign currencies such as the U.S. dollar.
Net cash provided by operating activities in fiscal 2006 increased by ¥89,563 million from the
previous year to ¥695,241 million, reflecting the substantial growth in sales and increased cash
proceeds from sales, combined with a substantial increase in net income. Cash flow from operating
activities consisted of the following components: the major component of Canon's cash inflow is
cash received from customers, while the major components of Canon's cash outflow are payments for
parts and materials, operating expenses, and income taxes.
For fiscal 2006, cash inflow from cash received from customers increased, due to the increase
in net sales. This increase in cash inflow was within the range of the increase in net sales, as
there were no significant changes in Canon's collection rates. Cash outflow for payments for parts
and materials also increased, as a result of an increase in net sales. However, this increase was
less than the increase in net sales, due to the effects of cost reduction. Cost reduction reflects
a decline in unit prices of parts and raw materials, as well as a streamlining of the process of
using these parts and materials through promoting efficiency in operations. Cash outflow for
payroll payments increased, due to the increase in the number of employees. The employees in the
Asian region increased, due to the expansion of production in the regions. Cash outflow for
payments for selling, general and administrative expenses increased, but the increase was within
the range of the increase in net sales, due to cost-cutting efforts. Cash outflow for payments of
income taxes increased, due to the increase in taxable income.
Net cash used in investing activities in fiscal 2006 was ¥460,805 million, compared with
¥401,141 million in fiscal 2005 and ¥252,967 million in fiscal 2004, consisting primarily of
capital expenditures. Capital expenditures in fiscal 2006 totaled ¥424,862 million, which was used
mainly to expand production capabilities in Japan and overseas regions and to strengthen the
Company's R&D-related infrastructure. As a result, free cash flow, or cash flow from operating
activities minus cash flow from investing activities, totaled ¥234,436 million for fiscal 2006 as
compared to ¥204,537 million for fiscal 2005.
Net cash used in financing activities totaled ¥107,487 million in fiscal 2006, mainly
resulting from a decrease in loan repayments accompanying the company's strengthened financial
position despite a large increase in the dividend payout. The Company paid dividends in fiscal 2006
of ¥83.33 per share, which was an increase of ¥16.66 per share over the prior year (after adjusting
for the effect of three for two stock split in 2006).
Canon seeks to meet its liquidity and capital requirements principally with cash flow from
operations. Consistent with this objective, Canon continued to reduce its reliance on external
funding for capital investments in favor of relying upon internally generated cash flows. This
approach is supplemented with group-wide treasury and cash management activities undertaken at the
parent company level. Canon believes that its working capital is sufficient for its present
requirements.
To the extent Canon relies on external funding for its liquidity and capital requirements, it
generally has access to various funding sources, including issuance of additional share capital,
long-term debt or short-term loans. While Canon has been able to obtain funding from its
traditional financing sources and from the capital markets, and believes it will continue to be
able to do so in the future, there can be no assurance that adverse economic or other conditions
will not affect Canon's liquidity or long-term funding in the future.
Short-term loans (including current portion of long-term debt) amounted to ¥15,362 million at
December 31, 2006 compared to ¥5,059 million at December 31, 2005. Long-term debt (excluding
current portion) amounted to ¥15,789 million at December 31, 2006 compared to ¥27,082 million at
December 31, 2005.
Canon's long-term debt generally consists of lease obligations, as well as fixed-rate notes
and convertible debentures which Canon has issued in the domestic market with original maturities
of ten to fifteen years.
In order to facilitate access to global capital markets, Canon obtains credit ratings from two
rating agencies, Moody's Investors Services, Inc. ("Moody's") and Standard and Poor's Rating
Services ("S&P"). In addition, Canon maintains a rating from Rating and Investment Information,
Inc. ("R&I"), a rating agency in Japan, for access to the Japanese capital market.
34
Table of Contents
As
of February 28, 2007, Canon's debt ratings are: Moody's: Aa2 (long-term); S&P: AA
(long-term), A-1+ (short-term); and R&I: AA+ (long-term). Canon does not have any rating downgrade
triggers that would accelerate the maturity of a material amount of its debt. A downgrade in
Canon's credit ratings or outlook could, however, increase the cost of its borrowings.
Capital expenditure in fiscal 2006 amounted to ¥379,657 million compared with ¥383,784 million
in fiscal 2005 and ¥318,730 million in fiscal 2004. In fiscal 2005, capital expenditures were
mainly used to expand production capabilities in both domestic and overseas regions, and to bolster
the Company's R&D-related infrastructure. In addition, Canon has been continually investing in
tools and dies for business machines, in which the amount invested is generally the same each year.
For fiscal 2007, Canon projects its capital expenditures will be approximately ¥480,000 million.
The capital expenditures include investments in new production plants and new facilities of Canon.
Employer contributions to Canon's worldwide defined benefit pension plans were ¥44,981 million
in fiscal 2006, ¥40,059 million in fiscal 2005, ¥31,018 million in fiscal 2004. During fiscal 2007,
Canon expects to make cash contributions of approximately ¥17,369 million to its defined benefit
pension plans.
Working capital in fiscal 2006 increased ¥239,101 million, to ¥1,619,042 million, compared
with ¥1,379,941 million in fiscal 2005 and ¥1,248,987 million in fiscal 2004. This increase was
primarily a result of an increase in cash and cash equivalents. Canon believes its working capital
will be sufficient for its requirements for the foreseeable future. Canon's capital requirements
are primarily dependent on management's business plans regarding the levels and timing of capital
expenditures and investments. The working capital ratio (ratio of current assets to current
liabilities) for fiscal 2006 was 2.39 compared to 2.28 for fiscal 2005 and 2.27 for fiscal 2004.
Return on assets (Net income divided by the average of total assets as of December 31, 2006,
2005 and 2004) recorded 10.6% in fiscal 2006, compared to 10.1% in fiscal 2005 and 10.1% in fiscal
2004. Return on stockholders' equity was 16.3% in fiscal 2006 compared with 16.0% in fiscal 2005
and 16.8% in fiscal 2004.
Debt to total assets ratio was 0.7%, 0.8% and 1.1% as of December 31, 2006, 2005 and 2004,
respectively. Canon had short-term loans and long-term debt of ¥31,151 million as of December 31,
2006, ¥32,141 million as of December 31, 2005 and ¥38,530 million as of December 31, 2004.
C. Research and development, patents and licenses
Canon kicked off the year 2006, the first year of Phase III (2006-2010) of the Excellent Global
Corporation Plan, with an objective to realize "Sound Growth" toward "Joining the World's Top 100
Companies."
Canon has established the following as key strategies:
•
Realize the overwhelming No.1 position worldwide in all current core businesses,
•
Expand operations through diversification and
•
Identify new business domains and accumulate necessary technological capabilities
Canon is striving to achieve these strategies as follows:
•
Realize the No.1 position worldwide in all current core businesses: Product R&D
divisions will work together with the corporate R&D headquarters to bolster product
competitiveness through development of superior next-generation products.
•
Expand operations through diversification: Canon is studying existing technologies to
expand business opportunities and develop required technologies for new SED businesses to
make SEDs the windows for images and information in living rooms.
•
Identify new business domains and accumulate necessary technological capabilities: Canon
has established a Strategic Committee for New Businesses. In
addition, Canon is developing and
strengthening relationships with universities and other research institutes to carry on
fundamental research and develop cutting-edge technologies. Canon has signed a
comprehensive partnership agreement with Tokyo Institute of Technology in 2005 regarding
joint research on advanced materials and imaging technologies. Canon has also tied up with
Kyoto University to develop next-generation medical-image processing technologies.
Canon has utilized 3D-CAD systems for some time to boost R&D efficiency by curtailing product
development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and
analysis technologies by introducing leading-edge facilities, including one of Japan's
highest-performance cluster computers in 2005. As a result, Canon has succeeded in further reducing
the need for prototypes, dramatically lowering costs and shortening development lead times.
Canon has R&D centers worldwide, including the USA. Each of our R&D centers, with its
expertise, is collaborating with other centers to achieve synergies, and cultivating closer ties in
fields ranging from basic research to product development.
The Company's R&D activities are conducted in the following four organizations:
•
Core Technology Development Headquarters, where component engineering and base
technology R&D, such as optics technology and nanotechnology, is conducted
•
Leading-Edge Technology Development Headquarters, where most advanced technology
R&D, aiming to create new technological capabilities, is conducted
•
Platform Technology Development Headquarters, where platform technology R&D, such
as system Large-Scale Integration (LSI) chips, network technology and visual information
technology, is conducted
•
Device Technology Development Headquarters, where key device R&D, such as for
semiconductor devices, is conducted
Canon's consolidated R&D expenditures were ¥308,307 million in fiscal 2006, ¥286,476 million
in fiscal 2005 and ¥275,300 million in fiscal 2004. The ratios of R&D expenditure to consolidated
total net sales for fiscal 2006, 2005, and 2004 were 7.4 %, 7.6% , and 7.9%, respectively.
Canon believes that new products protected by seminal patents will not easily allow competitors to
catch up with it, and provide Canon with advantages in establishing standards in the market and
industry. According to the United States patent annual list, which IFI CLAIMS
®
Patent Services
released, Canon obtained the 3rd-greatest number of private sector patents in 2006. This
achievement marks Canon's fifteenth consecutive year as one of the top three patent-receiving
private-sector organizations.
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Table of Contents
D. Trend information
Trend information
The global economy is generally expected to maintain a prolonged economic growth this year,
despite predictions of slightly lower growth rate in major areas of Japan, the U.S., and Europe.
Business competition in general, however, is expected to further intensify and the business
conditions surrounding the Canon Group will likely remain difficult.
Under these circumstances, the Canon Group has positioned 2007, the second year of Phase III
(2006 to 2010) of its "Excellent Global Corporation Plan," as a year for fundamental strengthening
to achieve 2010 objectives and will accelerate our growth.
For this year, the 70th anniversary of our founding, key objectives toward that end include,
first of all, introducing even more competitive new products to boost our competitiveness against
other companies with the aim of achieving the overwhelming No.1 position worldwide in all of our
current core businesses. Secondly, we aim to achieve steady cost reductions and further reduce our
cost ratio through continuous measures to improve productivity, such as promoting production
automation by introducing high-speed automation equipment; bringing the in-house production of more
key parts, taking procurement innovation activities to an even higher level; and building an IT
system that centralizes business information for everything from planning and development to
production, sales, procurement, and logistics.
Renewing our awareness that companies' mission is to maintain product quality, we will build
or enhance our systems for quality management, safety management and crisis management, including
measures to heighten awareness, to help ensure that our quality fits for an excellent global
corporation.
We will also reform our research and development activities from the new perspective to secure
robust patents, which are a critical lifeline for a manufacturer and the very source of
competitiveness for a high-value-added manufacturing business. Lastly, toward the objective of
becoming a truly excellent global corporation, we will bring to bear the resource of the entire
Canon Group to ensure that our compliance activities are thoroughly implemented, that our internal
controls are strictly enforced, and that our management excels in transparency.
Business machines segment
Office imaging products
In the office imaging products segment, it has become more important to provide added value in
the form of networking, integration, color printing, and multifunction models. Also, in addition to
the mid-segment products for the office market which is enjoying steady growth, Canon expects that
the market for higher-end models and low-end multifunction models will expand as well. The market
for color digital devices continued to grow rapidly, and sales of monochrome digital MFDs were
stable, reflecting the market trend shifting from single-function to multifunction. Recently, there
has been a new, printer-based MFP market created by other printer vendors as they seek to enter the
copier and MFD market.
To maintain and enhance a competitive edge and to meet more sophisticated customer demands,
Canon is strengthening its marketing capabilities by reinforcing its hardware and software product
lineups and by improving functionality. In 2006, Canon strengthened the product lineups of its
color digital devices in addition to its existing full line of monochrome machines and maintained
its market share by executing business strategies in line with current market trends.
Computer peripheral products
In the Inkjet printer market, Canon expects a continuation of declines in market prices,
slowdown in market growth, and a shift from single-function printers ("SFP") to MFPs. To manage in
line with these trends, Canon launched new lineups of SFP and MFP from flagship to entry models in
order to expand its printer sales.
Canon's laser beam printer business holds a strong position in the market. In the monochrome
laser beam printer market, Canon expects that the transition to a low price segment will expand
sales in the micro-business/home office market and in the emerging markets. In the color laser beam
printer market, Canon expects continued strong growth in demand. In general, competition will
become more intense as competitors implement aggressive price strategies in order to establish
themselves as market leaders. Canon seeks to remain competitive by developing technologies that can
be deployed in a timely fashion to produce innovative products in all segments. Canon is also
working to lower costs by automating production of consumables and to secure procurement of
essential parts through internal sourcing.
Although Canon expects that the size of the scanner market will continue to contract, the
stylish and compact CanoScan LiDE series and hyper CCD models with ultrahigh-resolution were both
introduced in fiscal 2005 in order to increase Canon's share of this market.
The size of the worldwide facsimile market has remained stable, as expansion in Asia, mainly
China, has offset declines in other regions. Due to price declines for inkjet MFPs with facsimile
function, prices are also declining for stand-alone machines.
Business information products
The market for business-use document scanners has further expanded as demand for document
scanners has accelerated due to the evolving office IT environment and the need to comply with
various laws related to the management of information. Under these conditions, in the "DR Scanner
series" , Canon has introduced the "DR-2050C II" as a new product for the segment of affordable
machines with the most significantly expanding demand and worked to expand sales of this product
and the "DR-1210C" introduced in the first half of 2006. As a result, sales steadily increased.
With regard to servers and personal computers, demand from corporate clients in the Japanese
market held steady in fiscal 2006, but a decline in sales was caused by Canon's change in marketing
strategy from selling single products to a solutions business involving the proposal of unique
combinations of various products. This trend is expected to continue in fiscal 2007.
36
Table of Contents
Cameras segment
The entire digital camera market continues to expand. While the growth rate has slowed in
Japan and the United States, emerging markets, especially China and Eastern Europe, have
experienced strong growth. In addition, the emergence of digital imaging systems has contributed to
this growth as well, such as PC-free direct printing systems, by expanding the digital imaging
functionality through network connectivity, along with the improvement of the user-friendly image
processing interfaces and software.
The digital camera industry is seeing growth on various fronts. As with most other digital
consumer electronics, the digital camera market is now confronted with a fierce price war and
intensified technological competition in terms of picture quality and functions. Profit margins
have been shrinking for the overall industry, but Canon has been able to maintain higher margins
through reforms of its production and procurement systems.
Canon expects the market for compact digital cameras to expand in the intermediate term.
However, profit margins for the overall industry are moving lower as prices fall and competition
increases. Therefore, Canon seeks to continue cutting production costs while expanding sales
volumes.
There are signs of rapid growth in the market for compact photo printers, which present a new
business opportunity. By creating a strong product line over the mid-term, Canon believes that it
will be able to take a significant role in this market and turn the compact photo printer business
into a new earnings source for Canon.
Canon played a major role in the continued expansion of the digital SLR market in fiscal 2006.
This market is expected to continue growing for the time being. However, Canon expects the growth
rate to decline over-time.
The market for film cameras is contracting as a result of the rapid shift to digital cameras.
Canon anticipates this trend to continue, both for film single lens reflex cameras and for film
compact cameras.
Canon expects the interchangeable lens market to grow as a result of the rapid market
penetration of digital SLR cameras. Canon aims to expand its sales and market share by introducing
the most suitable products for the digital SLR camera market, which is expected to continue
growing.
For video camcorders, analog camcorder sales have been further replaced by sales of digital
camcorders even in the United States and Europe, where this transition had been comparatively slow.
Now almost the entire world has made the switch over to digital. Against this background two new
trends have emerged in the market. First, the introduction of video cameras using DVDs, HDDs, SD
cards and other new forms of media has resulted in a trend in which convenience offered by the
products is increasingly emphasized. Second, the trend towards higher picture quality has evolved,
provided by products using high-resolution recording methods such as HDV and AVCHD. Canon believes
that these two trends are stimulating the market by responding to more diverse user needs, and will
likely contribute to further growth for the overall digital video market.
Canon will seek continued sales growth with a stronger product line while investing in
research and development in order to better respond to new market trends.
Canon expects that the market for business-use liquid crystal projectors will continue to grow
by about 20% per year on a unit basis, while market prices will continue to decline, resulting in
almost no growth in monetary terms. In addition to our independently developed SX50 high-resolution
projector released at the end of 2004, Canon has also introduced the SX6, 60 and X600 models late
in the second half of 2006. The high picture quality and resolution offered by these models have
won high praise from system integrators, allowing Canon to capture a large share of the market for
high-resolution projectors. Canon expects to continue to develop distinctive, value-added products
by further improving picture quality, resolution and brightness.
Optical and other products segment
In the semiconductor-production equipment industry, equipment manufacturers must provide high
quality products corresponding to rapid technology progress.
Canon will continue to focus on developing new products which adopt leading-edge technologies,
such as immersion exposure technology and ultra precision processing and measurement technology.
In the LCD production mask aligner market, Canon will seek to strengthen its technical
capabilities to meet the recent trend toward larger glass-substrates due to the increasing demand
for larger LCD televisions.
In addition, Canon will continue to make distinctive products enabling high resolution and
high productivity.
In the TV lens market, demand for HDTV, which has grown in the United States and Japan, is now
growing as well in Europe. In particular, there has been increased demand for lenses used for
broadcasting sporting events and for producing dramas and documentaries. Canon also expects to see
new demand in China and other Asian markets thanks to greater progress in digitalization. At the
same time, there have been signs of expanded HDTV applications by the press in Japan and the United
States while Canon already has a major market share worldwide for this class of lens, it intends to
continue to strengthen its position in this market.
Forward looking statements
The foregoing discussion and other disclosure in this report contains forward-looking
statements that reflect management's current views with respect to certain future events and
financial performance. Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are based upon assumptions
of future events that may not prove to be accurate. The following important factors could cause
actual results to differ materially from those projected or implied in any forward-looking
statements: foreign currency exchange rate fluctuations; the uncertainty of Canon's ability to
implement its plans to localize production and other measures to reduce the impact of foreign
currency exchange rate fluctuations; uncertainty as to economic conditions, in Canon's major
markets; uncertainty of continued demand for Canon's high-value-added products; uncertainty as to
the recovery of computer and related markets; uncertainty of recovery in demand for Canon's
semiconductor production equipment; Canon's ability to continue to develop products and to market
products that incorporate new technology on a timely basis, are competitively priced and achieve
market acceptance; the possibility of losses resulting from foreign currency transactions designed
to reduce financial risks from changes in foreign currency exchange rates; and inventory risk due
to shifts in market demand.
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Table of Contents
E. Off-balance sheet arrangements
As part of its ongoing business, Canon does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Canon provides guarantees to third parties of bank loans of its employees, affiliates and
other companies. Canon would have to perform under a guarantee, if the borrower defaults on a
payment within the contract periods of 1 year to 30 years in the case of employees with housing
loans, and of 1 year to 10 years in the case of affiliates and other companies. The maximum amount
of undiscounted payments Canon would have had to make in the event of default by all borrowers was
¥30,051 million at December 31, 2006. The carrying amounts of the liabilities recognized for
Canon's obligations as a guarantor under those guarantees are insignificant.
F. Contractual obligations
The following summarizes Canon's contractual obligations at December 31, 2006.
Payments Due By Period
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
Contractual
obligations:
Long-Term Debt:
Capital Lease Obligations
¥
10,585
5,263
4,850
465
7
Other Long-Term Debt
20,467
10,000
10,432
22
13
Operating Lease Obligations
60,378
16,025
22,565
10,532
11,256
Purchase commitments for :
Property Plant and Equipment.
107,685
107,685
—
—
—
Parts and Raw Materials
85,403
85,403
—
—
—
Total
¥
284,518
224,376
37,847
11,019
11,276
Canon provides warranties generally less than one year against defects in materials and
workmanship on most of its consumer products. Estimated product warranty related costs are
established at the time revenue is recognized and is included in selling, general and
administrative expenses. Estimates for accrued product warranty cost are primarily based on
historical experience, and are affected by ongoing product failure rates, specific product class
failures outside of the baseline experience, material usage and service delivery costs incurred in
correcting a product failure. As of December 31, 2006, accrued product warranty costs amounted to
¥18,144 million.
At December 31, 2006, commitments outstanding for the purchase of property, plant and
equipment approximated ¥107,685 million, and commitments outstanding for the purchase of parts and
raw materials approximated ¥85,403 million, both for use in the ordinary course of its business.
Canon anticipates that funds needed to fulfill these commitments will be generated internally
through operations.
Canon's management believes that current financial resources, cash generated from operations
and Canon's potential capacity for additional debt and/or equity financing will be sufficient to
fund current and future capital requirements.
38
Table of Contents
Item 6. Directors, Senior Management and Employees
A.
Directors and senior management
Directors and corporate auditors of the Company as of March 31, 2007 and their respective
business experience are listed below.
Name
Position
Date of
Business experience
(Date of birth)
(Group executive/function)
commencement
(*current position/function)
Fujio Mitarai
Chairman & CEO
4/1961
Entered the Company
(Sept. 23, 1935)
1/1979
President of Canon U.S.A., Inc.
3/1981
Director
3/1985
Managing Director
1/1989
In charge of HQ administration
3/1989
Senior Managing Director
3/1993
Executive Vice President
9/1995
President & CEO
3/2006
Chairman of the Board & President & CEO
5/2006
Chairman & CEO*
Tsuneji Uchida
President & COO
4/1965
Entered the Company
(Oct. 30, 1941)
4/1995
Group Executive of Lens Products Group
3/1997
Director
4/1997
Deputy Chief Executive of Camera Operations HQ/
Group Executive of Photo Products Group
4/1999
Chief Executive of Camera Operations HQ
7/1999
In charge of promotion of digital photo
business
1/2000
In charge of promotion of digital photo home
business
1/2001
Chief Executive of Image Communications
Products HQ
3/2001
Managing Director
3/2003
Senior Managing Director
3/2006
Executive Vice President
5/2006
President & COO *
Toshizo Tanaka
Executive Vice President
4/1964
Entered the Company
(Oct. 8, 1940)
(Group Executive of Finance & Accounting HQ
Group Executive
of Policy and Economy Research
HQ)
1/1992
Deputy Group Executive of Finance & Accounting HQ
3/1995
Director
4/1995
Group Executive of Finance & Accounting HQ*
3/1997
Managing Director
3/2001
Senior Managing Director
1/2007
Group Executive of Policy and Economy Research HQ*
3/2007
Executive Vice President*
Nobuyoshi Tanaka
Senior Managing Director
4/1970
Entered the Company
(Dec. 23, 1945)
(Group Executive of Corporate Intellectual Property & Legal
HQ)
1/1991
Senior General Manager of Semiconductor Production Equipment Development Center
3/1993
Director
4/1993
Chief Executive of Optical Products HQ
4/1999
Group Executive of Corporate Intellectual
Property & Legal HQ*
3/2001
Managing Director
3/2006
Senior Managing Director*
Junji Ichikawa
Senior Managing Director
4/1965
Entered Shiba Electronics Co., Ltd.
(Feb. 9, 1943)
(Chief Executive of Optical Products HQ)
1/1970
Entered the Company
4/1994
Group Executive of Peripheral Group 1
3/1997
Director
4/1997
Deputy Chief Executive of Peripheral Products
HQ
4/2000
Chief Executive of Peripheral Products HQ
3/2001
Managing Director
4/2003
Group Executive of Production Management HQ
4/2004
Chief Executive of Optical Products HQ*
3/2006
Senior Managing Director*
39
Table of Contents
Name
Position
Date of
Business experience
(Date of birth)
(Group executive/function)
commencement
(*current position/function)
Hajime Tsuruoka
Senior Managing Director
3/1970
Entered Meiji Seika Kaisha Ltd.
(July 9, 1943)
11/1973
Entered the Company
4/1995
President of Canon Italia S.p.A.
3/1997
Director
9/1997
President of Canon Deutschland GmbH
3/1999
President of Canon Europa N.V.*
3/2001
Managing Director
3/2006
Senior Managing Director*
Akiyoshi Moroe
Managing Director
4/1968
Entered the Company
(Sept. 28, 1944)
(Group Executive of General
Affairs HQ, Group Executive of
External Relations HQ)
7/1996
Deputy Group of Executive of
Human Resource
Management & Organization
HQ
3/1999
Director
4/1999
Group Executive of General Affairs HQ*
10/2000
Group Executive of Information & Communications
Systems HQ
3/2003
Managing Director*
5/2006
Group Executive of External Relations HQ*
Kunio Watanabe
Managing Director
4/1969
Entered the Company
(Oct. 3, 1944)
(Group Executive of Corporate
Strategy & Development HQ,
4/1995
Group Executive of Corporate
Strategy & Development
HQ*
Deputy Group Executive of
Policy and Economy Research HQ)
3/1999
3/2003
Director
Managing Director*
1/2007
Deputy Group Executive of Policy and Economy
Research HQ*
Yoroku Adachi
Managing Director
4/1970
Entered the Company
(Jan. 11, 1948)
3/2001
Chairman of Canon Singapore Pte. Ltd.
Chairman of Canon Hong Kong Co., Ltd.
Director
4/2003
President of Canon (China) Co., Ltd.
3/2005
Managing Director *
4/2005
President of Canon U.S.A., Inc.*
Yasuo Mitsuhashi
Managing Director
4/1974
Entered the Company
(Nov. 23, 1949)
(Chief Executive of Peripheral
Products HQ)
2/2001
Chief Executive of Chemical Products HQ
3/2001
Director
4/2003
Chief Executive of Peripheral Products HQ*
3/2005
Managing Director *
Tomonori Iwashita
Managing Director
4/1972
Entered the Company
(Jan. 28, 1949)
(Chief Executive of Image
4/1999
Senior General Manager of
Communications
Products HQ)
Camera Development Center
Group Executive of Global
1/2001
Group Executive of Photo
Environment Promotion HQ)
Products Group
3/2003
Director
4/2003
Deputy Chief Executive of Image Communication Products HQ
4/2006
Chief Executive of Image
Communication Products HQ*
3/2007
Managing Director*
3/2007
Group Executive of Global Environment Promotion HQ*
Masahiro Osawa
Managing Director
4/1971
Entered the Company
(May 26, 1947)
(Group Executive of
Global Procurement HQ)
7/1997
2/2003
Vice President of Canon
U.S.A., Inc.
Senior Vice President of Canon U.S.A., Inc.
7/2003
Deputy Group Executive of Finance & Accounting HQ
3/2004
Director
4/2004
Group Executive of Global Procurement HQ*
3/2007
Managing Director*
Shigeyuki Matsumoto
Managing Director
4/1977
Entered the Company
(Nov. 15, 1950)
(Group Executive of Device Technology
Development Headquarters)
1/2002
Group Executive of Device
Technology Development
Headquarters*
3/2004
Director
3/2007
Managing Director*
40
Table of Contents
Name
Position
Date of
Business experience
(Date of birth)
(Group executive/function)
commencement
(*current position/function)
Katsuichi Shimizu
Director
4/1970
Entered the Company
(Nov. 13, 1946)
(Chief
Executive of Inkjet
Products HQ)
4/2001
Deputy Chief Executive of
Office Imaging Products HQ
HQ
3/2003
Director*
4/2003
Chief Executive of Inkjet Products HQ*
Ryoichi Bamba
Director
4/1972
Entered the Company
(Nov. 25, 1946)
4/1998
Senior Vice President of Canon U.S.A., Inc.
2/2003
Executive Vice President of Canon U.S.A., Inc.*
3/2003
Director*
Toshio Honma
Director
4/1972
Entered the Company
(Mar. 10, 1949)
(Group Executive of L
Printer
Products HQ)
4/2001
Deputy Chief Executive of i
Printer Products HQ
3/2003
Director*
4/2003
Group Executive of Business Promotion HQ
7/2003
Group Executive of L Printer Business Promotion HQ
1/2007
Group Executive of L Printer Products HQ*
Keijiro Yamazaki
Director
4/1971
Entered the Company
(Oct. 14, 1948)
(Group Executive of Human Resource Management & Organization HQ,
4/1999
General
Manager of Human Resource Management & Organization Div.
1/2000
Deputy Group Executive of Human Resource
Management & Organization HQ
3/2004
Director*
4/2004
Group Executive of Information &
Communications Systems HQ
3/2006
Group Executive of Human Resource Management &
Organization HQ*
Shunichi Uzawa
Director
8/1978
Entered the Company
(Jan. 26, 1949)
(Group Executive of Core
Technology
Development
HQ)
1/1998
Senior
General Manager of

Nano-technology Research
Center
4/2001
Deputy Group Executive of Display Development HQ
3/2004
Director*
4/2004
Group Executive of SED Development HQ
10/2004
President of SED Inc.
1/2006
Group Executive of Core Technology Development HQ*
Masaki Nakaoka
Director
4/1975
Entered the Company
(Jan. 3, 1950)
(Group Executive of Office
Imaging Products HQ)
1/1997
Senior
General Manager of
Office Imaging
Products
Development Center 1
4/1999
Group Executive of Office Imaging Products Group 1
4/2001
Deputy Chief Executive of Office Imaging
Products HQ
3/2004
Director*
4/2005
Chief Executive of Office Imaging Products HQ*
Toshiyuki Komatsu
Director
4/1972
Entered the Company
(Jan. 19, 1950)
(Group Executive of
Leading-Edge Technology
Development HQ)
1/1998
Senior General Manager of
Canon Research Center
1/2000
Deputy Group Executive of Core Technology
Development HQ
3/2004
Director*
4/2004
Group Executive of Leading-Edge
Technology Development HQ*
7/2005
Group Executive of Core Technology
Development HQ
Haruhisa Honda
Director
4/1974
Entered the Company
(Oct. 14, 1948)
(Chief Executive of
Chemical Products
Operations
Group Executive of
Product
Engineering
HQ)
4/1995
Senior
General Manager of
Cartridge Development
Center
3/2004
Director*
4/2004
Chief Executive of Chemical
Products Operations*
3/2007
Group
Executive of Production Engineering HQ*
41
Table of Contents
Name
Position
Date of
Business experience
(Date of birth)
(Group executive/function)
commencement
(*current position/function)
Tetsuro Tahara
Director
4/1971
Entered the Company
(Jan. 31, 1949)
(Group Executive of Global
Manufacturing & Logistics
HQ)
4/1999
Senior General Manager of
Office
Imaging Products
Production Management
Center
4/2002
Deputy Chief Executive of
Office Imaging Products HQ
4/2003
President of Canon (Suzhou) Inc.
3/2006
Director*
4/2006
Group Executive of Global
Manufacturing & Logistics HQ*
Seijiro Sekine
Director
4/1972
Entered the Company
(Oct. 20, 1948)
(Group Executive of
Information &
Communication Systems HQ)
4/1995
General Manager of Business
Information Systems
Division
1/2001
Deputy Group Executive of Information
& Communication Systems HQ
10/2004
Group Executive of Logistics HQ
3/2006
Director*
4/2006
Group Executive of Information
& Communication Systems HQ,
Deputy Group Executive of Global
Manufacturing & Logistics HQ
1/2007
Group Executive of Information &
Communication Systems HQ*
Shunji Onda
Director
4/1972
Entered Canon Sales Co., Inc.
(Mar. 13, 1950)
(Deputy Group Executive of Finance &
(renamed Canon Marketing
Japan Inc.)
Accounting
HQ)
7/1980
Entered the Company
1/1999
General Manager of Peripheral Products
Chief Executive Office
1/2002
General Manager of Finance Division
4/2004
Senior General Manager of Optical Products
Business Administration Center
3/2006
Director*
4/2006
Deputy Group Executive of Finance &
Accounting HQ*
Kazunori Fukuma
Director
4/1972
Entered Toshiba Corporation
(Feb. 24, 1950)
6/2005
Executive Officer & Corporate Vice President
of Toshiba Corporation
1/2006
President of SED Inc.*
1/2007
Entered the Company
3/2007
Director*
Hideki Ozawa
Director
4/1973
Entered Canon Sales Co., Inc.
(Apr. 28, 1950)
(renamed Canon Marketing Japan Inc.)
7/1980
Entered the Company
4/2004
President of Canon Singapore Pte. Ltd.
4/2005
President of Canon (China) Co.,Ltd*.
3/2007
Director*
Masaya Maeda
Director
4/1975
Entered the Company
(Oct. 17, 1952)
(Group Executive of Digital Imaging
Business Group)
1/2002
Senior General Manager of Digital Consumer
Products Development Center
of Toshiba Corporation
7/2003
Deputy Group Executive of Digital Imaging
Business Group
1/2006
Group Executive of Digital Imaging Business Group*
3/2007
Director*
42
Table of Contents
Name
Position
Date of
Business experience
(Date of birth)
(Group executive/function)
commencement
(*current position/function)
Teruomi Takahashi
Corporate Auditor
9/1971
Entered the Company
(June 10, 1943)
3/1999
Director
4/1999
Chief Executive of Chemical Products HQ
2/2001
Chief Executive of BJ Products HQ
4/2001
Chief Executive of i Printer Products HQ
4/2003
Chief Executive of Chemical Products HQ
3/2004
Corporate Auditor *
Kunihiro Nagata
Corporate Auditor
4/1970
Entered the Company
(Mar.16, 1948)
1/1991
General Manager of Business Machines
Accounting Dept.
4/1995
Senior General Manager of Business
Machines Accounting & Production
Planning Center
10/2000
General Manager of Corporate Planning Division
1/2003
Deputy Group Executive of Corporate
Strategy Development HQ
3/2004
Corporate Auditor *
Tadashi Ohe
Corporate Auditor
4/1969
Registration as a lawyer*
(May 20, 1944)
4/1989
Instructor
of Judicial Research and Training Institute
3/1994
Corporate Auditor, the Company*
Yoshinobu Shimizu
Corporate Auditor
3/1973
Registered as Certified Public Accountant*
(Oct. 26, 1944)
6/1990
Representative Partner of Showa Ota & Co.
5/2002
Deputy Chief Executive Officer of Century
Ota Showa & Co. (renamed Ernst & Young ShinNihon)
3/2006
Corporate Auditor, the Company*
Minoru Shishikura
Corporate Auditor
4/1976
Entered The Dai-Ichi Mutual
Life Insurance Co.
(Sept. 13, 1953)
4/1998
General Manager of Metropolitan Corporate
Loan Dept. of The Dai-Ichi Mutual Life Insurance Co.
4/2000
General Manager of Loan Department of The
Dai-Ichi Mutual Life Insurance Co.
4/2002
General Manager of Credit Department of The
Dai-Ichi Mutual Life Insurance Co.
3/2006
Corporate Auditor, the Company*
Term
All directors and corporate auditors are elected by the shareholders at their general meeting.
The term of office of directors is one year. The current term of all directors expires in
March 2008. The term of office of corporate auditors is four years. The current term for Mr. Ohe
expires in March 2011, while current terms for Mr. Takahashi and Mr. Nagata, who were elected in
the general meeting of shareholders in March 2004, expire in March 2008, and current terms for
Mr. Shimizu and Mr. Shishikura, who were elected in the general meeting of shareholders in March
2006, expires in March 2010.
Board members and corporate auditors may serve any number of consecutive terms.
There is no arrangement or understanding between any director or corporate auditor and any
major shareholder, customer, supplier or other material stakeholders in connection with the
selection of such director or corporate auditor.
Board of Directors and Corporate Auditors
The Company's articles of incorporation provide for a board of directors of not more than 30
members and for not more than five corporate auditors. Currently the number of board members is 27,
and the number of corporate auditors is five. There is no maximum age limit for members of the
board. Board members and corporate auditors may be removed from office at any time by a resolution
of a general meeting of shareholders.
The board of directors has ultimate responsibility for the administration of the Company's
affairs. By resolution, the board of directors designates, from among its members, representative
directors, who have authority individually to represent the Company generally in the conduct of its
affairs.
Under the Corporation Law of Japan, board members must refrain from engaging in any business
competing with the Company unless approved by a board resolution, and no board member may vote on a
proposal, arrangement or contract in which that board member is deemed to be materially interested.
The Corporation Law of Japan requires a resolution of the board of directors for a company to
acquire or dispose of material assets, to borrow substantial amounts of money, to employ or
discharge important employees such as corporate officers, and to establish, change or abolish
material corporate organizations such as a branch office.
43
Table of Contents
The corporate auditors are not required to be certified public accountants, although
Mr.Shimizu is a certified public accountant. At least half of corporate auditors must be persons
who have not been either board members or employees of the Company or any of its subsidiaries. A
corporate auditor may not at the same time be a board member or an employee of the Company or any
of its subsidiaries. The corporate auditors have the statutory duty of examining the Company's
financial statements and the Company's business reports to be submitted annually by the board of
directors at the general meetings of shareholders and of reporting their opinions to the
shareholders. They also have the statutory duty of supervising the administration by the board
members of the Company's affairs. They shall participate in the meetings of the board of directors
but are not entitled to vote.
The corporate auditors constitute the board of corporate auditors. Under the Corporation Law
of Japan, the board of corporate auditors has a statutory duty to prepare and submit its audit
report to the board of directors each year. A corporate auditor may note an opinion in the auditor
report if a corporate auditor's opinion is different from the opinion expressed in the audit
report. The board of corporate auditors is empowered to establish audit principles, the method of
examination by corporate auditors of the Company's affairs and financial position and other matters
concerning the performance of the corporate auditors' duties. The Company does not have an audit
committee.
The amount of remuneration payable to the Company's board members as a group and that of the
Company's corporate auditors as a group in respect of a fiscal year is subject to approval by a
general meeting of shareholders. Within those authorized amounts, the compensation for each board
member and corporate auditor is determined by the board of directors and a consultation of the
corporate auditors, respectively. The Company does not have a remuneration committee.
In fiscal 2004, Canon established a standing committees, the Internal Control Committee, with
the president appointed as chairman of the group. The Internal Control Committee has built a highly
effective internal control system unique to the Canon Group, which not only serves to ensure the
reliability of the company's financial reporting, but also aims to ensure the effectiveness and
efficiency of its business operations, as well as compliance with related laws, regulations, and
internal controls.
Additionally, in fiscal 2005, the Disclosure Committee was established with the president
appointed as chairman. This committee was formed to ensure that Canon is not only in compliance
with applicable laws, rules and regulations, but also to ensure that information disclosed to
shareholders and capital markets is both correct and comprehensive.
B. Compensation
In the fiscal year ended December 31, 2006, the Company paid approximately ¥ 1,628 million, in
total to directors and corporate auditors. This amount includes bonuses but excludes retirement
allowances.
Directors and corporate auditors are not covered by the Company's retirement program. However,
in accordance with customary Japanese business practices, directors and corporate auditors receive
lump-sum retirement benefits, subject to shareholder approval. The Company paid retirement benefits
aggregating ¥ 241 million to two directors and one auditor during the fiscal year ended December 31, 2006.
The Company does not have a stock option plan for directors, corporate auditors or any other
employees.
C. Board practices
See Item 6A "Directors and senior management" and Item 6B " Compensation".
44
Table of Contents
D. Employees
Following table lists the number of Canon's full-time employees as of December 31, 2006, 2005
and 2004.
Total
Japan
Americas
Europe
Others
December 31, 2006
Business machines
79,293
30,046
7,409
9,202
32,636
Cameras
16,841
5,422
1,652
1,381
8,386
Optical and other products
16,494
9,768
1,164
703
4,859
Corporate
5,871
5,517
44
—
310
Total
118,499
50,753
10,269
11,286
46,191
December 31, 2005
Business machines
77,906
29,964
7,297
8,988
31,657
Cameras
18,308
5,263
1,552
1,405
10,088
Optical and other products
13,762
8,249
999
435
4,079
Corporate
5,607
5,161
90
94
262
Total
115,583
48,637
9,938
10,922
46,086
December 31, 2004
Business machines
74,772
29,928
7,833
8,997
28,014
Cameras
16,534
5,008
1,400
1,402
8,724
Optical and other products
11,397
6,458
908
391
3,640
Corporate
5,554
4,709
117
108
620
Total
108,257
46,103
10,258
10,898
40,998
There was an increase of approximately 2,900 employees as of the end of fiscal 2006 as
compared to the end of fiscal 2005. This increase is mainly due to
employment increases in the domestic region for the purpose to expand the staff for R&D purposes.
Canon had approximately 30,400 temporary employees on average during fiscal 2006. This number
includes seasonal workers as well as temp-staff employees such
as security staff, meal service staff and janitorial staff.
The Company and its subsidiaries have their own independent labor union. Canon has not
experienced a labor strike since its establishment. The Company
believes that the relationship between Canon and its labor union is good.
45
Table of Contents
E. Share ownership
The following table lists the number of shares owned by the directors and corporate auditors
of the Company as of March 31, 2007. The total is 338,246
shares constituting 0.03% of all outstanding shares.
Name
Position
Number of shares
Fujio Mitarai
Chairman & CEO
92,300
Tsuneji Uchida
President & COO
9,600
Toshizo Tanaka
Executive Vice President
17,752
Nobuyoshi Tanaka
Senior Managing Director
19,432
Junji Ichikawa
Senior Managing Director
17,096
Hajime Tsuruoka
Senior Managing Director
12,700
Akiyoshi Moroe
Managing Director
16,932
Kunio Watanabe
Managing Director
13,352
Yoroku Adachi
Managing Director
10,742
Yasuo Mitsuhashi
Managing Director
8,677
Tomonori Iwashita
Managing Director
6,250
Masahiro Osawa
Managing Director
5,342
Shigeyuki Matsumoto
Managing Director
4,152
Katsuichi Shimizu
Director
9,937
Ryoichi Bamba
Director
5,400
Toshio Honma
Director
10,492
Keijiro Yamazaki
Director
5,850
Shunichi Uzawa
Director
6,392
Masaki Nakaoka
Director
3,400
Toshiyuki Komatsu
Director
2,900
Haruhisa Honda
Director
5,789
Tetsuro Tahara
Director
1,652
Seijiro Sekine
Director
4,990
Shunji Onda
Director
4,402
Kazunori Fukuma
Directo
r
1,000
Hideki Ozawa
Director
719
Masaya Maeda
Director
1,000
Teruomi Takahashi
Corporate Auditor
10,846
Kunihiro Nagata
Corporate Auditor
2,150
Tadashi Ohe
Corporate Auditor
24,300
Yoshinobu Shimizu
Corporate Auditor
1,100
Minoru Shishikura
Corporate Auditor
1,600
Total
338,246
The Company and certain of its subsidiaries encourage its employees to purchase shares of
their Common Stock
in the market through an employees' stock purchase association.
46
Table of Contents
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders
The table below shows the number of The Company's shares held by the top ten holders of the
Company's shares and their percentage ownership as of December 31, 2006:
Name of major shareholder
Shares owned
Percentage
(In thousands)
The Dai-Ichi Mutual Life Insurance Co.
93,312
7.0
%
Japan Trustee Services Bank, Ltd.
82,773
6.2
%
(Trust Account)
The Master Trust Bank of Japan, Ltd.
74,645
5.6
%
(Trust Account)
Moxley & Co.
68,908
5.2
%
State Street Bank and Trust Company 505103
34,955
2.6
%
State Street Bank and Trust Company
34,198
2.6
%
Mizuho Corporate Bank, Ltd.
28,419
2.1
%
Nomura Securities Co., Ltd.
27,175
2.0
%
Sompo Japan Insurance Inc.
22,910
1.7
%
BNP Paribas
Securities (Japan) Ltd
21,105
1.6
%
Canon's major shareholders do not have different voting rights from other shareholders.
As
of December 31, 2006, 21.4% of the outstanding shares of common
stock was held of record
by 254 residents of the United States of America.
The Company is not directly or indirectly owned or controlled by any other corporation, by any
government, or by any other natural or legal person or
persons severally or jointly.
B. Related party transactions
Since the beginning of Canon's last full fiscal year, Canon has not transacted with, nor does
Canon currently plan to transact with a related party
(other than certain transactions with subsidiaries of the Company). For purposes of this paragraph,
a related party includes: (a) enterprises that directly or
indirectly through one or more intermediaries, control or are controlled by, or are under common
control with, Canon; (b) associates; (c) individuals owning,
directly or indirectly, an interest in the voting power of Canon that gives them significant
influence over Canon, and close members of any such individual's
family; (d) key management personnel, that is, those persons having authority and responsibility
for planning, directing and controlling the activities of
Canon, including directors and senior management of companies and close member of such individual's
families; (e) enterprises in which a substantial interest
in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over
which such a person is able to exercise significant influence. This includes enterprises owned by
directors or major shareholders of Canon and enterprises that have a member of key management in
common with Canon. Close members of an individual's family are those that may be expected to
influence, or be influenced by, that person in their dealings with Canon. An associate is an
unconsolidated
enterprise in which Canon has a significant influence or which has significant influence over
Canon. Significant influence over an enterprise is the power to participate in the financial and
operating policy decisions of the enterprise but is less than control over those policies.
Shareholders beneficially owning a 10% interest in the voting power of the Company are presumed to
have a significant influence on Canon.
To the Company's knowledge, no person owned a 10% interest in the voting power of the Company
as of March 31, 2007.
In the ordinary course of business on an arm's length basis, Canon purchases and sells
materials, supplies and services from and to its affiliates accounted for by the equity method.
There are 14 affiliates which are accounted for by the equity method. Canon does not consider the
amounts of the transactions with the above affiliates to be material to its business.
C. Interests of experts and counsel
Not Applicable.
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Table of Contents
Item 8. Financial Information
A. Consolidated financial statements and other financial information
Consolidated financial statements
This Annual Report contains consolidated financial statements as of December 31, 2006 and 2005
and for each of the three years in the period ended
December 31, 2006 prepared in accordance with U.S. generally accepted accounting principles and
audited in accordance with the standards of the Public Company Accounting Oversight Board (United
States) by an Independent Registered Public Accounting Firm. The financial statements as of and
for the years ended December 31, 2004, 2005 and 2006 have been audited by Ernst & Young ShinNihon,
and their audit report covering each of the periods is included in Item 17 of this report.
Refer to Item 17, Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
Legal proceedings
Other than as described below, neither the Company nor its subsidiaries are involved in any
litigation or other legal proceedings that, if determined adversely to the Company or its
subsidiaries, would individually or in the aggregate have a material adverse effect on the Company
or its operations.
•
In December 2002, the European Commission instituted an investigation into the
printer and supply market. Canon received a questionnaire in connection with the
investigation of the printer and supply market in January 2003 and Canon has submitted its
response. The investigation is yet to be closed.
•
In January 2003, the Dusseldorf District Court in Germany issued rulings in Canon's
favor in two patent infringement actions filed by Canon against Pelikan Hardcopy
Deutschland GmbH and Pelikan Hardcopy European Logistics & Services GmbH (collectively,
"Pelikan Hardcopy"). Pelikan Hardcopy has appealed against the decision. In November 2003,
the Dusseldorf District Court in Germany issued a ruling in Canon's favor in another
patent infringement action filed by Canon against Pelikan Hardcopy. Pelikan Hardcopy has
appealed against the decision. The Dusseldorf High Court issued rulings in Canon's favor
in one of the three appeals by Pelikan Hardcopy. Pelikan Hardcopy has applied for further
appeal to the Supreme Court. In November 2005, the Dusseldorf High Court issued a ruling
in Canon's favor in another of the three appeals by Pelikan hard copy. The ruling has
become finally binding, and now the procedure for enforcing the ruling is underway. The
remaining one of the appeals has been suspended by the Court since April 2004.
•
In February 2003, a lawsuit was filed by St. Clair Intellectual Property Consultants,
Inc. ("St. Clair") against the Company and one of its subsidiaries in the United States
District Court of Delaware, which accused the Company of infringement of patents related
to certain technology. In connection with this case, in October 2004, a jury
preliminarily found damages against the Company of approximately ¥ 4,000 million based on a
percentage of certain product sales in the United States through 2003. Subsequent to this
jury finding, St. Clair also made a motion to the court for damages relating to certain
2004 sales, using the same royalty rate awarded by the jury. In March 2006, the Company
and St. Clair entered into a settlement agreement, pursuant to which the lawsuit was
withdrawn in July 2006.
•
In October 2003, a lawsuit was filed by a former employee against the Company at the
Tokyo District Court in Japan. The lawsuit alleges that the former employee is entitled
to ¥ 45,872 million as compensation for an invention related to certain technology used by
the Company, and the former employee has sued for a partial payment of ¥ 1,000 million and
interest thereon. On January 30, 2007, the Tokyo District Court in Japan ordered the
Company to pay the former employee approximately ¥ 33.5 million and interest thereon. On
the same day, the Company appealed the decision.
•
In Germany, Verwertungsgesellschaft Wort ("VG Wort"), a collecting agency
representing certain copyright holders, has filed a series of lawsuits seeking to impose
copyright levies upon digital products such as PCs and printers, that allegedly enable the
reproduction of copyrighted materials, against the companies importing and distributing
these digital products. In May 2004, VG Wort filed a civil lawsuit against
Hewlett-Packard GmbH seeking levies on multi-function printers. This is an industry test
case under which Hewlett-Packard GmbH represents other companies sharing common interests,
and Canon has undertaken to be bound by the final decision of this court case. The court
of first instance and the court of appeals held that the multi-function printers were
subject to a levy. In particular, the court of appeals ordered Hewlett-Packard GmbH to
pay the amount equivalent to the levies imposed on photocopiers (EUR 38.35 to EUR 613.56
per unit, depending on printing speed and color printing capability). This lawsuit is
currently under appeal before the German Federal Supreme Court. With regard to
single-function printers, VG Wort filed a separate lawsuit in January 2006 against Canon,
seeking payment of copyright levies, and the court of first instance in Düsseldorf ruled
in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such
decision in December 2006. In a similar court case, which does not include Canon, seeking
copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and
Kyocera Mita Deutschland GmbH, the court of appeals in Düsseldorf rejected such alleged
levies on January 23, 2007. Canon, other companies and the industry associations have
expressed opposition to such extension of the levy scope and the final conclusion of these
court cases including the amount of levies to be imposed, remains uncertain.
•
In April 2004, Canon filed two patent infringement actions against Recycle•Assist
Co., Ltd. ("Recycle Assist") before the Tokyo District Court. In December 2004, the Tokyo
District Court issued rulings in Recycle Assist's favor in the two actions. In December
2004, Canon appealed against the decisions of the two actions. In January 2006, the
Intellectual Property High Court issued a ruling in favor of Canon in one of the two
appeal cases. In February 2006, Recycle Assist further appealed against this ruling of
the Intellectual Property High Court. Canon has withdrawn the remaining appeal case in
view of the judicial economy.
•
In April 2005, a lawsuit was filed by Nano-Proprietary Inc. ("NPI") against the
Company and Canon U.S.A. Inc. in the United States District Court of
Texas alleging that SED Inc., a joint venture company established by the Company and Toshiba
Corporation, is not regarded as a "Subsidiary" under the Patent License Agreement between
the Company and NPI (the "Agreement") and that the extension of the license to SED Inc.
constitutes a breach of the Agreement. NPI also alleges that there was fraudulent conduct
by the Company in executing the Agreement, and requests rescission of the Agreement and
compensatory damages. This case is still pending and the final outcome, including any
liability to the Company, is not yet determined, but in November 2006, the Court denied the
Company's Motion for a summary judgment that SED Inc. is a Subsidiary of the Company. In
January 2007, the Company purchased all the shares of SED Inc. owned by Toshiba Corporation,
making SED Inc. a 100% owned subsidiary of the Company. However, on February 22, 2007, the
court issued a summary judgment stating that SED Inc. (before the above stock purchase) was
not a Subsidiary of the Company, and that the Agreement has been terminated due to a
material breach of the Agreement by the Company. The remaining pending issues at the
district court are whether the Company was engaged in fraudulent conduct and whether
compensatory damages should be granted. The Company will appeal to the appellate court
immediately after the current proceeding at the district court has been concluded regardless
of any judgments rendered by the district court.
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Table of Contents
Dividend policy
Dividends are proposed by the Board of Directors of the Company based on the year-end
non-consolidated financial statements of the Company, and are approved at the ordinary general
meeting of shareholders, which is held in March of each year. Record holders of the Company's
American Depositary Receipts (ADRs) on the dividends' record date are entitled to receive payment
in full of the declared dividend. In addition to annual dividends, by resolution of the Board of
Directors, the Company may declare a cash distribution as an interim dividend. The record date for
the Company's year-end dividends and for the interim dividends are December 31 and June 30,
respectively.
Since 1996, under the two five-year initiatives — Phases I and II of the Excellent Global
Corporation Plan — the Canon Group has been working towards increasing its corporate value. During
this period, management has focused on profitability and cash flow, which has led to greater
competitiveness of its products and a stronger financial position.
Going forward, Canon will actively invest in strategic areas to accelerate growth, and will
also place priority on actively returning profits to shareholders as an important management
measure, taking full advantage of its financial base strengthened by the two five-year plans.
From now on, as an important part of its capital strategy, the Company will acquire its own
shares, as it deems necessary, to improve capital efficiency and realize a flexible capital
strategy, taking into account future investment and other financial plans. As for shareholder
return, the Company will continue its current dividend policy to gradually raise the payout ratio
to approximately 30% on a consolidated basis.
Accordingly, in response to the continued support of shareholders and based on the new policy
on returning profits to shareholders, Canon has increased its full-year dividend per share from ¥
66.67 in 2005, to ¥ 83.33 for fiscal year 2006.
B. Significant changes
No significant change has occurred since the date of the annual financial statements.
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Table of Contents
Item 9. The Offer and Listing
A. Offer and listing details
Trading in domestic markets
The common stock of the Company has been listed on the Tokyo Stock Exchange, Inc. ("TSE"), the
principal stock exchange market in Japan, since 1949, and is traded on the First Section of the
TSE. The shares are also listed on four other regional markets in Japan.
The following table lists the reported high and low sales prices of the shares on the TSE and
the closing highs and lows of the Tokyo Stock Price Index ("TOPIX") and Nikkei Stock Average for
the five most recent years. TOPIX is an index of the market value of stocks listed on the First
Section of the TSE. The Nikkei Stock Average, an index of 225 selected stocks on the First Section
of the TSE, is another widely accepted index.
TSE
TOPIX
Nikkei Stock Average
(Canon Inc.)
(Reference data)
(Reference data)
(Japanese yen)
(Points)
(Japanese yen)
Period
High
Low
High
Low
High
Low
2002 Year
¥
3,500
¥
2,413
1,144.02
807.35
¥
11,979.85
¥
8,303.39
2003 Year
4,140
2,607
1,114.40
770.46
11,161.71
7,607.88
2004 Year
3,880
3,273
1,225.97
1,017.84
12,195.66
10,299.43
2005 1(st) quarter
3,860
3,460
1,206.93
1,128.75
11,975.46
11,212.63
2(nd) quarter
4,000
3,587
1,202.46
1,104.30
11,911.90
10,770.58
3(rd) quarter
4,127
3,587
1,430.80
1,174.16
13,678.44
11,540.93
4(th) quarter
4,780
3,960
1,673.18
1,363.66
16,445.56
12,996.29
2005 Year
4,780
3,460
1,673.18
1,104.30
16,445.56
10,770.58
2006 1(st) quarter
5,287
4,567
1,735.25
1,538.85
17,125.64
15,059.52
2(nd) quarter
6,013
5,173
1,783.72
1,439.00
17,563.37
14,045.53
3(rd) quarter
6,160
5,240
1,655.27
1,473.59
16,414.94
14,437.24
4(th) quarter
6,780
5,840
1,685.76
1,526.37
17,301.69
15,615.56
2006 Year
6,780
4,567
1,783.72
1,439.00
17,563.37
14,045.53
TSE
TOPIX
Nikkei Stock Average
(Canon Inc.)
(Reference data)
(Reference data)
(Japanese yen)
(Points)
(Japanese yen)
Period
High
Low
High
Low
High
Low
2006 July
¥
5,810
¥
5,240
1,606.86
1,473.59
¥
15,710.39
¥
14,437.24
August
5,850
5,350
1,645.43
1,540.12
16,244.84
15,154.06
September
6,160
5,700
1,655.27
1,546.03
16,414.94
15,513.87
October
6,700
6,190
1,672.02
1,596.24
16,901.53
16,028.32
November
6,420
5,840
1,629.29
1,526.37
16,512.51
15,615.56
December
6,780
5,960
1,685.76
1,594.72
17,301.69
16,185.92
2007 January
6,750
6,290
1,749.18
1,650.82
17,617.64
16,758.46
February
6,700
6,070
1,823.89
1,712.28
18,300.39
17,199.66
March
6,600
6,020
1,755.70
1,656.74
17,558.04
16,532.91
Note:
Canon has made a three-for-two stock split on July 1, 2006. The information above has been
adjusted to reflect the stock
split.
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Table of Contents
Trading in foreign markets
The Company's ADRs are listed on the New York Stock Exchange ("NYSE") and the Company's Global
Bearer Certificates ("GBCs") are listed on the Frankfurt Stock Exchange.
Since the Company's 1969 public offering in the United States of U.S.$9,000,000 principal
amount of its 6 1/2 % Convertible Debentures due 1984, there has been limited trading in the
over-the-counter market in the Company's ADRs. Since March 16, 1998, each ADR represents one share
of the Company's common stock. The Company's ADSs had been quoted on the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") since 1972 to September 13, 2000 under the
symbol CANNY.
On September 14, 2000, Canon listed its ADSs on the NYSE under the symbol CAJ. The table below
displays historical transition of high and low prices of
our ADSs on NYSE.
NYSE
(Canon Inc.)
(U.S. dollars)
Period
High
Low
2002 Year
$
26.933
$
20.100
2003 Year
35.333
22.487
2004 Year
36.260
29.627
2005 1(st) quarter
36.327
33.687
2(nd) quarter
37.140
34.000
3(rd) quarter
36.700
32.640
4(th) quarter
40.280
34.380
2005 Year
40.280
32.640
2006 1(st) quarter
44.620
39.630
2(nd) quarter
53.100
42.160
3(rd) quarter
52.380
44.310
4(th) quarter
57.320
50.840
2006 Year
57.320
39.630
(Canon Inc.)
(U.S. dollars)
Period
High
Low
2006 July
$
50.870
$
44.310
August
49.310
47.260
September
52.380
48.400
October
56.500
52.800
November
54.500
50.840
December
57.320
51.970
2007 January
56.990
52.020
February
55.400
50.720
March
56.190
51.770
Note: Canon has made a three-for-two stock split on July 1, 2006. The information above has been
adjusted to reflect the stock
split.
The depositary and agent of the ADRs is JPMorgan Chase Bank, located at 1 Chase Manhattan
Plaza, New York, N.Y. 10081, U.S.A.
Co-ownership shares in a GBCs are listed on the Frankfurt Stock Exchange.
B. Plan of distribution
Not applicable.
C. Markets
See Item 9A "Offer and Listing Details".
51
Table of Contents
Item 10. Additional Information
A. Share capital
Not applicable.
B. Memorandum and articles of association
Objects and Purposes in Canon Inc. (the "Company")'s Articles of Incorporation
Objects of the Company provided in Article 2 of the Company's Articles of Incorporation shall
be to engage in the following business:
(1)
Manufacture and sale of optical machineries and instruments of various kinds.
(2)
Manufacture and sale of acoustic, electrical and electronic machineries and instruments of
various kinds.
(3)
Manufacture and sale of precision machineries and instruments of various kinds.
(4)
Manufacture and sale of medical machineries and instruments of various kinds.
(5)
Manufacture and sale of general machineries, instruments and equipments of various kinds.
(6)
Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of
the preceding items.
(7)
Production and sale of software products.
(8)
Manufacture and sale of pharmaceutical products
(9)
Telecommunications business, and information service business such as information processing service business, information providing
service business, etc.
(10)
Contracting for telecommunications works, electrical works and machinery and equipment installation works.
(11)
Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.
(12)
Manpower providing business, property leasing business and travel business.
(13)
Business relative to investigation, analysis of the environment and purification process of soil, water, etc.
(14)
Any and all business relative to each of the preceding items.
Provisions Regarding Directors
There is no provision in the Company's Articles of Incorporation as to a Director's power to
vote on a proposal, arrangement or contract in which the Director is materially interested, but,
under the Corporation Law of Japan, the new law relating to joint stock corporations (known in
Japanese as
kabushiki kaisya
) which came into effect on May 1, 2006, a director is required to
refrain from voting on such matters at meetings of the board of directors.
The Corporation Law of Japan provides that compensation for directors is determined at a
general meeting of shareholders of a company. Within the upper limit
approved at the shareholders'
meeting, the board of directors will determine the amount of compensation for each director. The
board of directors may, by its resolution, leave such decision to the discretion of the company's
representative director.
The Corporation Law of Japan provides that the incurrence by a company of a significant loan
from a third party should be approved by the company's board of directors. The Company's
Regulations of the Board of Directors have adopted this policy.
There is no mandatory retirement age for the Company's Directors under the Corporation Law of
Japan or its Articles of Incorporation.
There is no requirement concerning the number of shares an individual must hold in order to
qualify him as a Director of the Company under the Corporation Law of Japan or its Articles of
Incorporation.
Holding of Shares by Foreign Investors
Other than the Japanese unit share system that is described in "Rights of Shareholders -
Japanese Unit Share System" below, there are no limitations on the rights of non-residents or
foreign shareholders to hold or exercise voting rights on the Company's shares imposed by the laws
of Japan or the Company's Articles of Incorporation or other constituent documents.
Rights of Shareholders
Set forth below is information relating to the Company's common stock, including brief
summaries of the relevant provisions of its Articles of Incorporation and Regulations for Handling
of Shares, as currently in effect, and of the Corporation Law of Japan and related legislation.
52
Table of Contents
General
The Company's authorized share capital is 3,000,000,000 shares, of which 1,333,445,830 shares
were issued and outstanding as of December 31, 2006. Under the Corporation Law of Japan, shares
must be registered and are transferable by delivery of share certificates. In order to assert
shareholders' rights against the Company, a shareholder must have its name and address registered
on its register of shareholders, in accordance with the Company's Regulations for Handling of
Shares.
A holder of shares may choose, at its discretion, to participate in the central clearing
system for share certificates under the Law Concerning Central Clearing of Share Certificates and
Other Securities of Japan. Participating shareholders must deposit certificates representing all of
the shares to be included in this clearing system with the Japan Securities Depository Center, Inc.
(the "Securities Center"). If a holder is not a participating institution in the Securities Center,
it must participate through a participating institution, such as a securities company or bank
having a clearing account with the Securities Center. All shares deposited with the Securities
Center will be registered in the name of the Securities Center on the Company's register of
shareholders. Each participating shareholder will in turn be registered on the Company's register
of beneficial shareholders and be treated in the same way as shareholders registered on its
register of shareholders. For the purpose of transferring deposited shares, delivery of share
certificates is not required. Entry of the share transfer in the books maintained by the Securities
Center for participating institutions, or in the book maintained by a participating institution for
its customers, has the same effect as delivery of share certificates. The registered beneficial
owners may exercise the rights attached to the shares, such as voting rights, and will receive
dividends (if any) and notices to shareholders directly from the Company. The shares held by a
person as a registered shareholder and those held by the same person as a registered beneficial
owner are aggregated for these purposes. Beneficial owners may at any time withdraw their shares
from deposit and receive share certificates, subject to the limitations caused by the Japanese unit
share system described below.
A new law to establish a new central clearing system for shares of listed companies and to
eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the
relevant law will come into effect within five years of the date of promulgation. On the effective
date, a new central clearing system will be established and the shares of all Japanese companies
listed on any Japanese stock exchange, including the Company's shares, will be subject to the new
central clearing system. On the same day, all existing share certificates for share of all
Japanese companies listed on any Japanese stock exchange, including the Company's shares, will
become null and void and the transfer of such shares will be effected through entry in the books
maintained under the new central clearing system.
The registered beneficial holder of deposited shares underlying the ADSs is the depositary for
the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders' rights.
Distributions of Surplus
Under the Corporation Law of Japan, distributions of cash or other assets by joint stock
corporations to their shareholders, so called "dividends", are referred to as "distributions of
Surplus" ("Surplus" is defined in "-Restriction on Distributions of Surplus" below). The Company
may make distributions of Surplus to the shareholders any number of times per fiscal year, subject
to certain limitations described in "-Restriction on Distributions of Surplus". Under the
Corporation Law of Japan, distributions of Surplus are required to be authorized by a resolution of
a general meeting of shareholders.
Under the Articles of Incorporation of the Company, year-end dividends and interim dividends,
if any, may be distributed to shareholders (or pledgees) appearing in the register of shareholders
as of December 31 and June 30 of each year, respectively.
Distributions of Surplus may be made in cash or in kind in proportion to the number of shares
held by each shareholder. A resolution of shareholders' meeting must specify the kind and
aggregate book value of the assets to be distributed, the manner of allocation of such assets to
shareholders, and the effective date of the distribution. If a distribution of Surplus is to be
made in kind, the Company may, pursuant to a resolution of shareholders meeting, grant a right to
its shareholders to require the Company to make such distribution in cash in stead of in kind. If
no such right is granted to shareholders, the relevant distribution of Surplus must be approved by
a special resolution of a general meeting of shareholders.
Restriction on Distributions of Surplus
When the Company makes a distribution of Surplus, the Company must, until the aggregate amount
of its additional paid-in capital and legal reserve reaches one-quarter of its stated capital, set
aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the
amount of Surplus so distributed.
The amount of Surplus at any given time must be calculated in accordance with the following
formula:
A + B + C + D – (E + F + G)
In the above formula, the alphabet from "A" to "G" is defined as follows:
"A"= the total amount of "other capital surplus" and "other retained earnings", each such
amount being that appearing on its non-consolidated balance sheet as of the end of the last fiscal
year;
"B"= (if the Company has disposed of its treasury stock after the end of the last fiscal
year) the amount of the consideration for such treasury stock received by the Company less the book
value thereof;
"C"= (if the Company has reduced its stated capital after the end of the last fiscal year)
the amount of such reduction less the portion thereof that has been transferred to additional
paid-in capital or legal reserve (if any);
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Table of Contents
"D"= (if the Company has reduced its additional paid-in capital or legal reserve after the
end of the last fiscal year) the amount of such reduction less the portion thereof that has been
transferred to stated capital (if any);
"E"= (if the Company has cancelled its treasury stock after the end of the last fiscal year)
the book value of such treasury stock;
"F"= (if the Company has distributed Surplus to its shareholders after the end of the last
fiscal year) the total book value of the Surplus so distributed;
"G"= certain other amounts set forth in the ordinances of the Ministry of Justice, including
(if the Company has reduced Surplus and increased its stated capital, additional paid-in capital or
legal reserve after the end of the last fiscal year) the amount of such reduction and (if the
Company have distributed Surplus to the shareholders after the end of the last fiscal year) the
amount set aside in the additional paid-in capital or legal reserve (if any) as required by the
ordinances of the Ministry of Justice.
The aggregate book value of Surplus distributed by the Company may not exceed a prescribed
distributable amount (the "Distributable Amount"), as calculated on the effective date of such
distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus
less the aggregate of the following:
(a) the book value of the Company's treasury stock;
(b) the amount of consideration for the treasury stock disposed of by the Company after the
end of the last fiscal year; and
(c) certain other amounts set forth in the ordinances of the Ministry of Justice, including
(if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital,
additional paid-in capital and legal reserve, each such amount being that appearing on the
non-consolidate balance sheet as of the end of the last fiscal year) all or certain part of such
exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.
If the Company has become at its option a company with respect to which consolidated balance
sheets should also be taken into consideration in the calculation of the Distributable Amount
(
renketsu haito kisei tekiyo kaisha
), it will be required to further deduct from the amount of
Surplus the excess amount (if the amount is zero or below zero, zero) of (x) the total amount of
shareholders' equity appearing on its non-consolidated balance sheet as of the end of the last
fiscal year and certain other amounts set forth in the ordinances of the Ministry of Justice over
(y) the total amount of shareholders' equity and certain amounts set forth in the ordinances of the
Ministry of Justice appearing on its consolidated balance sheet as of the end of the last fiscal
year.
If the Company has prepared interim financial statements as described below, and if such
interim financial statements have been approved (unless exempted by the Corporation Law of Japan)
by a general meeting of shareholders, the Distributable Amount must be adjusted to take into
account the amount of profit or loss, and the amount of consideration for the treasury stock
disposed of by the Company, during the period in respect of which such interim financial statements
have been prepared. The Company may prepare non-consolidated interim financial statements
consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and an
income statement for the period from the first day of the current fiscal year to the date of such
balance sheet. Interim financial statements so prepared by the Company must be approved by the
board of directors and audited by its independent auditors, as requires by the ordinances of the
Ministry of Justice.
Stock Splits
The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to
make stock splits, regardless of the value of net assets (as appearing in its latest
non-consolidated balance sheet) per share. In addition, by resolution of the Company's Board of
Directors, the Company may increase the authorized shares up to the number reflecting the rate of
stock splits and amend its Articles of Incorporation to this effect without the approval of a
shareholders' meeting. For example, if each share became three shares by way of a stock split, the
Company may increase the authorized shares from the current 3,000,000,000 shares to 9,000,000,000
shares.
Japanese Unit Share System
The Company's Articles of Incorporation provided that 100 shares of common stock constitute
one "unit". The Corporation Law of Japan permits the Company, by resolution of its Board of
Directors, to reduce the number of shares which constitutes one unit or abolish the unit share
system, and amend its Articles of Incorporation to this effect without the approval of a
shareholders' meeting.
Transferability of Shares Representing Less than One Unit
The Company may not issue share certificates for a number of shares not constituting an
integral number of units, except in limited circumstances. Because the transfer of shares normally
requires delivery of the share certificates for the shares being transferred, shares constituting a
fraction of a unit and for which no share certificates are issued may not be transferable. Because
transfer of ADRs does not require a change in the ownership of the underlying shares, holders of
ADRs evidencing ADSs that constitute less than one unit of shares are not affected by these
restrictions in their ability to transfer the ADRs.
However, because transfers of less than one unit of the underlying shares are normally prohibited
under the unit share system, the deposit agreement provides that the right of ADR holders to
surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as
to whole units.
Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its
Shares
A holder of shares representing less than one unit may at any time require the Company to
purchase its shares. These shares will be purchased at (a) the closing price of the shares reported
by the Tokyo Stock Exchange, Inc. (the "Tokyo Stock Exchange") on the day when the request to
purchase is made or (b) if no sale takes place on the Tokyo Stock Exchange on that day, then the
price at which sale of shares is effected on such stock exchange immediately thereafter. In such
case, the Company will request payment of an amount equal to the brokerage commission applicable to
the shares purchased pursuant to its Regulations for Handling of Shares. However, because holders
of ADSs representing less than one unit are not able to withdraw the underlying shares from
deposit, these holders will not be able to exercise this right as a practical matter.
Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares
up to a Whole Unit
The Articles of Incorporation of the Company provide that a holder of shares representing less
than one unit may require the Company to sell its shares to such holder so that the holder can
raise its fractional ownership to a whole unit. These shares will be sold at (a) the closing price
of the shares reported by the Tokyo Stock Exchange on the day when the request to sell becomes
effective or (b) if no sale has taken place on the Tokyo Stock Exchange on that day, then
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the price
at which sale of shares is effected on such stock exchange immediately thereafter. In such case,
the Company will request payment of an amount equal to the brokerage commission applicable to the
shares sold pursuant to its Regulations for Handling of Shares.
Voting Rights of a Holder of Shares Representing Less than One Unit
A holder of shares representing less than one unit cannot exercise any voting rights
pertaining to those shares. In calculating the quorum for various voting purposes, the aggregate
number of shares representing less than one unit will be excluded from the number of outstanding
shares. A holder of shares representing one or more whole units will have one vote for each whole
unit represented.
A holder of shares representing less than one unit does not have any rights relating to
voting, such as the right to participate in a demand for the resignation of a director, the right
to participate in a demand for the convocation of a general meeting of shareholders and the right
to join with other shareholders to propose an agenda item to be addressed at a general meeting of
shareholders. In addition, a holder of shares constituting less than one unit does not have the
right to require the Company to issue share certificates for those shares.
However, a holder of shares constituting less than one unit has all other rights of a
shareholder in respect of those shares, including the following rights:
•
to receive annual and interim dividends,
•
to receive cash or other assets in case of consolidation or split of shares, exchange or
transfer of shares or corporate merger,
•
to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and
•
to participate in any distribution of surplus assets upon liquidation.
Ordinary and Extraordinary General Meeting of Shareholders
The Company normally holds its ordinary general meeting of shareholders in March of each year
in Ohta-ku, Tokyo or in a neighbouring area. In addition, the Company may hold an extraordinary
general meeting of shareholders whenever necessary by giving at least two weeks' advance notice.
Under the Corporation Law of Japan, notice of any shareholders' meeting must be given to each
shareholder having voting rights or, in the case of a non-resident shareholder, to his resident
proxy or mailing address in Japan in accordance with the Company's Regulations for Handling of
Shares, at least two weeks prior to the date of the meeting.
Voting Rights
A shareholder is generally entitled to one vote per one unit of shares as described in this
paragraph and under "Japanese Unit Share System" above. In general, under the Corporation Law of
Japan, a resolution can be adopted at a general meeting of shareholders by a majority of the shares
having voting rights represented at the meeting. The Corporation Law of Japan and the Company's
Articles of Incorporation require a quorum for the election of Directors and Corporate Auditors of
not less than one-third of the total number of outstanding shares having voting rights. The
Company's shareholders are not entitled to cumulative voting in the election of Directors. A
corporate shareholder whose outstanding shares are in turn more than one-quarter directly or
indirectly owned by the Company does not have voting rights. Shareholders may exercise their voting
rights through proxies, provided that those proxies are also shareholders who have voting rights.
Pursuant to the Corporation Law of Japan and the Company's Articles of Incorporation, a quorum
of, not less than one-third of the outstanding shares with voting rights must be present at a
shareholders' meeting to approve any material corporate actions such as:
•
a reduction of stated capital,
•
amendment of the Articles of Incorporation (except amendments which the board of directors are
authorized to make under the Corporation Law of Japan as described in"Stock Splits"and"Japanese
Unit Share System"above),
•
the removal of a Director or Corporate Auditor,
•
establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,
•
a dissolution, merger or consolidation,
•
a corporate separation,
•
the transfer of the whole or an important part of the Company's business,
•
the taking over of the whole of the business of any other corporation,
•
any issuance of new shares at a "specially favourable" price, stock acquisition
rights (
shinkabu yoyakuken
) with "specially
favourable" conditions or bonds with stock
acquisition rights (
shinkabu yoyakuken-tsuki shasai
) with
"specially favourable" conditions to
persons other than shareholders,
•
release of part of Directors' or Corporate Auditors' liabilities to the Company,
•
distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make
such distribution in cash instead of in kind,
•
purchase of shares by the Company from a specific shareholder other than its subsidiaries,
•
consolidation of shares, and
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•
discharge of a portion of liabilities of Directors, Corporate Auditors or independent auditors that are owed to the Company.
At least two-thirds of the outstanding shares having voting rights present at the meeting must approve these actions.
The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders.
Subscription Rights
Holders of shares have no pre-emptive rights. Authorized but un-issued shares may be issued at
such times and upon such terms as the board of directors determines, subject to the limitations as
to the issue of new shares at a "specially favorable" price mentioned in "Voting Rights" above. The
board of directors may, however, determine that shareholders be given subscription rights to new
shares, in which case they must be given on uniform terms to all shareholders as of a record date
of which not less than two weeks' prior public notice of the date on which such subscription rights
must be given. Each of the shareholders to whom such rights are given must also be given at least
two weeks' prior notice of the date on which such rights will expire.
Stock Acquisition Rights
The Company may issue stock acquisition rights or bonds with stock acquisition rights (in
relation to which the stock acquisition rights are undetachable). Except where the issue would be
on "specially favorable" conditions mentioned in "Voting Rights" above, the issue of stock
acquisition rights or bonds with stock acquisition rights may be authorized by a resolution of the
board of directors. Subject to the terms and conditions thereof, holders of stock acquisition
rights may acquire a prescribed number of shares by exercising their stock acquisition rights and
paying the exercise price at any time during the exercise period thereof. Upon exercise of stock
acquisition rights, the Company will be obliged to either issue the relevant number of new shares
or transfer the necessary number of existing shares held by it as treasury stock to the holder. The
entitlements accorded to stock acquisition rights attached to bonds are substantially similar to
those accorded to stock acquisition rights
issued without being attached to bonds, provided that, if so determined by the board of directors
at the time of its resolution authorizing the issue of the relevant bonds with stock acquisition
rights, then, upon exercise of the stock acquisition rights, their exercise price will be deemed to
have been paid by the holder thereof to the Company in lieu of the Company redeeming the relevant
bonds.
Liquidation Rights
In the event of liquidation, the assets remaining after payment of all debts, liquidation
expenses and taxes will be distributed among the shareholders in proportion to the number of shares
they own.
Liability to Further Calls or Assessments
All of the Company's currently outstanding shares, including shares represented by the ADSs,
are fully paid and nonassessable.
Share Registrar
Mizuho Trust & Banking Co., Ltd. is the share registrar for the Company's shares. Mizuho
Trust's office is located at 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan. Mizuho Trust maintains the
Company's register of shareholders and records transfers of record ownership upon presentation of
share certificates.
Record Date
The close of business on December 31 is the record date for the Company's year-end dividends,
if paid. June 30 is the record date for interim dividends, if paid. A holder of shares constituting
one or more whole units who is registered as a holder on the Company's register of shareholders at
the close of business as of December 31 is also entitled to exercise shareholders' voting rights at
the ordinary general meeting of shareholders with respect to the fiscal year ending on December 31.
In addition, the Company may set a record date for determining the shareholders entitled to other
rights and for other purposes by giving at least two weeks' public notice.
The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the
third business day before a record date (or if the record date is not a business day, the fourth
business day prior thereto), for the purpose of dividends or rights offerings.
Repurchase by the Company of Shares
Under the Corporation Law of Japan, the Company may acquire its shares (i) by soliciting all
shareholders to offer to sell its shares held by them (in this case, the certain terms of such
acquisition, such as the total number of the shares to be purchased and the total amount of the
consideration, shall be set by an ordinary resolution of a general meeting of shareholders in
advance, and acquisition shall be effected pursuant to a resolution of the board of directors),
(ii) from a specific shareholder other than any of the Company's subsidiaries (pursuant to a
special resolution of a general meeting of shareholders), (iii) from any of the Company's
subsidiaries (pursuant to a resolution of the board of directors), or (iv) by way of purchase on
any Japanese stock exchange on which the Company's shares are listed by way of tender offer (in
either case pursuant to a resolution of the board directors). In the case of (ii) above, if the
purchase price or any other consideration to be received by the relevant specific shareholder
exceeds the then market price of the Company's shares calculated in a manner set forth in the
ordinances of the Ministry of Justice, any other shareholder may make a request to a representative
director to be included as a seller in the proposed acquisition by the Company.
The total amount of the purchase price of the Company's shares may not exceed the
Distributable Amount, as described in "Restriction on Distributions of Surplus" above.
In addition, the Company may acquire its shares by means of repurchase of any number of shares
constituting less than one unit upon the request of the holder of those shares, as described under
"Japanese Unit Share System" above.
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C. Material contracts
All contracts entered into by us during the two years preceding the date of this annual report
were entered into in the ordinary course of business.
D. Exchange controls
(a) Information with respect to Japanese exchange regulations affecting the Company's
security holders is as follows:
The Foreign Exchange and Foreign Trade Law of Japan, as amended and effective from
April 1, 1998, and the cabinet orders and ministerial
ordinances thereunder (the "Foreign Exchange Regulations") govern certain aspects relating
to the issuance of securities by the Company and the acquisition and holding of such
securities by "non-residents of Japan" and by "foreign investors", as hereinafter defined.
"Non-residents of Japan" are defined as individuals who are not resident in Japan and
corporations whose principal offices are located
outside Japan. Generally, branches and other offices of Japanese corporations located
outside Japan are regarded as non-residents of
Japan, while branches and other offices located within Japan of non-resident corporations
are regarded as residents of Japan. "Foreign
investors" are defined to be (i) individuals not resident in Japan, (ii) corporations which
are organized under the laws of foreign
countries or whose principal offices are located outside Japan, (iii) corporations of which
50% or more of the shares are held by (i) and /
or (ii) above and (iv) corporations in respect of which (a) a majority of the officers are
non-resident individuals or (b) a majority of the
officers having the power to represent the corporation are non-resident individuals.
Issuance of Securities by the Company:
Under the Foreign Exchange Regulations, the issue of securities outside Japan by the
Company is, in principle, not subject to a prior
notification requirement, but subject to a post reporting requirement of the Minister of
Finance. Under the Foreign Exchange Regulations as
currently in effect, payments of principal, premium and interest in respect of securities
and any additional amounts payable pursuant to
the terms thereof may in general be paid when made without any restrictions under the
Foreign Exchange Regulations.
Acquisition of Shares:
In general, the acquisition of shares of stock of a Japanese company listed on any Japanese
stock by a non-resident of Japan from a resident of Japan is not subject to a prior
notification requirement, but subject to a post reporting requirement of the Minister of
Finance by such resident.
In the case where a foreign investor intends to acquire listed shares (whether from a
resident or a non-resident of Japan, from another
foreign investor or from or through a designated securities company) and as a result of
such acquisition the number of shares held,
directly or indirectly, by such foreign investor would become 10% or more of the total
outstanding shares of the company, the foreign investor
must generally report such acquisition to the Minister of Finance and other Ministers having
jurisdiction over the business of the subject
company within 15 days from and including the date of such acquisition. In certain
exceptional cases, a prior notification is required in respect
of such acquisition.
Acquisition of Shares upon Exercise of Rights for Subscription of Shares:
The acquisition by a non-resident of Japan of shares upon exercise of his rights for
subscription of shares is exempted from the notification
and reporting requirements described under "Acquisition of Shares" above.
Dividends and Proceeds of Sales:
Under the Foreign Exchange Regulations currently in effect, dividends paid on, and the
proceeds of sale in Japan of, the shares held by
non-residents of Japan may be converted into any foreign currency and repatriated abroad.
The acquisition of shares by non-resident
shareholders by way of stock splits is not subject to any of the aforesaid notification
requirements.
(b) Reporting of Substantial Shareholdings:
The Securities and Exchange Law of Japan requires any person who has become,
beneficially and solely or jointly, a holder of more than 5%
of the total outstanding voting shares of capital stock of a company listed on any Japanese
stock exchange to file with the relevant Local Finance Bureau of the Minister of Finance
within five business days a report concerning such share ownership. A similar report must
also be made in respect of any subsequent change of 1% or more in any such holding. Copies
of any such report must also be furnished to the issuer of such shares and all Japanese
stock exchanges on which the shares are listed. For this purpose, shares issuable exercise
of rights for subscription of shares held by such holder are taken into account in
determining both the size of a holding and a company's total outstanding share capital.
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E. Taxation
1. Taxation in Japan
Generally, a non-resident of Japan or non-Japanese corporation ( "Non-Resident Holders") is
subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits
are not subject to Japanese income tax. Due to the 2001 Japanese tax legislation, a conversion
of retained earnings or legal reserve (but, not additional paid-in capital, in general) into
stated capital (whether made in connection with a stock split or otherwise) is no longer
treated as a deemed dividend payment to shareholders for Japanese tax purposes. Thus, such a
conversion does not trigger Japanese withholding taxation.
(Article 2 (16) of the Japanese Corporation Tax Law and Article 8 (1) (xv) of the Japanese
Corporation Tax Law Enforcement Order).
Japan is a party to a number of income tax treaties, conventions and agreements,
(collectively "Tax Treaties"), whereby the maximum withholding tax rate for dividend payments
is set at, in most cases, 15% for portfolio investors who are Non-Resident Holders. Specific
countries with which such Tax Treaties have been entered into include Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, and Switzerland. Pursuant to the Convention Between
the Government of the United States of America and the Government of Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, or the
Treaty, dividend payments made by a Japanese corporation to a U.S. resident or corporation,
unless the recipient of the dividend has a "permanent establishment" in Japan and the shares
with respect to which such dividends are paid are effectively connected with such "permanent
establishment", will be subject to withholding tax at rate of: (1) 10% for dividends declared
on or after July 1, 2004 for portfolio investors who are qualified U.S. residents eligible for
benefits of the Treaty; and (2) 0% (i.e., no withholding) for dividends declared on or after
July 1, 2004 for pension funds which are qualified U.S. residents eligible for benefits of the
Treaty, provided that the dividends are not derived from the carrying on of a business,
directly or indirectly, by such pension funds. The similar withholding tax treatment applies
under the new tax treaty between the United Kingdom and Japan for dividends declared on or
after January 1, 2007 due to the renewal of the tax treaty. The tax treaty between France and
Japan will be renewed effective from January 1, 2008 under which the reduction of the standard
treaty withholding rate on dividends (15% to 10%) is promulgated. On the other hand, under the
Japanese Income Tax Law, the temporary rate of Japanese withholding tax applicable to dividends
paid with respect to listed shares, such as those paid by the Company, to Non-Resident Holders
is currently 7% which is applicable for the period from January 1, 2004 to March 31, 2008 (15%
rate(10% for eligible US residents) will apply thereafter), except for dividends paid to any
individual shareholder who holds 5% or more of the total issued shares for which the applicable
rate is 20%. While the treaty rate normally overrides the domestic rate, due to the so-called
"preservation doctrine" under Article 1(2) of the Treaty, and/or due to Article 3-2 of the
Special Measurement Law for the Income Tax Law, Corporation Tax Law and Local Taxes Law with
respect to the Implementation of Tax Treaties, if the tax rate under the domestic tax law is
lower than that promulgated under the applicable income tax
treaty, then the domestic tax rate is still applicable. If the domestic tax rate applies,
as will generally be the case until March 31, 2008 for most shareholders who are US residents
or corporations, no treaty application is required to be filed.
Gains derived from the sale outside Japan of Japanese corporations' shares by a
non-resident of Japan or a non-Japanese corporation, or from the sale of Japanese corporations'
shares within Japan by a non-resident of Japan as an occasional transaction or by a
non-Japanese corporation not having a permanent establishment in Japan, are generally not
subject to Japanese income or corporation taxes, provided that the seller is a portfolio
investors. Japanese inheritance and gift taxes at progressive rates may apply to an individual
who has acquired Japanese corporations' shares as a distributee, legatee or donee.
2. Taxation in the United States
The following is a discussion of material U.S. federal income tax consequences of
purchasing, owning and disposing of Canon shares or ADSs to the
persons described below, but it does not purport to be a comprehensive description of all of
the tax considerations that may be relevant to a particular person's decision to acquire, hold
or dispose of such securities. The discussion applies only if you hold Canon shares or ADSs as
capital assets for U.S. federal income tax purposes and it does not address special classes of
holders, such as:
•
certain financial institutions;
•
insurance companies;
•
dealers and traders in securities or foreign currencies;
•
persons holding Canon shares or ADSs as part of a hedge, straddle, conversion or other
integrated transaction;
•
persons whose functional currency for U.S. federal income tax purposes is not the U.S.
dollar;
•
partnerships or other entities classified as partnerships for U.S. federal income tax
purposes;
•
persons liable for the alternative minimum tax;
•
tax-exempt organizations;
•
persons holding Canon shares or ADSs that own or are deemed to own 10% or more of any
class of Canon stock; or
•
persons who acquired Canon shares or ADSs pursuant to the exercise of any employee stock
option or otherwise as compensation.
This discussion is based on the Internal Revenue Code of 1986, as amended, administrative
pronouncements, judicial decision and final, temporary and proposed Treasury regulations, all as of
the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also
based in part on representations by the depositary and assumes that each obligation under the
deposit agreement and any related agreement will be performed in accordance with its terms. An
investor should consult its own tax advisers concerning the U.S. federal, state, local and foreign
tax consequences of purchasing, owning and disposing of Canon shares or ADSs in its particular
circumstances.
As used herein, a "U.S. holder" is a beneficial owner of Canon shares or ADSs that is, for
U.S. federal tax purposes:
•
a citizen or resident of the United States;
•
a corporation, or other entity taxable as a corporation, created or organized in or under
the laws of the United States or any political
subdivision thereof; or
•
an estate or trust the income of which is subject to U.S. federal income taxation regardless
of its source.
In general, if a U.S. holder holds ADSs, it will be treated for U.S. federal income tax
purposes as the holder of the underlying shares represented by those ADSs. Accordingly, no gain or
loss will be recognized if a U.S. holder exchanges ADSs for the underlying shares represented by
those ADSs.
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The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming of
foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S.
holders. Accordingly, the analysis of the creditability of Japanese taxes and the reduced rates of
taxation applicable to dividends received by certain non-corporate U.S. holders, both as described
below, could be affected by actions that may be taken by parties to whom ADSs are pre-released.
This discussion assumes that Canon was not a passive foreign investment company
for 2006, as described below.
Taxation of Distributions
Distributions paid on Canon Shares or ADSs, other than certain pro rata distributions of
common shares, to the extent paid out of Canon's current or accumulated earnings and profits (as
determined under U.S. federal income tax principles) will be treated as dividends. The amount of
a dividend will include any amounts withheld by Canon or its paying agent in respect of Japanese
taxes. The amount of the dividend will be treated as foreign-source dividend income and will not
be eligible for the dividends-received deduction generally allowed to U.S. corporations. Subject
to applicable limitations that may vary depending upon a U.S. holder's individual circumstances
and the concerns expressed by the U.S. Treasury, dividends paid to certain non-corporate holders
in taxable years beginning before January 1, 2011 will be taxable at a maximum rate of 15%.
Non-corporate U.S. holders should consult their own tax advisers to determine whether they are
subject to any special rules that limit their ability to be taxed at this favorable rate.
Dividends paid in Japanese yen will be included in a U.S. holder's income in a U.S. dollar
amount calculated by reference to the exchange rate in effect on the date of receipt of the
dividend by the U.S.holders, in the case of Canon shares, or by the depository, in the case of
ADSs, regardless of whether the payment is in fact converted into U.S. dollars at that time. If
the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should
not be required to recognize foreign currency gain or loss in respect of the dividend income. A
U.S.holder may have foreign currency gain or loss if it does not convert the amount of such
dividend into U.S. dollars on the date of receipt.
Japanese taxes withheld from cash dividends on Canon shares or ADSs will be creditable
against a U.S. holder's U.S. federal income tax liability, subject to applicable limitations that
may vary depending upon U.S. holder's circumstances and the concerns expressed by the U.S.
Treasury. Instead of claiming a credit, a U.S.holder may, at its election, deduct such Japanese
taxes in computing its income, subject to generally applicable limitations under U.S. law. The
limitation on foreign taxes eligible for credit is calculated separately with respect to specific
classes of income. A U.S. holder should consult its own tax adviser to determine whether it is
subject to any special rules that limit its ability to make effective use of foreign tax credits.
Sale and Other Disposition of Canon Shares or ADSs
For U.S. federal income tax purposes, gain or loss a U.S. holder realizes on the sale or other
disposition of Canon shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if such holder held the Canon shares or ADSs for more
than one year. The amount of a U.S. holder's gain or loss will be
equal to the difference between its U.S. dollar tax basis in the Canon shares or ADSs disposed of
and the U.S. dollar amount realized on the disposition. Such gain or loss will generally be U.S.
source gain or loss for foreign tax credit purposes.
Passive Foreign Investment Company Rules
Canon believes that it was not a passive foreign investment company ("PFIC") for U.S. federal
income tax purposes for 2006. However, since PFIC status depends upon the composition of Canon's
income and assets and the market value of its assets (including, among others, goodwill and equity
investments in less than 25% owned entities) from time to time, there can be no assurance that
Canon will not be considered a PFIC for any taxable year. If Canon were treated as a PFIC for any
taxable year during which a U.S.holder held Canon shares or ADSs, certain adverse tax consequences
could apply to such U.S. holder.
If Canon were treated as a PFIC for any taxable year during which a U.S. holder held Canon
 shares or ADSs, gain recognized by a U.S.holder on the sale or other disposition of Canon shares
or ADSs would be allocated ratably over its holding period for such securities. The amounts
allocated to the taxable year of the sale or other disposition and to any year before Canon became
a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be
subject to tax at the highest rate in effect in such taxable year for individuals or corporations,
as appropriate, and an interest charge would be imposed on the tax liability attributable to such
allocated amounts. Further, any distribution in respect of Canon shares or ADSs in excess of 125% of the average of the annual distributions on such securities received by a U.S.holder during the
preceding three years or its holding period, whichever is shorter, would be subject to taxation as
described above. Certain elections (including a mark-to-market election) may be available to a
U.S.holder that may mitigate the adverse tax consequences resulting from PFIC status.
In addition, if Canon were treated as a PFIC in a taxable year in which it pays a dividend or
the prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to
certain non-corporate U.S.holders would not apply.
Information Reporting and Backup Withholding
Payment of dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless the U.S. holder is a corporation or
other exempt recipient or, in the case of backup withholding, the U.S. holder provides a correct
taxpayer identification number and certify that no loss of exemption from backup withholding has
occurred.
The amount of any backup withholding from a payment to a U.S. holder will be allowed as a
credit against such holder's U.S. federal income tax liability and may entitle it to a refund,
provided that the required information is furnished to the Internal Revenue Service.
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F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
According to the Securities Exchange Act of 1934, as amended, the Company is subject to the
requirements of informational disclosure. The Company files
various reports and other information, including Form 20-F and Annual Reports, with the Securities
Exchange Commission and the NYSE. These reports may be inspected at the following sites.
Securities Exchange Commission:
450 Fifth Street, N.W., Washington D.C. 20549
New York Stock Exchange, Inc. :
20 Broad Street, New York, New York 10005
Form 20-F is also available at the Electronic Data Gathering, Analysis, Retrieval system
(EDGAR) website which is maintained by the Securities
Exchange Commission.
Securities Exchange Commission Home Page:
http://www.sec.gov
I. Subsidiary information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Market risk exposures
Canon is exposed to market risks, including changes in foreign currency exchange rates,
interest rates and prices of marketable securities and investments. In order to hedge the risks of
changes in foreign currency exchange rates and interest rates, Canon uses derivative financial
instruments.
Equity price risk
Canon holds marketable securities included in current assets as short-term investments, which
consists generally of highly-liquid and low-risk instruments. Investments included in noncurrent
assets are held as long-term investments. Canon does not hold marketable securities and investments
for trading purposes.
Maturities and fair values of such marketable securities and investments were as follows at
December 31, 2006 and 2005.
Available-for-sale securities
2006
2005
Cost
Fair value
Cost
Fair value
(Millions of yen)
Due within one year
¥
295
¥
294
¥
71
¥
71
Due after one year through five years
5,606
7,104
1,811
3,243
Due after five years
2,891
2,947
3,352
3,376
Equity securities
12,648
29,852
11,474
26,550
¥
21,440
¥
40,197
¥
16,708
¥
33,240
Held-to-maturity securities
2006
2005
Cost
Fair value
Cost
Fair value
(Millions of yen)
Due within one year
¥
10,151
¥
10,151
¥
—
¥
—
Due after one year through five years
10,311
10,311
20,961
20,961
¥
20,462
¥
20,462
¥
20,961
¥
20,961
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Foreign currency exchange rate and interest rate risk
Canon operates internationally, exposing it to the risk of changes in foreign currency exchange
rates and interest rates. Derivative financial instruments are comprised principally of foreign
currency exchange contracts and interest rate swaps utilized by the Company and certain of its
subsidiaries to reduce these risks. Canon assesses foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these exposures and by evaluating hedging
opportunities. Canon does not hold or issue derivative financial instruments for trading purposes.
Canon is also exposed to credit-related losses in the event of non-performance by counterparties
to derivative financial instruments, but it is not expected that any counterparties will fail to
meet their obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions.
Canon's international operations expose Canon to the risk of changes in foreign currency
exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange
exposures principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts
are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canon's policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months.
The following table provides information about Canon's major derivative financial instruments
related to foreign currency exchange transactions existing at December 31, 2006. All of the foreign
exchange contracts described in the following table have a contractual maturity date in 2007.
Millions of yen
U.S.$
euro
Others
Total
Forwards to sell foreign currencies:
Contract amounts
¥
392,402
286,148
38,586
717,136
Estimated fair value
(6,692
)
(8,671
)
(392
)
(15,755
)
Forwards to buy foreign currencies:
Contract amounts
¥
34,004
3,204
13,981
51,189
Estimated fair value
(310
)
(111
)
(1,051
)
(1,472
)
Canon's exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps.
Derivative financial instruments designated as fair value hedges principally relate to
interest rate swaps associated with fixed-rate debt obligations. Changes in fair values of the
hedged debt obligations and derivative instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or net
gains or losses excluded from the assessment of hedge effectiveness for fiscal 2004 as the critical
terms of the interest rate swaps match the terms of the hedged debt obligations. Canon had no fair
value hedges in 2006 or 2005.
Changes in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted intercompany sales and interest
rate swaps associated with variable rate debt obligations, are reported in accumulated other
comprehensive income (loss). These amounts are subsequently reclassified into earnings through
other income (deductions) in the same period as the hedged items affect earnings. Substantially all
amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to be
recognized in earnings over the next twelve months. Canon excludes the time value component from
the assessment of hedge effectiveness.
The amounts of the hedging ineffectiveness are not material for the years ended December 31,
2006, 2005 and 2004. The amounts of net gains or losses excluded from the assessment of hedge
effectiveness which are recorded in other income (deductions) are net losses of ¥5,917 million,
¥3,725 million and ¥2,096 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
Canon has entered into certain foreign currency exchange contracts to manage its foreign
currency exposures. These foreign currency exchange contracts have not been designated as hedges.
Accordingly, the changes in fair values of the contracts are recorded in earnings immediately.
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For debt obligations, the table below presents principal cash flows by expected maturity dates and
related weighted average interest rates, as of December 31, 2006 and 2005.
Long-term debt (including due within one year)
Weighted Average
Expected maturity date
interest
Estimated
rates*
Total
2007
2008
2009
2010
2011
Thereafter
fair value
(Millions of yen except interest rate data)
Year ended
December 31, 2006:
Japanese yen notes
2.61
%
¥
20,000
¥
10,000
¥
10,000
—
—
—
—
¥
20,319
Japanese yen convertible
debentures
1.30
318
—
318
—
—
—
—
1,819
Other long-term
debt
1.34
10,734
¥
5,263
3,132
1,832
¥
418
¥
69
¥
20
10,657
Total
¥
31,052
¥
15,263
¥
13,450
¥
1,832
¥
418
¥
69
¥
20
¥
32,795
Weighted Average
Expected maturity date
interest
Estimated
rates*
Total
2006
2007
2008
2009
2010
Thereafter
fair value
(Millions of yen except interest rate data)
Year ended
December 31, 2005:
Japanese yen notes
2.61
%
¥
20,000
—
¥
10,000
¥
10,000
—
—
—
¥
20,848
Japanese yen convertible
debentures
1.30
649
—
—
649
—
—
—
3,052
Other long-term
debt
1.40
11,425
¥
4,992
3,318
1,702
¥
895
¥
417
¥
101
11,294
Total
¥
32,074
¥
4,992
¥
13,318
¥
12,351
¥
895
¥
417
¥
101
¥
35,194
Note:
All long-term debt is fixed rate.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
62
Table of Contents
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
The Corporation Law of Japan, which came into effect on May 1, 2006, generally maintained the
unit share system under the Commercial Code of Japan. The Company's Articles of Incorporation
provide that 100 shares constitute one "unit".
Under the unit share system, shareholders have one voting right for each unit of shares they
hold. Shares not constituting a full unit will carry all shareholders' rights except for those
relating to voting rights.
The Company's Articles of Incorporation provide that no share certificates shall, in general,
be issued with respect to any shares constituting less than one unit. Consequently, no certificates
for shares other than a full unit or an integral multiple thereof
will be issued unless the Company determines that it is necessary to issue such certificates for
protection of the holders of shares constituting less than one
unit. As the transfer of shares normally requires delivery of the relevant share certificates, any
fraction of a unit for which no share certificates are issued
will not be transferable.
A holder of shares constituting less than one unit may at any time require the Company
(through the participating institution in the case of a beneficial
shareholder under the central clearing system) to purchase such shares at the last selling price of
a share as reported by the Tokyo Stock Exchange, Inc. on the day when such request is made.
Shareholders (including beneficial owners) who own less than one unit of shares may request
that Company sell them a number of shares which, when added to their less than one unit shares,
would equal one unit of shares; provided, however, that the Company is not obliged to do so if the
Company does not own its own shares in the number which it is requested to sell.
A holder of shares constituting less than one unit is entitled as a shareholder to the rights
(i) to receive distribution of dividends of profit or interest, (ii) to receive cash or other
assets in case of consolidation or split of shares, exchange or transfer of shares or corporate
merger, (iii) to be allotted rights to subscribe for free for new shares when such rights are
granted to shareholders; and (iv) to participate in any distribution of surplus assets upon
liquidation. Such holder cannot exercise any voting rights pertaining to those shares. For
calculation of the quorum for various voting purposes, the aggregate number of shares constituting
less than one unit will be excluded from the number of voting rights.
Under the Company's unit share system, the depositary under the Deposit Agreement may be
unable to deliver share certificates with respect to those shares
otherwise deliverable upon the surrender of ADRs which do not constitute one or more complete
units. In such case, the Deposit Agreement provides that the depositary will promptly advise the
holder of the amount of such shares, deliver to the holder a new ADR evidencing such shares, and
notify the holder of
the additional amount of ADRs which the holder must surrender in order for the depositary to effect
delivery of share certificates for all of shares represented by the holder's ADSs.
Item 15. Controls and Procedures
Evaluation of disclosure controls and procedures
Canon's disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed in this report is recorded, processed, summarized and reported
on a timely basis.
As of December 31, 2006, Canon, under the supervision and with the participation of its
management, including the chief executive officer and the chief financial officer, performed an
evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined
in Rule 13a-15(f) of the Securities Exchange Act of 1934, as amended. Based on this evaluation,
Canon's chief executive officer and chief financial officer concluded that Canon's disclosure
controls and procedures are effective at the reasonable assurance level for gathering, analyzing
and disclosing the information Canon is required to disclose in the reports it files under the
Securities Exchange Act of 1934, as amended, within the time periods specified in the SEC's rules
and forms.
Management's Report on Internal Control over Financial Reporting
The management of Canon is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is defined in Rule
13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under
the supervision of, the company's principal executive and principal financial officers and effected
by the company's board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
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Table of Contents
Canon's management assessed the effectiveness of internal control over financial reporting as
of December 31, 2006. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated
Framework
(the COSO criteria).
Based on its assessment, management concluded that, as of December 31, 2006, Canon's internal
control over financial reporting was effective based on the COSO criteria.
Canon's independent registered public accounting firm, Ernst & Young
ShinNihon has issued an audit report on our assessment of internal
control over financial reporting. This report appears in item 17.
Changes in internal controls over financial reporting
There has been no change in Canon's internal control over financial reporting that occurred
during the period covered by this Annual Report that has materially affected, or is reasonably
likely to materially affect, its internal control over financial reporting.
Item 16A. Audit Committee Financial Expert
Canon's Board of Directors has determined that Kunihiro Nagata qualifies as
an "audit committee financial expert" as defined by the rules of the SEC. Mr. Nagata began his
career at Canon in 1970, and since that time has worked in the field of finance and accounting for
nearly thirty years. From 1996 to 1999, Mr. Nagata served as a senior manager of the Accounting
Planning & Administration Division, the division responsible for Canon's consolidated reporting.
Mr. Nagata was elected as one of Canon's corporate auditors at an ordinary general meeting of
shareholders held in March 2004. See Item 6.A. for additional information regarding Mr. Nagata.
Item 16B. Code of Ethics
Canon maintains a "Canon Group Code of Conduct", or Code of Conduct, applicable to all
executives and employees. The Code of Conduct sets forth provisions relating to honest and ethical
conduct (including the handling of conflicts of interest), compliance with applicable laws, rules
and regulations and accountability for adherence to the provisions of the Code of Conduct. In
addition, on March 31, 2004, the Board of Directors adopted a "Code of Ethics" as a supplement to
the Code of Conduct. This Code of Ethics applies to Canon's President and Chief Executive Officer,
each member of the Board of Directors (which includes the Chief Financial Officer) and general
managers belonging to Canon's accounting headquarters. The Code of Ethics requires full, fair,
accurate, timely and understandable disclosure in reports and documents that Canon files with or
submits to the SEC and in Canon's other communications with the public, prompt internal reporting
of violations of the Code of Conduct or Code of Ethics, and accountability for adherence to their
provisions. Both the Code of Conduct and the Code of Ethics have been filed as exhibits to this
Annual Report.
Item 16C. Principal Accountant Fees and Services
Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
Canon's board of corporate auditors consisting of five members, including three outside
corporate auditors, is responsible for the oversight of the services of its independent registered public accounting firm. The
board of corporate auditors has established Pre-Approval Policies and Procedures for Audit and
Non-Audit Services, effective as of May 28, 2003. These policies and procedures govern the board
of corporate auditors' review and approval of the board of director's engagement of Canon's
independent registered public accounting firm to render audit or non-audit services. Non-audit services include audit-related
services, tax services and other services, as described in greater detail below under "Fees and
Services". Canon and any affiliate controlled by Canon directly, indirectly or through one or more
intermediaries must follow these policies and procedures before any engagement of Canon's
independent registered public accounting firm for U.S. securities law reporting purposes.
The policies and procedures stipulate three means by which audit and non-audit services may be
pre-approved, depending on the content of and the fee for the services.
•
All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the
Public Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions,
and any engagement of an Independent Registered Public Accounting
Firm for any audit or non-audit service involving estimated fees
exceeding ¥ 10,000,000 per single engagement must be approved by
the full board of corporate auditors.
•
Certain other services may be pre-approved under detailed
categories of audit and non-audit services established annually by
the board of corporate auditors, as long as those services do not
exceed specified maximum yen limits for aggregate fees relating to
each of those categories. Any engagement of an Independent
Registered Public Accounting Firm by these means must be reported
to the board of corporate auditors at its next regularly scheduled
meeting.
•
For services that are not covered by the above two means of
pre-approval, the board of corporate auditors has delegated
pre-approval authority to the Chairman of the board of corporate
auditors. Any engagement of an Independent Registered Public
Accounting Firm by the Chairman is required to be reported to the
board of corporate auditors at its next regularly scheduled
meeting.
Additional services may be pre-approved by the board of corporate auditors on an individual basis.
No services were provided for which pre-approval was waived pursuant to paragraph (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X.
64
Table of Contents
Fees
and Services.
The following table discloses the aggregate fees accrued or paid to Canon's principal
accountant for each of the last two fiscal years and briefly describes the services performed:
Year ended
Year ended
December 31, 2006
December 31, 2005
(Millions of yen)
Audit fees
¥
2,052
¥
968
Audit-related fees
69
439
Tax fees
53
49
All other fees
3
92
Total
¥
2,177
¥
1,548
Audit fees
include fees billed for professional services rendered for audits of Canon's annual
consolidated financial statements, limited review procedures of consolidated quarterly
financial information,
statutory audits of the Company and its subsidiaries.
Audit-related fees
include fees billed for assurance and related services such as due
diligence, accounting consultations and audits in connection with
mergers and acquisitions, employee benefit plan audits, internal control reviews, and
consultations concerning financial accounting and reporting standards.
Tax fees
include fees billed for services related to tax compliance, including the preparation
of tax returns and claims for refund, tax planning and tax advice, including assistance with
tax audits and appeals, advice related to mergers and acquisitions, tax services for employee
benefit plans and assistance with respect to requests for rulings from tax authorities.
All other fees
include fees billed primarily for services rendered with respect to learning
products and services.
Ernst & Young ShinNihon served as Canon's principal accountant for fiscal 2006 and 2005.
65
Table of Contents
Item 16D. Exemptions from the Listing Standards for Audit Committees
Canon is relying on the general exemption contained in Rule 10A-3(c)(3) under the Exchange
Act. Because of such reliance, Canon does not have an audit committee which can act independently
and satisfy the other requirements of Rule 10A-3 under the Exchange Act.
According to Rule 10A-3 under the Exchange Act and NYSE listing standards, Canon's board of
corporate auditors has been identified to act in place of an audit committee. The board of
corporate auditors meets the following requirements of the general exemption contained in Rule
10A-3(c)(3):
•
the board of corporate auditors is established pursuant to applicable Japanese law and Canon's
Articles of Incorporations;
•
under Japanese legal requirements, the board of corporate auditors is separate from the board of
directors;
•
the board of corporate auditors is not elected by the management of Canon and no executive
officer of Canon is a member of the board of corporate auditors;
•
all of the members of the board of corporate auditors meet specific independence requirements
from Canon and the Canon Group, the management and the auditing firm, as set forth by Japanese
legal provisions;
•
the board of corporate auditors, in accordance with and to the extent permitted by Japanese law,
is responsible for the appointment, retention and oversight of the work of Canon's external
auditors engaged for the purpose of issuing audit reports on Canon's annual financial statements;
•
the board of corporate auditors adopted a complaints procedure (which became effective prior to
July 31, 2005) in accordance with Rule 10A-3(b)(3) of the Exchange Act; and
•
the board of corporate auditors is authorized to engage independent counsel and other advisers,
as it deems appropriate.
•
the board of corporate auditors is provided for appropriate funding for payment of (i)
compensation to Canon's independent registered public accounting
firm engaged for the purpose of issuing audit reports on
Canon's annual financial statements, (ii) compensation to independent counsel and other advisers
engaged by the board of corporate auditors, and (iii) ordinary administrative expenses of the board
of corporate auditors in carrying out its duties.
Canon's reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the
ability of its board of corporate auditors to act independently and to satisfy the other
requirements of Rule 10A-3.
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Table of Contents
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth, for each of the months indicated, the total number of shares
purchased by Canon, or on Canon's behalf or by an any affiliated purchaser, the average price paid
per share, the number of shares purchased pursuant to the applicable shareholder resolution or
board resolution, which are publicly announced and the maximum number of shares that may yet be
purchased pursuant to these shareholder resolutions or board resolutions.
Period
(a) Total Number of
(b) Average Price
(c) Total Numbers of
(d) Maximum Numbers of
Shares Purchased
Paid per Share
Shares Purchased as
Shares that May
Part of Publicly
Yet Be Purchased
Announced Plans or
Under the Plans or
(Shares)
(Yen)
Programs
Programs
January 1 - January 31
2,115
4,714
—
—
February 1 - February 28
2,760
4,775
—
—
March 1 - March 31
2,910
4,930
—
—
April 1 - April 30
3,597
5,517
—
—
May 1 - May 31
3,276
5,664
—
—
June 1 - June 30
1,638
5,181
—
—
July 1 - July 31
12,770
5,540
—
—
August 1 - August 31
10,602
5,521
—
—
September 1- September 30
15,930
5,858
—
—
October 1 - October 31
14,382
6,434
—
—
November 1 - November 30
8,047
6,270
—
—
December 1 - December 31
5,884
6,476
—
—
Notes:
(1) On May 11, 2006 our board of directors authorized a three-for-two stock split. Canon
shares held by stockholders were split on a three-for-two basis on July 1, 2006. The information
above has been adjusted to reflect the stock split.
(2) A resolution approved at the meeting of our board of directors held on February 15, 2007
authorized us to acquire up to 17 million shares with an aggregate purchase price of ¥100 billion
during the period from February 16, 2007 through March 16, 2007.
(3) A resolution approved at the meeting of our board of directors held on March 8, 2007
authorized us to acquire up to 17 million shares with an aggregate purchase price of ¥100 billion
during the period from March 9, 2007 through April 9, 2007.
All of the purchases shown above represent the purchase of fractional shares from fractional
share owners, in accordance with the Corporation Law of Japan.
67
Table of Contents
PART III
Item 17. Financial Statements
Consolidated financial statement of Canon Inc. and Subsidiaries:
Page number
Report of
Independent Registered Public Accounting Firm
69
Consolidated Balance Sheets as of December 31, 2006 and 2005
71
Consolidated Statements of Income for the years ended December
31, 2006, 2005 and 2004
72
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2006, 2005 and 2004
73
Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
74
Notes to Consolidated Financial Statements
75
Schedule:
Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 2006, 2005 and 2004
120
All other schedules are omitted as permitted by the rules and
regulations of the Securities and Exchange Commission as not
applicable.
68
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Canon Inc.
We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries (the
"Company") as of December 31, 2006 and 2005, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31,
2006, all expressed in Japanese yen. Our audits also included the financial statement schedule
listed in the Index at Item 17. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
The Company's consolidated financial statements do not disclose segment information required by
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information." In our opinion, disclosure of segment information is required by U.S.
generally accepted accounting principles.
In our opinion, except for the omission of segment information as discussed in the preceding
paragraph, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Canon Inc. and subsidiaries at December 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 December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Canon Inc. and subsidiaries' internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 16, 2007 expressed an unqualified opinion thereon.
/s/ Ernst & Young ShinNihon
Tokyo, Japan
March 16, 2007
69
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Canon Inc.
We have audited management's assessment, included in the accompanying Management's Report on
Internal Control over Financial Reporting, that Canon Inc. and subsidiaries (the "Company")
maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's management
is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Canon Inc. and subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Canon Inc. and subsidiaries
maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the accompanying consolidated balance sheets of Canon Inc. and subsidiaries
as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2006, all
expressed in Japanese yen, and our report thereon dated March 16, 2007 stated that, except for the
omission of segment information required by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of
Canon Inc. and subsidiaries at December 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 December 31, 2006,
in conformity with U.S. generally accepted accounting principles.
/s/
Ernst & Young ShinNihon
Tokyo,
Japan
March 16, 2007
70
Table of Contents
Canon Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2006
2005
(Millions of yen)
Assets
Current assets:
Cash and cash equivalents
¥
1,155,626
¥
1,004,953
Marketable securities
(Notes 3 and 10)
10,445
172
Trade receivables, net
(Note 4)
761,947
689,427
Inventories
(Note 5)
539,057
510,195
Prepaid expenses and other current assets
(Notes 1, 7 and 13)
315,274
253,822
Total current assets
2,782,349
2,458,569
Noncurrent receivables
(Note 19)
14,335
14,122
Investments
(Notes 3 and 10)
110,418
104,486
Property, plant and equipment, net
(Notes 6 and 7)
1,266,425
1,148,821
Other assets
(Notes 7, 8, 9, 12 and 13)
348,388
317,555
Total assets
¥
4,521,915
¥
4,043,553
Liabilities and stockholders' equity
Current liabilities:
Short-term loans and current portion of long-term debt
(Note 10)
¥
15,362
¥
5,059
Trade payables
(Note 11)
493,058
505,126
Income taxes
(Note 13)
133,745
110,844
Accrued expenses
(Note 19)
303,353
248,205
Other current liabilities
(Notes 6 and 13)
217,789
209,394
Total current liabilities
1,163,307
1,078,628
Long-term debt, excluding current installments
(Note 10)
15,789
27,082
Accrued pension and severance cost
(Note 12)
83,876
80,430
Other noncurrent liabilities
(Note 13)
55,536
52,395
Total liabilities
1,318,508
1,238,535
Minority interests
216,801
200,336
Commitments and contingent liabilities
(Note 19)
Stockholders' equity:
Common stock
Authorized 3,000,000,000 shares;
issued 1,333,445,830 shares in 2006 and 1,333,114,169 shares in 2005
(Note 14)
174,603
174,438
Additional paid-in capital
(Note 14)
403,510
403,246
Legal reserve
(Note 15)
43,600
42,331
Retained earnings
(Note 15)
2,368,047
2,018,289
Accumulated other comprehensive income (loss)
(Note 16)
2,718
(28,212
)
Treasury stock, at cost 1,794,390 shares in 2006 and 1,718,523 shares in 2005
(5,872
)
(5,410
)
Total stockholders' equity
2,986,606
2,604,682
Total liabilities and stockholders' equity
¥
4,521,915
¥
4,043,553
See accompanying notes to consolidated financial statements.
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Canon Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
2006
2005
2004
(Millions of yen)
Net sales
¥
4,156,759
¥
3,754,191
¥
3,467,853
Cost of sales
(Notes 9, 12 and 19)
2,096,279
1,935,148
1,754,510
Gross profit
2,060,480
1,819,043
1,713,343
Operating expenses:
Selling, general and administrative expenses
(Notes
1, 9, 12 and 19)
1,045,140
949,524
894,250
Research and development expenses
308,307
286,476
275,300
1,353,447
1,236,000
1,169,550
Operating profit
707,033
583,043
543,793
Other income (deductions):
Interest and dividend income
27,153
14,252
7,118
Interest expense
(2,190
)
(1,741
)
(2,756
)
Other, net
(Notes 1, 3 and 18)
(12,853
)
16,450
3,961
12,110
28,961
8,323
Income before income taxes and minority interests
719,143
612,004
552,116
Income taxes
(Note 13)
248,233
212,785
194,014
Income before minority interests
470,910
399,219
358,102
Minority interests
15,585
15,123
14,758
Net income
¥
455,325
¥
384,096
¥
343,344
(Yen)
Net income per share
(Note 17)
:
Basic
¥
341.95
¥
288.63
¥
258.53
Diluted
341.84
288.36
257.85
Cash dividends per share
83.33
66.67
43.33
See accompanying notes to consolidated financial statements.
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Canon Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Additional
other
Total
Common
paid-in
Legal
Retained
comprehensive
Treasury
stockholders'
stock
capital
reserve
earnings
income (loss)
stock
equity
(Millions of yen)
Balance at December 31, 2003
¥
168,892
¥
396,939
¥
39,998
¥
1,410,442
¥
(143,275
)
¥
(7,451
)
¥
1,865,545
Conversion of convertible debt and other
4,972
4,966
9,938
Stock exchanged under exchange offering
114
2,691
2,805
Capital transaction by consolidated subsidiaries and
affiliated companies
(246
)
(246
)
Cash dividends
(52,950
)
(52,950
)
Transfer to legal reserve
1,202
(1,202
)
—
Comprehensive income:
Net income
343,344
343,344
Other comprehensive income (loss), net of tax
(Note 16)
Foreign currency translation adjustments
4,050
4,050
Net unrealized gains and losses on securities
686
686
Net gains and losses on derivative instruments
(396
)
(396
)
Minimum pension liability adjustments
37,623
37,623
Total comprehensive income
385,307
Repurchase of treasury stock, net
(503
)
(503
)
Balance at December 31, 2004
173,864
401,773
41,200
1,699,634
(101,312
)
(5,263
)
2,209,896
Conversion of convertible debt and other
574
574
1,148
Capital transaction by consolidated subsidiaries and
affiliated companies
899
899
Cash dividends
(64,310
)
(64,310
)
Transfer to legal reserve
1,131
(1,131
)
—
Comprehensive income:
Net income
384,096
384,096
Other comprehensive income (loss), net of tax
(Note 16)
Foreign currency translation adjustments
53,979
53,979
Net unrealized gains and losses on securities
(1,397
)
(1,397
)
Net gains and losses on derivative instruments
(481
)
(481
)
Minimum pension liability adjustments
20,999
20,999
Total comprehensive income
457,196
Repurchase of treasury stock, net
(147
)
(147
)
Balance at December 31, 2005
174,438
403,246
42,331
2,018,289
(28,212
)
(5,410
)
2,604,682
Conversion of convertible debt and other
165
264
429
Cash dividends
(104,298
)
(104,298
)
Transfer to legal reserve
1,269
(1,269
)
—
Comprehensive income:
Net income
455,325
455,325
Other comprehensive income (loss), net of tax
(Note 16)
Foreign currency translation adjustments
48,630
48,630
Net unrealized gains and losses on securities
1,992
1,992
Net gains and losses on derivative instruments
(489
)
(489
)
Minimum pension liability adjustments
(3,575
)
(3,575
)
Total comprehensive income
501,883
Adjustment to initially apply SFAS 158,
net of tax
(Note 12)
(15,628
)
(15,628
)
Repurchase of treasury stock, net
(462
)
(462
)
Balance at December 31, 2006
¥
174,603
¥
403,510
¥
43,600
¥
2,368,047
¥
2,718
¥
(5,872
)
¥
2,986,606
See accompanying notes
consolidated financial statements.
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Canon Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2006
2005
2004
(Millions of yen)
Cash flows from operating activities:
Net income
¥
455,325
¥
384,096
¥
343,344
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
262,294
225,941
192,692
Loss on disposal of property, plant and equipment
16,182
13,784
24,597
Deferred income taxes
(6,945
)
(766
)
9,060
Increase in trade receivables
(40,969
)
(48,391
)
(53,595
)
(Increase) decrease in inventories
(5,542
)
27,558
(40,050
)
(Decrease) increase in trade payables
(2,313
)
16,018
65,873
Increase in income taxes
22,657
1,998
21,689
Increase in accrued expenses
36,165
31,241
8,196
Decrease in accrued pension and severance cost
(20,309
)
(16,221
)
(16,924
)
Other, net
(21,304
)
(29,580
)
6,647
Net cash provided by operating activities
695,241
605,678
561,529
Cash flows from investing activities:
Purchases of fixed assets
(424,862
)
(395,055
)
(256,714
)
Proceeds from sale of fixed assets
12,507
14,827
7,431
Purchases of available-for-sale securities
(7,768
)
(5,680
)
(388
)
Purchases of held-to-maturity securities
—
—
(21,544
)
Proceeds from sale of available-for-sale securities
4,047
12,337
9,735
Increase in time deposits
(35,863
)
(6,090
)
—
Acquisitions of subsidiaries, net of cash acquired
(2,485
)
(17,657
)
—
Proceeds from sale of subsidiary common stock
—
—
9,731
Purchases of other investments
(8,911
)
(19,531
)
(8,628
)
Other, net
2,530
15,708
7,410
Net cash used in investing activities
(460,805
)
(401,141
)
(252,967
)
Cash flows from financing activities:
Proceeds from issuance of long-term debt
1,053
1,716
2,115
Repayments of long-term debt
(5,861
)
(15,187
)
(43,175
)
Decrease in short-term loans
(828
)
(12,011
)
(3,046
)
Dividends paid
(104,298
)
(64,310
)
(52,950
)
Purchases of treasury stock, net
(462
)
(147
)
(494
)
Other, net
2,909
(4,000
)
(4,718
)
Net cash used in financing activities
(107,487
)
(93,939
)
(102,268
)
Effect of exchange rate changes on cash and cash equivalents
23,724
6,581
(8,818
)
Net increase in cash and cash equivalents
150,673
117,179
197,476
Cash and cash equivalents at beginning of year
1,004,953
887,774
690,298
Cash and cash equivalents at end of year
¥
1,155,626
¥
1,004,953
¥
887,774
Supplemental disclosure for cash flow information
(Note 21)
:
Cash paid during the year for:
Interest
¥
2,146
¥
1,919
¥
2,981
Income taxes
244,236
211,540
164,450
See accompanying notes to consolidated financial statements.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
Basis of Presentation and Significant Accounting Policies
(a)
Description of Business
Canon Inc. (the "Company") and subsidiaries (collectively "Canon") is one of the world's
leading manufacturers in such fields as office imaging products, computer peripherals,
business information products, cameras, and optical related products. Office imaging products
consist mainly of copying machines and digital multifunction devices. Computer peripherals
consist mainly of laser beam and inkjet printers. Business information products consist
mainly of computer information systems, micrographics and calculators. Cameras consist mainly
of single lens reflex ("SLR") cameras, compact cameras, digital cameras and video camcorders.
Optical related products include steppers and aligners used in semiconductor chip production,
projection aligners used in the production of liquid crystal displays ("LCDs"), broadcasting
lenses and medical equipment. Canon's consolidated net sales for the years ended December 31,
2006, 2005 and 2004 were distributed as follows: office imaging products 28%, 31% and 33%,
computer peripherals 34%, 33% and 33%, business information products 3%, 3% and 3%, cameras
25%, 23% and 22%, and optical and other products 10%, 10% and 9%, respectively.
Sales are made principally under the Canon brand name, almost entirely through sales
subsidiaries. These subsidiaries are responsible for marketing and distribution, and
primarily sell to retail dealers in their geographical area. Approximately 75%, 74% and 73%
of consolidated net sales for the years ended December 31, 2006, 2005 and 2004 were generated
outside Japan, with 31%, 30% and 30% in the Americas, 31%, 32% and 31% in Europe, and 13%, 12%
and 12% in other areas, respectively.
Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales
constituted approximately 22%, 21% and 21% of consolidated net sales for the years ended
December 31, 2006, 2005 and 2004, respectively.
Canon's manufacturing operations are conducted primarily at 23 plants in Japan and 17 overseas
plants which are located in countries or regions such as the United States, Germany, France,
Taiwan, China, Malaysia, Thailand and Vietnam.
(b)
Basis of Presentation
The Company and its domestic subsidiaries maintain their books of account in conformity with
financial accounting standards of Japan. Foreign subsidiaries maintain their books of account
in conformity with financial accounting standards of the countries of their domicile.
Certain adjustments and reclassifications have been incorporated in the accompanying
consolidated financial statements to conform with U.S. generally accepted accounting
principles. These adjustments were not recorded in the statutory books of account.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(c)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its majority owned
subsidiaries and those variable interest entities where the Company or its consolidated
subsidiaries are the primary beneficiaries under Financial Accounting Standards Board ("FASB")
Interpretation No. 46 (revised December 2003) ("FIN 46R"), "Consolidation of Variable Interest
Entities." All significant intercompany balances and transactions have been eliminated.
(d)
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the period. Significant estimates and assumptions are
reflected in valuation and disclosure of revenue recognition, allowance for doubtful
receivables, valuation of inventories, environmental liabilities, valuation of deferred tax
assets and employee retirement and severance benefit plans. Actual results could differ
materially from those estimates.
(e)
Cash Equivalents and Time Deposits
All highly liquid investments acquired with an original maturity of three months or less are
considered to be cash equivalents. Time deposits with an original maturity of more than three
months are ¥41,953 million and ¥6,090 million at December 31, 2006 and 2005, respectively, and
are included in prepaid expenses and other current assets in the accompanying consolidated
balance sheets.
(f)
Translation of Foreign Currencies
Assets and liabilities of the Company's subsidiaries located outside Japan with functional
currencies other than Japanese yen are translated into Japanese yen at the rates of exchange
in effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are reported in other comprehensive income
(loss).
Gains and losses resulting from foreign currency transactions, including foreign exchange
contracts, and translation of assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency exchange losses, net were ¥25,804
million, ¥3,710 million and ¥17,800 million for the years ended December 31, 2006, 2005 and
2004, respectively.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(g)
Marketable Securities and Investments
Canon classifies investments in debt and marketable equity securities as available-for-sale,
or held-to-maturity securities. Canon does not hold any trading securities which are bought
and held primarily for the purpose of sale in the near term. Available-for-sale securities
are recorded at fair value. Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of other comprehensive income (loss) until
realized. Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.
Available-for-sale and held-to-maturity securities are regularly reviewed for
other-than-temporary declines in carrying value based on criteria that include the length of
time and the extent to which the market value has been less than cost, the financial condition
and near-term prospects of the issuer and Canon's intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated recovery in market value. When
such a decline exists, Canon recognizes an impairment loss to the extent by which the cost
basis of the investment exceeds the fair value of the investment. Fair value is determined
based on quoted market prices, projected discounted cash flows or other valuation techniques
as appropriate.
Realized gains and losses are determined on the average cost method and reflected in earnings.
Other securities are stated at cost and reviewed periodically for impairment.
(h)
Allowance for Doubtful Receivables
Allowance for doubtful trade and finance receivables is maintained for all customers based on
a combination of factors, including aging analysis, macroeconomic conditions, significant
one-time events, and historical experience. An additional reserve for individual accounts is
recorded when Canon becomes aware of a customer's inability to meet its financial obligations,
such as in the case of bankruptcy filings. If circumstances related to customers change,
estimates of the recoverability of receivables would be further adjusted. When all collection
options are exhausted including legal recourse, the accounts or portions thereof are deemed to
be uncollectible and charged against the allowance.
(i)
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally
by the average method for domestic inventories and the first-in, first-out method for overseas
inventories.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(j)
Investments in Affiliated Companies
Investments in affiliated companies over which Canon has the ability to exercise significant
influence, but does not hold a controlling financial interest, are accounted for by the equity
method.
(k)
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.
(l)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is calculated principally by
the declining-balance method, except for certain assets which are depreciated by the
straight-line method over the estimated useful lives of the assets. The depreciation period
ranges from 3 years to 60 years for buildings and 2 years to 20 years for machinery and
equipment.
Assets leased to others under operating leases are stated at cost and depreciated to the
estimated residual value of the assets by the straight-line method over the period ranging
from 2 years to 5 years.
(m)
Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite useful lives are not amortized, but are
instead tested for impairment annually in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist. Intangible assets with finite useful lives,
consisting primarily of software and license fees, are amortized using the straight-line
method over the estimated useful lives, which range from 3 years to 5 years for software and 5
years to 10 years for license fees. Certain costs incurred in connection with developing or
obtaining internal use software are capitalized. These costs consist of payments made to
third parties and the salaries of employees working on such software development. Costs
incurred in connection with developing internal use software are capitalized at the
application development stage. In addition, Canon develops or obtains certain software to be
sold where related costs are capitalized after establishment of technological feasibility.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(n)
Environmental Liabilities
Liabilities for environmental remediation and other environmental costs are accrued when
environmental assessments or remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present values.
(o)
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
Canon records a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not realizable.
(p)
Issuance of Stock by Subsidiaries and Equity Investees
The change in the Company's proportionate share of a subsidiary's or equity investee's equity
resulting from the issuance of stock by the subsidiary or equity investee is accounted for as
an equity transaction.
(q)
Net Income per Share
Basic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during each year. Diluted net income per share includes the
effect from potential issuance of common stock based on the assumption that all convertible
debentures were converted into common stock.
(r)
Revenue Recognition
Canon generates revenue principally through the sale of consumer products, equipment,
supplies, and related services under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and
risk of loss have been transferred to the customer, the sales price is fixed or determinable,
and collectibility is probable.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(r)
Revenue Recognition (continued)
For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative
fair value if such element meets the criteria for treatment as a separate unit of accounting
as prescribed in the Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables." Otherwise, revenue is deferred until the
undelivered elements are fulfilled as a single unit of accounting.
Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or
delivery, depending upon when title and risk of loss transfer to the customer.
Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is
installed at the customer site and the specific criteria of the equipment functionality are
successfully tested and demonstrated by Canon. Service revenue is derived primarily from
maintenance contracts on equipment sold to customers and is recognized as services are
provided.
Canon offers service maintenance contracts for most office imaging products, for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts is recognized as services are provided.
Revenue from the sale of equipment under sales-type leases is recognized at the inception of
the lease. Income on sales-type leases and direct-financing leases is recognized over the
life of each respective lease using the interest method. Leases not qualifying as sales-type
leases or direct-financing leases are accounted for as operating leases and related revenue is
recognized over the lease term.
Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other known factors at the time of
sale. In addition, Canon provides price protection to certain resellers of its products, and
records reductions to sales for the estimated impact of price protection obligations when
announced.
Estimated product warranty costs are recorded at the time revenue is recognized and are
included in selling, general and administrative expenses. Estimates for accrued product
warranty costs are based on historical experience, and are affected by ongoing product failure
rates, specific product class failures outside of the baseline experience, material usage and
service delivery costs incurred in correcting a product failure.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(s)
Research and Development Costs
Research and development costs are expensed as incurred.
(t)
Advertising Costs
Advertising costs are expensed as incurred. Advertising
expenses were ¥116,809 million, ¥106,250 million
and ¥111,770 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
(u)
Shipping and Handling Costs
Shipping and handling costs totaled ¥62,626 million, ¥50,052 million and ¥46,953 million for
the years ended December 31, 2006, 2005 and 2004, respectively, and are included in selling,
general and administrative expenses in the consolidated statements of income.
(v)
Derivative Financial Instruments
All derivatives are recognized at fair value and are included in prepaid expenses and other
current assets, or other current liabilities in the consolidated balance sheets. On the date
the derivative contract is entered into, Canon designates the derivative as either a hedge of
the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair
value" hedge), or a hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability ("cash flow" hedge). Canon
formally documents all relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various hedge transactions. Canon
also formally assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss), until earnings are affected
by the variability in cash flows of the hedged item. Gains and losses from hedging
ineffectiveness are included in other income (deductions). Gains and losses excluded from the
assessment of hedge effectiveness (time value component) are included in other income
(deductions).
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(v)
Derivative Financial Instruments (continued)
Canon also uses certain derivative financial instruments which are not designated as hedges.
Canon records these derivative financial instruments in the consolidated balance sheets at
fair value. The changes in fair values are immediately recorded in earnings.
(w)
Guarantees
Canon recognizes, at the inception of a guarantee, a liability for the fair value of the
obligation it has undertaken in issuing guarantees.
(x)
New Accounting Standards
In June 2006, the FASB ratified the EITF consensus on EITF Issue No. 06-2, "Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43" ("EITF 06-2").
EITF 06-2 provides guidance for an accrual of compensated absences that require a minimum
service period but have no increase in the benefit even with additional years of service.
EITF 06-2 is effective for fiscal years beginning after December 15, 2006, and is required to
be adopted by Canon in the first quarter beginning January 1, 2007. The adoption of EITF 06-2
will not have a material impact on Canon's consolidated results of operations and financial
condition.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and is required to be adopted by Canon in the first quarter beginning
January 1, 2007. The adoption of FIN 48 will not have a material impact on Canon's
consolidated results of operations and financial condition.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(x)
New Accounting Standards (continued)
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No.
157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is required to be
adopted by Canon in the first quarter beginning January 1, 2008. Canon is currently
evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of
operations and financial condition but does not expect SFAS 157 to have a material impact.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R)" ("SFAS 158"). SFAS 158 requires plan sponsors of defined benefit pension and other
postretirement benefit plans (collectively, "postretirement benefit plans") to recognize the
funded status of their postretirement benefit plans in the consolidated balance sheet, measure
the fair value of plan assets and benefit obligations as of the date of the fiscal year-end
consolidated balance sheet, and provide additional disclosures. On December 31, 2006, Canon
adopted the recognition and disclosure provisions of SFAS 158. The effect of adopting SFAS
158 on Canon's financial condition at December 31, 2006 has been included in the accompanying
consolidated financial statements. SFAS 158 did not have an effect on Canon's consolidated
financial condition at December 31, 2005. SFAS 158's provisions regarding the change in the
measurement date of postretirement benefit plans will not have a material impact on Canon's
consolidated results of operations and financial condition as Canon already uses a measurement
date of December 31 for the majority of its plans. See Note 12 for further discussion of the
effect of adopting SFAS 158 on Canon's consolidated financial statements.
In September 2006, the Securities and Exchange Commission ("SEC") staff published Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides
guidance on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108 requires
quantification of the effects of financial statement errors on each of the balance sheets and
statements of income and the related financial statement disclosures. SAB 108 was adopted by
Canon in the year ended December 31, 2006. The adoption of SAB 108 did not have a material
impact on Canon's consolidated results of operations and financial condition.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1.
Basis of Presentation and Significant Accounting Policies (continued)
(x)
New Accounting Standards (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities-Including an amendment of FASB Statement No. 115" ("SFAS 159").
SFAS 159 provides companies with an option to report selected financial assets and liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by Canon in the first quarter beginning
January 1, 2008. Canon is currently evaluating the effect that the adoption of SFAS 159 will
have on its consolidated results of operations and financial condition but does not expect
SFAS 159 to have a material impact.
(y)
Reclassification
Certain reclassifications have been made to the prior years' consolidated financial statements
to conform with the presentation used for the year ended December 31, 2006.
2.
Foreign Operations
Amounts included in the consolidated financial statements relating to subsidiaries operating in
foreign countries are summarized as follows:
2006
2005
2004
(Millions of yen)
December 31:
Total assets
¥
1,995,927
¥
1,751,011
¥
1,500,197
Net assets
907,845
767,711
632,657
Year ended December 31:
Net sales
¥
3,119,102
¥
2,774,443
¥
2,548,700
Net income
114,916
81,916
70,227
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3.
Marketable Securities and Investments
The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for
available-for-sale securities and held-to-maturity securities by major security type at December
31, 2006 and 2005 were as follows:
December 31, 2006
Gross
Gross
unrealized
unrealized
holding
holding
Fair
Cost
gains
losses
value
(Millions of yen)
Current:
Available-for-sale:
Government bonds
¥
224
¥
—
¥
—
¥
224
Bank debt securities
71
—
1
70
295
—
1
294
Held-to-maturity:
Corporate debt securities
10,151
—
—
10,151
¥
10,446
¥
—
¥
1
¥
10,445
Noncurrent:
Available-for-sale:
Government bonds
¥
335
¥
—
¥
15
¥
320
Corporate debt securities
4,090
35
1
4,124
Fund trusts
4,072
1,536
1
5,607
Equity securities
12,648
17,479
275
29,852
21,145
19,050
292
39,903
Held-to-maturity:
Corporate debt securities
10,311
—
—
10,311
¥
31,456
¥
19,050
¥
292
¥
50,214
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3.
Marketable Securities and Investments (continued)
December 31, 2005
Gross
Gross
unrealized
unrealized
holding
holding
Fair
Cost
gains
losses
value
(Millions of yen)
Current:
Available-for-sale:
Bank debt securities
¥
71
¥
—
¥
—
¥
71
Equity securities
101
—
—
101
¥
172
¥
—
¥
—
¥
172
Noncurrent:
Available-for-sale:
Government bonds
¥
525
¥
7
¥
—
¥
532
Corporate debt securities
85
3
—
88
Fund trusts
4,553
1,446
—
5,999
Equity securities
11,373
15,086
10
26,449
16,536
16,542
10
33,068
Held-to-maturity:
Corporate debt securities
20,961
—
—
20,961
¥
37,497
¥
16,542
¥
10
¥
54,029
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3.
Marketable Securities and Investments (continued)
Maturities of debt securities and fund trusts classified as available-for-sale and held-to-maturity
were as follows at December 31, 2006:
Available-for-sale securities
Cost
Fair value
(Millions of yen)
Due within one year
¥
295
¥
294
Due after one year through
five years
5,606
7,104
Due after five years
2,891
2,947
¥
8,792
¥
10,345
Held-to-maturity securities
Cost
Fair value
(Millions of yen)
Due within one year
¥
10,151
¥
10,151
Due after one year through
five years
10,311
10,311
¥
20,462
¥
20,462
The gross realized gains for the year ended December 31, 2006, 2005 and 2004 were ¥674 million,
¥11,049 million and ¥3,867 million, respectively. The gross realized losses for the years ended
December 31, 2006, 2005 and 2004 were not significant.
At December 31, 2006, substantially all of the available-for-sale and held-to-maturity securities
with unrealized losses had been in a continuous unrealized loss position for less than 12 months.
Aggregate cost of non-marketable equity securities accounted for under the cost method totaled
¥18,462 million and ¥16,714 million at December 31, 2006 and 2005, respectively. Investments with
an aggregate cost of ¥18,429 million were not evaluated for impairment because (a) Canon did not
estimate the fair value of those investments as it was not practicable to estimate the fair value
of the investments and (b) Canon did not identify any events or changes in circumstances that might
have had significant adverse effects on the fair value of those investments.
Investments in affiliated companies accounted for by the equity method amounted to ¥40,143 million
and ¥31,418 million at December 31, 2006 and 2005, respectively. Canon's share of the net earnings
(losses) in affiliated companies accounted for by the equity method, included in other income
(deductions), are earnings of ¥4,237 million, ¥1,646 million and ¥1,921 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4.
Trade Receivables
Trade receivables are summarized as follows:
December 31
2006
2005
(Millions of yen)
Notes
¥
24,241
¥
27,328
Accounts
751,555
673,827
775,796
701,155
Less allowance for doubtful
receivables
(13,849
)
(11,728
)
¥
761,947
¥
689,427
5.
Inventories
Inventories are summarized as follows:
December 31
2006
2005
(Millions of yen)
Finished goods
¥
359,471
¥
359,934
Work in process
160,231
132,520
Raw materials
19,355
17,741
¥
539,057
¥
510,195
6.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and are summarized
as follows:
December 31
2006
2005
(Millions of yen)
Land
¥
231,026
¥
199,595
Buildings
1,077,585
997,351
Machinery and equipment
1,261,176
1,164,480
Construction in progress
79,582
59,558
2,649,369
2,420,984
Less accumulated depreciation
(1,382,944
)
(1,272,163
)
¥
1,266,425
¥
1,148,821
Amounts due for purchases of property, plant and equipment were ¥122,081 million and ¥116,716
million at December 31, 2006 and 2005, respectively, and are included in other current liabilities
in the accompanying consolidated balance sheets.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Finance Receivables and Operating Leases
Finance receivables represent financing leases which consist of sales-type leases and
direct-financing leases resulting from the marketing of Canon's and complementary third-party
products. These receivables typically have terms ranging from 1 to 6 years. The components of the
finance receivables, which are included in prepaid expenses and other current assets, and other
assets in the accompanying consolidated balance sheets, are as follows:
December 31
2006
2005
(Millions of yen)
Total minimum lease payments receivable
¥
216,697
¥
204,774
Unguaranteed residual values
14,377
13,849
Executory costs
(2,923
)
(2,785
)
Unearned income
(24,930
)
(23,632
)
203,221
192,206
Less allowance for doubtful receivables
(7,871
)
(8,372
)
195,350
183,834
Less amount due within one year
(72,808
)
(69,211
)
¥
122,542
¥
114,623
The cost of equipment leased to customers under operating leases included in property, plant and
equipment, net at December 31, 2006 and 2005 was ¥62,357 million and ¥60,839 million, respectively.
Accumulated depreciation on equipment under operating leases at December 31, 2006 and 2005 was
¥46,092 million and ¥45,285 million, respectively.
The following is a schedule by year of the future minimum lease payments to be received under
financing leases and non-cancelable operating leases at December 31, 2006.
Financing
Operating
leases
leases
(Millions of yen)
Year ending December 31:
2007
¥
86,961
¥
5,689
2008
64,107
2,996
2009
41,212
1,699
2010
18,368
770
2011
5,518
70
Thereafter
531
24
¥
216,697
¥
11,248
89
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Acquisitions
In 2005, the Company acquired two companies for a total cost of ¥20,205 million, which was paid in
cash. Those companies are engaged in the development, manufacturing and sales of semiconductor
manufacturing equipment, factory automation equipment and vacuum equipment for production of
electronic parts, including semiconductors, flat panel displays, magnetic heads and hard disc
drives. In connection with those transactions, the Company recognized goodwill of ¥4,885 million
and intangible assets of ¥16,382 million, which were classified as other assets in the accompanying
consolidated financial statements. Intangible assets consist primarily of developed technology,
and are subject to a weighted average amortization period of approximately 9 years.
In 2004, the Company acquired all of the outstanding common shares of a precision plastic mold
manufacturer, in an exchange offering for 866,880 shares of the Company's common stock. The
aggregate value of the shares exchanged was approximately ¥2,805 million. In connection with this
transaction, the Company recognized goodwill of ¥1,585 million, which was classified as other
assets in the accompanying consolidated financial statements.
Canon has included the results of operations of these transactions prospectively from the
respective dates of transactions. Canon has not presented the pro forma results of operations of
the acquired businesses because the results are not material to its consolidated results of
operations on either an individual or an aggregate basis.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Goodwill and Other Intangible Assets
Intangible assets acquired during the year ended December 31, 2006 totaled ¥46,791 million, which
are subject to amortization, and primarily consist of internal use software of ¥33,996 million and
license fees of ¥5,898 million. The weighted average amortization period for internal use software
and license fees is approximately 4 years and 8 years, respectively.
The components of acquired intangible assets subject to amortization included in other assets at
December 31, 2006 and 2005 were as follows:
December 31, 2006
December 31, 2005
Gross
Gross
carrying
Accumulated
Carrying
Accumulated
amount
amortization
amount
amortization
(Millions of yen)
Software
¥
140,756
¥
76,120
¥
121,729
¥
70,535
License fees
23,681
11,257
20,567
11,329
Other
24,899
4,919
23,291
4,997
¥
189,336
¥
92,296
¥
165,587
¥
86,861
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Goodwill and Other Intangible Assets (continued)
Aggregate amortization expense for the years ended December 31, 2006, 2005 and 2004 was ¥26,490
million, ¥20,214 million and ¥18,295 million, respectively. Estimated amortization expense for
intangible assets currently held for the next five years ending December 31 is ¥29,979 million in
2007, ¥23,033 million in 2008, ¥14,374 million in 2009, ¥8,127 million in 2010, and ¥5,355 million
in 2011.
Intangible assets not subject to amortization other than goodwill at December 31, 2006 and 2005
were not significant.
The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 were
as follows:
Year ended December 31
2006
2005
(Millions of yen)
Balance at beginning of year
¥
40,161
¥
24,233
Goodwill acquired during the year
2,297
15,391
Recognition of acquired company's tax benefits
(1,038
)
—
Translation adjustments and other
(619
)
537
Balance at end of year
¥
40,801
¥
40,161
During the year ended December 31, 2006, Canon recognized ¥1,038 million of deferred tax benefits
relating to preexisting net operating tax losses of a company acquired in 2005. In connection
therewith, Canon reduced the related goodwill by the same amount.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Short-Term Loans and Long-Term Debt
Short-term loans consisting of bank borrowings at December 31, 2006 and 2005 were ¥99 million and
¥67 million, respectively. The weighted average interest rates on short-term loans outstanding at
December 31, 2006 and 2005 were 4.91% and 2.14%, respectively.
Long-term debt consisted of the following:
December 31
2006
2005
(Millions of yen)
Loans, principally from banks, maturing
in installments through 2018; bearing
weighted average interest of 1.34% and
1.40% at December 31, 2006 and 2005,
respectively, partially secured by
mortgage of property, plant and
equipment
¥
149
¥
2,641
2.95% Japanese yen notes, due 2007
10,000
10,000
2.27% Japanese yen notes, due 2008
10,000
10,000
1.30% Japanese yen convertible
debentures, due 2008
318
649
Capital lease obligations
10,585
8,784
31,052
32,074
Less amount due within one year
(15,263
)
(4,992
)
¥
15,789
¥
27,082
The aggregate annual maturities of long-term debt outstanding at December 31, 2006 were as follows:
(Millions of yen)
Year ending December 31:
2007
¥
15,263
2008
13,450
2009
1,832
2010
418
2011
69
Thereafter
20
¥
31,052
93
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Short-Term Loans and Long-Term Debt (continued)
Canon entered into an agreement whereby certain assets were deposited into an irrevocable trust to
meet the debt service requirements of the: 2.95% Japanese yen notes; and 2.27% Japanese yen notes
in the aggregate amount of ¥20,000 million. The assets contributed by Canon were debt securities
with carrying amounts of ¥20,462 million at December 31, 2006. Cash flows from such investments
will be used solely to satisfy the principal and interest obligations for the debts. Accordingly,
the debt securities are included in the consolidated balance sheets under the captions of
marketable securities and investments.
Both short-term and long-term bank loans are made under general agreements which provide that
security and guarantees for present and future indebtedness will be given upon request of the bank,
and that the bank shall have the right to offset cash deposits against obligations that have become
due or, in the event of default, against all obligations due to the bank.
The 1.30% Japanese yen convertible debentures due 2008 are convertible into approximately 319,000
shares of common stock at a conversion price of ¥998.00 per share at December 31, 2006. The
debentures are redeemable at the option of the Company between January 1, 2007 and December 31,
2007 at premiums of 1%, and at par thereafter.
11. Trade Payables
Trade payables are summarized as follows:
December 31
2006
2005
(Millions of yen)
Notes
¥
15,902
¥
17,567
Accounts
477,156
487,559
¥
493,058
¥
505,126
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory and noncontributory defined benefit
plans covering substantially all employees after one year of service. Other subsidiaries sponsor
unfunded retirement and severance plans. Benefits payable under the plans are based on employee
earnings and years of service.
The contributory plans in Japan mainly represented the Employees' Pension Fund plans ("EPFs"),
composed of the substitutional portions based on the pay-related part of the old age pension
benefits prescribed by the Welfare Pension Insurance Law and the corporate portions based on
contributory defined benefit pension arrangements established at the discretion of the Company and
its subsidiaries. The substitutional portions of the EPFs represented welfare pension plans
carried on behalf of the Japanese government. These contributory and noncontributory plans were
funded in conformity with the funding requirements of applicable Japanese governmental regulations.
In January 2003, the EITF reached a final consensus on EITF Issue No. 03-2, "Accounting for the
Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund
Liabilities" ("EITF 03-2"), which addresses accounting for a transfer to the Japanese government of
a substitutional portion of an EPF. During the year ended December 31, 2003, the Company and
certain of its domestic subsidiaries received approval from the government for an exemption from
the obligation to pay benefits for future employee service related to the substitutional portion.
During the year ended December 31, 2004, the Company and certain of its domestic subsidiaries
received approval to separate the remaining substitutional portion related to past service by their
employees. During the year ended December 31, 2004, the Company and certain of its domestic
subsidiaries also completed the transfer of the substitutional portion of the benefit obligation
and the related government-specified portion of the plan assets which were computed by the
government, and were relieved of all related obligations. Canon accounted for the entire process
at the completion of the transfer to the government of the substitutional portion of the benefit
obligation and the related plan assets as a single settlement transaction in accordance with EITF
03-2. As a result, Canon recognized a settlement loss of ¥69,651 million for the year ended
December 31, 2004, which was determined based on the proportion of the projected benefit obligation
settled to the total projected benefit obligation immediately prior to the separation. Canon also
recognized a subsidy from the government of ¥86,792 million, which was calculated as the difference
between the obligation settled and the assets transferred to the government. The net gain of
¥17,141 million was included in selling, general and administrative expenses for the year ended
December 31, 2004.
Effective January 1, 2007, Canon and certain of its domestic subsidiaries have amended their
defined benefit pension plans, and the projected benefit obligation has decreased by ¥101,620
million. In conjunction therewith, Canon and certain of its domestic
subsidiaries also have implemented a defined contribution pension plan for certain future pension
benefits attributable to employees' future services.
95
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
Canon uses a measurement date of December 31 for the majority of its plans.
On December 31, 2006, Canon adopted the recognition and disclosure provisions of SFAS 158. SFAS
158 required Canon to recognize the funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension plans in the December 31, 2006
consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
income (loss), net of tax. The adjustment to accumulated other comprehensive income (loss) at
adoption represents the unrecognized actuarial loss, unrecognized prior service cost, and
unrecognized net transition obligation, all of which were previously netted against the plans'
funded status in the consolidated balance sheet pursuant to the provisions of SFAS 87. These
amounts will be subsequently recognized as net periodic benefit cost pursuant to Canon's historical
accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in
subsequent periods and are not recognized as net periodic benefit cost in the same periods will be
recognized as a component of other comprehensive income (loss). Those amounts will be subsequently
recognized as a component of net periodic benefit cost on the same basis as the amounts recognized
in accumulated other comprehensive income (loss) at adoption of SFAS 158.
The incremental effects of adopting the provisions of SFAS 158 on the accompanying consolidated
balance sheet at December 31, 2006 are presented in the following table. The adoption of SFAS 158
had no effect on the consolidated statement of income for the years ended December 31, 2006, or for
any prior period presented, and it will not effect Canon's operating results in future periods.
Had Canon not been required to adopt SFAS 158 at December 31, 2006, it would have recognized an
additional minimum liability pursuant to the provisions of SFAS 87. The effect of recognizing the
additional minimum liability is included in the table below in the column labeled "Before
application of SFAS 158."
Before
After
application of
application of
SFAS 158
Adjustments
SFAS 158
(Millions of yen)
Other assets
¥
5,230
¥
(2,206
)
¥
3,024
Accrued expenses
—
(90
)
(90
)
Accrued pension and severance cost
(57,031
)
(26,845
)
(83,876
)
Deferred income taxes
6,408
9,516
15,924
Minority interests
1,517
3,997
5,514
Accumulated other comprehensive
income (loss)
10,914
15,628
26,542
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
Obligations and funded status
Reconciliations of beginning and ending balances of the benefit obligations and the fair value of
the plan assets are as follows:
December 31
2006
2005
(Millions of yen)
Change in benefit obligations:
Benefit obligations at beginning of year
¥
620,493
¥
582,212
Service cost
27,399
25,801
Interest cost
17,309
16,172
Plan participants' contributions
1,412
1,161
Amendments
(954
)
(6,212
)
Actuarial gain
23,586
3,340
Benefits paid
(13,064
)
(12,239
)
Acquisition
714
10,106
Foreign currency exchange rate changes
11,696
167
Other
—
(15
)
Benefit obligations at end of year
688,591
620,493
Change in plan assets:
Fair value of plan assets at beginning
of year
545,518
418,798
Actual return on plan assets
18,858
93,844
Employer contributions
44,981
40,059
Plan participants' contributions
1,412
1,161
Benefits paid
(13,064
)
(12,239
)
Acquisition
320
3,486
Foreign currency exchange rate changes
9,624
409
Fair value of plan assets at end of year
607,649
545,518
Funded status at end of year
¥
(80,942
)
¥
(74,975
)
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12.
Employee Retirement and Severance Benefits (continued)
Amounts recognized in the consolidated balance sheet at December 31, 2006 consist of:
(Millions of yen)
Other assets
¥
3,024
Accrued expenses
(90
)
Accrued pension and severance cost
(83,876
)
¥
(80,942
)
Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2006 consist
of:
(Millions of yen)
Actuarial loss
¥
139,305
Prior service cost
(94,935
)
Net transition obligation
3,610
¥
47,980
The funded status at December 31, 2005, reconciled to the net amount recognized in the consolidated
balance sheet at that date, is summarized as follows:
(Millions of yen)
Funded status
¥
(74,975
)
Unrecognized actuarial loss
110,424
Unrecognized prior service cost
(101,552
)
Unrecognized net transition obligation
3,955
Net amount recognized
¥
(62,148
)
Amounts recognized in the consolidated balance sheet at December 31, 2005 consist of:
(Millions of yen)
Other assets
¥
3,089
Accrued pension and severance cost
(80,430
)
Accumulated
other comprehensive income (loss)
15,193
Net amount recognized
¥
(62,148
)
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
The accumulated benefit obligation for all defined benefit plans was as follows:
December 31
2006
2005
(Millions of yen)
Accumulated benefit obligation
¥
641,199
¥
578,627
The projected benefit obligations and the fair value of plan assets for the pension plans with
projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and
the fair value of plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets are as follows:
December 31
2006
2005
(Millions of yen)
Plans with projected benefit
obligations in excess of plan assets:
Projected benefit obligations
¥
656,722
¥
587,162
Fair value of plan assets
572,756
510,287
Plans with accumulated benefit
obligations in excess of plan assets:
Accumulated benefit obligations
608,812
545,375
Fair value of plan assets
568,615
506,634
99
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
Components of net periodic benefit cost
Net periodic benefit cost for Canon's employee retirement and severance defined benefit plans for
the years ended December 31, 2006, 2005 and 2004 consisted of the following components:
Year ended December 31
2006
2005
2004
(Millions of yen)
Service cost
¥
27,399
¥
25,801
¥
26,571
Interest cost
17,309
16,172
19,108
Expected return on plan assets
(26,199
)
(19,651
)
(17,054
)
Amortization of net transition
obligation
345
345
344
Amortization of prior service cost
(7,549
)
(8,007
)
(6,814
)
Recognized actuarial loss
3,779
10,542
12,505
Settlement loss resulting from
plan termination
—
—
2,784
Settlement loss resulting from
transfer of substitutional
portion of EPFs to the Japanese
government
—
—
69,651
¥
15,084
¥
25,202
¥
107,095
The estimated net transition obligation, prior service cost and actuarial loss for the defined
benefit pension plans that will be amortized from accumulated other comprehensive income (loss)
into net periodic benefit cost over the next year are summarized as follows:
(
Millions of yen)
Net transition obligation
¥
345
Prior service cost
(13,491
)
Actuarial loss
6,100
The above prior service cost that will be amortized over the next year includes amortization
amounting to ¥5,834 million of prior service cost resulting from the plan amendment effective
January 1, 2007.
100
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
December 31
2006
2005
Discount rate
2.8
%
2.7
%
Assumed rate of increase in future compensation levels
3.4
%
3.3
%
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Year ended December 31
2006
2005
2004
Discount rate
2.7
%
2.7
%
2.7
%
Assumed rate of increase in future
compensation levels
3.3
%
3.0
%
2.0
%
Expected long-term rate of return on
plan assets
4.8
%
4.6
%
3.6
%
Canon determines the expected long-term rate of return based on the expected long-term return of
the various asset categories in which it invests. Canon considers the current expectations for
future returns and the actual historical returns of each plan asset category.
Plan assets
The weighted-average asset allocations of Canon's benefit plans at December 31, 2006 and 2005 and
target asset allocation by asset category are as follows:
December 31
Target
2006
2005
allocation
Asset category:
Equity securities
40.5
%
50.8
%
37.5
%
Debt securities
40.5
%
34.6
%
44.5
%
Cash
0.4
%
0.7
%
0.1
%
Life insurance company
general accounts
15.9
%
13.5
%
15.7
%
Other
2.7
%
0.4
%
2.2
%
100.0
%
100.0
%
100.0
%
101
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Employee Retirement and Severance Benefits (continued)
Canon's investment policies are designed to ensure adequate plan assets are available to provide
future payments of pension benefits to eligible participants. Taking into account the expected
long-term rate of return on plan assets, Canon formulates a "model" portfolio comprised of the
optimal combination of equity securities and debt securities. Plan assets are invested in
individual equity and debt securities using the guidelines of the "model" portfolio in order to
produce a total return that will match the expected return on a mid-term to long-term basis. Canon
evaluates the gap between expected return and actual return of invested plan assets on an annual
basis to determine if such differences necessitate a revision in the formulation of the "model"
portfolio. Canon revises the "model" portfolio when and to the extent considered necessary to
achieve the expected long-term rate of return on plan assets.
The plan's equity securities include common stock of the Company and certain of its subsidiaries in
the amounts of ¥1,797 million and ¥1,311 million at December 31, 2006 and 2005, respectively.
Contributions
Canon expects to contribute ¥17,369 million to its defined benefit plans for the year ending
December 31, 2007.
Estimated future benefit payments
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
Year ending December 31:
(Millions of yen)
2007
¥
10,709
2008
12,514
2009
13,914
2010
15,216
2011
16,800
2012 – 2016
109,869
102
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Income Taxes
Domestic and foreign components of income before income taxes and minority interests, and the
current and deferred income tax expense (benefit) attributable to such income are summarized as
follows:
Year ended December 31, 2006
Japanese
Foreign
Total
(Millions of yen)
Income before income
taxes and minority
interests
¥
556,759
¥
162,384
¥
719,143
Income taxes:
Current
¥
201,022
¥
54,156
¥
255,178
Deferred
(73
)
(6,872
)
(6,945
)
¥
200,949
¥
47,284
¥
248,233
Year ended December 31, 2005
Japanese
Foreign
Total
(Millions of yen)
Income before income
taxes and minority
interests
¥
492,709
¥
119,295
¥
612,004
Income taxes:
Current
¥
172,595
¥
40,956
¥
213,551
Deferred
3,441
(4,207
)
(766
)
¥
176,036
¥
36,749
¥
212,785
Year ended December 31, 2004
Japanese
Foreign
Total
(Millions of yen)
Income before income
taxes and minority
interests
¥
447,864
¥
104,252
¥
552,116
Income taxes:
Current
¥
162,679
¥
22,275
¥
184,954
Deferred
(1,065
)
10,125
9,060
¥
161,614
¥
32,400
¥
194,014
103
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Income Taxes (continued)
The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the
aggregate, represent a statutory income tax rate of approximately 40% for the years ended December
31, 2006 and 2005, and 42% for the year ended December 31, 2004.
Amendments to the Japanese tax regulations were enacted on March 24, 2003. As a result of these
amendments, the statutory income tax rate was reduced from approximately 42% to 40% effective from
the year beginning January 1, 2005. Consequently, the statutory tax rate utilized for deferred tax
assets and liabilities expected to be settled or realized subsequent to January 1, 2005 is
approximately 40%.
A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a
percentage of income before income taxes and minority interests is as follows:
Year ended December 31
2006
2005
2004
Japanese statutory income tax rate
40.0
%
40.0
%
42.0
%
Increase (reduction) in income taxes
resulting from:
Expenses not deductible for tax
purposes
0.3
0.3
0.4
Tax benefits not recognized on
operating losses of subsidiaries
—
—
0.1
Income of foreign subsidiaries
taxed at lower than Japanese
statutory tax rate
(2.1
)
(1.9
)
(2.1
)
Tax credit for research and
development expenses
(4.1
)
(3.9
)
(4.0
)
Other
0.4
0.3
(1.3
)
Effective income tax rate
34.5
%
34.8
%
35.1
%
104
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Income Taxes (continued)
Net deferred income tax assets and liabilities are included in the accompanying consolidated
balance sheets under the following captions:
December 31
2006
2005
(Millions of yen)
Prepaid expenses and other current assets
¥
66,839
¥
52,116
Other assets
67,568
61,325
Other current liabilities
(4,133
)
(3,500
)
Other noncurrent liabilities
(39,299
)
(36,329
)
¥
90,975
¥
73,612
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax
liabilities at December 31, 2006 and 2005 are presented below:
December 31
2006
2005
(Millions of yen)
Deferred tax assets:
Inventories
¥
20,077
¥
13,459
Accrued business tax
10,654
8,599
Accrued pension and severance cost
33,633
34,257
Research and development – costs
capitalized for tax purposes
31,068
23,629
Property, plant and equipment
26,577
21,839
Accrued expenses
21,277
20,132
Net operating losses carried forward
1,767
1,388
Other
28,061
24,362
Total gross deferred tax assets
173,114
147,665
Less valuation allowance
(6,500
)
(3,345
)
Net deferred tax assets
166,614
144,320
Deferred tax liabilities:
Undistributed earnings of foreign
subsidiaries
(9,138
)
(6,806
)
Net unrealized gains on securities
(7,521
)
(6,480
)
Tax deductible reserve
(11,955
)
(14,307
)
Financing lease revenue
(35,990
)
(35,395
)
Other
(11,035
)
(7,720
)
Total gross deferred tax liabilities
(75,639
)
(70,708
)
Net deferred tax assets
¥
90,975
¥
73,612
105
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Income Taxes (continued)
The net changes in the total valuation allowance were an increase of ¥3,155 million for the year
ended December 31, 2006, and decreases of ¥150 million and ¥4,906 million for the years ended
December 31, 2005 and 2004, respectively.
Based upon the level of historical taxable income and projections for future taxable income over
the periods which the net deductible temporary differences are expected to reverse, management
believes it is more likely than not that Canon will realize the benefits of these deferred tax
assets, net of the existing valuation allowance at December 31, 2006.
At December 31, 2006, Canon had net operating losses which can be carried forward for income tax
purposes of ¥5,567 million to reduce future taxable income. Periods available to reduce future
taxable income vary in each tax jurisdiction and generally range from one year to ten years as
follows:
(Millions of yen)
Within one year
¥
2,979
After one year through five years
967
After five years through ten years
101
Indefinite period
1,520
Total
¥
5,567
Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax
law provides a means by which the dividends from a domestic subsidiary can be received tax free.
Canon has not recognized deferred tax liabilities of ¥36,568 million for a portion of undistributed
earnings of foreign subsidiaries that arose for the year ended December 31, 2006 and prior years
because Canon currently does not expect to have such amounts distributed or paid as dividends to
the Company in the foreseeable future. Deferred tax liabilities will be recognized when Canon
expects that it will realize those undistributed earnings in a taxable manner, such as through
receipt of dividends or sale of the investments. At December 31, 2006, such undistributed earnings
of these subsidiaries were ¥597,969 million.
106
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Common Stock
Based on the resolution of Board of Directors on May 11, 2006, the Company made a three-for-two
stock split on July 1, 2006, for stockholders recorded in the stockholders' register as of June 30,
2006. All share and per share information has been adjusted to reflect the implementation of the
stock split.
For the years ended December 31, 2006, 2005 and 2004, the Company issued 331,661 shares, 1,148,292
shares and 9,957,909 shares of common stock, respectively, in connection with the conversion of
convertible debt. In accordance with the Corporation Law of Japan, conversion into common stock of
convertible debt is accounted for by crediting one-half or more of the conversion price to the
common stock account and the remainder to the additional paid-in capital account.
15. Legal Reserve and Retained Earnings
The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained
earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No
further appropriations are required when the total amount of the additional paid-in capital and the
legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also
provides that additional paid-in capital and legal reserve are available for appropriations by the
resolution of the stockholders. Certain foreign subsidiaries are also required to appropriate
their earnings to legal reserves under the laws of the respective countries.
Cash dividends and appropriations to the legal reserve charged to retained earnings for the years
ended December 31, 2006, 2005 and 2004 represent dividends paid out during those years and the
related appropriations to the legal reserve. Retained earnings at December 31, 2006 do not reflect
current year-end dividends in the amount of ¥66,583 million which will be payable in March 2007
upon approval by the stockholders.
The amount available for dividends under the Corporation Law of Japan is based on the amount
recorded in the Company's nonconsolidated books of account in accordance with financial accounting
standards of Japan. Such amount was ¥1,494,372 million at December 31, 2006.
Retained earnings at December 31, 2006 included Canon's equity in undistributed earnings of
affiliated companies accounted for by the equity method in the amount of ¥13,493 million.
107
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) are as follows:
Year ended December 31
2006
2005
2004
(Millions of yen)
Foreign currency translation
adjustments:
Balance at beginning of year
¥
(25,772
)
¥
(79,751
)
¥
(83,801
)
Adjustments for the year
48,630
53,979
4,050
Balance at end of year
22,858
(25,772
)
(79,751
)
Net unrealized gains and losses on
securities:
Balance at beginning of year
6,073
7,470
6,784
Adjustments for the year
1,992
(1,397
)
686
Balance at end of year
8,065
6,073
7,470
Net gains and losses on derivative
instruments:
Balance at beginning of year
(1,174
)
(693
)
(297
)
Adjustments for the year
(489
)
(481
)
(396
)
Balance at end of year
(1,663
)
(1,174
)
(693
)
Minimum pension liability adjustments:
Balance at beginning of year
(7,339
)
(28,338
)
(65,961
)
Adjustments for the year
(3,575
)
20,999
37,623
Adjustment to initially apply SFAS 158
10,914
—
—
Balance at end of year
—
(7,339
)
(28,338
)
Pension liability adjustments:
Adjustment to initially apply SFAS 158
(26,542
)
—
—
Balance at end of year
(26,542
)
—
—
Total accumulated other comprehensive
income (loss):
Balance at beginning of year
(28,212
)
(101,312
)
(143,275
)
Adjustments for the year
46,558
73,100
41,963
Adjustment to initially apply SFAS 158
(15,628
)
—
—
Balance at end of year
¥
2,718
¥
(28,212
)
¥
(101,312
)
108
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Other Comprehensive Income (Loss) (continued)
Tax effects allocated to each component of other comprehensive income (loss) and reclassification
adjustments are as follows:
Year ended December 31
Before-tax
Tax (expense)
Net-of-tax
amount
or benefit
amount
(Millions of yen)
2006:
Foreign currency translation adjustments
¥
49,518
¥
(888
)
¥
48,630
Net unrealized gains and losses on securities:
Amount arising during the year
3,708
(1,502
)
2,206
Reclassification adjustments for gains
and losses realized in net income
(388
)
174
(214
)
Net change during the year
3,320
(1,328
)
1,992
Net gains and losses on derivative
instruments:
Amount arising during the year
(7,126
)
2,858
(4,268
)
Reclassification adjustments for gains
and losses realized in net income
6,309
(2,530
)
3,779
Net change during the year
(817
)
328
(489
)
Minimum pension liability adjustments
(4,391
)
816
(3,575
)
Other comprehensive income (loss)
¥
47,630
¥
(1,072
)
¥
46,558
2005:
Foreign currency translation adjustments
¥
55,345
¥
(1,366
)
¥
53,979
Net unrealized gains and losses on securities:
Amount arising during the year
9,005
(3,892
)
5,113
Reclassification adjustments for gains
and losses realized in net income
(10,793
)
4,283
(6,510
)
Net change during the year
(1,788
)
391
(1,397
)
Net gains and losses on derivative
instruments:
Amount arising during the year
(9,137
)
3,658
(5,479
)
Reclassification adjustments for gains
and losses realized in net income
8,333
(3,335
)
4,998
Net change during the year
(804
)
323
(481
)
Minimum pension liability adjustments
40,364
(19,365
)
20,999
Other comprehensive income (loss)
¥
93,117
¥
(20,017
)
¥
73,100
109
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Other Comprehensive Income (Loss) (continued)
Year ended December 31
Before-tax
Tax (expense)
Net-of-tax
amount
or benefit
amount
(Millions of yen)
2004:
Foreign currency translation adjustments
¥
4,400
¥
(350
)
¥
4,050
Net unrealized gains and losses on securities:
Amount arising during the year
5,022
(2,202
)
2,820
Reclassification adjustments for gains
and losses realized in net income
(3,698
)
1,564
(2,134
)
Net change during the year
1,324
(638
)
686
Net gains and losses on derivative
instruments:
Amount arising during the year
(1,673
)
708
(965
)
Reclassification adjustments for gains
and losses realized in net income
929
(360
)
569
Net change during the year
(744
)
348
(396
)
Minimum pension liability adjustments
78,179
(40,556
)
37,623
Other comprehensive income (loss)
¥
83,159
¥
(41,196
)
¥
41,963
110
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Net Income per Share
The basic and diluted net income per share as well as the number of shares has been calculated to
reflect the three-for-two stock split that was completed on July 1, 2006.
A reconciliation of the numerators and denominators of basic and diluted net income per share
computations is as follows:
Year ended December 31
2006
2005
2004
(Millions of yen)
Net income
¥
455,325
¥
384,096
¥
343,344
Effect of dilutive securities:
1.20% Japanese yen
convertible debentures, due 2005
—
5
24
1.30% Japanese yen
convertible debentures, due 2008
8
18
72
Diluted net income
¥
455,333
¥
384,119
¥
343,440
(Number of shares)
Average common shares outstanding
1,331,542,074
1,330,760,715
1,328,047,686
Effect of dilutive securities:
1.20% Japanese yen
convertible debentures, due 2005
—
185,755
694,235
1.30% Japanese yen
convertible debentures, due 2008
474,796
1,118,931
3,187,917
Diluted common shares outstanding
1,332,016,870
1,332,065,401
1,331,929,838
(Yen)
Net income per share:
Basic
¥
341.95
¥
288.63
¥
258.53
Diluted
341.84
288.36
257.85
111
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of changes in foreign currency exchange
rates and interest rates. Derivative financial instruments are comprised principally of foreign
exchange contracts and interest rate swaps utilized by the Company and certain of its subsidiaries
to reduce these risks. Canon assesses foreign currency exchange rate risk and interest rate risk
by continually monitoring changes in these exposures and by evaluating hedging opportunities.
Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also
exposed to credit-related losses in the event of non-performance by counterparties to derivative
financial instruments, but it is not expected that any counterparties will fail to meet their
obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions.
Foreign currency exchange rate risk management
Canon's international operations expose Canon to the risk of changes in foreign currency exchange
rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures
principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canon's policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months.
Interest rate risk management
Canon's exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps.
Fair value hedge
Derivative financial instruments designated as fair value hedges principally relate to interest
rate swaps associated with fixed rate debt obligations. Changes in fair values of the hedged debt
obligations and derivative financial instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or
net gains or losses excluded from the assessment of hedge effectiveness for the year ended December
31, 2004 as the critical terms of the interest rate swaps match the terms of the hedged debt
obligations.
112
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Derivatives and Hedging Activities (continued)
Cash flow hedge
Changes in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted intercompany sales and interest
rate swaps associated with variable rate debt obligations, are reported in accumulated other
comprehensive income (loss). These amounts are subsequently reclassified into earnings through
other income (deductions) in the same period as the hedged items affect earnings. Substantially
all amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to
be recognized in earnings over the next twelve months. Canon excludes the time value component
from the assessment of hedge effectiveness.
The amount of the hedging ineffectiveness was not material for the years ended December 31, 2006,
2005 and 2004. The amount of net gains or losses excluded from the assessment of hedge
effectiveness (time value component) which was recorded in other income (deductions) was net losses
of ¥5,917 million, ¥3,725 million and ¥2,096 million for the years ended December 31, 2006, 2005
and 2004, respectively.
Derivatives not designated as hedges
Canon has entered into certain foreign exchange contracts to manage its foreign currency exposures.
These foreign exchange contracts have not been designated as hedges. Accordingly, the changes in
fair value of the contracts are recorded in earnings immediately.
Contract amounts of foreign exchange contracts at December 31, 2006 and 2005 are set forth below:
December 31
2006
2005
(Millions of yen)
To sell foreign currencies
¥
717,136
¥
645,188
To buy foreign currencies
51,189
46,424
113
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Commitments and Contingent Liabilities
Commitments
At December 31, 2006, commitments outstanding for the purchase of property, plant and equipment
approximated ¥107,685 million, and commitments outstanding for the purchase of parts and raw
materials approximated ¥85,403 million.
Canon occupies sales offices and other facilities under lease arrangements accounted for as
operating leases. Deposits made under such arrangements aggregated ¥13,648 million and ¥13,790
million at December 31, 2006 and 2005, respectively, and are included in noncurrent receivables in
the accompanying consolidated balance sheets. Rental expenses under the operating lease
arrangements amounted to ¥36,157 million, ¥38,297 million and ¥41,381 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
Future minimum lease payments required under noncancelable operating leases that have initial or
remaining lease terms in excess of one year at December 31, 2006 are as follows:
(Millions of yen)
Year ending December 31:
2007
¥
16,025
2008
12,975
2009
9,590
2010
5,962
2011
4,570
Thereafter
11,256
Total future minimum lease payments
¥
60,378
114
Table of Contents
Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Commitments and Contingent Liabilities (continued)
Guarantees
Canon provides guarantees for bank loans of its employees, affiliates and other companies. The
guarantees for the employees are principally made for their housing loans. The guarantees of loans
of its affiliates and other companies are made to ensure that those companies operate with less
financial risk.
For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults
on a payment within the contract periods of 1 year to 30 years, in the case of employees with
housing loans, and of 1 year to 10 years, in the case of affiliates and other companies. The
maximum amount of undiscounted payments Canon would have had to make in the event of default is
¥30,051 million at December 31, 2006. The carrying amounts of the liabilities recognized for
Canon's obligations as a guarantor under those guarantees at December 31, 2006 were not
significant.
Canon also issues contractual product warranties under which it generally guarantees the
performance of products delivered and services rendered for a certain period or term. Changes in
accrued product warranty cost for the years ended December 31, 2006 and 2005 are summarized as
follows:
Year ended December 31
2006
2005
(Millions of yen)
Balance at beginning of year
¥
16,746
¥
14,264
Addition
15,213
18,510
Utilization
(14,266
)
(15,580
)
Other
451
(448
)
Balance at end of year
¥
18,144
¥
16,746
Legal proceedings
In February 2003, a lawsuit was filed by St. Clair Intellectual Property Consultants, Inc. ("St.
Clair") against the Company and one of its subsidiaries in the United States District Court of
Delaware, which accused the Company of infringement of patents related to certain technology. In
connection with this case, in October 2004, a jury preliminarily found damages against the Company
of approximately ¥4,000 million based on a percentage of certain product sales in the United States
through 2003. Subsequent to this jury finding, St. Clair also made a motion to the court for
damages relating to certain 2004 sales, using the same royalty rate awarded by the jury. In March
2006, the Company and St. Clair entered into a settlement agreement, pursuant to which the lawsuit
was withdrawn in July 2006.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Commitments and Contingent Liabilities (continued)
In October 2003, a lawsuit was filed by a former employee against the Company at the Tokyo
District Court in Japan. The lawsuit alleges that the former employee is entitled to ¥45,872
million as compensation for an invention related to certain technology used by the Company, and the
former employee has sued for a partial payment of ¥1,000 million and interest thereon. On January
30, 2007, the Tokyo District Court in Japan ordered the Company to pay the former employee
approximately ¥33.5 million and interest thereon. On the same day, the Company appealed the
decision.
In Germany, Verwertungsgesellschaft Wort ("VG Wort"), a collecting agency representing certain
copyright holders, has filed a series of lawsuits seeking to impose copyright levies upon digital
products such as PCs and printers, that allegedly enable the reproduction of copyrighted materials,
against the companies importing and distributing these digital products. In May 2004, VG Wort
filed a civil lawsuit against Hewlett-Packard GmbH seeking levies on multi-function printers. This
is an industry test case under which Hewlett-Packard GmbH represents other companies sharing common
interests, and Canon has undertaken to be bound by the final decision of this court case. The
court of first instance and the court of appeals held that the multi-function printers were subject
to a levy. In particular, the court of appeals ordered Hewlett-Packard GmbH to pay the amount
equivalent to the levies imposed on photocopiers (EUR 38.35 to EUR 613.56 per unit, depending on
printing speed and color printing capability). This lawsuit is currently under appeal before the
German Federal Supreme Court. With regard to single-function printers, VG Wort filed a separate
lawsuit in January 2006 against Canon seeking payment of copyright levies, and the court of first
instance in Düsseldorf ruled in favor of the claim by VG Wort in November 2006. Canon lodged an
appeal against such decision in December 2006. In a similar court case, which does not include
Canon, seeking copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH
and Kyocera Mita Deutschland GmbH, the court of appeals in Düsseldorf rejected such alleged levies
on January 23, 2007. Canon, other companies and the industry associations have expressed opposition
to such extension of the levy scope and the final conclusion of these court cases including the
amount of levies to be imposed, remains uncertain.
In April 2005, a lawsuit was filed by Nano-Proprietary Inc. ("NPI") against the Company and Canon
U.S.A. Inc. in the United States District Court of Texas alleging that SED Inc., a joint venture
company established by the Company and Toshiba Corporation, is not regarded as a "Subsidiary" under
the Patent License Agreement between the Company and NPI (the "Agreement") and that the extension
of the license to SED Inc. constitutes a breach of the Agreement. NPI also alleges that there was
fraudulent conduct by the Company in executing the Agreement, and requests rescission of the
Agreement and compensatory damages. This case is still pending and the final outcome, including
any liability to the Company, is not yet determined, but in November 2006, the Court denied the
Company's Motion for a summary judgment that SED Inc. is a Subsidiary of the Company. In January
2007, the Company purchased all the shares of SED Inc. owned by Toshiba Corporation, making SED
Inc. a 100% owned subsidiary of the Company. However, on February 22, 2007, the court issued a
summary judgment stating that SED Inc.(before the above stock purchase) was not a Subsidiary of the Company, and that the Agreement has been
terminated due to a material breach of the Agreement by the Company. The remaining pending issues
at the district court are whether the Company was engaged in fraudulent conduct and whether
compensatory damages should be granted. The Company will appeal to the appellate court immediately
after the current proceeding at the district court has been concluded regardless of any judgments
rendered by the district court.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Commitments and Contingent Liabilities (continued)
Canon is involved in various claims and legal actions, including those noted above, arising in the
ordinary course of business. In accordance with SFAS No. 5, "Accounting for Contingencies," Canon
has recorded provisions for liabilities when it is probable that liabilities have been incurred and
the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly
and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings,
advice of legal counsel and other information and events pertaining to a particular case. Based on
its experience, Canon believes that any damage amounts claimed in the specific matters discussed
above are not a meaningful indicator of Canon's potential liability. In the opinion of management,
the ultimate disposition of the above mentioned matters will not have a material adverse effect on
Canon's consolidated financial position, results of operations, or cash flows. However, litigation
is inherently unpredictable. While Canon believes that it has valid defenses with respect to legal
matters pending against it, it is possible that Canon's consolidated financial position, results of
operations, or cash flows could be materially affected in any particular period by the unfavorable
resolution of one or more of these matters.
20. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
Fair value of financial instruments
The estimated fair values of Canon's financial instruments at December 31, 2006 and 2005 are set
forth below. The following summary excludes cash and cash equivalents, trade receivables, finance
receivables, noncurrent receivables, short-term loans, trade payables, accrued expenses for which
fair values approximate their carrying amounts. The summary also excludes marketable securities
and investments which are disclosed in Note 3.
December 31
2006
2005
Carrying
Estimated
Carrying
Estimated
amount
fair value
amount
fair value
(Millions of yen)
Long-term debt, including
current installments
¥
(31,052
)
¥
(32,795
)
¥
(32,074
)
¥
(35,194
)
Foreign exchange contracts:
Assets
307
307
2,250
2,250
Liabilities
(17,534
)
(17,534
)
(10,062
)
(10,062
)
The following methods and assumptions are used to estimate the fair value in the above table.
117
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20.
Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
(continued)
Long-term debt
The fair values of Canon's long-term debt instruments are based on the quoted price in the most
active market or the present value of future cash flows associated with each instrument discounted
using Canon's current borrowing rate for similar debt instruments of comparable maturity.
Foreign exchange contracts
The fair values of foreign exchange contracts, all of which are used for purposes other than
trading, are estimated by obtaining quotes from brokers.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.
Concentrations of credit risk
At December 31, 2006 and 2005, one customer accounted for approximately 14% and 12% of consolidated
trade receivables, respectively. Although Canon does not expect that the customer will fail to
meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer
failed to perform according to the terms of the contracts.
21. Supplemental Cash Flow Information
For the years ended December 31, 2006, 2005 and 2004, aggregate common stock and additional paid-in
capital arising from conversion of convertible debt amounted to ¥331 million, ¥1,147 million and
¥9,938 million, respectively.
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Canon Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. Subsequent Event
On February 15, 2007, the Board of Directors of the Company approved a plan to repurchase up to 17
million shares of the Company's common stock at a cost of up to ¥100,000 million for the period
from February 16, 2007 to March 16, 2007. Such repurchases are intended to improve capital
efficiency and ensure flexible capital strategy. Common stock repurchased in the Tokyo Stock
Exchange between February 16, 2007 and March 6, 2007 under the aforementioned plan was 15,423,300
shares at a cost of ¥100,000 million.
On March 8, 2007, the Board of Directors of the Company approved an additional plan to repurchase
up to 17 million shares of the Company's common stock at a cost of up to ¥100,000 million for the
period from March 9, 2007 to April 9, 2007.
23. Event (Unaudited) Subsequent to the Date of the Report of Independent Registered Public
Accounting Firm
Common stock repurchased in the Tokyo Stock Exchange through March 23, 2007 under the plan approved
by the Board of Directors of the Company on March 8, 2007 mentioned in Note 22 was 15,742,200 shares at a
cost of ¥100,000 million.
119
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CANON INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years ended December 31, 2006, 2005 and 2004
Balance at
Add
Deduct
Add
Balance
beginning of
charge to
bad debts
translation
at end of
period
income
written off
adjustments
period
(Millions of yen)
Year ended December 31, 2006:
Allowance for doubtful receivables
¥
11,728
¥
3,384
¥
2,058
¥
795
¥
13,849
Year ended December 31, 2005:
Allowance for doubtful receivables
¥
11,657
¥
560
¥
1,180
¥
691
¥
11,728
Year ended December 31, 2004:
Allowance for doubtful receivables
¥
14,423
¥
449
¥
3,515
¥
300
¥
11,657
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Table of Contents
Item 18. Financial Statements
Not applicable.
Item 19. Financial Statements and Exhibits
(a) The following consolidated financial statements and schedule II included in
Item 17. "Financial Statements."
Consolidated financial statements of Canon Inc. and Subsidiaries:
Report of Independent Registered Public
Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006,
2005 and 2004
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years ended December 31,
2006, 2005 and 2004
Notes to Consolidated Financial Statements
Schedule:
Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 2006, 2005 and 2004
(b) List of exhibits
Exhibit:
1.1
Articles of Incorporation of Canon Inc. (Translation)
1.2
Regulations Of the Board of Directors of Canon Inc. (Translation)
2
Regulations for Handling of Shares of Canon Inc. (Translation)
8
List of Significant Subsidiaries (See "Organizational Structure" in Item 4.C. of this
Form 20-F)
11.1
Canon Group Code of Conduct (Translation) , incorporated by reference from the annual
report on Form20-F (Commission file number 0-15122) filed on June 10, 2004
11.2
Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation), incorporated by
reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004
12
302 Certifications
13
906 Certification
121
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CANON INC.
(Registrant)
By:
/s/ Toshizo Tanaka
(Executive Vice President & CFO)
Canon INC.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan
Date
April 4, 2007
122
Table of Contents
EXHIBIT INDEX
Exhibit number
Title
Exhibit 1.1
Articles of Incorporation of Canon Inc. (Translation)
Exhibit 1.2
Regulations of the Board of Directors of Canon Inc. (Translation)
Exhibit 2
Regulations for Handling of Shares of Canon Inc. (Translation)
Exhibit 8
List of Significant Subsidiaries (See "Organizational Structure" in Item
4.C. of this Form 20-F)
Exhibit 11.1
Canon Group Code of Conduct (Translation) , incorporated by reference from
the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004
Exhibit 11.2
Code of Ethics (Supplement to The Canon Group Code of Conduct)
(Translation), incorporated by reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004
Exhibit 12
302 Certifications
Exhibit 13
906 Certification
123