SECURITIES AND EXCHANGE
                                   COMMISSION

                                    Form 20-F

(     )     REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
            OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
                                       OR
(  X  )     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
            OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1999
                                             -----------------
                                       OR

(     )     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
            OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the transition period from____ to ____

                         Commission file number 0-12131

                             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
   None                                        None
-------------------            -------------------------------------------------

              Securities registered or to be registered pursuant to
                            Section 12(g) of the Act.

          Common stock* (par value 50 Japanese yen per share)
--------------------------------------------------------------------------------
                                (Title of Class)

--------------------------------------------------------------------------------
                                (Title of Class)

              Securities for which there is a reporting obligation
                      pursuant to Section 15(d) of the Act.

               Common stock* (par value 50 Japanese yen per share)
--------------------------------------------------------------------------------
                                (Title of Class)

   *  American Depositary Receipts for 50,000,000 American Depositary Shares,
      each American Depositary Share representing 1 share of common stock of
      Canon Inc., were registered under the Securities Act of 1933.

          This form contains 82 pages.


<PAGE>


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.

          Common stock: Yen 50 par value per share
          Outstanding as of December 31, 1999: 871,555,698 shares

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    X       No       .
   -----------   -------

Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17  X   Item 18
        ---          ---

All information contained in this Report is as of December 31, 1999 unless
otherwise specified.

As used herein, "Canon" and the "Company" refer to Canon Inc. and its
subsidiaries and Canon Inc., respectively, unless the context otherwise
indicates.

On March 31, 2000, the noon buying rate for yen in New York City as reported by
the Federal Reserve Bank of New York was Yen102.73=U.S.$1.

                                       2

<PAGE>


                                     PART I


Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the United
States Private Securities Litigation Reform Act of 1995. The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking
statements. This Form 20-F contains certain forward-looking statements,
including, but not limited to, statements regarding the intent, belief or
current expectations of Canon with respect to the introduction of new products,
trends affecting Canon's financial condition or results of operations and
Canon's future business policies and strategies. Such statements include, but
are not limited to, statements under the following headings: (i) Item 1.
"Description of Business", (ii) Item 3. "Legal Proceedings" and (iii) Item 9.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." These forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and actual results may differ
materially from those projected or implied in the forward-looking statements.
These risks and uncertainties include, but are not limited to, economic
conditions and changes in the regulatory and competitive environment in which
the Company operates. See the related cautionary statement under Item 9.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."


Item 1. Description of Business

Overview:

The Company was incorporated under the laws of Japan in 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.

Utilizing technology obtained through the development of photographic and
optical products, Canon entered the business machines field. With the successful
introduction of electronic calculators in 1964, Canon continued to expand its
operations to include plain paper copying machines, electronic typewriters,
Japanese-language word processors, faxes, laser beam printers, computers and
bubble jet printers.

Canon is now one of the world's leading manufacturers of plain paper copying
machines, laser beam and bubble jet printers and cameras.

Canon sells its products principally under the Canon brand name and through
sales subsidiaries. These subsidiaries are responsible for marketing and
distribution to retail dealers in an assigned territory. Approximately 70% of
the Company's consolidated net sales in 1999 were generated outside Japan;
approximately 35% in the Americas, 28% in Europe and 7% in other areas.

Canon's strategy is to develop innovative high value-added products which
incorporate advanced technologies. The following is a list of some of Canon's
most innovative products:

     o    In 1968: The first plain paper copying machine using alternative
          technology to the xerographic process

     o    In 1976: The 35mm single-lens reflex (SLR) camera with a built-in
          microcomputer

     o    In 1982: The small and light plain paper copying machine incorporating
          a replaceable cartridge for easy maintenance

                                       3


<PAGE>

     o    In 1983: The compact laser beam printer

     o    In 1987: The digital laser full-color plain paper copying machine

     o    In 1988: The color bubble jet copying machine utilizing Canon's
          original bubble jet printing technology

     o    In 1990: The notebook-sized bubble jet printer with a replaceable
          cartridge

     o    In 1992: The digital integration copying machine

     o    In 1996: The Advanced Photo System cameras

     o    In 1997: LCD color filter utilizing Canon's original bubble jet
          technology

     o    In 1998: The CXDI-11 X-ray Digital Camera, a medical imaging product
          with the LANMIT (Large Area New-MIS sensor and TFT) sensor.

In 1999 Canon Inc. and Toshiba Corporation announced an agreement to collaborate
on developing and establishing mass-production technologies for SED
(Surface-conduction Electron-emitter Display) with potential in large-screen
wall-mounted displays.

Canon's research and development activities range from basic research to
product-oriented research directed at maintaining 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 the currency exchange risks, Canon has increased overseas production and
the use of local parts. Canon has manufacturing subsidiaries in the United
States, Germany, France, United Kingdom, Taiwan, China, Malaysia, Thailand and
Mexico, and manufacturing joint ventures in Italy and Korea.

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, it has removed
certain environmentally unfriendly chemicals from all of its manufucturing
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 copying machines, computer peripherals and business systems.

Copying machines o Canon manufactures, markets and services a wide range of
copying machines, including the NP series copying machines, utilizing
alternative technology to the xerographic system; the GP series digital copying
machines; the CLC series full color digital copying machines and the PC series
personal copying machines.

[NP series copying machines]

     o    In 1990 Canon made its entry into the high-end black-and-white copying
          machine market by introducing the NP9800, an 83 pages-per-minute (ppm)
          copying machine.

     o    In 1997 Canon released the NP6085, an 85 ppm copying machine which
          features a touch sensitive LCD control panel.

     o    In 1998 Canon introduced the NP6551 with a rate of 50 letter-size ppm
          and a touch sensitive LCD control panel.

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<PAGE>

     o    In 1999 Canon released the NP6035F, the first "Factory Produced New
          Models", which are manufactured by converting existing products to new
          models by adding new features or functions, thereby furthering Canon's
          commitment to conserve the environment and reduce waste.

[GP series digital copying machines]

     o    In 1992 Canon entered the digital copying machine market by
          introducing the GP55.

     o    In 1996 Canon launched the GP200 series of multifunction digital
          copying machines worldwide, using Canon's Surface Rapid Fusing (SURF)
          technology to reduce energy consumption and warm-up time, and
          functioning as copying machines, faxes, scanners or printers.

     o    In 1999 Canon released the ImageRUNNER 330 and the ImageRUNNER 440 in
          the United States. These are multifunction digital copying machines
          each with a rate of 33 and 40 letter-size ppm. Canon introduced the
          imageCLASS2200 Series in 1999, which has a rate of 16 letter-size ppm
          and with the capability to add network printing, faxing, or scanning
          functions.

[CLC series full color digital copying machines]

     o    In 1987 Canon introduced the world's first digital laser full-color
          plain paper copying machine and has since then improved its line-up of
          color copying machines. The digital format of copying machines allows
          users to both create and reproduce full color copies, and when an
          optional Intelligent Processing Unit (IPU) or video adapter is
          incorporated, these copying machines are capable of connecting to
          computer systems.

     o    In 1998 Canon introduced the CLC2400, which has a rate of 24
          letter-size ppm and many features of the CLC1000.

     o    In 1999 Canon launched the imageCLASS2100, with the rate of 6ppm in
          full-color A4 copies and provides smooth and non glossy color images
          using a new spherical toner.

[PC series personal copying machines]

     o    In 1982 Canon introduced a plain paper copying machine, the smallest
          and lightest in the world at that time and the first to contain the
          entire imaging mechanism in a user-replaceable cartridge. Since then,
          Canon has retained its strong position in the personal copying machine
          market.

     o    In 1998 Canon released the PC400/420 with RAPID Fusing System, which
          eliminates warm-up time.

This category also includes the related sales of paper and chemicals, service
charges and sales of replacement parts.

Computer peripherals o Computer peripherals include laser beam printers (LBPs),
bubble jet (BJ) printers and scanners.

Canon's LBPs are relatively small in size, easy to maintain, and have
high-quality printing capabilities. This is attributable to Canon's expertise in
laser beam printing and plain paper copying technologies and the adoption of a
user-replaceable toner cartridge system which contains optical components.

     o    In 1995 the LBP-730 was introduced in Japan. This model features the
          LIPS IV page description language with 600 dpi resolution for data
          processing and Canon's On-Demand fusing technology, reducing power
          consumption and warm-up periods.

                                       5

<PAGE>

     o    In 1997 Canon introduced the LBP-2460, a high-end, 24 ppm printer to
          Asia, Oceania, and Europe. Canon also released the LBP-750/740, an A3
          machine with excellent cost performance, in Japan.

     o    In 1998, the LBP-840/850 with 1,200 dpi printing at 16 ppm was
          introduced in Japan. In the overseas market, Canon released the
          LBP-1760 with a rate of 17 letter-size ppm and the C LBP 460PS, a
          full-color A4/letter-size printer.

     o    In 1999, Canon launched the LBP910, with an output of 22 ppm,
          resolution of 1,200 dpi X 1,200 dpi and network function and
          LBP2160/2260, with 6 ppm color and 24 ppm monochrome output in Japan.
          In the overseas market, Canon released the LBP800, which has a rate of
          8 ppm monochrome output and zero warm-up time.

     Most Canon LBP sales are on an original equipment manufacture (OEM) basis.

Canon continues to incorporate its exclusive bubble jet technology into a range
of new products through the following series of products:

     o    In 1995 Canon introduced the BJC-210 full-color desktop printer.

     o    In 1997 Canon launched the BJC-7000 and BJC-4300 series. The BJC-7000
          is the world's first printer offering water-resistant color printing
          on plain paper. The BJC-4300/4650 offers cartridge option to convert
          the printer into a scanner.

     o    In 1998 Canon released the BJC-5000 with a dual cartridge system, the
          first Canon bubble jet printer to be fully developed and produced for
          worldwide shipment by a subsidiary outside of Japan.

     o    In 1999 the BJ F850, which features new technologies and Photo Inks
          for output indistinguishable from conventional photographs, was
          introduced in Japan. Canon also introduced the BJC-6000, with 5 ppm
          color and 8 ppm monochrome output, 1,440 X 720 dpi resolution and Six
          Colors Individual Ink Cartridge System in the overseas market.

Canon offers entry-level (300-600 dpi) and mid-level (1200 dpi) flatbed image
scanners, as well as film scanners for both 35mm and Advanced Photo System film.

     o    In 1996 Canon introduced the CanoScan 300 and 600, flatbed color image
          scanners. The 300 model featutres a resolution of 300 X 600 dpi, while
          the 600 achieves 600 X 1,200 dpi resolution.

     o    In 1998 the CanoScan 620P with a new contact image sensor (LED
          Indirect Exposure) and 600 dpi resolution was released.

     o    In 1999 Canon introduced the CanoScan FB 630P, featuring 600 X 1,200
          dpi/36-bit color scanning and slim design (1.5 inches thick).

Business systems o Business systems include fax machines, work stations and
personal computers. Also included are micrographic equipment such as desktop
electronic filing systems, wordprocessing systems, desktop publishing systems
and calculators.

Canon produces a broad range of fax machines, from G4 machines for digital
networking to small and economical machines for personal use.

     o    In 1992 Canon expanded its line of desktop plain paper fax machines
          (PPFs) with built-in laser beam printers. Canon also introduced new
          PPFs with built-in bubble jet printers.

     o    In 1997 Canon introduced the Laser Class 8500 and the Laser Class
          9000/9500. The Laser Class 8500 is network compatible and can be
          turned into a printer/scanner. The

                                       6
<PAGE>

          Laser Class 9000/9500, a super G3 fax, has a 33.6 Kbps modem speed and
          transmits one page in about 3 seconds.

     o    In 1998 the multiPass C3500/C5500, a fax machine with color bubble jet
          printing, copying and scanning function, was introduced.

     o    In 1999 Canon introduced the Laser Class 9000L. This machine features
          super G3 Dual Line Option, which allows faxes to be sent and received
          simultaneously.

The majority of the work stations and personal computers sold by Canon are
manufactured by third parties under the manufacturers' own brand names, while
some are sold by Canon on an OEM basis. In 1997 Canon made a strategic
withdrawal from the personal computer business in the United States.

In 1989 Canon released the Canofile 250, an electronic filing system featuring
high-speed input and easy referencing of documentation through use of a
magneto-optical disk (MOD). To further strengthen its line of micrographic
equipment, Canon introduced the Microprinter 90 in 1992, a compact
reader-printer that displays original documents on screen or prints images on
plain paper. In 1994 Canon released the new CF510/520 computer-controlled
electronic filing systems, featuring easy-to-read larger screens and improved
software.

Cameras

Canon manufactures and markets a wide range of 35mm SLR cameras (focal plane
shutter cameras with interchangeable lenses), leaf shutter (L/S) cameras (35mm
cameras with fixed lenses) the Advanced Photo System cameras and digital
cameras. Canon also manufactures and markets camcorders, lenses and various
camera accessories.

     o    In 1987 Canon introduced a new auto-focus SLR camera system called the
          Electro-Optical System (EOS) series. Canon has since added new models
          such as the economical EOS Rebel, and the EOS ELAN featuring a unique
          bar-code programming function and a quiet film transport system.

     o    In 1998 Canon introduced the EOS-3, the first commercial application
          of the CMOS sensor, featuring 45-point area autofocus (AF) and
          eye-controlled focus.

     o    In 1999 Canon released the EOS Rebel 2000, entry-level model,
          featuring 7-point AF and 35-zone AE, as a successor of the EOS Rebel
          G.

Canon also produces various types of leaf shutter cameras.

     o    In 1998 the Sure Shot 85Zoom with 38-85mm 2.2 X power zoom lens and
          3-point, 280-step autofocus system, was released.

     o    In 1999 Canon introduced the Sure Shot Classic 120, featuring 38-120mm
          3.2 X power zoom lens and 3-point, dual-hybrid autofocus system, while
          incorporating classic design elements.

In 1996 Canon started to produce cameras for the Advanced Photo System, which
has smaller film than 35mm film, the negatives of which contain magnetically
coded information for three print types, in addition to that for dates, titles,
and shooting conditions.

     o    In 1997 Canon released the ELPH Jr., an L/S camera.

     o    In 1998 the ELPH 370Z, an L/S camera with 23-69mm 3Xpower zoom lens
          and 3-point autofocus system, was introduced.

     o    In 1999 Canon released the ELPH 2, with 23-46mm 2Xpower zoom lens,
          which is

                                       7

<PAGE>

          smaller than the original ELPH.

Canon manufactures digital video camcorders.

     o    In 1997 Canon released the Optura and XL1, two digital camcorder
          models. The Optura produces high-quality movie and still images, and
          comes with a lens unit equipped with a 14X optical zoom and a 35X
          digital zoom, as well as an optical image stabilizer. The XL1 features
          an exclusive XL lens-mount system which, when used with the optional
          EF to XL mount adapter, allows it to utilize a range of Canon's
          extensive lineup of EF lenses.

     o    In 1998 Canon introduced the ZR, a digital camcorder with 11X optical
          zoom plus 44X digital zoom and an image stabilization system. The
          VISTURA with 16X optical zoom plus 64X digital zoom, a 2.8-inch LCD
          display, and a shift-type optical image stabilization system adapted
          from the technology used in Canon's AF EOS lenses was also introduced
          in 1998.

     o    In 1999 Canon introduced the ELURA and the GL1. The ELURA features 12X
          optical zoom with 48X digital zoom, image stabilization system, DV
          terminal, and a 2.5-inch LCD display. The GL1 is equipped with 3CCD
          image sensors, 20X optical zoom with 100X digital zoom, image
          stabilization system, DV terminal, and a 2.5-inch LCD display.

Canon entered the digital camera market in 1996.

     o    In 1997 Canon released the PowerShot 350 which has a color LCD and a
          removable 2MB memory card.

     o    In 1998 Canon released the PowerShot A5, equipped with a 810,000 pixel
          CCD and the PowerShot Pro70, equipped with a 1,680,000 pixel CCD and a
          2.5X zoom lens.

     o    In 1999 Canon released the PowerShot S10 with a 2.1 megapixel CCD, a
          2X zoom lens, USB interface and TYPE II CompactFlash memory card
          compatibility.

     o    In March 2000, Canon released the PowerShot S20 with a 3.3 megapixel
          CCD, a 2X zoom lens, USB interface and TYPE II CompactFlash memory
          card compatibility.

Optical and other products

Canon's optical products include semiconductor production equipment,
broadcasting lenses and medical equipment.

Canon manufacturers steppers and aligners, tools necessary for semiconductor
chip production.

     o    In 1997 Canon released the MPA-5000, mirror projection mask aligner,
          for the mass production of 20-inch flat panel display substrates.

     o    In 1998 the FPA-3000EX5, a Krypton Fluoride (KrF) excimer-laser
          stepper for the mass production of 64Mb and 256Mb DRAMs was
          introduced. The FPA-5000ES2, a KrF excimer-laser scanning stepper
          featuring less than 0.18-micron linewidth patterning, which supports
          high-volume semiconductor production on 300-mm silicon wafers was also
          introduced in 1998.

     o    In 1999 Canon introduced the FPA-5000AS1, an Argon Fluoride (ArF)
          excimer-laser scanning stepper capable of realizing 0.13-micron
          linewidth for 1Gb-class DRAMs and 1GHz-class microprocessor process
          development on either 200 or 300mm wafer substrates. The FPA-3000EX6,
          a KrF excimer-laser stepper for the mass production on 200mm wafers of
          256Mb DRAMs was also introduced in 1999.

Optical products also include broadcasting lenses and medical equipment such as
X-ray cameras,

                                       8
<PAGE>

retinal cameras, autorefractometers and image-processing equipment for
computerized diagnostic systems.

     o    In 1998 Canon introduced the CXDI-11 X-ray Digital Camera, a medical
          imaging product with the LANMIT sensor, which measures 430mm X 430mm
          (17in X 17in) and produces precise, high-resolution X-ray images in
          4,096 gray-scale.

     o    In 1999 CXDI-12 X-ray Digital Camera, a table-type adaptation of
          CXDI-11, was introduced.

Canon also manufactures electronic components which are sold primarily to
equipment manufacturers. Such products include magnetic heads for audio and
video tape recorders, micro-motors for printers and other components.

Canon has also been developing a cost efficient solar-power system. This system
uses amorphous silicon technology, which Canon has been working on in relation
to copying machines since 1977. In 1996 Canon introduced the Roof-Integrated
Solar Panels, which reduce material and construction costs by integrating the
solar panels upon the roof structure.

Marketing and Distribution:

Sales of Canon products are made primarily through sales subsidiaries which have
responsibility for specific geographic areas. Each sales subsidiary arranges for
market research, the selection of sales channels, advertising and promotion in
their geographic territory.

In Japan, sales are made by Canon Sales Co., Inc. mainly to dealers and outlets.
Most optical products however, are sold by Canon Inc. directly to end-users.

In the Americas, sales are made by Canon U.S.A., Inc., Canon Canada, Inc. and
Canon Latin America, Inc., to retail outlets. Some copying machine sales are
made directly to end-users and a portion of other business machines' sales are
made through distributors.

In Europe, Canon Europa N.V. sells primarily through sales subsidiaries or
independent distributors to dealers and retail outlets in each locality. Copying
machines are also sold directly to end-users by Canon (U.K.) Ltd. in the United
Kingdom, by Canon Deutschland GmbH in Germany and by Canon France S.A. in
France.

Sales in Southeast Asia and Oceania are conducted through sales subsidiaries in
those areas. In addition, Canon sells copying machines to independent
distributors who resell them in China.

Canon also sells laser beam printers on an OEM basis to Hewlett-Packard Co.
Hewlett-Packard resells these printers under the "HP LaserJet" name. During the
year ended December 31, 1999, such sales constituted approximately 20% of
consolidated net sales.

Service:

In Japan and in overseas markets, product service is provided by independent
retail outlets and designated service centers, which 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 sales. Cameras and accessories carry a
one-year warranty against defective

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<PAGE>

materials or workmanship.

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 charge per-copy. Copying machines not covered by a service contract
receive maintenance services from time to time on a fee for service basis,
either from Canon or local dealers.

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<PAGE>


Canon's net sales by product group and geographic area:

<TABLE>
Net sales by product group                                   Years ended December 31
                                                         --------------------------------
                                                                (Millions of yen)
                                            1999                    1998                    1997
                                    ------------------- ----------------------- ------------------------
                                        Yen         %           Yen         %           Yen          %
<S>                                   <C>         <C>         <C>         <C>         <C>          <C>
Business machines:
   Copying machines                   842,082     32.1        896,641     31.7        899,205      32.6
   Computer peripherals               965,499     36.8      1,064,304     37.7        964,808      34.9
   Business systems                   356,350     13.6        397,272     14.0        436,053      15.8
                                    ---------- -------- -------------- -------- -------------- ---------
      Total business machines       2,163,931     82.5      2,358,217     83.4      2,300,066      83.3

Cameras                               277,349     10.6        267,636      9.5        247,766       9.0

Optical and other products            180,985      6.9        200,416      7.1        213,193       7.7
                                    ---------- -------- -------------- -------- -------------- ---------

               Total                2,622,265    100.0      2,826,269    100.0      2,761,025     100.0
                                    ========== ======== ============== ======== ============== =========
</TABLE>

<TABLE>

Net sales by geographic area                                        Years ended December 31
                                                                ---------------------------------
                                                                       (Millions of yen)
                                                              1999            1998            1997
                                                         --------------- --------------- ----------------
Net sales to unaffiliated customers:
<S>                                                             <C>             <C>              <C>
   Japan                                              Yen       791,399         796,406          904,545
   Americas                                                     912,676       1,003,683          887,302
   Europe                                                       736,570         841,400          765,580
   Others                                                       181,620         184,780          203,598
                                                         --------------- --------------- ----------------
       Total                                                  2,622,265       2,826,269        2,761,025
                                                         --------------- --------------- ----------------

Intercompany transfers to geographic areas:
   Japan                                                      1,205,021       1,312,405        1,226,130
   Americas                                                      14,468          21,523           17,793
   Europe                                                         3,645           3,126            3,842
   Others                                                       179,527         198,702          190,602
                                                         --------------- --------------- ----------------
   Eliminations                                              (1,402,661)     (1,535,756)      (1,438,367)
                                                         --------------- --------------- ----------------
       Total                                                        --               --               --
                                                         --------------- --------------- ----------------

Total net sales and transfers:
   Japan                                                      1,996,420       2,108,811        2,130,675
   Americas                                                     927,144       1,025,206          905,095
   Europe                                                       740,215         844,526          769,422
   Others                                                       361,147         383,482          394,200
                                                         --------------- --------------- ----------------
   Eliminations                                              (1,402,661)     (1,535,756)      (1,438,367)
                                                         --------------- --------------- ----------------
       Total                                          Yen     2,622,265       2,826,269        2,761,025
                                                         =============== =============== ================
</TABLE>

Note: Net sales by geographic area is based on the location of the sales company
      of Canon.

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<PAGE>


The contribution to total operating profit by each category of Canon's activity
is discussed in Item 9.

Research and Development:

Research and development (R&D) is one of the most important aspects of Canon's
operations. Canon believes that the competitiveness and superiority of its
products can be attributed primarily to its research and development activities.

Canon employs approximately 6,700 engineers and scientists who are involved in
the fields of precision mechanics, electronics, optics, applied physics and
organic and inorganic chemistry. Canon had research and development expenditures
of (Y)177,922 million in 1999, (Y)176,967 million in 1998, and (Y)170,793
million in 1997, respectively. Canon's strategy is to emphasize the application
of advanced technologies to competitive new products, to conduct research on
improving manufacturing techniques and to engage in basic research for the
future.

Canon's research and development activities are conducted at five primary
centers: the Core Technology Development Headquarters (where research and
development of component engineering and base technology, such as new materials,
nanotechnology, and production engineering are conducted); Platform Technology
Development Headquarters (platform technologies for digital network devices);
Display Development Headquarters (display devices); Internet Business
Development Headquarters (new business based on internet technology); Ecology
Research Center (solar cell batteries). In addition, Canon maintains research
and development centers for each of its product divisions.

As a technology-intensive firm, Canon generates a significant number of patented
innovations every year. The ownership of patents is important to Canon, but
Canon does not believe that the expiration of any single patent or group of
related patents will materially affect the conduct of its business.

Sources of Supply:

Canon purchases a variety of parts and raw materials, such as glass, aluminum,
plastics, steel and chemicals for use in product manufacturing. All finished and
semi-finished products purchased from outside sources are produced according to
Canon's designs and specifications. The most important parts purchased by Canon
are large scale integrated circuits (LSIs) which are used in most of its
products. Some of the circuits are manufactured in-house. Canon has not
experienced any difficulty in obtaining parts or raw materials and believes that
it will be able to continue to obtain them in sufficient quantities to meet its
needs.

Environmental Protection:

Canon has been working on antipollution strategies for many years. In 1993 Canon
implemented its "New Principles for Environmental Assurance" to promote a
comprehensive response to environmental concerns.

These principles are:

     1)   to contribute to society by developing products, production technology
          and evaluation technology and by conducting all corporate activity in
          a manner which is consistent with the principles of environmental
          conservation.

     2)   to implement environmental impact assessments prior to product
          development,

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<PAGE>

          and to design and manufacture products that minimize resource and
          energy consumption.

     3)   to undertake worldwide environmentally sound manufacturing by reducing
          waste and energy consumption.

     4)   to work together with governments on environmental strategies.

     5)   to actively support local and regional environmental protection
          movements as a good corporate citizen.

     6)   to boost awareness of environmental conservation among Canon employees
          through training and education.

According to these guidelines, Canon not only observes relevant environmental
laws and regulations throughout the world, but also establishes its own stricter
internal standards to help protect the environment.

Canon established the Environmental Audit Department in 1993 specifically for
the purpose of performing environmental audits and designating environmental
auditors. In Japan, internal audits of 26 sites have been conducted every two
years. The Environmental Audit Department, using a team of independent
specialists, is currently working at the steady pace of one audit per month.

Canon completely eliminated the use of ozone-depleting chlorofluorocarbons in
manufacturing and production in 1992, and halted all use of trichloroethane in
1993. Canon is also working to develop technologies which eliminate hazardous
material from the manufacturing process.

In addition, Canon is emphasizing product recycling and refurbishment. In 1990,
Canon initiated a unique program whereby cartridges from Canon personal copying
machines and laser beam printers are collected and then recycled at Canon Dalian
Business Machines, Inc. in China. Custom Integrated Technology, Inc. in Virginia
U.S. began to refurbish used copying machines in 1996, thereby promoting the
reuse of equipment that has reached the end of its normal life. In 1997,
cartridge recycling also started at Industrial Resource Technologies, Inc. in
Virginia and Canon Bretagne S.A. in France. In 1998, Canon announced plans to
expand copying machine remanufacturing activities to the Japanese market. In
1999, Canon became the first company in Japan to adopt the Type III Eco-Label
featuring detailed indications of environmental data over the life cycle of our
product. Canon also started publishing the "Ecology Brochure" and "Environmental
Report" containing detailed information on the environmental aspects of its
products and operations.


                                       13
<PAGE>



Item 2. Description of Property

Canon's manufacturing operations are conducted primarily at 16 plants in Japan
and 13 plants in other countries. Canon owns all of the buildings and the land
on which its plants are located, with the minor exception of leases of land and
floor space by its subsidiaries. The names and locations of Canon's plants and
other facilities, their approximate floor space at December 31, 1999 and the
principal activities or products manufactured therein are as follows:

<TABLE>
                                             Floor Space
                                              (Thousands             Principal Activities or
    Name and Location                       of square feet)           Products Manufactured
    -----------------                       --------------           -----------------------
<S>                                                <C>         <C>

    (Domestic)

Shimomaruko Headquarters, Tokyo                    1,621       Corporate headquarters,
                                                               development of business machines
                                                               and cameras, patents, purchasing,
                                                               quality assurance and research and
                                                               planning for production engineering
                                                               and technology

Canon Research Center, Kanagawa                      137       Research and development (R&D)
                                                               in software and systems

Ecology Research Center, Kyoto                        93       R&D in solar-power systems

Hiratsuka Development Center,                        466       R&D in semiconductors,
Kanagawa                                                       electron devices and display

Ayase Office,                                        296       R&D in semiconductors
Kanagawa

Kosugi Office,                                       398       R&D in software and systems
Kanagawa

Fuji-Susono Research Park,                           958       R&D in electrophotographic
Shizuoka                                                       technologies

Tamagawa Plant, Kanagawa                             409       Bubble jet printer consumables

Fukushima Plant, Fukushima                           619       Business machines, primarily
                                                               bubble jet printers

Toride Plant, Ibaraki                              1,858       Copying machines, laser beam
                                                               printers and copying machine
                                                               consumables and development
                                                               of business machines


                                       14
<PAGE>


                                             Floor Space
                                              (Thousands             Principal Activities or
    Name and Location                       of square feet)           Products Manufactured
    -----------------                       --------------           -----------------------

(Ueno Plant, Mie                                      543      Copying machine and laser beam
                                                               printer consumables

Ami Plant, Ibaraki                                 1,160       Business machines, tools and
                                                               production equipment, and optical
                                                               products

Utsunomiya Plant,                                  1,452       Camera lenses, optical products
Tochigi                                                        and development of optical products

Canon Electronics Inc. Plants,                     1,124       Electronic components,
Saitama and Gunma                                              micrographic equipment, laser beam
                                                               printers and cameras parts

Copyer Co., Ltd. Plants,                             351       Copying machines and copying
Tokyo,Yamanashi and Fukui                                      machine consumables

Canon Precision Inc. Plants,                         740       Micro-motors, precision parts,
Tokyo, Aomori and Fukushima                                    metal mold parts and laser beam
                                                               printer consumables

Canon Aptex Inc. Plants,                             454       Copying machine parts and
Ibaraki and Tokyo                                              accessories

Canon Chemicals Inc. Plants,                       1,359       Copying machine and laser beam
Ibaraki and Kanagawa                                           printer consumables

Canon Components Inc. Plant,                         734       Electronic components, bubble jet
Saitama                                                        printer consumables and color filter

Oita Canon Inc. Plant,                               316       35mm and Advanced Photo System
Oita                                                           cameras, digital video camcorders
                                                               and digital cameras

Nagahama Canon Inc. Plant,                           919       Laser beam printers, bubble jet
Shiga                                                          printers, laser beam printer
                                                               consumables and solar panels

Nippon Typewriter Co., Ltd. Plant,                 1,520       Parts for business machines
Ibaraki

Oita Canon Material Co., Ltd. Plant,               1,163       Copying machine and laser beam
Oita                                                           printer consumables


                                       15
<PAGE>

                                             Floor Space
                                              (Thousands             Principal Activities or
    Name and Location                       of square feet)           Products Manufactured
    -----------------                       --------------           -----------------------

   (Overseas)

Canon Virginia, Inc. Plants,                       1,084       Copying machines, laser beam
Newport News and Tappahannock,                                 printers and refurbishment of
Virginia, U.S.                                                 copying machines

Canon Business Machines, Inc. Plants,                264       Development and manufacture of
Costa Mesa, California, U.S. and                               bubble jet printers and manufacture
Tijuana, B.C., Mexico                                          of copying machine supplies

Canon Giessen GmbH Plant,                            359       Copying machines, copying
Giessen, Germany                                               machine consumables and bubble jet
                                                               printer consumables

Canon Bretagne S.A. Plant,                           506       Copying machines, copying machine
Liffre, France                                                 consumables and laser beam printers

Canon Manufacturing U.K. Ltd. Plant,                 197       Manufacture of bubble jet printers
Glenrothes Fife, United Kingdom

Canon Inc., Taiwan Plant,                            449       Development and manufacture of
Taiwan                                                         35mm SLR cameras and leaf shutter
                                                               cameras and manufacture of
                                                               Advanced Photo System cameras

Canon Opto (Malaysia) Sdn. Bhd. Plant,               534       Leaf shutter cameras,
Selangor, Malaysia                                             Advanced Photo System cameras,
                                                               video and camera lenses

Canon Dalian Business Machines, Inc.               1,039       Laser beam printer consumables
Plant,
Dalian, China

Canon Zhuhai, Inc. Plant,                            765       Leaf shutter cameras, laser beam
Zhuhai, China                                                  printers and fax machines

Tianjin Canon Co., Ltd. Plant,                       157       Copying machines
Tianjin, China

Guang-Dong United Optical Instrument                  14       Leaf shutter cameras
Co. Plant,
Guang Dong, China


                                       16
<PAGE>

                                             Floor Space
                                              (Thousands             Principal Activities or
    Name and Location                       of square feet)           Products Manufactured
    -----------------                       --------------           -----------------------

Canon Hi-Tech (Thailand) Ltd. Plant,                 830       Copying machines, bubble jet
Phra Nakhon Si Ayutthaya, Thailand                             printers and fax machines

Canon Engineering (Thailand) Ltd.                    128       Molds for business machine parts
Plant,
Phra Nakhon Si Ayutthaya, Thailand
</TABLE>

Canon considers its manufacturing and other facilities to be well maintained and
believes that its plant capacity is adequate for its current requirements.

At December 31, 1999, land, buildings and related equipment having a book value
of (Y)10,822 million were subject to mortgages securing (Y)4,327 million of
Canon's indebtedness.



                                       17
<PAGE>


Item 3. Legal Proceedings

Canon and certain of its subsidiaries are defendants in a number of pending
lawsuits. However, based upon information available to Canon, management of the
Company does not expect such lawsuits to have a material effect on Canon's
financial condition or results of operations.

Item 4. Control of Registrant

(a)  The Company is not directly or indirectly owned or controlled by any other
     corporation or by any government.

(b)  (1) To the Company's best knowledge, no person owned more than ten percent
     of the Company's common stock as of March 31, 2000.

     (2)  The total number of shares of the Company's common stock owned by the
          Directors and Corporate Auditors as of March 31, 2000 was as follows:

                                                       Number        Percent
Title of Class    Identity of Person or Group     of Shares Owned   of Class
--------------    ---------------------------     ---------------   --------

Common stock       Directors and Corporate             237,647        0.03%
                   Auditors

(c)  None

Item 5. Nature of Trading Market

The common stock of the Company, par value 50 yen per share (the "Shares"), has
been listed on the Tokyo Stock Exchange since 1949 and is traded on the First
Section of that exchange. The shares are also listed on five other regional
stock exchanges in Japan.

The Tokyo Stock Exchange is the principal stock exchange in Japan. The Tokyo
Stock Exchange publishes the Tokyo Stock Price Index (the "TOPIX"), an index of
the market value of all the stocks which are listed on the First Section of the
exchange. The Nikkei Stock Average, an index of 225 selected stocks traded on
the First Section of the Tokyo Stock Exchange, which is computed by a private
corporation, is another widely followed index. The following table sets forth
the reported high and low sales prices of the Shares on the Tokyo Stock Exchange
and the closing highs and lows of the foregoing indices during the periods
indicated:


                                       18
<PAGE>


<TABLE>
                                  Price per                                           Nikkei Stock
             Period              Share (yen)                 TOPIX                    Average (yen)
             ------           -----------------      ----------------------      -------------------------
                              High         Low        High           Low           High            Low
                              ----         ---        ----           ---           ----            ---
<S>        <C>                <C>         <C>        <C>           <C>           <C>             <C>
1998       1st Quarter        3,280       2,660      1,300.30      1,120.61      17,264.34       14,664.44
           2nd Quarter        3,340       2,970      1,254.74      1,156.47      16,536.66       14,715.38
           3rd Quarter        3,400       2,500      1,280.73      1,043.57      16,731.92       13,406.39
           4th Quarter        2,840       1,930      1,164.59       980.11       15,207.77       12,879.87

1999       1st Quarter        3,120       2,170      1,269.76      1,048.33      16,378.78       13,232.74
           2nd Quarter        3,600       2,715      1,425.64      1,292.07      17,782.79       15,972.68
           3rd Quarter        4,100       2,740      1,535.23      1,420.64      18,532.58       16,821.06
           4th Quarter        4,200       2,725      1,722.20      1,460.23      18,934.34       17,254.17
</TABLE>

As of December 31, 1999, approximately 16.6% of the outstanding Shares were
held of record by 229 persons resident in the United States.

Co-ownership shares in a Global Bearer Certificate are listed on the Frankfurt
Stock Exchange.

Since the 1969 public offering in the United States of U.S.$9,000,000 principal
amount of the Company's 6 1/2 % Convertible Debentures due 1984, there has been
limited trading in the over-the-counter market in the Company's American
Depositary Receipts ("ADRs"). The depositary of the ADRs is Morgan Guaranty
Trust Company of New York. Each ADR evidences American Depositary Shares
("ADSs"), which, effective from March 16, 1998, represent one Share each. The
ADSs have been quoted on the National Association of Securities Dealers
Automated Quotation system ("NASDAQ") since 1972 under the symbol CANNY. The
actual and adjusted reported high and low sales prices of the ADSs on the NASDAQ
are as follows:


                           Period                Price per ADS (U.S. dollars)
                           ------                ----------------------------
                                                  High                 Low
                                                  ----                 ---

         1998          1st    Quarter            24.963               21.200
                       2nd    Quarter            24.563               22.063
                       3rd    Quarter            24.000               18.500
                       4th    Quarter            23.375               17.000

         1999          1st    Quarter            25.938               19.250
                       2nd    Quarter            29.250               23.000
                       3rd    Quarter            33.625               26.625
                       4th    Quarter            40.938               25.750


                                       19
<PAGE>


Item 6. Exchange Controls and Other Limitations Affecting Security Holders

(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 (including bonds, convertible bonds, bonds with warrants
and shares) 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 exchange or traded in any over-the-counter market in Japan
("listed shares") 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.


                                       20
<PAGE>


Acquisition of Shares upon Conversion of Convertible Bonds or Exercise of
Warrants:

The acquisition by a non-resident of Japan of shares upon conversion of his
convertible bonds or upon exercise of his warrants 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 or whose shares are traded on the over-the-counter market in
Japan to file with 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 or (in the case of
over-the-counter shares) the Japan Securities Dealers Association. For this
purpose, shares issuable upon the conversion of convertible bonds or exercise of
warrants held by such holder are taken into account in determining both the size
of a holding and a company's total outstanding share capital.

Item 7. Taxation

Generally, a non-resident of Japan or a non-Japanese corporation is subject to
Japanese withholding tax on dividends paid by Japanese corporations. Stock
splits, subject to the following, are not subject to Japanese income tax.
However, a transfer of retained earnings or legal reserve (but, in general, not
additional paid-in capital) to stated capital (whether made in connection with a
stock split or otherwise) is treated as a dividend payment to shareholders for
Japanese tax purposes and is, in general, subject to Japanese income tax. No
such transfer would be necessary in connection with a stock split if the total
par value of the shares in issue after the stock split does not exceed the
stated capital.

Pursuant to the tax convention between the United States and Japan as currently
in force, a Japanese withholding tax at the rate of 15% is imposed, generally,
on dividend payments made by a Japanese corporation to a United States 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.

The amount of such withholding tax imposed on dividends payable to the holders
of the Shares and ADRs who reside in a country other than the United States is
dependent upon the provisions of such conventions or agreements as may exist
between such country and Japan. In the absence of any convention or agreement,
the rate of Japanese withholding tax imposed on dividends paid by Japanese
companies is 20%.

Gains derived from the sale outside Japan of the Shares or ADRs by a
non-resident of Japan or a


                                       21
<PAGE>


non-Japanese corporation, or from the sale of the Shares within Japan by a
non-resident of Japan or by a non-Japanese corporation not having a permanent
establishment in Japan, are in general not subject to Japanese income or
corporation taxes. Japanese inheritance and gift taxes at progressive rates may
be payable by an individual who has acquired Shares or ADRs as a distributee,
legatee or donee.


                                       22
<PAGE>

Item 8. Selected Financial Data
         (Millions of yen except per share data and yen exchange rates)

<TABLE>
                                             1999          1998          1997          1996          1995
                                          ------------ ------------- ------------- ------------- -------------

<S>                                         <C>           <C>           <C>           <C>           <C>
Net sales                             (Y)   2,622,265     2,826,269     2,761,025     2,558,227     2,165,626
Net income                                     70,234       109,569       118,813        94,177        55,036
Advertising                                    67,544        76,911        75,800        68,354        53,033
Research and development                      177,972       176,967       170,793       150,085       125,253
Depreciation                                  155,682       159,888       137,777       117,263       104,474
Capital expenditure                           200,386       221,401       219,779       176,357       123,560
Long-term debt                                165,277       180,320       226,889       192,254       298,055
Stockholders' equity                        1,202,003     1,155,520     1,109,511     1,007,434       880,150
Total assets                                2,587,532     2,728,329     2,872,779     2,644,452     2,506,152
Per share data:
    Net income:
       Basic                          (Y)       80.66        126.10        137.73        111.29         65.96
       Diluted                                  79.50        123.93        134.60        106.96         62.73
    Cash dividends declared                     17.00         17.00         17.00         15.00         13.00
    Cash dividends declared
     (U.S. dollars)                   $         0.164         0.134         0.134         0.128         0.125
Yen exchange rates per
  U.S. dollar:
    Year end                          (Y)      102.16        113.08        130.45        115.77        103.42
    Average                                    112.79        130.88        121.85        109.31         94.14
    High                                       101.53        113.08        111.42        103.92         80.63
    Low                                        124.45        147.14        131.08        116.13        104.45
</TABLE>

Notes:

1.   The above financial data are provided in conformity with United States
     generally accepted accounting principles.

2.   Canon adopted Statement of Financial Accounting Standards No. 115 ("SFAS
     115"), "Accounting for Certain Investments in Debt and Equity Securities,"
     from the fiscal year beginning January 1, 1999, and has applied SFAS 115
     retroactively to the consolidated financial statements for the prior years.
     See Note 3 of Notes to Consolidated Financial Statements.

3.   Yen exchange rates are the noon buying rates for yen in New York City as
     reported by the Federal Reserve Bank of New York.


                                       23
<PAGE>


Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations

(a) Results of Operations

The appreciation of the yen adversely affected the financial performance of
Canon in 1999. Net sales decreased 7.2% to (Y)2,622,265 million while net income
decreased 35.9% to (Y)70,234 million.

Summarized results of operations for the past four years are as follows:

<TABLE>
                                               (Millions of yen except per share amounts)
                        1999         change         1998        change         1997         change        1996
                    ------------    ----------- ------------   ----------- ------------    --------   -------------
<S>                    <C>         <C>  <C>       <C>          <C> <C>        <C>         <C>  <C>       <C>
Net sales           (Y)2,622,265    -    7.2%   (Y)2,826,269   +   2.4%    (Y)2,761,025    +   7.9%   (Y)2,558,227
Operating profit         176,056    -   32.5         260,778   -   4.8          274,034    +  24.0         221,036
Income before                                                                              +
   income taxes          156,072    -   34.8         239,513   +   2.0          234,805       28.5         182,765
Net income                70,234    -   35.9         109,569   -   7.8          118,813    +  26.2          94,177

Net income
  per share:
  Basic                    80.66    -   36.0          126.10   -   8.4           137.73    +  23.8          111.29
  Diluted                  79.50    -   35.9          123.93   -   7.9           134.60    +  25.8          106.96
</TABLE>
Note: See Note 1 of Item 8.

Sales:

During 1999, the U.S. economy remained strong against a backdrop of healthy
domestic demand, and the European economy expanded slightly though the value of
the euro against other major currencies declined in the second half. The Asian
region showed signs of recovery owing to increased exports, particularly from
the Republic of Korea and Thailand. In Japan, indications of an economic
turnaround reflected increased public works expenditures, but sluggish consumer
spending and private sector capital investment prevented a full-scale recovery.

During this period, the average yen-dollar exchange rate was approximately
(Y)113/U.S.$1, reflecting a 15% increase in the average value of the yen from
that of 1998. The average yen-euro exchange rate also appreciated by 20% to
approximately (Y)120/euro 1. Using the average 1998 exchange rates, 1999 net
sales would have increased 3.4% from 1998.

In 1998, the Southeast Asian economies remained weak and the Japanese markets
suffered from weak consumer spending and concerns over the stability of the
Japanese banking systems. The average yen-dollar exchange rate was approximately
(Y)131/U.S.$1, reflecting a (Y)10 increase in the average value of the U.S.
dollar from that of 1997, while the average yen-deutsch mark exchange rate fell
from approximately (Y)70/DM1 during the previous year to (Y)74/DM1.

In 1997, the Southeast Asian economies experienced severe financial problems and
the markets were weak as economy the stagnated. The average yen-dollar exchange
rate was approximately (Y)121/U.S.$1, reflecting a (Y)12 increase in the average
value of the U.S. dollar from that of 1996. The yen strengthened against
Deutschmark. The average yen-deutsch mark exchange rate was approximately
(Y)70/DM1, reflecting a (Y)2 decrease in the average value of the deutsch mark
versus 1996.

                                       24
<PAGE>


Canon's sales by products are summarized as follows:

<TABLE>
                                                              (Millions of yen)
                               1999         change         1998        change         1997        change       1996
                            ------------ ------------- ------------- ------------ ------------- ----------- ------------
Business machines:
<S>                             <C>           <C>           <C>          <C>           <C>          <C>         <C>
 Copying machines       (Y)     842,082    -  6.1%          896,641   -  0.3%          899,205   +  9.8%        818,909
 Computer
    peripherals                 965,499    -  9.3         1,064,304   + 10.3           964,808   +  9.9         878,170
 Business machines              356,350    - 10.3           397,272   -  8.9           436,053   -  1.0         440,532
                              ---------    ------         ---------   ------         ---------   ------       ----------
 Total business
    machines                  2,163,931    -  8.2         2,358,217   +  2.5         2,300,066   +  7.6       2,137,611
                              ---------  --------         ---------   ------         ---------   ------       ----------
Cameras                         277,349    +  3.6           267,636   +  8.0           247,766   + 15.9         213,760
Optical and other
   products                     180,985    -  9.7           200,416   -  6.0           213,193   +  3.1         206,856
                              ---------  --------         ---------   ------         ---------   ------       ----------
Total                   (Y)   2,622,265    -  7.2         2,826,269   +  2.4         2,761,025   +  7.9       2,558,227
                              =========  ========         =========   ======         =========   ======       ==========
</TABLE>


Sales of business machines (copying machines, computer peripherals and business
systems) accounted for 82.5% of net sales and decreased 8.2% to (Y)2,163,931
million in 1999. In 1998, business machine sales grew 2.5% in comparison to an
increase of 7.6% in 1997.

Sales of copying machines (including digital, color, office and personal models)
decreased 6.1% to (Y)842,082 million in 1999. Sales of the digital machines
showed significant growth in all regions, particularly in the Americas and
Europe. Color machines also performed well in most markets. In comparison, sales
of analogue machines decreased as buyers shifted toward digital products.
Although total sales of copying machines grew in terms of local currencies, the
value of these sales decreased in terms of yen.

Sales of copying machines decreased in 1998 owing to the weak domestic market
but showed healthy growth in 1997.

Sales of computer peripherals in 1999 (mainly laser beam, bubble jet printers
and scanners) slipped 9.3% to (Y)965,499 million. Laser beam printer sales
showed a decrease mainly because the release of several new products in late
1998 temporarily lessened overall demand in 1999 while the consumables continued
to grow steadily. New bubble jet printers released in the Japanese market were
well received but overseas sales decreased due to severe price competition. The
new compact scanner released during the period sold well.

Sales of computer peripherals increased substantially in both 1998 and 1997.

Sales of business systems (including faxes, computers, micrographics,
Japanese-language word processors and calculators) decreased 10.3% to (Y)356,350
million in 1999. Sales of faxes, especially in multifunction faxes, declined due
to severe price competition.

Sales of business systems decreased in 1998 and in 1997. The decrease in 1998
mainly reflected a decline in sales of computers in Japan and Canon's withdrawal
from the electronic typewriter business in 1998.

Sales of cameras increased by 3.6% to (Y)277,349 million in 1999, owing mainly
to the introduction



                                       25
<PAGE>


of new digital cameras and digital video camcorders. Sales of 35mm and Advanced
Photo System cameras decreased due to the appreciation of the yen. Cameras
accounted for 10.6% of net sales.

Sales of cameras increased in both 1998 and 1997, led by a growth in sales of
the Advanced Photo System cameras.

Sales of optical and other products (including steppers and aligners for
semiconductor chip production, broadcasting lenses, and medical equipment)
decreased 9.7% to (Y)180,985 million in 1999. Stepper-related sales were
negatively impacted by restricted capital investment by semiconductor
manufacturers which was caused by the sluggish semiconductor market through the
first half of 1999. Optical and other products contributed 6.9% to net sales.

Sales of optical and other products decreased in 1998 because of restrained
capital investments by semiconductor manufacturers but increased in 1997.

A geographical analysis indicates that net sales in 1999 decreased in Japan, the
Americas and Europe, but increased elsewhere.

In Japan, overall sales declined slightly by 0.8% in 1999, primarily due to the
decrease in sales of computers and optical products. Sales of computer
peripherals and cameras showed substantial growth. Sales in the Americas
decreased 9.2% in 1999. The decrease was mainly attributable to the appreciation
of the yen against the U.S. dollar. Product groups other than business systems
and optical and other products increased sales in terms of the U.S. dollar.
Sales in Europe decreased 12.8% in 1999. Product groups other than optical and
other products increased sales in terms of the euro but the stronger yen against
the euro adversely affected regional sales. Sales in other areas increased by
1.4%, reflecting the economic recovery in the regions.

In 1998, net sales increased in Europe and the Americas mainly due to favorable
changes in exchange rates but decreased in Japan and other areas. In 1997, all
areas experienced some growth, with Europe showing double-digit growth.

The summary of net sales by region is provided below:

<TABLE>
                                                         (Millions of yen)
                       1999         change         1998          change         1997          change         1996
                   -------------- ------------ -------------- ------------- -------------- ------------- --------------
<S>                      <C>            <C>          <C>           <C>            <C>            <C>          <C>
Japan         (Y)        755,704     -  0.8%         761,776    -  11.2%          857,993     +  3.5%         828,829
Americas                 913,377     -  9.2        1,005,648    +  12.7           891,979     +  8.8          819,737
Europe                   741,657     - 12.8          850,226    +   9.6           775,592     + 10.4          702,516
Others                   211,527     +  1.4          208,619    -  11.4           235,461     + 13.7          207,145
                   -------------- ------------ -------------- ---------------------------- ------------ --------------
    Total     (Y)      2,622,265     -  7.2        2,826,269    +   2.4         2,761,025     +  7.9        2,558,227
                   ============== ============ ============== ============= ============== ============ ==============
</TABLE>

Note: This summary of sales by region is based on the location of the customer.


                                       26
<PAGE>


Earnings:

Operating profit in 1999 decreased 32.5% to (Y)176,056 million or 6.7% of net
sales. This compares with 9.2% in 1998 and 9.9% in 1997.

In 1999, the appreciation of the yen adversely affected net sales by
approximately (Y)300,000 million. The appreciation of the yen lowered gross
profit ratio (gross profit to net sales) by approximately 4.5% including
positive effects on the overseas production and the use of local parts
suppliers. On the other hand, successful Canon's efforts aimed at reducing
production costs and increasing sales of high-value-added products favorably
affected the gross profit ratio. As a result, the gross profit ratio to net
sales was 42.9% in 1999 as compared to 44.5% in 1998.

Selling, general and administrative expenses decreased 4.8% to (Y)948,269
million, or 36.2% of net sales, an increase of 0.9% from the previous year. The
decrease was mainly attributable to Canon's efforts to reduce selling expenses,
such as advertising and sales promotions. On the contrary R&D expenditure during
1999 slightly increased by 0.5% to (Y)177,922 million, representing 6.8% of net
sales.

In 1998, Canon's operating profit decreased 4.8% to (Y)260,778 million or 9.2%
of net sales. The depreciation of the yen positively influenced net sales by
approximately (Y)124,000 million. However, most of this influence was eliminated
at the gross profit level due to price reductions made to increase Canon's
competitive position in the world markets.

In 1997, Canon's operating profit increased 24.0% to (Y)274,034 million. The
depreciation of the yen positively affected net sales by approximately
(Y)102,800 million. Approximately 80% of this influence was eliminated at the
gross profit level due to price reductions.

The disclosures of segment information by product as required in Japan for the
years ended December 31, 1999, 1998 and 1997 are provided on page 28, and the
disclosures of segment information by geographic area as required in Japan for
the years ended December 31, 1999, 1998 and 1997 are shown on page 29.


                                       27
<PAGE>


Segment information by product:
<TABLE>

  1999                                                               (Millions of yen)
----------
                                      Business                 Optical and     Corporate and
                                      machines    Cameras    other products    eliminations   Consolidated
                                   ------------ ----------- ----------------  --------------- ------------
Net sales
<S>                            <C>   <C>         <C>             <C>             <C>            <C>
   Unaffiliated customers      (Y)   2,163,931     277,349       180,985               --       2,622,265
   Intersegment                             --          --        79,413          (79,413)             --
                                     ---------     -------       -------          -------       ---------
       Total                         2,163,931     277,349       260,398          (79,413)      2,622,265
                                     ---------     -------       -------          -------       ---------
Operating cost and expenses          1,902,053     258,382       273,631           12,143       2,446,209
                                     ---------     -------       -------          -------       ---------
Operating profit               (Y)     261,878      18,967       (13,233)         (91,556)        176,056
                                     =========     =======       =======          =======       =========
Assets                         (Y)   1,256,667     155,204       252,071          923,590       2,587,532
Depreciation and amortization          114,451      12,285        12,860           18,515         158,111
Capital expenditure                    143,269      12,880        17,856           26,381         200,386

  1998
----------
                                      Business                 Optical and     Corporate and
                                      machines    Cameras    other products    eliminations   Consolidated
                                   ------------ ----------- ----------------  --------------- ------------
Net sales
   Unaffiliated customers      (Y)   2,358,217     267,636       200,416               --      2,826,269
   Intersegment                             --          --        80,179          (80,179)            --
                                     ---------     -------       -------        ---------      ---------
       Total                         2,358,217     267,636       280,595          (80,179)     2,826,269
                                     ---------     -------       -------        ---------      ---------
Operating cost and expenses          2,041,532     240,429       275,946            7,584      2,565,491
                                     ---------     -------       -------        ---------      ---------
Operating profit               (Y)     316,685      27,207         4,649          (87,763)       260,778
                                     =========     =======       =======        =========      =========
Assets                         (Y)   1,438,218     159,896       239,884          890,331      2,728,329
Depreciation and amortization          117,179      11,695         9,925           22,988        161,787
Capital expenditure                    149,072      14,019        17,296           41,014        221,401

  1997
----------
                                      Business                 Optical and     Corporate and
                                      machines    Cameras    other products    eliminations   Consolidated
                                   ------------ ----------- ----------------  --------------- ------------
Net sales
   Unaffiliated customers      (Y)   2,300,066     247,766       213,193               --      2,761,025
   Intersegment                             --          --        71,844          (71,844)            --
                                     ---------     -------       -------        ---------      ---------
       Total                         2,300,066     247,766       285,037          (71,844)     2,761,025
                                     ---------     -------       -------        ---------      ---------
Operating cost and expenses          1,981,113     225,652       259,573           20,653      2,486,991
                                     ---------     -------       -------        ---------      ---------
Operating profit               (Y)     318,953      22,114        25,464          (92,497)       274,034
                                     =========     =======       =======        =========      =========
Assets                         (Y)   1,433,626     163,095       232,436        1,043,622      2,872,779
Depreciation and amortization          102,789       9,963         8,793           18,270        139,815
Capital expenditure                    148,834      13,953        17,097           39,895        219,779
</TABLE>

Notes:

1.   General corporate expenses of (Y)91,540 million, (Y)88,064 million and
     (Y)92,677 million in 1999, 1998 and 1997, respectively, are included in
     "Corporate and eliminations."

2.   Corporate assets of (Y)923,863 million, (Y)892,863 million and (Y)1,045,127
     million in 1999, 1998 and 1997, respectively, which mainly consist of cash
     and cash equivalents, marketable securities and corporate properties, are
     included in "Corporate and eliminations."

                                       28
<PAGE>


Segment information by geographic area:

    1999                                                     (Millions of yen)
-------------
<TABLE>
                                                                                                   Corporate
                                                                                                      and
                                        Japan          Americas        Europe        Others      eliminations    Consolidated
                                   ---------------- --------------- ------------- -------------- -------------- ---------------
<S>                            <C>       <C>           <C>             <C>             <C>          <C>           <C>
Net sales
   Unaffiliated customers      (Y)         791,399         912,676       736,570        181,620            --        2,622,265
   Intersegment                          1,205,021          14,468         3,645        179,527    (1,402,661)              --
                                   ---------------  --------------  ------------  -------------  ------------   --------------
       Total                             1,996,420         927,144       740,215        361,147    (1,402,661)       2,622,265
Operating cost and expenses              1,791,871         898,900       727,215        350,482    (1,322,259)       2,446,209
                                   ---------------  --------------  ------------  -------------  ------------   --------------
Operating profit               (Y)         204,549          28,244        13,000         10,665       (80,402)         176,056
                                   ===============  ==============  ============  =============  ============   ==============
Assets                         (Y)       1,328,376         298,624       338,630        138,251       483,651        2,587,532
                                   ===============  ==============  ============  =============  ============   ==============

    1998
-------------
                                                                                                   Corporate
                                                                                                      and
                                        Japan          Americas        Europe        Others      eliminations    Consolidated
                                   ---------------- --------------- ------------- -------------- -------------- ---------------
Net sales
   Unaffiliated customers      (Y)         796,406       1,003,683       841,400        184,780            --        2,826,269
   Intersegment                          1,312,405          21,523         3,126        198,702    (1,535,756)              --
                                   ---------------  --------------  ------------  -------------  ------------   --------------
       Total                             2,108,811       1,025,206       844,526        383,482    (1,535,756)       2,826,269
Operating cost and expenses              1,831,816       1,002,166       820,257        370,036    (1,458,784)       2,565,491
                                   ---------------  --------------  ------------  -------------  ------------   --------------
Operating profit               (Y)         276,995          23,040        24,269         13,446       (76,972)         260,778
                                   ===============  ==============  ============  =============  ============   ==============
Assets                         (Y)       1,384,473         328,634       391,354        136,843       487,025        2,728,329
                                   ===============  ==============  ============  =============  ============   ==============

    1997
-------------
                                                                                                   Corporate
                                                                                                      and
                                        Japan          Americas        Europe        Others      eliminations    Consolidated
                                   ---------------- --------------- ------------- -------------- -------------- ---------------
Net sales
   Unaffiliated customers      (Y)         904,545         887,302       765,580        203,598            --        2,761,025
   Intersegment                          1,226,130          17,793         3,842        190,602    (1,438,367)              --
                                   ---------------  --------------  ------------  -------------  ------------   --------------
       Total                             2,130,675         905,095       769,422        394,200    (1,438,367)       2,761,025
Operating cost and expenses              1,832,174         883,698       733,016        371,221    (1,333,118)       2,486,991
                                   ---------------  --------------  ------------  -------------  ------------   --------------
Operating profit               (Y)         298,501          21,397        36,406         22,979      (105,249)         274,034
                                   ===============  ==============  ============  =============  ============   ==============
Assets                         (Y)       1,477,052         353,027       397,824        165,691       479,185        2,872,779
                                   ===============  ==============  ============  =============  ============   ==============
</TABLE>

Notes:

1.   General corporate expenses of (Y)91,540 million, (Y)88,064 million and
     (Y)92,677 million in 1999, 1998 and 1997, respectively, are included in
     "Corporate and eliminations."

2.   Corporate assets of (Y)923,863 million, (Y)892,863 million and (Y)1,045,127
     million in 1999, 1998 and 1997, respectively, which mainly consist of cash
     and cash equivalents, marketable securities and corporate properties, are
     included in "Corporate and eliminations."



                                       29
<PAGE>


Operating profit for business machines decreased by (Y)54,807 million in 1999.
This decrease mainly reflected the decline of the gross profit ratio reflecting
the appreciation of the yen. The operating profit ratio also decreased by 1.3%
to 12.1%. In 1998, operating profit for business machines decreased by (Y)2,268
million to (Y)316,685 million, mainly due to reduced sales of copying machines.
In 1997, operating profit for business machines increased by (Y)50,177 million
to (Y)318,953 million. This increase was due to significant growth in sales of
copying machines, laser beam and bubble jet printers.

Operating profit for cameras decreased by (Y)8,240 million to (Y)18,967 million
in 1999. The strong yen reduced the gross profit ratio from cameras and the
operating profit ratio also declined 3.4% to 6.8%. Operating profit for cameras
increased both in 1998 and 1997, reflecting increased sales of Advanced Photo
System and 35mm cameras.

Operating profit for optical and other products in 1999 decreased by (Y)17,882
million to an operating loss of (Y)13,233 million, mainly attributable to the
semiconductor market decline. Operating profit for optical and other products
decreased both in 1998 and 1997 due to the slowdown of the semiconductor market.

Income before income taxes in 1999 was (Y)156,072 million, a 34.8% decrease from
the previous year, or 6.0% of net sales. Interest expenses decreased (Y)8,525
million to (Y)20,356 million, mainly owing to the reduction of short-term loans.
The loss attributable to equity in earnings of affiliated companies decreased
(Y)2,390 million to net loss of (Y)2,848 million, primary due to the recovery of
a semiconductor-related affiliated company. In 1999, foreign exchange losses of
(Y)3,387 million were recorded, compared to an exchange gains of (Y)1,189
million in 1998.

Income before income taxes in 1998 was (Y)239,513 million, accounting for 8.5%
of net sales. Other net deductions significantly improved from (Y)23,362 million
to (Y)4,960 million due to the decrease in foreign exchange losses.

Income before income taxes in 1997 was (Y)234,805 million, accounting for 8.5%
of net sales. Interest expenses decreased by (Y)4,055 million, while foreign
exchange losses increased (Y)7,140 million due mainly to the devaluation of
Asian currencies.

Net income in 1999 was (Y)70,234 million, a 35.9% decrease compared to the
previous year, representing a 2.7% return on sales. While Japanese normal income
tax rates declined by 4% to 47%, the ratio of income taxes to income before
income taxes rose by 2.1% to 53.8%. Of this increase, 3.2% was due to the effect
of changing Japanese income tax rates on net deferred tax assets.

Net income in 1998 and 1997 was (Y)109,569 million and (Y)118,813 million,
respectively. Return on sales in 1998 and 1997 was 3.9% and 4.3%, respectively.

Foreign Operations and Foreign Currency Transactions:

Canon's marketing activities are performed by subsidiaries in each region in
local currencies, while the cost of goods sold is generally in yen. Given
Canon's current structure, appreciation of the yen has a negative impact on
Canon's net sales and 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 domestic operations
because foreign


                                       30
<PAGE>


operations consist mainly of marketing activities. The return on foreign
operation sales in 1999, 1998 and 1997 was 1.8%, 2.1% and 2.5%, respectively.
This compares with 2.7%, 3.9% and 4.3% on total operations for such years,
respectively.

(b) Liquidity

Cash and cash equivalents in 1999 decreased by (Y)18,729 million to (Y)480,453
million compared with (Y)499,182 million in 1998 and (Y)647,097 million in 1997.

Net cash provided by operating activities in 1999 was (Y)308,917 million,
compared with (Y)279,220 million in 1998 and (Y)184,200 million in 1997. This
increase is attributable mainly to the significant reduction of inventory
levels.

Net cash used in investing activities in 1999 decreased to (Y)200,982 million,
compared with (Y)247,947 million in 1998 and (Y)206,711 million in 1997. Capital
expenditure decreased by (Y)21,015 million to (Y)200,386 million compared to
1998. The introduction of a new production system helped to reduce certain part
of capital expenditure required for production.

A decrease of net cash used in financing activities in 1999 and 1998 was mainly
owing to the reduction of short-term loans, reflecting Canon's policy to improve
its financial structure. Net cash provided by (used in) financing activities in
1999 was (Y)(122,823) million, compared to (Y)(177,862) million in 1998 and
(Y)21,440 million in 1997.

Capital expenditure in 1999 amounted to (Y)200,386 million compared with
(Y)221,401 million in 1998 and (Y)219,779 million in 1997. In 1999, major
capital expenditure included the expansion and maintenance of production
capabilities, construction of a new plant for consumables and new corporate
headquarters and sales offices. Funds required for investments have been
generated internally from operations.

(c) Capital Resources

At December 31, 1999, Canon had outstanding commitments of approximately
(Y)25,830 million to purchase property, plant and equipment for use in the
ordinary course of its business. Canon anticipates that funds needed to fulfill
these commitments will be generated internally from operations.

Working capital in 1999 decreased by (Y)14,593 million to (Y)609,730 million
compared with (Y)624,323 million in 1998 and (Y)647,762 million in 1997. The
decrease was primarily attributable to the reduction of inventory levels.

The working capital ratio (current assets to current liabilities) for 1999 was
1.70 compared with 1.60 for 1998 and 1.53 for 1997.

Return on assets fell to 2.6% in 1999, compared with 3.9% in 1998 and 4.3% in
1997. This decline was due mainly to a decrease in net income. Return on
stockholders' equity also fell to 6.0% in 1999, compared with 9.7% in 1998 and
11.2% in 1997.

(d) New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging



                                       31
<PAGE>

Activities". SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities, and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS 133, as amended, is effective
for fiscal years beginning after June 15, 2000. Canon will adopt SFAS 133 for
the year beginning January 1, 2001 and is currently assessing the impact of
adopting SFAS 133. However, based on its limited use of derivative financial
instruments, management does not anticipate that the adoption of SFAS 133 will
have a material effect on Canon's consolidated financial position or results of
operations.

In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Canon will adopt SAB 101 for the year beginning January 1, 2000 and
is in the process of determining the impact that adoption will have on its
consolidated financial statements.

(e) Item 9A Market Risk Management

Market Risk Exposures:

Canon is exposed to markets risk, including changes in foreign exchange rates,
interest rates and prices of marketable securities and marketable investments.
In order to hedge the risks of changes in foreign exchange rates and interest
rates, Canon uses derivative financial instruments. Canon does not hold or issue
derivative financial instruments for trading purposes. Although the use of
derivative financial instruments exposes Canon to the risk of credit-related
losses in the event of non-performance by counterparties, Canon believes that
its counterparties are creditworthy and does not expect such losses, if any, to
be significant.

Equity Price Risk:

Canon holds marketable securities and marketable investments included in current
assets for short-term investment. In general, highly-liquid and low-risk
instruments are preferred in the portfolio. Marketable securities and marketable
investments included in noncurrent assets are held as longer-term investments.
Canon does not hold marketable securities and marketable investments for trading
purposes.

Maturities and fair values of such marketable securities and marketable
investments were as follows at December 31, 1999 and 1998.

<TABLE>
                                                                     (Millions of yen)
                                                          1999                                1998
                                              -----------------------------     ------------------------------
                                                  Cost           Fair Value          Cost           Fair Value
                                              ---------        ------------     ------------        ----------
<S>                                               <C>              <C>              <C>               <C>
Due within one year                      (Y)      1,745            1,732            1,234             1,223
Due after one year through five years             3,004            4,484            4,755             4,965
Due after five years                              5,377            5,741            1,437             1,463
Equity securities                                24,772          116,720           19,496            33,752
                                                 ------          -------           ------            ------
                                         (Y)     34,898          128,677           26,922            41,403
</TABLE>


                                       32
<PAGE>


Foreign Exchange Risk:

Canon's international operations and foreign currency indebtedness expose Canon
to the risk of changes in foreign currency exchange rates. To manage this
exposure, Canon enters into foreign exchange contracts. With respect to risks
related to its sales revenue, Canon currently has a policy of entering into
foreign exchange contracts that cover approximately 30-50% of the amount of
foreign currency cash flows that Canon, at a given time, anticipates it will
receive within the immediately succeeding two to three month period. Canon also
enters into foreign exchange contracts from time to time to hedge a portion of
the risk of fluctuation in foreign currency exchange rates associated with
long-term debt that is denominated in foreign currencies. Foreign exchange
contracts related to such long-term debt have the same maturity as the
underlying debt.

The following table provides information about Canon's major derivative
financial instruments related to foreign currency exchange transactions existing
at December 31, 1999 and 1998, which is translated into yen at the rate used
herein as of such date, together with the related weighted average contractual
exchange rates at December 31, 1999 and 1998. This table does not include
amounts related to foreign exchange contracts entered into in connection with
long-term debt denominated in foreign currencies which eliminate all foreign
currency exposures. All of the foreign exchange contracts described in the
following table as of December 31, 1999 have a contractual maturity date in
2000.

<TABLE>
      1999                                         (Millions of yen except average contractual rates)
      ----                                      ---------------------------------------------------------
      Forwards to sell foreign currencies        U.S.$/Yen      euro/Yen        Others         Total
      ----------------------------------------- ------------- -------------- ------------- --------------
<S>                                        <C>       <C>             <C>            <C>          <C>
      Contract amounts                     (Y)       123,813         45,037         2,081        170,931
      Estimated fair value                               953            579          (104)         1,428
      Average contractual rates                       102.38         103.84


      1998                                         (Millions of yen except average contractual rates)
      ----                                      ---------------------------------------------------------
      Forwards to sell foreign currencies        U.S.$/Yen       DM/Yen         Others         Total
      ----------------------------------------- ------------- -------------- ------------- --------------
      Contract amounts                     (Y)        80,296         24,199           794        105,289
      Estimated fair value                             4,367            714          (128)         4,953
      Average contractual rates                       121.25          70.84
</TABLE>


                                       33
<PAGE>


Interest Rate Risk:

Canon's exposure to the market risk of changes in interest rates relates
primarily to its debt obligations. Canon has long-term debt with both fixed
rates and floating rates. Interest rate swaps may be entered into from time to
time by Canon to hedge cash flows of interest and debt when determined by Canon
to be appropriate based on market conditions.

The following tables provide information about Canon's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows
and related weighted average interest rates by expected maturity dates. For
interest rate swaps, the table presents notional principal amounts and weighted
average interest rates by expected maturity dates. Notional principal amounts
are used to calculate the contractual payments to be exchanged under the
contracts. The table presents information for obligations existing at December
31, 1999 and 1998, which is translated into yen at the rate used herein as of
such date, together with the related weighted average contractual interest rates
at December 31, 1999 and 1998.

<TABLE>
Long-term debt (including due within one year)                                                (Millions of yen )
---------------------------------------------------- ----------------------------------------------------------
                          Average *
                          interest                   Expected maturity date (year ended December 31, 1999)
                            rates              ----------------------------------------------------------------
                                       Total     2000     2001    2002     2003     2004   Thereafter Estimated
                                                                                                      fair value
---------------------------------------------------------------------------------------------------------------
<S>                       <C>          <C>               <C>     <C>      <C>      <C>        <C>       <C>
Japanese yen notes        2.27%     (Y)111,920      --   19,920  37,000   10,000   20,000     25,000    116,233
Japanese yen
   convertible            1.20%         21,254      --        9   5,248       --       --     15,997     55,734
   debentures
Swiss franc note with
   warrants               0.74%          6,984   6,984       --      --       --       --         --      6,994
Loans, principally
   from banks             3.69%         50,193  18,090   15,966   9,407    2,152      674      3,904     49,303
---------------------------------------------------------------------------------------------------------------
   Total                            (Y)190,351  25,074   35,895  51,655   12,152   20,674     44,901    228,264
---------------------------------------------------------------------------------------------------------------


Long-term debt (including due within one year)                                                (Millions of yen )
---------------------------------------------------- ----------------------------------------------------------
                          Average *
                          interest                   Expected maturity date (year ended December 31, 1998)
                            rates
                                               ----------------------------------------------------------------

                                       Total     1999     2000    2001     2002     2003   Thereafter Estimated
                                                                                                      fair value
---------------------------------------------------------------------------------------------------------------
U.S. dollar bonds         9.75%     (Y)  8,099   8,099       --      --       --       --         --      8,142
Japanese yen notes        2.29%        109,920      --       --   19,920  35,000   10,000     45,000    110,046
Japanese yen
   convertible            1.20%         23,125      --        9      --    5,574       --     17,542     50,486
   debentures
Swiss franc note with
   warrants               0.65%         45,918  36,970    8,948      --       --       --         --     44,193
Loans, principally
   from banks             4.53%         59,418  21,091   17,786   10,781   2,710      527      6,523     58,609
---------------------------------------------------------------------------------------------------------------
   Total                            (Y)246,480  66,160   26,743   30,701  43,284   10,527     69,065    271,476
---------------------------------------------------------------------------------------------------------------
</TABLE>
   *All long-term debt is fixed rate except loans, principally from banks which
include both fixed and floating rate debt.

                                       34
<PAGE>


<TABLE>
Interest rate swaps                                                                              (Millions of yen )
------------------------------------------------------------------------------------------------------------------
                                                     Expected maturity date (year ended December 31, 1999)
                                               -------------------------------------------------------------------
     Notional     Average  Average   Total       2000     2001      2002     2003      2004   Thereafter  Estimated
 principal amount receive   pay                                                                          fair value
    (million)       rate    rate
------------------------------------------------------------------------------------------------------------------
<S>        <C>     <C>      <C>       <C>       <C>      <C>      <C>        <C>      <C>       <C>       <C>
  (Y)      60,000  1.66%    0.88% (Y) 60,000       --    40,000   20,000      --       --         --      2,113
 U.S.$        468  6.02%    6.11%     47,929    4,316    15,130   28,483      --       --         --        161
------------------------------------------------------------------------------------------------------------------



Interest rate swaps                                                                              (Millions of yen )
-------------------------------------------------------------------------------------------------------------------
                                                     Expected maturity date (year ended December 31, 1998)
                                               --------------------------------------------------------------------
     Notional     Average  Average   Total       1999     2000      2001     2002      2003   Thereafter Estimated
 principal amount receive  pay                                                                          fair value
    (million)       rate    rate
------------------------------------------------------------------------------------------------------------------
   (Y)     61,000  1.78%    0.50% (Y) 61,000    1,000        --   40,000    20,000       --        --       2,388
  Sfr          22  4.63%    2.06%      1,821       --       847       --        --      974        --          (1)
 U.S.$        498  6.31%    5.77%     57,657   19,587    12,445   25,625        --       --        --         (48)
------------------------------------------------------------------------------------------------------------------
</TABLE>


(f) Regarding the Environment

Canon is not aware of any sites that may have a material adverse effect on its
liquidity, financial position or results of operations. It is difficult to
estimate future environmental expenditure because of the many uncertainties
involved, including the future status of the law, regulations, technology and
information. Nevertheless, Canon believes that capital expenditure and expenses
incurred in complying with current laws for environmental protection will not
have a material effect upon its liquidity, financial position or results of
operations.

(g) Year 2000

Canon's State of Readiness
Canon considers continued attention to the Year 2000 (Y2K) issue as one of its
most important management tasks. In 1998 Canon formed a Y2K committee with the
participation of major Canon Group companies. This committee coordinated all
aspects of the Y2K preparations of Canon Group.

Prior to the beginning of the year 2000, Canon established the countermeasures
headquarters to test and confirm compliance of our utilities, information
infrastructure, main information systems, manufacturing facilities and major
suppliers during the year end/beginning. However, Canon's management has so far
remained unaffected by Y2K-related problems. Although Canon Group sales
companies established a special team to handle customer communications, no
specific product-related issues have arisen.

Costs
Canon and major Canon Group companies consigned external software companies to
ensure Y2K compliance. For the Canon Group as a whole, these activities involved
costs of approximately (Y)1,800 million for the period up to and including
December 31, 1999.


                                       35
<PAGE>


Y2K-related costs also arose in other areas. However, these costs are not
material to Canon's business operations, financial condition or results of
operations.

(h) Looking Forward

In 2000, Canon expects that the overall U.S. economy will remain favorable and
the European economy will show economic expansion supported by an increase of
exports reflecting the lower value of the euro against major currencies. Canon
expects personal spending and capital investment in Japan to continue to improve
slightly. The markets in which Canon operates are expected to grow steadily, as
demand for information and communications equipment shifts further toward
products with digital, network and color functions. Nevertheless, the operating
environment will continue to feel pressure from increasing customer demands for
improved performance and from intense price competition. Canon expects an
increase in demand for semiconductors to an increase in capital investment by
manufactures will lead to growing demand for Canon's semiconductor production
equipment. As nearly 70% of Canon's products are distributed overseas and a
large portion of these products are manufactured at plants in Japan, the
appreciation of the yen has a negative impact on Canon's operating results.

Under these circumstances, Canon will devote all of its energies and resources
to improving business results by introducing attractive and competitive products
that meet customer needs and by continuing management reformation activities
aimed at enhancing the efficiency of development, production, sales and
distribution.

The foregoing discussion in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" 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: exchange rate fluctuations; the uncertainty of
Canon's ability to implement its plans to localize production and other measures
to reduce the impact of exchange rate fluctuations; uncertainty of economic
conditions in Canon's major markets; uncertainty of continued demand for Canon's
high-value-added products; uncertainty in the continued growth of computer and
related markets; uncertainty of increased demand for Canon's semiconductor
production equipment; Canon's ability to continue to develop products and to
market products that incorporate new technologies on a timely basis, at
competitive prices and with the ability to achieve market acceptance; the
possibility of losses resulting from foreign currency transactions designed to
reduce financial risks from changes in foreign exchange rates; and inventory
risk due to shifts in market demand.


                                       36
<PAGE>


Item 10. Directors and Officers of Registrant

Directors and Corporate Auditors of the Company as of March 31, 2000 were as
follows:

                                                                  Director/
                   Age as of                                     Corporate
    Name        March 31, 2000        Position                  Auditor since
    ----        --------------        --------                  -------------

Fujio Mitarai           64            President and C.E.O.        March, 1981
Takashi Kitamura        59            Senior Managing Director    March, 1989

Ichiro Endo             59            Senior Managing Director    March, 1989

Yukio Yamashita         60            Senior Managing Director    March, 1991
Takashi Saito           58            Managing Director           March, 1991
Toshizo Tanaka          59            Managing Director           March, 1995
Yusuke Emura            55            Managing Director           March, 1993
Kinya Uchida            61            Managing Director           March, 1995

Akira Tajima            59            Managing Director           March, 1995
Haruo Murase            60            Director                    March, 1991
Toru Takahashi          57            Director                    March, 1991
Nobuyoshi Tanaka        54            Director                    March, 1993
Kohtaro Miyagi          59            Director                    March, 1995
Tsuneji Uchida          58            Director                    March, 1997
Junji Ichikawa          57            Director                    March, 1997
Muneo Adachi            57            Director                    March, 1997
Hajime Tsuruoka         56            Director                    March, 1997
Teruomi Takahashi       56            Director                    March, 1999
Hironori Yamamoto       56            Director                    March, 1999
Akiyoshi Moroe          55            Director                    March, 1999
Kunio Watanabe          55            Director                    March, 1999
Ikuo Soma               53            Director                    March, 1999
Shuichi Ishizuki        62            Corporate Auditor           March, 1998
Takenori Matsuoka       60            Corporate Auditor           March, 1995
Tadashi Ohe             55            Corporate Auditor           March, 1994
Tetsuo Yoshizawa        54            Corporate Auditor           March, 1998

Directors and Corporate Auditors are elected at the annual meeting of
shareholders for a two-year term and three-year term of office, respectively,
and may serve any number of consecutive terms. There is no arrangement or
understanding between a Director or a Corporate Auditor and any other person
pursuant to his election as a Director or a Corporate Auditor.

All Directors and Messrs. Shuichi Ishizuki and Takenori Matsuoka, Corporate
Auditors, have been employed by the business of the Company on a full-time basis
for more than five years.


                                       37
<PAGE>


Item 11. Compensation of Directors and Officers

(a)  The aggregate amount of compensation, including bonuses but excluding
     retirement allowances, paid by the Company in 1999 to all Directors and
     Corporate Auditors of the Company who served during 1999 was approximately
     (Y)1,274 million.

(b)  Directors and Corporate Auditors are not covered by the Company's
     retirement program. However, in accordance with customary Japanese business
     practice, when a Director or a Corporate Auditor retires, a proposal to pay
     a lump-sum retirement allowance is submitted to an annual meeting of
     shareholders for approval.

     In 1999, the Company paid retirement allowances aggregating (Y)1,003
     million to eight Directors.

Item 12. Options to Purchase Securities from Registrant or Subsidiaries

(a)  None

(b)  None

Item 13. Interest of Management in Certain Transactions

     None


                                    PART II

Item 14. Description of Securities to be Registered

None


                                    PART III

Item 15. Defaults Upon Senior Securities

     None

Item 16. Changes in Securities and Changes in Security for Registered Securities

(a)  As a result of amendments to the Japanese Commercial Code which became
     effective on October 1, 1982 (the "Amendments"), the Deposit Agreement
     dated May 1, 1969, which constituted the American Depositary Receipts for
     10,000,000 American Depositary Shares (ADSs), each ADS representing five
     Shares, was amended and restated as of October 1, 1982 (the "amended
     Deposit Agreement").

                                       38
<PAGE>

     Under the Amendments, the Company was required to adopt a "unit" of Shares.
     At its annual meeting of shareholders held on March 30, 1982, the Company
     adopted 1,000 Shares as one unit, effective from October 1, 1982.

      The adoption of a unit of Shares has, inter alia, the following
consequences:

     (i)  Except under certain limited circumstances, the Company may issue
          share certificates only for Shares constituting one or more complete
          units. Since the transfer of Shares normally requires delivery of the
          certificates therefor, fractions of a unit for which no share
          certificates have been issued are not transferable.

     (ii) A holder of Shares not constituting one or more complete units may at
          any time require the Company to purchase such Shares at their last
          reported sale price on the Tokyo Stock Exchange on the day when such
          request is made or, if no sale takes place on the Tokyo Stock Exchange
          on that day, the price at which the first sale of the Shares is
          effected on the Tokyo Stock Exchange thereafter, less the usual
          brokerage commission and securities transfer tax.

    (iii) A holder of Shares representing less than one unit cannot exercise
          any voting rights with respect to such Shares. A person (except a
          corporate shareholder more than one-quarter of whose outstanding
          Shares are, directly or indirectly, owned by the Company) holding at
          least one unit of Shares has one vote per Share with respect to those
          Shares constituting one or more complete unit.

          As a result of the Amendments, 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 amended
          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.

      Effective from March 16, 1998, the Company changed the ratio of ADSs to
      Shares from five Shares to one Share. In this regard, four additional ADSs
      for each ADS held were distributed to holders of ADS. Existing ADRs remain
      valid and do not need to be exchanged for new ones.

(b)  None

(c)  None

(d)  None


                                       39
<PAGE>


                                    PART IV

Item 17. Financial Statments
Consolidated Financial Statement of Canon Inc. and Subsidiaries:
                                                                         Page
                                                                        Number
                                                                        ------
    Independent Auditors' Report                                          41
    Consolidated Balance Sheets as of December 31, 1999 and 1998          42
    Consolidated Statements of Income for the years ended
       December 31, 1999, 1998 and 1997                                   43
    Consolidated Statements of Stockholders' Equity for the years
       ended December 31, 1999, 1998 and 1997                             44
    Consolidated Statements of Cash Flows for the years ended
       December 31, 1999, 1998 and 1997                                   45
    Notes to Consolidated Financial Statements                            46

Schedule:
    Independent Auditors' Report on Schedule                              41
    Schedule II    Valuation and Qualifying Accounts for the
                   years ended December 31, 1999, 1998 and 1997           71

     All other schedules are omitted as permitted by the rules and regulations
     of the Securities and Exchange Commission as they are not applicable.

Financial statements of non-consolidated subsidiaries and affiliates, 20% to 50%
owned, are omitted because none of these subsidiaries and affiliates constitute
a significant subsidiary or an affiliate as of or for the year ended December
31, 1999.


                                       40


                          Independent Auditors' Report

The Board of Directors
Canon Inc.:

We have audited the consolidated financial statements (expressed in yen) of
Canon Inc. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards in the 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 segment information required to be disclosed in financial statements under
United States generally accepted accounting principles is not presented in the
accompanying consolidated financial statements. Foreign issuers are currently
exempted from such disclosure requirement in Securities Exchange Act filings
with the United States Securities and Exchange Commission.

In our report dated February 8, 1999, our opinion on the 1998 and 1997
consolidated financial statements of Canon Inc. and subsidiaries was qualified
because of the effects of the departure from Statement of Financial Accounting
Standards No. 115 in accounting for certain investments in debt and equity
securities. As described in note 1(f) of the notes to the consolidated
financial statements, Canon Inc. and subsidiaries have changed their method of
accounting for such investments in debt and equity securities and restated
their 1998 and 1997 consolidated financial statements to conform with United
States generally accepted accounting principles. Accordingly, our present
opinion on the accompanying 1998 and 1997 consolidated financial statements, as
presented herein, is different from that expressed in our previous report.

In our opinion, except for the omission of the segment information as discussed
in the third paragraph of this report, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Canon Inc. and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with United States
generally accepted accounting principles.

Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.


/s/ KPMG
Tokyo, Japan
February 8, 2000


<PAGE>


                          CANON INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
                           December 31, 1999 and 1998

<TABLE>
                                                                      Millions of yen
                                                             --------------------------------
                                                                    1999          1998
                                                                    ----          ----
                        Assets
Current assets:
<S>                                                          <C>              <C>
  Cash and cash equivalents                                  (Y)   480,453       499,182
  Marketable securities (notes 3 and 7)                              9,003         7,470
  Trade receivables (notes 4 and 7)                                376,472       412,375
  Inventories (notes 5 and 7)                                      436,250       549,257
  Prepaid expenses and other current assets (note 10)              184,411       197,433
                                                                ----------    ----------
          Total current assets                                   1,486,589     1,665,717

Noncurrent receivables and restricted funds (note 17)               29,771        50,309
Investments (notes 3 and 7)                                        166,464        83,212
Net property, plant and equipment (notes 6 and 7)                  746,824       742,312
Other assets (notes 9 and 10)                                      157,884       186,779
                                                                ----------    ----------
          Total assets                                       (Y) 2,587,532     2,728,329
                                                                ==========    ==========

          Liabilities and Stockholders' Equity
Current liabilities:
  Short-term loans (note 7)                                        298,399       403,332
  Trade payables (note 8)                                          364,664       401,527
  Income taxes (note 10)                                            45,915        61,328
  Accrued expenses                                                 117,390       127,905
  Other current liabilities (note 10)                               50,491        47,302
                                                                ----------    ----------
          Total current liabilities                                876,859     1,041,394

Long-term debt, excluding current installments (note 7)            165,277       180,320
Accrued pension and severance cost (note 9)                        132,826       132,818
Other noncurrent liabilities (note 10)                              11,325        12,228
                                                                ----------    ----------
          Total liabilities                                      1,186,287     1,366,760
                                                                ----------    ----------

Minority interests                                                 199,242       206,049
                                                                ----------    ----------
Stockholders' equity:
  Common stock of (Y) 50 par value.
    Authorized 2,000,000,000 shares;
    issued and outstanding 871,555,698 shares in 1999 and
    870,305,870 shares in 1998 (notes 7 and 11)                    163,969       163,033
  Additional paid-in capital (notes 7 and 11)                      376,848       375,913
  Legal reserve (note 12)                                           33,518        31,396
  Retained earnings (notes 10 and 12)                              735,975       682,663
  Accumulated other comprehensive income (loss)
    (notes 3, 9, 10 and 14)                                       (108,307)      (97,485)
          Total stockholders' equity                             1,202,003     1,155,520
                                                                ----------    ----------
Commitments and contingent liabilities (note 17)

          Total liabilities and stockholders' equity         (Y) 2,587,532     2,728,329
                                                                ==========    ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                       42
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                       Consolidated Statements of Income

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
                                                                      Millions of yen
                                                             --------------------------------------
                                                                1999         1998          1997
                                                                ----         ----          ----
<S>                                                        <C>             <C>          <C>
Net sales                                                  (Y) 2,622,265   2,826,269    2,761,025

Cost of sales                                                  1,497,940   1,569,197    1,528,364
                                                              ----------  ----------   ----------
          Gross profit                                         1,124,325   1,257,072    1,232,661

Selling, general and administrative expenses                     948,269     996,294      958,627
                                                              ----------  ----------   ----------
          Operating profit                                       176,056     260,778      274,034

Other income (deductions):
  Interest and dividend income                                    10,222      12,576       13,922
  Interest expense                                               (20,356)    (28,881)     (29,789)
  Other, net                                                      (9,850)     (4,960)     (23,362)
                                                              ----------  ----------   ----------
                                                                 (19,984)    (21,265)     (39,229)
                                                              ----------  ----------   ----------
          Income before income taxes and minority interests      156,072     239,513      234,805

Income taxes (note 10)                                            83,939     123,843      109,364
                                                              ----------  ----------   ----------
          Income before minority interests                        72,133     115,670      125,441

Minority interests                                                 1,899       6,101        6,628
                                                              ----------  ----------   ----------

          Net income                                       (Y)    70,234     109,569      118,813
                                                              ==========  ==========   ==========


                                                                              (Y)
                                                             --------------------------------------
Net income per share (notes 1 (p) and 15):
  Basic                                                     (Y)    80.66      126.10       137.73
  Diluted                                                          79.50      123.93       134.60
                                                                 =======     =======      =======

Dividends per common share (note 12)                               17.00       17.00        17.00
                                                                 =======     =======      =======
</TABLE>


See accompanying notes to consolidated financial statements.


                                       43
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
                                                                      Millions of yen
                                                             --------------------------------------
                                                                1999         1998         1997
                                                                ----         ----         ----
<S>                                                      <C>            <C>          <C>
Common stock:
  Balance at beginning of year                           (Y)   163,033     160,411      150,565
  Conversion of convertible debt (notes 11 and 13)                 936       2,622        9,846
                                                             ---------  ----------   ----------
  Balance at end of year                                       163,969     163,033      160,411
                                                             ---------  ----------   ----------
Additional paid-in capital:
  Balance at beginning of year                                 375,913     372,398      359,011
  Conversion of convertible debt (notes 11 and 13)                 935       2,612        9,779
  Increase arising from issuance of subsidiaries' common
    stock, conversion of convertible debt and exercise of
    warrants of subsidiaries and other transfers                     -         903        3,608
                                                             ---------  ----------   ----------
  Balance at end of year                                       376,848     375,913      372,398
                                                             ---------  ----------   ----------
Legal reserve:
  Balance at beginning of year                                  31,396      28,467       26,770
  Transfers from retained earnings (note 12)                     2,122       2,934        1,728
  Transfers to minority interests arising from
    issuance of subsidiaries' common stock,
    conversion of convertible debt and exercise of
    warrants of subsidiaries and other transfers                     -          (5)         (31)
                                                             ---------  ----------   ----------
  Balance at end of year                                        33,518      31,396       28,467
                                                             ---------  ----------   ----------
Retained earnings:
  Balance at beginning of year                                 682,663     592,268      489,617
  Net income for the year                                       70,234     109,569      118,813
  Cash dividends (note 12)                                     (14,797)    (15,619)     (13,727)
  Transfers to legal reserve (note 12)                          (2,122)     (2,934)      (1,728)
  Transfers to minority interests arising from
    issuance of subsidiaries' common stock, conversion
    of convertible debt and exercise of warrants of
    subsidiaries and other transfers                                (3)       (621)        (707)
                                                             ---------  ----------   ----------
  Balance at end of year                                       735,975     682,663      592,268
                                                             ---------  ----------   ----------
Accumulated other comprehensive income (loss)
(notes 3, 9, 10 and 14):
  Balance at beginning of year                                 (97,485)    (44,033)     (18,529)
  Other comprehensive income (loss) for the year,
    net of tax                                                 (10,822)    (53,452)     (25,504)
                                                             ---------  ----------   ----------
  Balance at end of year                                      (108,307)    (97,485)     (44,033)
                                                             ---------  ----------   ----------

      Total stockholders' equity                         (Y) 1,202,003   1,155,520    1,109,511
                                                             =========  ==========   ==========

Disclosure of comprehensive income:
  Net income for the year                                       70,234     109,569      118,813
  Other comprehensive income (loss) for the year,
    net of tax (note 14)                                       (10,822)    (53,452)     (25,504)
                                                             ---------  ----------   ----------

      Total comprehensive income for the year            (Y)    59,412      56,117       93,309
                                                             =========  ==========   ==========
</TABLE>


See accompanying notes to consolidated financial statements.


                                      44
<PAGE>



                          CANON INC. AND SUBSIDIARIES

                     Consolidated Statements of Cash Flows

                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
                                                                                  Millions of yen
                                                                     ---------------------------------------
                                                                            1999         1998        1997
                                                                            ----         ----        ----
<S>                                                                  <C>                <C>        <C>
Net income                                                           (Y)    70,234      109,569    118,813

Adjustments to reconcile net income to net cash provided
  by operating activities:
     Depreciation and amortization                                         158,111      161,787    139,815
     Loss on disposal of property and equipment                              8,814        6,631      8,289
     Deferred income taxes                                                  (5,972)       1,941     (9,618)
     Decrease (increase) in trade receivables                               (1,231)       1,640    (66,975)
     Decrease (increase) in inventories                                    107,913       15,737    (43,895)
     Increase (decrease) in trade payables                                 (22,950)     (46,636)    31,527
     Increase (decrease) in income taxes                                   (13,966)         607    (12,459)
     Increase in accrued expenses                                            3,206        9,386     12,962
     Other, net                                                              4,758       18,558      5,741
                                                                           -------      -------    -------
         Net cash provided by operating activities                         308,917      279,220    184,200
                                                                           -------      -------    -------

Cash flows from investing activities:
     Capital expenditure                                                  (200,386)    (221,401)  (219,779)
     Proceeds from sale of property, plant and equipment                     6,104        3,404      4,330
     Payment for purchase of marketable securities                         (12,349)      (5,386)    (8,635)
     Proceeds from sale of marketable securities                             6,637        9,439      5,145
     Payment for purchase of investments                                    (9,770)     (28,111)    (6,797)
     Other                                                                   8,782       (5,892)    19,025
                                                                           -------      -------    -------
         Net cash used in investing activities                            (200,982)    (247,947)  (206,711)
                                                                           -------      -------    -------

Cash flows from financing activities (note 13):
     Proceeds from long-term debt                                    (Y)    23,811       34,903     70,768
     Repayment of long-term debt                                           (75,005)     (29,458)   (98,693)
     Increase (decrease) in short-term loans                               (51,871)    (167,295)    51,030
     Dividends paid (note 12)                                              (14,797)     (15,619)   (13,727)
     Other                                                                  (4,961)        (393)    12,062
                                                                           -------      -------    -------
         Net cash provided by (used in) financing activities              (122,823)    (177,862)    21,440
                                                                           -------      -------    -------
Effect of exchange rate changes on cash and cash equivalents                (3,841)      (1,326)    (3,578)
                                                                           -------      -------    -------
Net change in cash and cash equivalents                                    (18,729)    (147,915)    (4,649)

Cash and cash equivalents at beginning of year                             499,182      647,097    651,746

Cash and cash equivalents at end of year                             (Y)   480,453      499,182    647,097
                                                                           =======      =======    =======
Cash paid during the year for:
     Interest                                                        (Y)    19,321       21,083     27,120
     Income taxes                                                          103,877      121,295    131,441
                                                                           =======      =======    =======
</TABLE>


See accompanying notes to consolidated financial statements.


                                      45
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(1)  Basis of Presentation and Significant Accounting Policies

     (a)  Description of Business
          The Company and subsidiaries (collectively "Canon") is a
          high-technology oriented company which operates globally and has
          numerous core businesses. Originally a 35mm camera maker, Canon is
          now one of the world's leading manufacturers in other fields, such as
          copying machines and computer peripherals, mainly laser beam and
          bubble jet printers. Canon's products also include business systems
          such as faxes, computers, micrographics, Japanese-language word
          processors and calculators. Canon's camera business consists mainly
          of SLR cameras, compact cameras, video camcorders and digital
          cameras. Optical related products include steppers and aligners used
          in semiconductor chip production, broadcasting lenses and medical
          equipment. Canon's sales in 1999 were distributed as follows: copying
          machines-32%, computer peripherals-37%, business systems-13%,
          cameras-11%, and optical and other products-7%.

          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 70% of
          consolidated net sales in 1999 were generated outside Japan, with 35%
          in the Americas, 28% in Europe and 7% in other areas.

          Canon's manufacturing operations are conducted primarily at 16 plants
          in Japan and 13 overseas plants which are located in the United
          States, Germany, France, United Kingdom, Taiwan, China, Malaysia,
          Thailand, and Mexico.

          Canon sells laser beam printers on an OEM basis to Hewlett-Packard
          Co.; such sales constituted approximately 20% of consolidated sales
          for the year ended December 31, 1999. Canon believes it is highly
          unlikely that it would lose such OEM business in the near term.

     (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 in conformity with
          financial accounting standards of the countries of their domicile.

          The accompanying consolidated financial statements reflect the
          adjustments which management believes are necessary to conform them
          with United States generally accepted accounting principles.

     (c)  Principles of Consolidation
          The consolidated financial statements include the accounts of Canon
          after elimination of all significant intercompany balances and
          transactions.

     (d)  Cash Equivalents
          For purposes of the statements of cash flows, Canon considers all
          highly-liquid debt instruments purchased with an original maturity of
          three months or less to be cash equivalents.


                                      46
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (e)  Translation of Foreign Currencies
          Foreign currency financial statements have been translated in
          accordance with Statement of Financial Accounting Standards No. 52
          ("SFAS 52"), "Foreign Currency Translation". Under SFAS 52, assets
          and liabilities of the Company's subsidiaries located outside Japan
          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, including
          gains and losses from hedging and intercompany transactions, net of
          related taxes, are included in other comprehensive income (loss) and
          are accumulated in stockholders' equity as foreign currency
          translation adjustments.

          Gains and losses resulting from other foreign currency transactions
          are included in other income (deductions) (see note 19).

     (f)  Marketable Securities and Marketable Investments
          During 1999, Canon changed its method of accounting for certain
          investments in debt and equity securities and restated the
          consolidated financial statements as of and for the years ended
          December 31, 1998 and 1997 to apply Statement of Financial Accounting
          Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
          in Debt and Equity Securities". Under SFAS 115, certain investments
          in debt and equity securities should be classified as trading,
          available-for-sale, or held-to-maturity securities. Trading
          securities are bought and held principally for the purpose of selling
          them in the near term. Held-to-maturity securities are those
          securities in which Canon has the ability and intent to hold the
          security until maturity. All securities not included in trading or
          held-to-maturity are classified as available-for-sale.

          Trading and available-for-sale securities are recorded at fair value.
          Held-to-maturity securities are recorded at amortized cost, adjusted
          for the amortization or accretion of premiums or discounts.
          Unrealized holding gains and losses on trading securities are
          included in earnings. Unrealized holding gains and losses, net of the
          related tax effect, on available-for-sale securities are excluded
          from earnings and are reported as a separate component of other
          comprehensive income until realized.

          Prior to the application of SFAS 115, marketable securities and
          marketable investments held for temporary and long-term investment
          purposes were carried predominantly at the lower of cost or market.
          The cost of such securities was based on the average cost.

          As a result of the application of SFAS 115, total assets increased
          (Y)7,732 million, stockholders' equity increased (Y)7,442 million and
          comprehensive income decreased (Y)3,059 million in the consolidated
          financial statements as of and for the year ended December 31, 1998,
          and comprehensive income decreased (Y)15,065 million in the
          consolidated financial statements for the year ended December 31,
          1997. There were no effects on previously reported net income for the
          years ended December 31, 1998 or 1997.


                                      47
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (g)  Inventories
          Inventories are stated at the lower of cost or market. Cost is
          determined principally by the average method for domestic inventories
          and the first-in, first-out method for overseas inventories.

     (h)  Investments in Affiliated Companies
          Of the investments in affiliated companies owned 20% to 50%, certain
          investments are accounted for on the equity basis and the others are
          carried at cost. Canon's equity in undistributed earnings of the
          latter companies is not significant.

          Canon's share of the net earnings (loss) of companies carried at
          equity, included in other income (deductions), and dividends received
          from those companies for the years 1999, 1998 and 1997 are as
          follows:

                                                      Millions of yen
                                             --------------------------------
                                                1999       1998       1997
                                                ----       ----       ----
                 Net loss                  (Y) (2,848)    (5,238)    (4,282)
                 Dividends received                40        188         30

     (i)  Depreciation
          Depreciation is calculated principally by the declining-balance
          method over the estimated useful lives of the assets.

     (j)  Goodwill
          The excess of cost over underlying equity at acquisition dates of
          investments in subsidiaries and affiliated companies is being
          amortized principally over 10 years.

     (k)  Income Taxes
          Canon accounts for income taxes in accordance with Statement of
          Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for
          Income Taxes". Under the asset and liability method of SFAS 109,
          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. Under SFAS 109, 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.

     (l)  Employee Retirement and Severance Benefits
          The Company and certain of its subsidiaries have various employee
          retirement and severance defined benefit plans covering substantially
          all employees who meet eligibility requirements (see note 9).


                                      48
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (m)  Advertising
          The costs of advertising are expensed as incurred.

     (n)  Derivatives
          Canon does not hold derivative financial instruments for trading
          purposes. Derivative financial instruments held by Canon are
          comprised principally of foreign exchange contracts to manage
          currency risk and interest rate swaps to manage interest rate risk.

          Derivative financial instruments that are designated and effective to
          hedge forecasted transactions for which there is no firm commitment
          are marked to market, and gains and losses on such derivatives are
          recorded in other income (deductions). Foreign currency derivative
          financial instruments generally qualify for hedge accounting if their
          maturity dates correspond to hedged existing assets and liabilities
          denominated in foreign currencies, and gains and losses on such
          derivative financial instruments are recognized and recorded in other
          income (deductions) at end of year and at settlement, as are the
          offsetting foreign exchange losses and gains on the hedged items.
          Gains and losses on the hedging derivative financial instruments that
          are designated and effective as hedges of firm commitments are
          deferred and recognized in income when the sale of the hedged items
          occurs. Amounts receivable or payable under derivative financial
          instruments used to manage interest rate risks arising from financial
          assets and liabilities are recognized as a component of interest
          income or expense of such related underlying assets or liabilities
          (see note 16).

     (o)  Issuance of Stock by Subsidiaries
          The change in the Company's proportionate share of subsidiary equity
          resulting from issuance of stock by the subsidiaries is accounted for
          as an equity transaction.

     (p)  Net Income per Share
          Basic net income per share has been computed by dividing net income
          available to common stockholders by the weighted-average number of
          common shares outstanding during each year. Diluted net income per
          share reflects the potential dilution and has been computed on the
          basis that all convertible debentures were converted at beginning of
          the year or at time of issuance (if later), and that all dilutive
          warrants were exercised (less the number of treasury shares assumed
          to be purchased from the proceeds using the average market price of
          the Company's common shares).

     (q)  Use of Estimates
          Management of Canon has made a number of estimates and assumptions
          that affect the reported amounts of assets, liabilities, revenues and
          expenses, and the disclosure of contingent assets and liabilities to
          prepare these financial statements in conformity with generally
          accepted accounting principles. Actual results could differ from
          those estimates.


                                      49
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     (r)  Long-Lived Assets and Long-Lived Assets to Be Disposed Of
          Canon's long-lived assets and certain identifiable intangibles 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 an asset to future net cash
          flows (undiscounted and without interest charges) expected to be
          generated by the asset. If such assets are considered to be impaired,
          the impairment to be recognized is measured by the amount by which
          the carrying amount of the assets exceed the fair value of the
          assets. Assets to be disposed of are reported at the lower of the
          carrying amount or fair value less costs to sell.

     (s)  New Accounting Standards
          In June 1998, the Financial Accounting Standards Board issued
          Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
          "Accounting for Derivative Instruments and Hedging Activities". SFAS
          133 establishes accounting and reporting standards for derivative
          instruments and for hedging activities, and requires that an entity
          recognize all derivatives as either assets or liabilities in the
          balance sheet and measure those instruments at fair value. SFAS 133,
          as amended, is effective for fiscal years beginning after June 15,
          2000. Canon will adopt SFAS 133 for the year beginning January 1,
          2001 and is currently assessing the impact of adopting SFAS 133.
          However, based on its limited use of derivative financial
          instruments, management does not anticipate that the adoption of SFAS
          133 will have a material effect on Canon's consolidated financial
          position or results of operations.

     (t)  Reclassifications
          Certain reclassifications have been made to the prior years'
          consolidated financial statements to conform the presentation used
          for the year ended December 31, 1999.

(2)  Foreign Operations
     Amounts included in the consolidated financial statements relating to
     subsidiaries operating in foreign countries are summarized as follows:

                                                  Millions of yen
                                       --------------------------------------
                                          1999          1998        1997
                                          ----          ----        ----
             Total assets           (Y)   917,810      987,828    1,109,388
             Net assets                   326,631      364,623      358,122
             Net sales                  1,830,866    2,029,863    1,856,480
             Net income                    32,876       42,505       47,073


                                      50
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(3)  Marketable Securities and Marketable Investments
     Marketable securities and marketable investments consist of
     available-for-sale securities. The carrying amount, gross unrealized
     holding gains, gross unrealized holding losses and fair value for such
     securities by major security type at December 31, 1999 and 1998 are as
     follows:

<TABLE>
                                                            Millions of yen
                                                -------------------------------------------
                                                           Gross        Gross
                                                         Unrealized  Unrealized
                                                           Holding     Holding
                                                  Cost      Gains      Losses    Fair Value
                                                  ----      -----      ------    ----------
<S>                                               <C>         <C>                 <C>
     1999:
        Current:
           Available-for-sale:
              Japanese and foreign
                governmental bond
                securities                           45         -        -           45
              Corporate debt securities      (Y)  2,543       373        -        2,916
              Bank debt securities                  157         -        -          157
              Fund trusts                         1,962     1,470        -        3,432
              Equity securities                   2,039       432       18        2,453
                                                 ------   -------      ---       ------
                                             (Y)  6,746     2,275       18        9,003
                                                 ======   =======      ===       ======
        Noncurrent:
           Available-for-sale:
                governmental bond
                securities                          156         -        -          156
              Japanese and foreign
              Corporate debt securities           5,099        84        -        5,183
              Bank debt securities                  164         -       96           68
              Fund trusts                             -         -        -            -
              Equity securities                  22,733    91,534        -      114,267
                                                 ------   -------      ---       ------
                                             (Y) 28,152    91,618       96      119,674
                                                 ======   =======      ===       ======
</TABLE>


                                      51
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


<TABLE>
                                                            Millions of yen
                                                -------------------------------------------
                                                           Gross        Gross
                                                         Unrealized  Unrealized
                                                           Holding     Holding
                                                  Cost      Gains      Losses    Fair Value
                                                  ----      -----      ------    ----------
<S>                                               <C>         <C>      <C>       <C>
     1998:
        Current:
           Available-for-sale:
              Japanese and foreign
                governmental bond
                securities                  (Y)    553           8          --          571
              Corporate debt securities          2,845         167          --        3,012
              Bank debt securities                 443          12          --          455
              Fund trusts                        1,973          45          --        2,018
              Equity securities                  1,142         282          --        1,424
                                                 -----         ---         ---        -----
                                            (Y)  6,956         514          --        7,470
                                                 -----         ---         ---        -----
        Noncurrent:
           Available-for-sale:
              Japanese and foreign
                governmental bond
                securities                         206           4          --          210
              Corporate debt securities          1,174          42          --        1,216
              Bank debt securities                 188          --          53          135
              Fund trusts                           44          --          --           44
              Equity securities                 18,354      13,974          --       32,328
                                                ------         ---         ---        -----
                                            (Y) 19,966      14,020          53       33,933
                                                ======      ======          ==       ======
</TABLE>


                                       52
<PAGE>

                                   CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Net unrealized gain on available-for-sale securities, net of related taxes
     and minority interests, increased by (Y)41,257 million in 1999, and
     decreased by (Y)3,059 million and (Y)15,065 million in 1998 and 1997,
     respectively.

     Maturities of marketable securities and marketable investments classified
     as available-for-sale were as follows at December 31, 1999:

                                                              Millions of yen
                                                              ---------------
                                                            Cost     Fair Value
                                                            ----     ----------

             Due within one year                     (Y)    1,745       1,732
             Due after one year through five years          3,004       4,484
             Due after five years                           5,377       5,741
             Equity securities                             24,772     116,720
                                                           ------     -------
                                                     (Y)   34,898     128,677
                                                           ======     =======

     Proceeds from sale of available-for-sale securities were (Y)6,637 million,
     (Y)9,439 million and (Y)5,145 million in 1999, 1998 and 1997, respectively.
     Realized gains and losses during the years 1999, 1998 and 1997 were
     insignificant.

(4)    Trade Receivables
       Trade receivables are summarized as follows:

                                                             Millions of yen
                                                            ----------------
                                                            1999         1998
                                                            ----         ----

             Notes                                   (Y)   31,989       39,519
             Accounts                                     359,572      389,291
             Less allowance for doubtful receivables       15,089       16,435
                                                          -------      -------
                                                     (Y)  376,472      412,375
                                                          =======      =======

(5)    Inventories
       Inventories comprised the following:

                                                             Millions of yen
                                                            ----------------
                                                            1999         1998
                                                            ----         ----

             Finished goods                          (Y)  308,529      397,459
             Work in process                              114,666      135,706
             Raw materials                                 13,055       16,092
                                                          -------      -------
                                                     (Y)  436,250      549,257
                                                          =======      =======


                                       53
<PAGE>


                           CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(6)    Property, Plant and Equipment
---    -----------------------------
       Property, plant and equipment are stated at cost less accumulated
       depreciation and are summarized as follows:

                                                              Millions of yen
                                                             ----------------
                                                             1999          1998
                                                             ----          ----

             Land                                    (Y)   148,722       117,670
             Buildings                                     614,136       571,513
             Machinery and equipment                       871,207       873,345
             Construction in progress                       26,331        48,557
                                                         ---------     ---------
                                                         1,660,396     1,611,085
             Less accumulated depreciation                 913,572       868,773
                                                         ---------     ---------
                                                     (Y)   746,824       742,312
                                                         =========     =========

(7)    Short-term Loans and Long-term Debt
       Short-term loans consisted of the following:

                                                              Millions of yen
                                                             ----------------
                                                             1999        1998
                                                             ----        ----

             Bank borrowings                         (Y)   72,645         98,465
             Acceptances payable by foreign
              subsidiaries                                200,680        238,707
             Long-term debt due within one year            25,074         66,160
                                                          -------        -------
                                                     (Y)  298,399        403,332
                                                          =======        =======

       The weighted average interest rates on short-term loans outstanding at
       December 31, 1999 and 1998 were 5.18% and 5.14%, respectively.

       At December 31, 1999, unused short-term credit facilities for issuance of
       commercial paper amounted to (Y)60,540 million.

       A substantial portion of the acceptances payable by foreign subsidiaries
       was secured by the subsidiaries' inventories and trade receivables.


                                       54
<PAGE>


                           CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


       Long-term debt consisted of the following:

<TABLE>
                                                                                               Millions of yen
                                                                                               ---------------
                                                                                               1999        1998
                                                                                               ----        ----
<S>                                                                                           <C>         <C>
             Loans, principally from banks, maturing in installments through
               2029; bearing weighted average interest of 3.69% and 4.53% at
               December 31, 1999 and 1998, respectively, partially secured by
               mortgage of property,
               plant and equipment and marketable securities                          (Y)     50,193      59,418
             9-3/4% U.S. dollar bonds, due 1999                                                    -       8,099
             2-7/20% Japanese yen notes, due 2001                                             19,920      19,920
             2-1/20% Japanese yen notes, due 2002                                              5,000       5,000
             2-3/5% Japanese yen notes, due 2002                                              20,000      20,000
             1-7/50% Japanese yen notes, due 2002                                              2,000           -
             1-3/5% Japanese yen notes, due 2002                                              10,000      10,000
             2-3/10% Japanese yen notes, due 2003                                              5,000       5,000
             1-53/100% Japanese yen notes, due 2003                                            5,000       5,000
             2-23/40% Japanese yen notes, due 2004                                            10,000      10,000
             2-1/40% Japanese yen notes, due 2004                                             10,000      10,000
             1-22/25% Japanese yen notes, due 2005                                             5,000       5,000
             2-19/20% Japanese yen notes, due 2007                                            10,000      10,000
             2-27/100% Japanese yen notes, due 2008                                           10,000      10,000
             5/8% - 3/4% Swiss franc notes with warrants
               issued by subsidiaries, due 1999 - 2000 :
                  Principal amount                                                             7,055      47,427
                  Less unamortized discount                                                       71       1,509
                                                                                             -------     -------
                                                                                               6,984      45,918
                                                                                             -------     -------
             1% Japanese yen convertible debentures, due 2002                                  5,248       5,574
             1-2/10% Japanese yen convertible debentures, due 2005                             5,763       6,178
             1-3/10% Japanese yen convertible debentures, due 2008                            10,234      11,364
             Other                                                                                 9           9
                                                                                             -------     -------
                                                                                             190,351     246,480
             Less amount due within one year                                                  25,074      66,160
                                                                                             -------     -------
                                                                                      (Y)    165,277     180,320
                                                                                             =======     =======
</TABLE>


                                       55
<PAGE>


                           CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     The aggregate annual maturities of long-term debt outstanding at December
     31, 1999 were as follows:

                                            Millions of yen
                                            ---------------

              2000                        (Y)   25,074
              2001                              35,895
              2002                              51,655
              2003                              12,152
              2004                              20,674
              Later years                       44,901
                                               -------
                                          (Y)  190,351
                                               =======

     Property, plant and equipment with a book value at December 31, 1999 of
     (Y)10,822 million were mortgaged to secure long-term debt.

     As is customary in Japan, 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 the bank. Long-term agreements with lenders other than
     banks also generally provide that Canon must give additional security upon
     request of the lender.

     The 1% Japanese yen convertible debentures due 2002 are currently
     convertible into approximately 3,506,000 shares of common stock at a
     conversion price of (Y)1,497.00 per share. The debentures are redeemable at
     the option of the Company between January 1, 2000 and December 31, 2001 at
     premiums ranging from 2% to 1%, and at par thereafter, or, dependent on a
     particular circumstance, at par.

     The 1-2/10% Japanese yen convertible debentures due 2005 are currently
     convertible into approximately 3,850,000 shares of common stock at a
     conversion price of (Y)1,497.00 per share. The debentures are redeemable at
     the option of the Company between January 1, 2000 and December 31, 2004 at
     premiums ranging from 5% to 1%, and at par thereafter, or, dependent on a
     particular circumstance, at par.

     The 1-3/10% Japanese yen convertible debentures due 2008 are currently
     convertible into approximately 6,836,000 shares of common stock at a
     conversion price of (Y)1,497.00 per share. The debentures are redeemable at
     the option of the Company between January 1, 2002 and December 31, 2007 at
     premiums ranging from 6% to 1%, and at par thereafter, or, dependent on a
     particular circumstance, at par.


                                       56
<PAGE>


                           CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(8)    Trade Payables
       --------------
       Trade payables are summarized as follows:

                                              Millions of yen
                                             ----------------
                                             1999         1998
                                             ----         ----
             Notes                    (Y)    113,512      159,104
             Accounts                        251,152      242,423
                                             -------      -------
                                      (Y)    364,664      401,527
                                             =======      =======

(9)  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 plan includes a portion of
     the governmental welfare pension benefits which would otherwise be provided
     by the Japanese government in accordance with the Welfare Pension Insurance
     Law in Japan. Management considers that a portion of the contributory
     plans, which are administered by a board of trustees composed of management
     and labor representatives, represents a welfare pension plan carried on
     behalf of the Japanese government. These contributory and noncontributory
     plans are funded in conformity with the funding requirements of applicable
     Japanese governmental regulations.

     Net periodic benefit cost for Canon's employee retirement and severance
     defined benefit plans for 1999, 1998 and 1997 consisted of the following
     components:

                                                           Millions of yen
                                                           ---------------
                                                     1999       1998       1997
                                                     ----       ----       ----
        Service cost - benefits earned
          during the year                 (Y)      31,295     25,307     21,228
        Interest cost on projected
          benefit of obligation                    15,599     14,360     13,123
        Expected return on plan assets            (10,393)   (11,510)    (8,539)
        Net amortization                            6,566      4,244      2,655
                                                   ------     ------     ------
                                          (Y)      43,067     32,401     28,467
                                                   ======     ======     ======


                                       57
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

     Reconciliations of beginning and ending balances of the benefit
     obligations and the fair value of the plan assets are as follows:

<TABLE>
                                                                        Millions of yen
                                                                        ---------------
                                                                        1999        1998
                                                                        ----        ----
<S>                                                                    <C>         <C>
     Change in benefit obligations:
          Benefit obligations at beginning of year               (Y)   491,102     396,838
          Service cost                                                  31,295      25,307
          Interest cost                                                 15,599      14,360
          Plan participants' contributions                               3,403       3,333
          Actuarial loss (gain)                                        (16,983)     56,392
          Benefits paid                                                 (6,067)     (5,070)
          Other                                                           (271)        (58)
                                                                      --------    --------
          Benefit obligations at end of year                           518,078     491,102
                                                                      --------    --------
     Change in plan assets:
          Fair value of plan assets at beginning of year               270,713     239,338
          Actual return on plan assets                                  17,336      11,394
          Employer contributions                                        26,022      21,718
          Plan participants' contributions                               3,403       3,333
          Benefits paid                                                 (6,067)     (5,070)
                                                                      --------    --------
          Fair value of plan assets at end of year                     311,407     270,713
                                                                      --------    --------
     Funded status                                                     206,671     220,389
     Unrecognized actuarial loss                                      (136,119)   (166,254)
     Unrecognized net transition obligation being
       recognized over 22 years                                         (6,025)     (6,369)
                                                                      --------    --------
     Net amount recognized                                              64,527      47,766

     Adjustments to recognize minimum liability:
          Intangible assets                                              6,025       6,369
          Amount included in accumulated other comprehensive            62,274      78,683
                                                                      --------    --------
            Income (loss), gross of tax                                 68,299      85,052
                                                                      --------    --------
     Accrued pension and severance cost recognized in the
       consolidated balance sheets                               (Y)   132,826     132,818
                                                                      ========    ========

     Actuarial present vale of accumulated benefit obligations
       at end of year                                            (Y)   444,233     403,531
                                                                      ========    ========

     Actuarial assumptions:
          Discount rate                                                   3.00%       3.00%
          Assumed rate of increase in future
            compensation levels                                           3.60        4.00
          Expected long-term rate on plan assets                          4.00%       5.00%
</TABLE>


                                      58
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


Directors and certain employees are not covered by the programs described
above. Benefits paid to such persons and meritorious service payments are
charged to income as paid, since amounts vary with circumstances, and it is
therefore not practicable to compute the liability for future payments.

(10) Income Taxes
     Total income taxes were allocated as follows:

<TABLE>
                                                                      Millions of yen
                                                               ------------------------------
                                                                 1999       1998       1997
                                                                 ----       ----       ----
<S>                                                             <C>       <C>        <C>
     Income before income taxes and minority interests     (Y)  83,939    123,843    109,364
     Stockholders' equity - accumulated other
       comprehensive income (loss):
          Foreign currency translation
            adjustments                                           (239)      (674)        (3)
          Net unrealized gains on securities                    37,286     (4,399)   (15,480)
          Minimum pension liability adjustments                  7,712    (17,345)   (15,126)
                                                              --------   --------   --------
                                                           (Y) 128,698    101,425     78,755
                                                              ========   ========   ========
</TABLE>


                                      59
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Domestic and foreign components of income before income taxes and minority
     interests ("income before income taxes"), and the current and deferred
     income tax expense (benefit) attributable to such income before income
     taxes are summarized as follows:

                                                     Millions of yen
                                            ---------------------------------
                                              Japanese   Foreign     Total
                                              --------   -------     -----
     1999:
          Income before income taxes     (Y)  100,044    56,028     156,072
                                             ========   =======    ========
          Income taxes:
              Current                    (Y)   64,197    25,714      89,911
              Deferred                         (2,097)   (3,875)     (5,972)
                                             --------   -------    --------
                                         (Y)   62,100    21,839      83,939
                                             ========   =======    ========
     1998:
          Income before income taxes     (Y)  172,303    67,210     239,513
                                             --------   -------    --------
          Income taxes:
              Current                    (Y)   97,437    24,465     121,902
              Deferred                          3,453    (1,512)      1,941
                                             --------   -------    --------
                                         (Y)  100,890    22,953     123,843
                                             --------   -------    --------
     1997:
          Income before income taxes     (Y)  160,543    74,262     234,805
                                             ========   =======    ========
          Income taxes:
              Current                    (Y)   90,293    28,689     118,982
              Deferred                         (6,999)   (2,619)     (9,618)
                                             --------   -------    --------
                                         (Y)   83,294    26,070     109,364
                                             ========   =======    ========


                                      60
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     The Company and its domestic subsidiaries are subject to a number of taxes
     based on income, which in the aggregate resulted in a normal tax rate of
     approximately 47.0% in the year ended December 31, 1999 and 51.0% in the
     years ended December 31, 1998 and 1997.

     Amendments to Japanese tax regulations were enacted into law on March 24,
     1999 and on March 31, 1998. As a result of these amendments, the normal
     income tax rate is to be reduced from approximately 51.0% to 47.0%
     effective from Canon's fiscal year beginning January 1, 1999 and from
     approximately 47.0% to 42.0% effective from Canon's fiscal year beginning
     January 1, 2000. Current income taxes were calculated at the rate of 47.0%
     and 51.0% in effect for the years ended December 31, 1999 and 1998,
     respectively. Deferred income tax assets and liabilities as of December
     31, 1999 and 1998 were measured at a rate of principally 42.0% and 47.0%,
     respectively. The effects of the income tax rate reduction on deferred
     income tax balances as of December 31, 1999 and 1998 are presented below.

     The significant components of deferred income tax expense (benefit)
     attributable to income before income taxes are as follows:

<TABLE>
                                                                             Millions of yen
                                                                    --------------------------------
                                                                      1999        1998        1997
                                                                      ----        ----        ----
<S>                                                                  <C>          <C>         <C>
     Deferred tax expense (exclusive of the effects of
       other components listed below)                            (Y) (16,181)     (5,638)     (9,674)
     Adjustments to deferred tax assets and
       liabilities for enacted changes in tax laws and rates          10,209       8,014         491
     Decrease in the beginning-of-the-year balance of the
       valuation allowance for deferred tax assets                         -        (435)       (435)
                                                                     -------     -------     -------
                                                                 (Y)  (5,972)      1,941      (9,618)
                                                                     =======     =======     =======
</TABLE>

     A reconciliation of the Japanese normal income tax rate and the effective
     income tax rate as a percentage of income before income taxes is as
     follows:

<TABLE>
                                                                        1999        1998        1997
                                                                        ----        ----        ----
<S>                                                                     <C>         <C>         <C>
     Japanese normal income tax rate                                    47.0%       51.0%       51.0%
     Increase (reduction) in income taxes resulting from:
          Expenses not deductible for tax purposes                       1.0         0.9         1.2
          Tax benefits not recognized on operating
            losses of subsidiaries                                       1.2         0.3         0.5
          Income of foreign subsidiaries taxed at lower
            than Japanese normal tax rate                               (6.1)       (5.7)       (5.7)
          Tax credit for increased research and development
            expenses                                                    (0.5)       (0.8)       (1.6)
          Effect of enacted changes in tax laws and rates                6.5         3.3         0.1
          Other                                                          4.7         2.7         1.1
                                                                       -----       -----       -----
                  Effective income tax rate                             53.8%       51.7%       46.6%
                                                                       =====       =====       =====
</TABLE>


                                      61
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Net deferred income tax assets and liabilities are reflected on the
     accompanying consolidated balance sheets under the following captions:

                                                          Millions of yen
                                                          ---------------
                                                          1999       1998
                                                          ----       ----
     Prepaid expenses and other current assets      (Y)   75,431     86,740
     Other assets                                         47,211     79,121
     Other current liabilities                            (1,033)    (1,121)
     Other noncurrent liabilities                         (5,320)    (6,402)
                                                       ---------   --------
                                                    (Y)  116,289    158,338
                                                       =========   ========

     The tax effects of temporary differences that give rise to significant
     portions of the deferred tax assets and deferred tax liabilities at
     December 31, 1999 and 1998 are presented below:

<TABLE>
                                                                          Millions of yen
                                                                          ---------------
                                                                         1999        1998
                                                                         ----        ----
<S>                                                                      <C>         <C>
     Deferred tax assets:
          Inventories - intercompany profits and write-downs      (Y)    51,476      60,994
          Accrued business tax                                            3,366       5,652
          Accrued pension and severance cost                             25,544      20,574
          Minimum pension liability adjustments                          26,155      36,981
          Property, plant and equipment - intercompany profits            7,015       6,810
          Research and development - costs capitalized for
            tax purposes                                                 21,371      21,223
          Depreciation                                                   11,386       8,703
          Other                                                          32,713      30,891
                                                                       --------    --------
              Total gross deferred tax assets                           179,026     191,828
              Less valuation allowance                                    4,191       4,722
                                                                       --------    --------
              Net deferred tax assets                                   174,835     187,106
                                                                       --------    --------
     Deferred tax liabilities:
          Land including deferred gain on sale                           (3,629)     (4,446)
          Unamortized debt issuance cost                                   (359)       (587)
          Accounts receivable - allowance for doubtful                   (3,810)     (4,449)
          Undistributed earnings of foreign subsidiaries and
            affiliated companies                                         (4,471)     (4,880)
          Net unrealized gains on securities                            (39,396)     (6,815)
          Other                                                          (6,881)     (7,591)
                                                                       --------    --------
              Total gross deferred tax liabilities                      (58,546)    (28,768)
                                                                       --------    --------
              Net deferred tax assets                             (Y)   116,289     158,338
                                                                       ========    ========
</TABLE>


                                      62
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     The valuation allowance for deferred tax assets as of January 1, 1998 was
     (Y)4,990 million. The net change in the total valuation allowance for the
     years ended December 31, 1999 and 1998 was a decrease of (Y)531 million
     and (Y)268 million, 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 Canon will realize the benefits of these deferred tax assets, net
     of the existing valuation allowances at December 31, 1999.

     At December 31, 1999, Canon had net operating losses carried forward for
     income tax purposes of approximately (Y)7,668 million which were available
     to reduce future income taxes, if any. Approximately (Y)6,833 million of
     the operating losses expire through 2007 while the remainder have an
     indefinite carryforward period.

     Income taxes have not been accrued on undistributed income of domestic
     subsidiaries and affiliated companies as distributions of such income are
     not taxable under present circumstances.

     Canon has not recognized deferred tax liabilities of approximately
     (Y)22,089 million for the portion of undistributed earnings of foreign
     subsidiaries that arose in 1999 and prior years because Canon currently
     does not expect those unremitted earnings to reverse and become taxable to
     the Company in the foreseeable future. Deferred tax liabilities will be
     recognized when Canon expects that it will recover those undistributed
     earnings in a taxable manner, such as through receipt of dividends or sale
     of the investments. As of December 31, 1999, such undistributed earnings
     of these subsidiaries were approximately (Y)289,006 million.

(11) Common Stock
     During 1999, 1998 and 1997, the Company issued 1,249,828 shares, 3,506,936
     shares and 13,184,712 shares, respectively, of common stock in connection
     with conversion of convertible debt. Conversion into common stock of
     convertible debt issued subsequent to October 1, 1982 and exercise of
     warrants were accounted for in accordance with the provisions of the
     Japanese Commercial Code by crediting one-half of the conversion price and
     exercise price to each of the common stock account and the additional
     paid-in capital account.


                                      63
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(12) Legal Reserve and Cash Dividends
     The Japanese Commercial Code provides that an amount equal to at least 10%
     of appropriations paid in cash be appropriated as a legal reserve until
     such reserve equals 25% of stated capital. This reserve is not available
     for dividends but may be used to reduce a deficit or may be transferred to
     stated capital. Certain foreign subsidiaries are also required to
     appropriate their earnings to legal reserves under the laws of the
     respective countries. Canon's equity in retained earnings or deficit of
     affiliated companies owned 20% to 50% accounted for on the equity basis
     aggregating negative (Y)4,668 million at December 31, 1999 is included in
     retained earnings.

     Cash dividends and appropriations to the legal reserve charged to retained
     earnings during the years 1999, 1998 and 1997 represent dividends paid out
     during those years and the related appropriations to the legal reserve.
     Provision has not been made in the accompanying consolidated financial
     statements for the semiannual dividend of (Y)8.50 per share, aggregating
     (Y)7,408 million, subsequently proposed by the Board of Directors in
     respect of the year ended December 31, 1999, or for the related
     appropriation to the legal reserve.

     Cash dividends per common share are computed based on dividends declared
     with respect to earnings for the periods.

     The amount of retained earnings available for dividends under the Japanese
     Commercial Code is based on the amount recorded in the Company's
     nonconsolidated books of account in accordance with financial accounting
     standards of Japan. The adjustments included in the accompanying
     consolidated financial statements to have them conform with United States
     generally accepted accounting principles, but not recorded in the books of
     account, have no effect on the determination of retained earnings
     available for dividends under the Japanese Commercial Code. Retained
     earnings in the Company's nonconsolidated books of account under the
     Japanese Commercial Code amounted to (Y)521,552 million at December 31,
     1999.

(13) Noncash Financing Activities
     In 1999, 1998 and 1997, common stock issued and additional paid-in capital
     arising from conversion of convertible debt amounted to (Y)1,871 million,
     (Y)5,234 million and (Y)19,625 million, respectively.


                                      65
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(14) Other Comprehensive Income (Loss)
     Change in accumulated other comprehensive income (loss) is as follows:

<TABLE>
                                                                 Millions of yen
                                                        ---------------------------------
                                                          1999        1998         1997
                                                          ----        ----         ----
<S>                                                      <C>         <C>         <C>
     Foreign currency translation adjustments:
          Balance at beginning of year              (Y)  (66,372)    (32,644)    (36,739)
          Adjustments for the year                       (60,776)    (33,728)      4,095
                                                       ---------    --------     -------
          Balance at end of year                        (127,148)    (66,372)    (32,644)
                                                       ---------    --------     -------
     Net unrealized gains on securities:
          Balance at beginning of year                     7,442      10,501      25,566
          Adjustments for the year                        41,257      (3,059)    (15,065)
                                                       ---------    --------     -------
          Balance at end of year                          48,699       7,442      10,501
                                                       ---------    --------     -------
     Minimum pension liability adjustments:
          Balance at beginning of year                   (38,555)    (21,890)     (7,356)
          Adjustments for the year                         8,697     (16,665)    (14,534)
                                                       ---------    --------     -------
          Balance at end of year                         (29,858)    (38,555)    (21,890)
                                                       ---------    --------     -------
     Total accumulated other comprehensive income (loss)
          Balance at beginning of year                   (97,485)    (44,033)    (18,529)
          Adjustments for the year                       (10,822)    (53,452)    (25,504)
                                                       ---------    --------     -------
          Balance at end of year                    (Y) (108,307)    (97,485)    (44,033)
                                                       =========    ========     =======
</TABLE>


                                      65
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Tax effects allocated to each component of other comprehensive income
     (loss) and reclassification adjustments are as follows:

<TABLE>
                                                                                 Millions of yen
                                                                   ---------------------------------------
                                                                                     Tax
                                                                   Before-tax     (expense)     Net-of-tax
                                                                     amount       or benefit       amount
                                                                     ------       ----------       ------
<S>                                                                   <C>          <C>             <C>
     1999:
           Foreign currency translation adjustments:
              Amount arising during the year on
                investments in foreign entities held at
                end of year                                    (Y)   (61,023)          239        (60,784)
              Reclassification adjustments for the
                portion of gains and losses realized
                upon sale or liquidation of investments
                in foreign entities                                        8             -              8
                                                                   ---------    ----------     ----------
              Net change in foreign currency
                translation adjustments during the year              (61,015)          239        (60,776)
           Net unrealized gains on securities:
              Amount arising during the year on
                securities during the year                            79,789       (37,914)        41,875
              Reclassification adjustments for gains and
                losses realized in net income                         (1,246)          628           (618)
                                                                   ---------    ----------     ----------
              Net change in net unrealized gains on
                securities during the year                            78,543       (37,286)        41,257
           Minimum pension liability adjustments                      16,409        (7,712)         8,697
                                                                   ---------    ----------     ----------
           Other comprehensive income (loss)                   (Y)    33,937       (44,759)       (10,822)

     1998:
           Foreign currency translation adjustments            (Y)   (34,402)          674        (33,728)
           Net unrealized gains on securities:
              Amount arising during the year on
                securities held at end of year                        (9,897)        5,642         (4,255)
              Reclassification adjustments for gains
                and losses realized in net income                      2,439        (1,243)         1,196
                                                                   ---------    ----------     ----------
              Net change in net unrealized gains on
                securities during the year                            (7,458)        4,399         (3,059)
           Minimum pension liability adjustments                     (34,010)       17,345        (16,665)
                                                                   ---------    ----------     ----------
           Other comprehensive income (loss)                   (Y)   (75,870)       22,418        (53,452)
                                                                   ---------    ----------     ----------
     1997:
           Foreign currency translation adjustments            (Y)     4,092             3          4,095
           Net unrealized gains on securities                        (30,545)       15,480        (15,065)
           Minimum pension liability adjustments                     (29,660)       15,126        (14,534)
                                                                   ---------    ----------     ----------
           Other comprehensive income (loss)                   (Y)   (56,113)       30,609        (25,504)
                                                                   ---------    ----------     ----------
</TABLE>


                                      66
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(15) Net Income per Share
     A reconciliation of the numerators and denominators of the basic and
     diluted net income per share computations is as follows:

<TABLE>
                                                                                   Millions of yen
                                                                  -----------------------------------------------
                                                                         1999            1998            1997
                                                                         ----            ----            ----
<S>                                                              <C>                 <C>             <C>
     Net income available to common stockholders                 (Y)      70,234        109,569         118,813
     Effect of dilutive securities:
          1% Japanese yen convertible debentures, due 2002                    45             43              96
          1-2/10% Japanese yen convertible debentures, due 2005               50             59             112
          1-3/10% Japanese yen convertible debentures, due 2008               89            108             205
          Other                                                                -             (2)             (3)
                                                                     -----------    -----------      ----------
     Diluted net income                                          (Y)      70,418        109,777         119,223
                                                                     -----------    -----------      ----------

                                                                                   Number of shares
                                                                  -----------------------------------------------
     Average common shares outstanding                               870,699,219    868,915,888     862,664,129
     Dilutive effect of:
          1% Japanese yen convertible debentures, due 2002             3,649,401      3,991,367       5,687,040
          1-2/10% Japanese yen convertible, due 2005                   4,029,084      4,609,783       6,722,111
          1-3/10% Japanese yen convertible, due 2008                   7,369,714      8,220,954      10,599,248
          Other                                                           15,994         25,427          90,902
                                                                     -----------    -----------      ----------
     Diluted common shares outstanding                               885,763,412    885,763,419     885,763,430
                                                                     -----------    -----------      ----------

                                                                                       Yen
                                                                  -----------------------------------------------
     Net income per share:
          Basic                                                  (Y)   80.66         126.10          137.73
          Diluted                                                      79.50         123.93          134.60

</TABLE>


                                      67
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


(16) Foreign Exchange Risk Management and Interest Rate Risk Management
     Canon operates internationally which exposes Canon to the risk of changes
     in foreign 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 does not hold or issue financial
     instruments for trading purposes.

     The contract amounts of derivative financial instruments summarized in the
     following paragraphs do not represent amounts exchanged by the parties and
     thus are not a measure of the exposure of Canon through its use of
     derivative financial instruments. Canon is exposed to the risk of
     credit-related losses in the event of nonperformance by counterparties to
     foreign exchange contracts and interest rate swaps, but it does not expect
     any counterparties to fail given their high credit ratings.

     Contract amounts of foreign exchange contracts and interest rate swaps at
     December 31, 1999 and 1998 are set forth below:

                                                              Millions of yen
                                                              ---------------
                                                             1999        1998
                                                             ----        ----
             Forwards and swaps:
                  To sell foreign currencies            (Y)  170,931    105,289
                  To buy foreign currencies                   12,110     54,222
                  Receive-fixed interest rate swaps           41,024     91,379
                  Pay-fixed interest rate swaps               66,905     29,099

     The Company and certain of its subsidiaries enter into foreign exchange
     forward contracts and currency swaps to hedge the risk of fluctuation in
     foreign currency exchange rates associated with certain trade receivables,
     long-term debt and anticipated sales transactions (including firm
     commitments) denominated in foreign currencies. The terms of these foreign
     exchange contracts rarely extend beyond three months except for those
     related to long-term debt denominated in foreign currencies which have the
     same terms as underlying debts. Interest rate swap contracts are generally
     used by the Company and certain of its subsidiaries to offset changes in
     the rates paid on long-term debt. Interest rate swap contracts outstanding
     at December 31, 1999 mature between 2000 and 2002.

(17) Commitments and Contingent Liabilities
     At December 31, 1999, commitments outstanding for the purchase of
     property, plant and equipment approximated (Y)25,830 million. Contingent
     liabilities for guarantees of bank loans to employees and to affiliated
     and other companies amounted to approximately (Y)66,943 million.

     Canon occupies sales offices and other facilities under lease arrangements
     accounted for as operating leases. Deposits made under such arrangements
     aggregated (Y)20,188 million and (Y)23,754 million at December 31, 1999
     and 1998, respectively, and are reflected in noncurrent receivables and
     restricted funds on the accompanying consolidated balance sheets.



<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     Future minimum lease payments required under noncancellable operating
     leases that have initial or remaining lease terms in excess of one year as
     of December 31, 1999 are:

                                                              Millions
             Year ending December 31:                          of yen
                                                               ------
                  2000                                     (Y) 10,820
                  2001                                          8,036
                  2002                                          5,899
                  2003                                          4,399
                  2004                                          3,268
                  Later years                                   7,092
                                                               ------
                      Total future minimum lease payments  (Y) 39,514
                                                               ======

(18) Disclosures about the Fair Value of Financial Instruments
     Cash and cash equivalents, Trade receivables, Short-term loans, Trade
     payables, Accrued expenses

     The carrying amount approximates fair value because of the short maturity
     of these instruments.

     Marketable securities and Investments
     The fair values of Canon's marketable securities and investments are based
     on quoted market prices.

     Noncurrent receivables and restricted funds
     The fair values of Canon's noncurrent receivables and restricted funds are
     based on the present value of future cash flows through estimated
     maturity, discounted using estimated market discount rates. Their carrying
     amounts at December 31, 1999 and 1998 totaled (Y)29,771 million and
     (Y)50,309 million, respectively, which approximate fair values.

     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.

     Derivative financial instruments (see note 16)
     The fair values of derivative financial instruments, consisting
     principally of foreign exchange contracts and interest rate swaps, all of
     which are used for purposes other than trading, are estimated by obtaining
     quotes from brokers.


                                      69
<PAGE>


                          CANON INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements


     The estimated fair values of Canon's financial instruments at December 31,
     1999 and 1998 are summarized as follows:

<TABLE>
                                                                        Millions of yen
                                                                ------------------------------
                                                                1999                      1998
                                                                ----                      ----
                                                        Carrying     Estimated     Carrying    Estimated
                                                         Amount      Fair Value     Amount     Fair Value
                                                         ------      ----------     ------     ----------
<S>                                                      <C>          <C>          <C>          <C>
     Nonderivatives:
       Assets:
         Marketable securities and Investments       (Y)  141,546      141,546       51,402       51,402
       Liabilities:
         Long-term debt, including current
           installments                                  (190,351)    (228,264)    (246,480)    (271,476)

     Derivatives relating to:
        Trade receivables and anticipated
          sales transactions:
            Assets                                          1,385        1,635        4,786        5,076
            Liabilities                                      (947)        (207)        (342)        (123)
        Long-term debt, including current
          installments:
            Foreign exchange contracts:
              Assets                                            -            -          446          666
              Liabilities                                  (2,155)      (2,155)      (1,904)      (1,768)
            Interest rate swaps:
              Assets                                          369        2,377          811        2,957
              Liabilities                                     (71)        (103)        (119)        (634)
</TABLE>

     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.

(19) Supplementary Expense Information

                                                         Millions of yen
                                                 -------------------------------
                                                   1999        1998       1997
                                                   ----        ----       ----

          Research and development            (Y) 177,922    176,967    170,793
          Depreciation of property, plant
            and equipment                         155,682    159,888    137,777
          Rent                                     48,236     53,923     55,227
          Advertising                              67,544     76,911     75,800
          Exchange loss (gain)                      3,387     (1,189)    11,200


                                      70
<PAGE>


                                                                    Schedule II


                          CANON INC. AND SUBSIDIARIES

                       Valuation and Qualifying Accounts

                  Years ended December 31, 1999, 1998 and 1997

                               (Millions of yen)


<TABLE>
                                  Balance at     Add        Deduct    Add (deduct)  Balance
                                  beginning   charge to   bad debts   translation    at end
                                  of period    income    written off  adjustments   of period
                                  ----------  ---------  -----------  ------------  ---------
<S>                                   <C>       <C>          <C>         <C>          <C>
Year ended December 31, 1999:
  Allowance for doubtful
    receivables                   (Y) 16,435    4,622        3,685       (2,283)      15,089
                                      ======    =====        =====       ======       ======

Year ended December 31, 1998:
  Allowance for doubtful
    receivables                   (Y) 15,997    6,275        4,239       (1,598)      16,435
                                      ======    =====        =====       ======       ======

Year ended December 31, 1997:
  Allowance for doubtful
    receivables                   (Y) 14,772    5,386        4,751          590       15,997
                                      ======    =====        =====       ======       ======
</TABLE>


                                      71
<PAGE>


Item 19. Financial Statements and Exhibits

(a)   The following financial statements and schedule are filed in Part IV,
      Item 17 of this report:

      Consolidated Financial Statements of Canon Inc. and
        Subsidiaries:
                                                                          Page
                                                                         Number
                                                                         ------
       Independent Auditors' Report                                        41

       Consolidated Balance Sheets as of December 31, 1999 and 1998        42

       Consolidated Statements of Income for the years ended
         December 31, 1999, 1998 and 1997                                  43

       Consolidated Statements of Stockholders' Equity for the years
         ended December 31, 1999, 1998 and 1997                            44

       Consolidated Statements of Cash Flows for the years ended
         December 31, 1999, 1998 and 1997                                  45

       Notes to Consolidated Financial Statements                          46

      Schedule:

       Independent Auditors' Report on Schedule                            41

       Schedule II      Valuation and Qualifying Accounts for the
                          years ended December 31, 1999, 1998 and 1997     71

(b)   The following exhibit is filed as part of this report:

      Exhibit 1.1     English Translation of Share Handling Regulations,
                      as amended                                           74


                                      72
<PAGE>


                                   SIGNATURES


Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, 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
                                                  --------------------------
                                                  (Managing Director)


                                                Canon Inc.
                                                30-2, Shimomaruko 3-chome,
                                                Ohta-ku, Tokyo 146-8501, Japan

Date June 9, 2000
    --------------


                                      73
<PAGE>


                                 EXHIBIT INDEX


                                                                   Sequentially
                                                                   Numbered Page
                                                                   -------------

Exhibit 1.1   English Translation of Share Handling Regulations,
              as amended                                                75


                                      74
<PAGE>


(Translation)
                           SHARE HANDLING REGULATIONS
                                       OF
                                   CANON INC.
                          (as amended October 1, 1999)


                         Chapter I. General Provisions

(Object)
       Article 1.   With regard to the denominations of share certificates,
                    the handling of shares of the Company and the fees
                    therefor, what are provided for in these Regulations shall
                    govern, pursuant to Article 8 of the Articles of
                    Incorporation. The handling of shares relative to
                    beneficial owners shall be as provided in Chapter IX
                    hereof.

(Denominations of share certificates)
       Article 2.   The share certificates of the Company shall be in
                    denominations representing one share, five shares, ten
                    shares, fifty shares, one-hundred shares, five-hundred
                    shares, one-thousand shares and ten-thousand shares;
                    provided, however, that in respect of any number of shares
                    of less than one hundred, a share certificate representing
                    such number of shares may be issued.

                 2. Not withstanding the preceding paragraph, with regard to
                    any number of shares falling short of the number of shares
                    to constitute on unit of shares as provided for in Article
                    6 of the Articles of Incorporation (hereinafter referred to
                    as "less-than-one-unit shares"), share certificates
                    representing such less-than-one-unit shares (hereinafter
                    referred to as "certificates for less-than-one-unit
                    shares") shall not be issued unless it is permitted to
                    issue such share certificates under any law or ordinance.

(Transfer agent)
       Article 3.   The transfer agent of the Company, its place of handling
                    business and its intermediary offices shall be as follows:

                    Transfer agent:
                    Dai-Ichi Kangyo Fuji Trust & Banking Co., Ltd.
                    6-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo


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                    Its place of handling the business:
                    6-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo
                    Transfer Agency Department, Dai-Ichi Kangyo Fuji Trust &
                      Banking Co., Ltd.

                    Its intermediary offices:
                    Branches of Dai-Ichi Kangyo Fuji Trust & Banking Co., Ltd.
                    Head Office and Branches of Yasuda Trust & Banking Co., Ltd.

(Matters to be handled by the transfer agent)
       Article 4.   Any application, request, notification, notice or the
                    like to be made or given in respect of any procedure under
                    these Regulations, payment of dividends or other matters
                    the handling of which the Company has entrusted to the
                    transfer agent shall be directed to the transfer agent.

(Method of application, request, notification and notice)
       Article 5.   Any application, request, notification, notice or the
                    like to be made or given under the preceding Article shall
                    be in the form prescribed by the Company and affixed with
                    the seal filed as provided in Article 12.

                 2. When any application, request, notification, notice or the
                    like under the preceding Article is made or given by an
                    agent, a document evidencing the power of representation
                    shall be submitted.


                      Chapter II. Registration of transfer

(Registration of transfer)
       Article 6.   In case of an application for registration of transfer
                    of shares because of assignment, the application shall be
                    submitted in the prescribed form, together with the share
                    certificate.

                 2. The registration of transfer of less-than-one-unit shares
                    acquired through assignment may be applied for if and only
                    if the acquiring party is a shareholder appearing on the
                    register of shareholders.

                 3. In case of an application for registration of transfer of
                    shares for causes other than


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assignment, the procedure
                    under paragraph 1 shall be followed and in addition, a
                    document evidencing the acquisition shall be submitted at
                    the request of the Company; provided, however, that when
                    the share certificate has not been issued, it is not
                    necessary to submit the share certificate.

(Registration of transfer in cases otherwise provided for in laws or ordinances)
       Article 7.   In case it is required to take special procedure under
                    laws or ordinances with regard to transfer of shares, the
                    application shall be submitted in the prescribed form,
                    together with the share certificate and a document
                    evidencing the completion of such procedures.


      Chapter III. Registration of Pledge and Indication of Trust Property

(Registration of pledge or cancellation thereof)
       Article 8.   In case of an application for registration of a pledge
                    or for alteration or cancellation thereof, the application
                    shall be submitted in the prescribed form, together with
                    the share certificate.

(Indication of trust property or cancellation thereof)
       Article 9.   In case of an application for indication of trust
                    property or for cancellation thereof, the application shall
                    be submitted in the prescribed form, together with the
                    share certificate.


                Chapter IV. Non-Possession of Share Certificates

(Notice of non-possession of share certificates)
       Article 10.  In case of notice of non-possession of share
                    certificate, the written notice shall be submitted in the
                    prescribed form, together with the share certificate;
                    provided, however, that when the share certificate has not
                    been issued, it is not necessary to submit the share
                    certificate.

                 2. The share certificates in respect of which notice has been
                    given under the preceding paragraph shall be treated as not
                    issued, and shall not be deposited.


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(Application for delivery of non-possessed share certificate)
       Article 11.  In order for a shareholder who has given notice of
                    non-possession of share certificate to apply for the
                    issuance of such share certificate, he/she shall submit the
                    application in the prescribed form; provided, however, that
                    no such application shall be made for issuance of any
                    certificate for less-than-one-unit shares.


                        Chapter V. Various Notifications

(Notification of addresses, names and seals of shareholders, etc.)
       Article 12.  Shareholders, registered pledgees or their legal
                    representatives shall file notification of their addresses,
                    names and seals in the prescribed form; provided, however,
                    that foreigners may substitute their specimen signatures
                    for seals.

                 2. The same shall also apply in case of any change occurring
                    in the matters notified under the preceding paragraph.

(Notification of places at which shareholders, etc. residing in foreign
countries are to receive notices)
       Article 13.  Shareholders, registered pledgees or their legal
                    representatives who reside in foreign countries shall, in
                    addition to the procedures under the preceding Article,
                    either appoint their standing proxies or set up the places
                    at which to receive notices, in Japan, and shall file
                    notification of such matters.

                 2. The provisions of the preceding Article shall apply mutatis
                    mutandis to standing proxies.

(Representative of corporation)
       Article 14.  If a shareholder is a corporation, such shareholder
                    shall file notification of its representative. In case of a
                    change in such representative, notification shall be filed
                    in the prescribed form, together with a certified extract
                    of the corporate register.

(Representative of jointly-owned share)
       Article 15.  The shareholders who own shares jointly shall select
                    their representative and file notification of such
                    representative in the prescribed form. The same shall also
                    apply in case of any change occurring in such
                    representative.


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(Alteration of matters stated in the register of shareholders and in the share
certificate)
       Article 16.  When a person desires to have the matters stated in the
                    register of shareholders and in the share certificate
                    altered for any of the causes mentioned below, he/she shall
                    submit the notification in the prescribed form, together
                    with the share certificate and a certified extract of the
                    family register or the corporate register; provided,
                    however, that when the share certificate has not been
                    issued, it is not necessary to submit the share certificate.
                    (1) Change of family name or given name;
                    (2) Appointment, change or discharge of legal
                        representatives, such as a person having
                        parental power, a guardian, etc.;
                    (3) Change of trade name or corporate name;
                    (4) Change of corporate organization.


              Chapter VI. Re-Issuance of Share Certificates, etc.

(Re-issuance due to division, consolidation, etc.)
       Article 17.  In case of an application for issuance of new share
                    certificates for any of the causes mentioned below, the
                    application shall be submitted in the prescribed form,
                    together with the share certificates; provided, however,
                    that when the share certificates have not been issued it is
                    not necessary to submit the share certificates.
                    (1) Division or consolidation of share certificates;
                    (2) In case a combined total of the shares represented by
                        the certificates for less-than-one-unit shares and the
                        less-than-one-unit shares for which no certificates
                        have been issued has reached one or more units of
                        shares in number.

                 2. In the case of the preceding paragraph, no application shall
                    be made for the issuance of any certificate for
                    less-than-one-unit shares.

(Re-issuance due to loss)
       Article 18.  In case of an application for issuance of a new share
                    certificate due to loss of share certificate, the
                    application shall be submitted in the prescribed form,
                    together with the authenticated copy or a certified copy of
                    the judgment of annulment.

(Re-issuance due to defacement or destruction)
       Article 19.  In case of an application for issuance of a new share
                    certificate due to defacement or


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                    destruction of share certificate, the application shall be
                    submitted in the prescribed form, together with the share
                    certificate; provided, however, that if it is difficult to
                    ascertain the indication on the share certificate concerned
                    or the genuineness thereof, the procedure under the
                    preceding Article shall be followed.


               Chapter VII. Purchase of Less-than-one-unit Shares

(Request for purchase)
       Article 20.  In the event that a shareholder requests to have
                    his/her less-than-one-unit shares purchased, the request
                    shall be submitted, in the prescribed form, together with
                    the share certificates; provided, however, that when the
                    share certificates have not been issued, it is not
                    necessary to submit the share certificates.

(Determination of purchase price)
       Article 21.  The per-share purchase price of less-than-one-unit
                    shares shall be an amount equal to the final price on the
                    market provided by the Tokyo Stock Exchange on the day on
                    which the request is made at the transfer agent's place of
                    handling the business or any of its intermediary offices
                    mentioned in Article 3; provided, however, that if there is
                    no trading on such day, such purchase price shall be an
                    amount equal to the price at which the first sale and
                    purchase transaction is validly concluded thereafter.

                 2. If the request for purchase is made on a holiday for the
                    market mentioned in the preceding paragraph, such purchase
                    price shall be an amount equal to the price at which the
                    first sale and purchase transaction is validly concluded on
                    the first trading day of that Exchange occurring after such
                    holiday.

                 3. The per-share purchase price mentioned in the preceding two
                    paragraphs multiplied by the number of the shares requested
                    to be purchased shall be the purchase price.

(Payment of purchase price)
       Article 22.  The purchase price of the shares in respect of which a
                    request to have them purchased was received shall be paid,
                    in principle, not later than the 6th business day of the
                    transfer agent counting from the day following the date of
                    determination of the purchase price, in such manner as
                    designated in the request for purchase, subject, however,
                    to the deduction of the purchase commission mentioned in
                    Article 25.


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(Time of passing of shares)
       Article 23.  The shares in respect of which a request to have them
                    purchased was received shall pass to the Company at such
                    time as the procedure for payment under the preceding
                    Article has been taken.

                 2. Notwithstanding the provision of the preceding paragraph,
                    if a request for purchase is made from the day as of which
                    the shares become ex-dividend (including interim dividend)
                    or ex-rights to the day as of which such dividends or
                    rights become conclusive, no registration of transfer of
                    such shares shall be made until the day as of which such
                    dividend or rights become conclusive.


                               Chapter VIII. Fees

(Fee for issuance of new share certificates)
       Article 24.  For issuance of new share certificates upon application
                    for delivery of share certificates not in possession or
                    upon division, defacement or destruction of share
                    certificates, the fee shall be in such amount as shall be
                    equal to the amount of the stamp tax; provided, however,
                    that no fee shall be charged in case of a division made for
                    the Company's own reason.

(Purchase commission)
       Article 25.  The purchase commission for less-than-one-unit shares
                    shall be an amount obtainable by prorating the amount of
                    the sale and purchase entrustment fee established by the
                    Tokyo Stock Exchange for the number of shares constituting
                    one unit of shares of the Company according to the number
                    of less-than-one-unit shares purchased.


           Chapter IX. Special Handling Relative to Beneficial Owners

(Making entries in the beneficial owners list)
       Article 26.  The Company shall make entries in the beneficial owners
                    list pursuant to notifications regarding beneficial owners
                    and beneficial owner entry forms submitted by the Japan
                    Securities Depository Center (hereinafter referred to as
                    "Center").


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(Beneficiary owner entry form)
       Article 27.  Beneficial owners shall submit the beneficial owner
                    entry forms through the participants; provided, however,
                    that in case where the total number of deposited shares is
                    less than one unit, a beneficial owner entry form shall not
                    be submitted.

(Matching and identification of shareholder)
       Article 28.  When a shareholder stated in the register of
                    shareholders and a beneficial owner stated in the
                    beneficial owners list is confirmed as being identical
                    pursuant to the stated address and name, the number of
                    shares stated in the register of shareholders and the
                    number of shares stated in the beneficial owners list shall
                    be added together for the purpose of such shareholder's
                    exercise of rights.

(Various notifications of beneficial owners)
       Article 29.  The provisions of Chapter V shall apply mutatis
                    mutandis to beneficial owners; provided, however, that the
                    submission of share certificate is not required with
                    respect to the alteration of the matters stated in the
                    beneficial owners list.

                 2. In the event that a beneficial owner submits the
                    notification mentioned in the preceding paragraph, he/she
                    shall submit the same through a participant; provided,
                    however, that when only the filed seal is to be altered, it
                    is not necessary to submit the notification through the
                    participant.

(Purchase of less-than-one-unit shares of beneficial owners)
       Article 30.  The provisions of Chapter VII shall apply mutatis
                    mutandis to beneficial owners; provided that in case where
                    a beneficial owner requests its less-than-one-unit share to
                    be purchased, he shall make the request through the
                    participant and the Center.

(Miscellaneous)
       Article 31.  Handling relative to beneficial owners shall be
                    performed pursuant to the provisions of this chapter;
                    provided, however, that in respect of matters which are not
                    covered in this chapter, various regulations of the Center
                    shall be observed.


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