##### Table of Contents



o
    
    REGISTRATION STATEMENT PURSUANT TOSECTION
12(b)OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company report
 
  
     JAPAN
 
  Title of each class
    
    Name of each exchange on which registered(1) Common Stock (the shares)
    
    New York Stock Exchange*(2) American Depositary Shares (ADSs), each of which represents one share
    
    New York Stock Exchange
  
 
 
  
 
 þ o
 o þ
 
 þ o
  þ o o
 
 þ o
 o þ




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##### 



Page numberCERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    1PART IItem 1.     Identity of Directors, Senior Management and Advisers
    
    
    2Item 2.     Offer Statistics and Expected Timetable
    
    
    2Item 3.     Key Information
    
    
    2A.
    
    Selected financial data
    
    
    2B.
    
    Capitalization and indebtedness
    
    
    3C.
    
    Reasons for the offer and use of proceeds
    
    
    3D.
    
    Risk factors
    
    
    3Item 4.     Information on the Company
    
    
    9A.
    
    History and development of the Company
    
    
    9B.
    
    Business overview
    
    
    10Products
    
    
    10Marketing and distribution
    
    
    13Service
    
    
    13Net sales by product group and geographic area
    
    
    14Seasonality
    
    
    15Sources of supply
    
    
    15Competition
    
    
    15Patents and licenses
    
    
    16Environmental regulations
    
    
    17C.
    
    Organizational structure
    
    
    19D.
    
    Property, plants and equipment
    
    
    20Item 5.     Operating and Financial Review and Prospects
    
    
    23A.
    
    Operating results
    
    
    23Overview
    
    
    23Critical accounting policies and estimates
    
    
    24Consolidated result of operations
    
    
    26Fiscal 2006 compared with fiscal 2005
    
    
    26Fiscal 2005 compared with fiscal 2004
    
    
    29Foreign operations and foreign currency transactions
    
    
    34Recent developments
    
    
    34B.
    
    Liquidity and capital resources
    
    
    34C.
    
    Research and development, patents and licenses
    
    
    35D.
    
    Trend information
    
    
    36Trend information
    
    
    36Forward looking statements
    
    
    37E.
    
    Off-balance sheet arrangements
    
    
    38F.
    
    Contractual obligations
    
    
    38Item 6.     Directors, Senior Management and Employees
    
    
    39A.
    
    Directors and senior management
    
    
    39B.
    
    Compensation
    
    
    44C.
    
    Board practices
    
    
    44D.
    
    Employees
    
    
    45E.
    
    Share ownership
    
    
    46Item 7.     Major Shareholders and Related Party Transactions
    
    
    47A.
    
    Major shareholders
    
    
    47B.
    
    Related party transactions
    
    
    47C.
    
    Interests of experts and counsel
    
    
    47




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Page numberItem 8.
    
    Financial Information
    
    
    48A.
    
    Consolidated financial statements and other financial information
    
    
    48Consolidated financial statements
    
    
    48Legal proceedings
    
    
    48Dividend policy
    
    
    49B.
    
    Significant changes
    
    
    49Item 9.
    
    The Offer and Listing
    
    
    50A.
    
    Offer and listing details
    
    
    50Trading in domestic markets
    
    
    50Trading in foreign markets
    
    
    51B.
    
    Plan of distribution
    
    
    51C.
    
    Markets
    
    
    51Item 10.
    
    Additional Information
    
    
    52A.
    
    Share capital
    
    
    52B.
    
    Memorandum and articles of association
    
    
    52C.
    
    Material contracts
    
    
    57D.
    
    Exchange controls
    
    
    57E.
    
    Taxation
    
    
    58F.
    
    Dividends and paying agents
    
    
    60G.
    
    Statement by experts
    
    
    60H.
    
    Documents on display
    
    
    60I.
    
    Subsidiary information
    
    
    60Item 11.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    60Market risk exposures
    
    
    60Equity price risk
    
    
    60Foreign currency exchange rate and interest rate risk
    
    
    61Item 12.
    
    Description of Securities Other than Equity Securities
    
    
    62PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    63Item 14.
    
    Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    63Item 15.
    
    Controls and Procedures
    
    
    63Item 16A.
    Audit Committee Financial Expert
    
    
    64Item 16B.
    Code of Ethics
    
    
    64Item 16C.
    Principal Accountant Fees and Services
    
    
    64Item 16D.
    Exemptions from the Listing Standards for Audit Committees
    
    
    66Item 16E.
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    67PART IIIItem 17.
    Financial Statements
    
    
    68Report of Independent Registered Public Accounting Firm
    
    
    69Consolidated Balance Sheets
    
    
    71Consolidated Statements of Income
    
    
    72Consolidated Statements of Stockholders Equity
    
    
    73Consolidated Statements of Cash Flows
    
    
    74Notes to Consolidated Financial Statements
    
    
    75Valuation and Qualifying Accounts
    
    
    120Item 18.
    Financial Statements
    
    
    121Item 19.
    Financial Statements and Exhibits
    
    
    121SIGNATURES
    
    
    122EXHIBIT INDEX
    
    
    123




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1




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PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 
 A. Selected financial data
  Selected financial data *1:
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002(Millions of yen except average number of shares and per share data)Net sales
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191
    
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072
    
    
    ¥
    2,940,128Operating
profit
    
    
    707,033
    
    
    
    583,043
    
    
    
    543,793
    
    
    
    454,424
    
    
    
    346,359Net income
    
    
    455,325
    
    
    
    384,096
    
    
    
    343,344
    
    
    
    275,730
    
    
    
    190,737Advertising
expenses .
    
    
    116,809
    
    
    
    106,250
    
    
    
    111,770
    
    
    
    100,278
    
    
    
    71,725Research and
development
expenses
    
    
    308,307
    
    
    
    286,476
    
    
    
    275,300
    
    
    
    259,140
    
    
    
    233,669Depreciation of
property,
plant and equipment
    
    
    235,804
    
    
    
    205,727
    
    
    
    174,397
    
    
    
    168,636
    
    
    
    158,469Capital
expenditures
    
    
    379,657
    
    
    
    383,784
    
    
    
    318,730
    
    
    
    210,038
    
    
    
    198,702Long-term debt,
excluding current
installments
    
    
    15,789
    
    
    
    27,082
    
    
    
    28,651
    
    
    
    59,260
    
    
    
    81,349Common
stock
    
    
    174,603
    
    
    
    174,438
    
    
    
    173,864
    
    
    
    168,892
    
    
    
    167,242Stockholders
equity
    
    
    2,986,606
    
    
    
    2,604,682
    
    
    
    2,209,896
    
    
    
    1,865,545
    
    
    
    1,591,950Total assets
    
    
    4,521,915
    
    
    
    4,043,553
    
    
    
    3,587,021
    
    
    
    3,182,148
    
    
    
    2,942,706Average number of
common shares
in thousands *3
    
    
    1,331,542
    
    
    
    1,330,761
    
    
    
    1,328,048
    
    
    
    1,317,974
    
    
    
    1,315,074Per share data *3:Net income:Basic
    
    ¥
    341.95
    
    
    ¥
    288.63
    
    
    ¥
    258.53
    
    
    ¥
    209.21
    
    
    ¥
    145.04Diluted
    
    
    341.84
    
    
    
    288.36
    
    
    
    257.85
    
    
    
    207.17
    
    
    
    143.20Cash dividends
declared
    
    
    83.33
    
    
    
    66.67
    
    
    
    43.33
    
    
    
    33.33
    
    
    
    20.00Cash dividends
declared (U.S.$)*2
    
    $
    0.709
    
    
    $
    0.580
    
    
    $
    0.401
    
    
    $
    0.309
    
    
    $
    0.169
  1.
    
    The above financial data are prepared in accordance with U.S. generally accepted accounting
principles.2.
    
    Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average
of the noon buying rates for yen in New York city as reported by the Federal Reserve Bank of New York
in effect on the date of each semiannual dividend payment.3.
    

    The Company has made a three-for-two stock split on July 1, 2006. The average number of common shares and the
per share data have been adjusted to reflect the stock split.
 2




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Yen exchange rates per U.S. dollar:
    
    Average
    
    Term end
    
    High
    
    Low2002
    
    
    124.81
    
    
    
    118.75
    
    
    
    115.71
    
    
    
    134.772003
    
    
    115.83
    
    
    
    107.13
    
    
    
    106.93
    
    
    
    121.422004
    
    
    107.63
    
    
    
    102.68
    
    
    
    102.56
    
    
    
    114.302005 -
    
    
    110.74
    
    
    
    117.88
    
    
    
    120.93
    
    
    
    102.262006 - Year
    
    
    115.99
    
    
    
    119.02
    
    
    
    119.81
    
    
    
    110.07- 1(st) half
    
    
    
    
    
    
    114.51
    
    
    
    119.07
    
    
    
    110.07- July
    
    
    
    
    
    
    114.44
    
    
    
    117.44
    
    
    
    113.97- August
    
    
    
    
    
    
    117.35
    
    
    
    117.35
    
    
    
    114.21- September
    
    
    
    
    
    
    117.99
    
    
    
    118.02
    
    
    
    116.04- October
    
    
    
    
    
    
    116.82
    
    
    
    119.81
    
    
    
    116.82- November
    
    
    
    
    
    
    115.55
    
    
    
    118.40
    
    
    
    115.55- December
    
    
    
    
    
    
    119.02
    
    
    
    119.02
    
    
    
    114.982007 - January
    
    
    
    
    
    
    121.02
    
    
    
    121.81
    
    
    
    118.49- February
    
    
    
    
    
    
    118.33
    
    
    
    121.77
    
    
    
    118.33-
March
    
    
    
    
    
    117.56
    
    
    118.15
    
    
    116.01
 
 B. Capitalization and indebtedness
  
 C. Reasons for the offer and use of proceeds
  
 D. Risk Factors
   Risks Related to Canons Industries
 Canon has invested and will continue to invest heavily in next-generation technologies. If the
market for these technologies does not develop as Canon expects or if its competitors produce these
or competing technologies in a more timely or effective manner, Canons operating results could be
materially adversely affected.
   If Canon does not effectively manage transitions in its products and services, its operating
results may decline.
  3




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Canons digital camera business operates in a highly competitive environment.
  Because the semiconductor industry is highly cyclical, Canon may be adversely affected by any
downturn in the industry.
   Downturns in the semiconductor industry have caused Canons customers to change their
operating strategies, which in turn may affect Canons business.
   The semiconductor equipment industry is characterized by rapid technological change. If Canon
does not constantly develop new products to keep pace with technological change and meet its
customer requirements, Canon may lose customers and its business may suffer.
  Growing popularity of High Definition (HD) and increased diversification of recording media
may adversely affect Canons video camcorder business.
   Risks Related to Canons Business
 Canon derives a significant percentage of its revenues from Hewlett-Packard.
  Canon depends on a limited number of suppliers for certain key components.
  4




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Although competition is increasing in the market for sales of supplies and services following
initial product placement, Canon maintains a high market share in sales of such supplies. As a
result, Canon may be subject to antitrust-related suits, investigations or proceedings which may
adversely affect its operating results or reputation.
  Increases in counterfeit Canon products may adversely affect Canons brand image and its
operating results.
  Per unit production costs are highest when a new product is introduced, and if such new
products are not successful or if Canon fails to achieve cost reductions over time, Canons gross
profits may be adversely affected.
  
    
    engineering improvements;
    
    economies of scale;
    
    improvements in manufacturing processes;
    
    improved serviceability of products; and
    
    reduced inventories of parts and products
  Cyclical patters in sales of Canons products make planning and inventory management difficult
and future financial results less predictable.
  Canons business is subject to changes in the sales environment.
  Canon is subject to financial and reputational risks due to product quality and liability
issues.
  Canons success depends on the value of its brand name, and if the value of the brand name is
diminished, operating results and prospects will be adversely affected.
  5




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A substantial portion of Canons business activity is conducted outside Japan, exposing Canon
to the risks of international operations.
  
    
    less developed technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canons services;
    
    difficulties in recruiting and retaining personnel;
    
    potentially adverse tax consequences;
    
    longer payment cycles;
    
    unfavorable political or economic factors; and
    
    unexpected legal or regulatory changes.
      Canon depends on efficient logistics services to distribute its products worldwide.
     Economic trends in Canons major markets may adversely affect its results of operations.
   6




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Risks Related to Environmental Issues
 Canons business is subject to environmental laws and regulations.
   Environmental clean-up and remediation costs relating to Canons properties and associated
litigation could decrease Canons net cash flow, adversely affect its results of operations and
impair its financial condition.
   Risks Related to Intellectual Property
 Canon may be subject to intellectual property litigation and infringement claims, which could
cause it to incur significant expenses or prevent it from selling its products.
   
    
    competitors will be able to develop similar technology independently;
    
    Canons pending patent applications may not be issued;
    
    the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and
    
    intellectual property laws may not adequately protect Canons intellectual property, particularly in some emerging markets.
   
    
    refrain from selling the affected product in certain markets;
    
    make royalty payments or pay monetary damages;
    
    seek to develop non-infringing technologies, which may not be feasible; or
    
    seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all.
   Disputes involving payment of remuneration for employee inventions may materially affect
Canons brand image as well as its business.
  7




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##### Table of Contents



Other Risks
 Canon must attract and retain  highly qualified professionals.
   Canons physical facilities, information systems and information security systems are subject
to damage as a result of disasters, outages or similar events.
  Canons operating and financing activities expose Canon to foreign currency exchange and
interest rate risks that may adversely affect its revenues and profitability.
  The cooperation and alliances with, and strategic investments in, third parties undertaken by
Canon may not produce successful results. Also, unexpected emergence of strong competitors through
mergers and acquisitions, may affect Canons business environment.
   Canon may be adversely affected by fluctuations in the stock and bond markets.
  Confidential information may be inadvertently disclosed which could lead to damage claims or
harm Canons reputation, and may have an adverse effect upon
Canon s business.
   8




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Item 4. Information on the Company
 
 A. History and development of the Company
     
    
    In 2001, Canon Vietnam Co., Ltd. was established in Hanoi, Vietnam as a production site
for bubble jet printers.
    
    In 2001, Canon Zhongshan Business Machines Co., Ltd. was established in Zhongshan, China
as a production site for laser beam printers.
    
    In 2001, Canon (Suzhou) Inc. was established in Suzhou, China as a production site for
digital copying machines and digital multifunction devices.
    
    In January 2003, Canon Aptex Inc. and Copyer Co., Ltd., two of Canon Inc.s
manufacturing subsidiaries in Japan, merged to become Canon Finetech Inc. The merger was
conducted with the aim of concentrating and further strengthening the core competencies of
the two merged companies in office equipment-related technologies.
    
    In April 2003, Fukushima Canon Inc. was established as a wholly-owned subsidiary through
the spin-off of Fukushima Plant, with the aim of establishing a high value-added
manufacturing company equipped with product-launching capability.
    
    In April 2003, Canon N.T.C.s marketing operations were spun off and merged with
Canon System & Support Inc., and its real estate operations were spun off into Canon
Facility Management, Inc. Following the corporate spin-offs, Canon N.T.C.s operations
focuses on development and manufacturing.
    
    In January, 2004, Canon Precision Inc., or Canon Precision, a wholly-owned subsidiary
of Canon Inc., merged with Hirosaki Precision, Inc., or Hirosaki Precision, a wholly-owned
subsidiary of Canon Precision. Hirosaki Precision was merged into Canon Precision, the
surviving company. Canon Precision targets the improved efficiency and specialization of
business operations. Since both Canon Precision and Hirosaki Precision were consolidated
subsidiaries of Canon Inc., the merger has no impact on Canons current or future business
results.
    
    On October 15, 2004, the Company entered into an agreement with Canon Sales Co., Inc. and
Canotec Co., Inc., or Canotec, joint equity shareholders of Niigata Canotec Co., Inc., or
Niigata Canotec, to acquire all outstanding shares of Niigata Canotec. Therefore, on
January 1, 2005, Niigata Canotec became a wholly-owned subsidiary of the Company and
changed its name to Canon Imaging System Technologies Inc. By making Canon Imaging System
Technologies, Inc. a wholly-owned subsidiary of the Company, Canon aims to raise the level
of its technical capacity and improve development efficiency by enabling closer
coordination.
    
    On January 1, 2005, Canotec and FastNet, Inc. merged, and the merged entity changed
its name to Canon Network Communications, Inc. The purpose of the merger was to increase
management efficiency by consolidating the Canon Groups network and Internet service
operations. Canon Network Communications, Inc. aims to strengthen Information Technology
Management Services, dealing with all stages from the establishment of comprehensive
network systems to their operation and management.
    
    On September 30, 2005, Canon acquired all of the issued and outstanding shares of
ANELVA Corporation, which possesses advanced vacuum technology, and made it into a
subsidiary. ANELVA Corporations corporate name was changed to Canon ANELVA Corporation as
of October 1, 2005. By making Canon ANELVA Corporation a subsidiary of the Company, Canon
aims to promote the in-house production of manufacturing equipment which is indispensable
to differentiate Canon products from the competitions in various fields, including Canons
new display business.
    
    On October 19, 2005, Canon acquired the share of NEC Machinery Corporation (listed on
the Second Section of the Osaka Securities Exchange Co.,Ltd.), which possesses advanced
automation technologies, through tender offer and made it into a subsidiary. NEC Machinery
Corporations corporate name was changed to Canon Machinery Inc. as of December 17, 2005.
By making Canon Machinery Inc. a subsidiary of the Company, Canon aims to make further
advance in its production reform activities, including the automation of production
processes for Canon products.
    
    On December 27, 2006, Canon Electronics Inc. acquired shares of e-System Corporation
(listed on the Hercules Section of the Osaka Securities Exchange) through a third party
distribution in order to strengthen its groups information-related business and develop
it into a core business, and made that company its subsidiary.
  9




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B. Business overview
       
 Products
  -
Business machines -
  Office
imaging products
        10




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Computer
peripherals
      Business
information products
     Cameras
      11




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Optical and other products
        12




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Marketing and distribution
        
 Service
    13




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##### Table of Contents



NET SALES BY PRODUCT GROUP
 Years ended December 312006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004(Millions of yen except percentage data)Business machines:Office imaging products
    
    ¥
    1,185,925
    
    
    
    2.8
    %
    
    ¥
    1,153,240
    
    
    
    2.9
    %
    
    ¥
    1,120,972Computer peripherals
    
    
    1,398,408
    
    
    
    12.3
    
    
    
    1,244,906
    
    
    
    8.3
    
    
    
    1,149,914Business information products
    
    
    106,754
    
    
    
    2.4
    
    
    
    104,255
    
    
    
    -10.9
    
    
    
    117,0672,691,087
    
    
    
    7.5
    
    
    
    2,502,401
    
    
    
    4.8
    
    
    
    2,387,953Cameras
    
    
    1,041,865
    
    
    
    18.5
    
    
    
    879,186
    
    
    
    15.2
    
    
    
    763,079Optical and other products
    
    
    423,807
    
    
    
    13.7
    
    
    
    372,604
    
    
    
    17.6
    
    
    
    316,821Total
    
    ¥
    4,156,759
    
    
    
    10.7
    
    
    ¥
    3,754,191
    
    
    
    8.3
    
    
    ¥
    3,467,853
 NET SALES BY GEOGRAPHIC AREA
 Years ended December 312006
    
    
    change
    
    
    2005
    
    
    Change
    
    
    2004(Millions of yen except percentage data)JapanUnaffiliated customers
    
    ¥
    1,037,657
    
    
    
    5.9
    %
    
    ¥
    979,748
    
    
    
    6.6
    %
    
    ¥
    919,153Intersegment
    
    
    2,311,482
    
    
    
    13.0
    
    
    
    2,046,173
    
    
    
    8.7
    
    
    
    1,882,973Total
    
    
    3,349,139
    
    
    
    10.7
    
    
    
    3,025,921
    
    
    
    8.0
    
    
    
    2,802,126AmericasUnaffiliated customers
    
    ¥
    1,277,867
    
    
    
    12.1
    %
    
    ¥
    1,139,784
    
    
    
    7.8
    %
    
    ¥
    1,057,066Intersegment
    
    
    4,764
    
    
    
    -35.8
    
    
    
    7,424
    
    
    
    -16.2
    
    
    
    8,863Total
    
    
    1,282,631
    
    
    
    11.8
    
    
    
    1,147,208
    
    
    
    7.6
    
    
    
    1,065,929EuropeUnaffiliated customers
    
    ¥
    1,313,919
    
    
    
    11.5
    %
    
    ¥
    1,178,672
    
    
    
    8.1
    %
    
    ¥
    1,090,712Intersegment
    
    
    3,586
    
    
    
    62.6
    
    
    
    2,206
    
    
    
    -47.0
    
    
    
    4,161Total
    
    
    1,317,505
    
    
    
    11.6
    
    
    
    1,180,878
    
    
    
    7.9
    
    
    
    1,094,873OthersUnaffiliated customers
    
    ¥
    527,316
    
    
    
    15.6
    %
    
    ¥
    455,987
    
    
    
    13.7
    %
    
    ¥
    400,922Intersegment
    
    
    792,018
    
    
    
    22.5
    
    
    
    646,530
    
    
    
    9.3
    
    
    
    591,677Total
    
    
    1,319,334
    
    
    
    19.7
    
    
    
    1,102,517
    
    
    
    11.1
    
    
    
    992,599EliminationsUnaffiliated customers
    
    ¥
    
    
    
    
    
    %
    
    ¥
    
    
    
    
    
    %
    
    ¥
    Intersegment
    
    
    -3,111,850
    
    
    
    
    
    
    
    -2,702,333
    
    
    
    
    
    
    
    -2,487,674Total
    
    
    -3,111,850
    
    
    
    
    
    
    
    -2,702,333
    
    
    
    
    
    
    
    -2,487,674ConsolidatedUnaffiliated customers
    
    ¥
    4,156,759
    
    
    
    10.7
    %
    
    ¥
    3,754,191
    
    
    
    8.3
    %
    
    ¥
    3,467,853Intersegment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,156,759
    
    
    
    10.7
    
    
    
    3,754,191
    
    
    
    8.3
    
    
    
    3,467,853
 
 Note:
    
    The segments are defined under Japanese GAAP. In grouping of segment information by product, Japanese GAAP requires that consideration be given to similarities of
product types and characteristics, manufacturing methods, sales markets, and other factors that are similar. In grouping of segment information by geographic area, Japanese
GAAP requires that consideration be given to geographic proximity, as well as similarities of economic activities, interrelationships of business activities and other similar
factors. Segment information by geographic area is determined by the location of the Company or its relevant subsidiary making the sale.Total operating profit by category is discussed in Item 5A Operating Results. 14




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##### Table of Contents



Seasonality
  
 Sources of supply
    
 Competition
    
    
    Business machines
   
    
    Cameras
    15




---



##### Table of Contents




    
    Steppers and Aligners
    
 Patents and licenses
     Oki Electric Industry Co., Ltd.
    
    (LED printers, multifunction printers and facsimiles)Matsushita Electric Industrial Co., Ltd.
    
    (electrophotography)Ricoh Company, Ltd.
    
    (electrophotography)Sanyo Electric Co., Ltd.
    
    (electronic still camera)Samsung Electronics Co., Ltd.
    
    (laser beam printers, multifunction printers and facsimiles)Brother Industries, Ltd.
    
    (electrophotography and facsimiles)Kyocera Mita Corporation
    
    (electrophotography)Konica Minolta Holding Co.,Ltd.
    
    (business machines)Toshiba Corporation
    
    (business machines)Sharp Corporation
    
    (electrophotography)
   Jerome H. Lemelson Patent Incentives, Inc.
    
    (computer systems, image recording apparatus, and communication apparatus)Energy Conversion Devices, Inc.
    
    (solar battery)Honeywell Inc.
    
    (camera and video products)Gilbert P. Hyatt U.S. Philips Corporation
    
    (microcomputer)Nano-Proprietary Inc.
    
    (FED technology)St. Clair Intellectual Property Consultants, Inc.
    
    (Selection of digital cameras image format)
 16




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##### Table of Contents



International Business Machines Corporation
    
    (information handling systems)Hewlett-Packard Company
    
    (bubble jet printers)Xerox Corporation
    
    (business machines)Matsushita Electric Industrial Co., Ltd.
    
    (video tape recorders and video cameras)Eastman Kodak Co.
    
    (electrophotography and image processing technology)Ricoh Company, Ltd.
    
    (electrophotography products, facsimiles and word processors)
  
 Environmental regulations
  1.        European Union Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (the RoHS Directive), and Directive on Waste Electrical and
Electronic Equipment (theWEEE Directive).
   2.
    
    Soil Pollution Prevention Law of Japan
    3.
    
    Law for Promotion of Effective Utilization of Resources of Japan
  17




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##### Table of Contents



4.
    
    Law on Promoting Green Purchasing of Japan
   
    manufacture of products that consume less electricity to prevent global warming and to conserve energy,

    use of recycled parts and recycled materials,
    reduction of the types of raw materials used in order to conserve resources, and
    acceleration of the date by which the requirements of the law are implemented to promote the elimination of hazardous substances.
  5.    European Union Directive on Batteries and Accumulators and Waste Batteries and Accumulators
  6.    Administrative Measures on the Control of Pollution Caused by Electronic Information Products
of China
     7.    U.S. States Legislations concerning Waste Electric and Electronic Products and RoHS-like
Regulations
   8.    The European Framework for the management of chemical substances, or REACH Regulations
  9.    The European Framework for the Setting of Requirements for Energy-Using Products (so-called
EuP directive)
  18




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##### Table of Contents



10.    Kyoto Protocol to the United Nations Framework Convention on Climate Change
 2 2
      
 C. Organizational structure
   Proportion of
    
    
    Proportion ofownership interest
    
    
    voting powerName of company
    
    Head office location
    
    
    owned
    
    
    heldCanon Marketing Japan Inc.
    
    Tokyo, Japan
    
    
    50.3
    %
    
    
    50.7
    %Canon U.S.A., Inc.
    
    New York, U.S.A.
    
    
    100.0
    %
    
    
    100.0
    %Canon Europa N.V.
    
    Amstelveen, The Netherlands
    
    
    100.0
    %
    
    
    100.0
    %
 19




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##### Table of Contents



D. Property, plants and equipment
  Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Headquarters, Tokyo
    
    
    2,468
    
    
    R&D, corporate administration, other functionsCanon
Global Management Institute, Tokyo
    
    
    100
    
    
    HRD Training & administrationMizonokuchi HRD center, Kanagawa
    
    
    78
    
    
    HRD Training & administrationKosugi Office, Kanagawa
    
    
    398
    
    
    Development of software for office imaging productsFuji-Susono Research Park, Shizuoka
    
    
    1,039
    
    
    R&D in electrophotographic technologiesHiratsuka
Development Center, Kanagawa
    
    
    348
    
    
    Development of displays, electronic devicesAyase Office, Kanagawa
    
    
    394
    
    
    R&D and manufacturing of semiconductor devicesOptics R&D Center, Tochigi
    
    
    473
    
    
    R&D in optical technologies, development and sales of
broadcasting equipmentTamagawa Office, Kanagawa
    
    
    95
    
    
    Quality Engineering DivisionYako Development Center, Kanagawa
    
    
    902
    
    
    Development of inkjet printers, Ink Jet chemical productsUtsunomiya Plant, Tochigi
    
    
    857
    
    
    Manufacturing of EF lenses, video camcorder lenses,
broadcasting lenses, lenses for business machines, other
specialized optical lensesToride Plant, Ibaraki
    
    
    2,914
    
    
    R&D in electrophotographic technologies, mass-production
trials and support; manufacturing of office imaging
products,chemical productsAmi Plant, Ibaraki
    
    
    1,252
    
    
    semiconductor production equipment; design and
manufacturing of factory automation equipment and metal
moldsUtsunomiya
Optical Products Plant, Tochigi
    
    
    1,420
    
    
    R&D, manufacturing, sales and servicing of semiconductor
equipment; sales of broadcasting equipment; R&D and
sales of medical equipmentCanon
Electronics Inc.,Saitama and Gunma
    
    
    1,153
    
    
    Development, production and sales of camera components,
magnetic heads, sensors, micrographics, document
scanners, LBPs, laser scanner units, portable data
terminals, semiconductor equipmentCanon Finetech Inc, , Ibaraki, Tokyo,
Yamanashi, and Fukui
    
    
    763
    
    
    Production and sales of business machines, business
machine peripherals, chemical products, business-use
printersCanon Precision Inc.,Aomori
    
    
    1,089
    
    
    Development, production and sales of motors; production
of toner cartridges, sensorsOptron Inc., Ibaraki
    
    
    143
    
    
    Polishing of optical crystals (for steppers, cameras,
telescopes), vapor deposition materials
 20




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##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Canon Chemicals Inc.,Ibaraki
    
    1,783
    
    
    Toner cartridges and advanced-function parts, plastic precision-molded parts, metal moldsCanon Components Inc.,Saitama
    
        602
    
    
    Image sensor units, printed circuit boards, Ink Jet print heads/ink tanksOita Canon Inc., Oita
    
    1,344
    
    
    SLR cameras, digital SLR and compact cameras, digital video camcorders, visual communication camerasNagahama Canon Inc., Shiga
    
    1,100
    
    
    LBPs, toner cartridges, a-si drumsOita Canon Materials Inc., Oita
    
    1,200
    
    
    Chemical products for copying machines and printersUeno Canon Materials Inc., Mie
    
    632
    
    
    Chemical products for copying machines and printersFukushima Canon Inc., Fukushima
    
    971
    
    
    Production of inkjet printers, Ink Jet print heads/ink tanks; analysis of software and fontsCanon Semiconductor Equipment Inc., Ibaraki
    
    495
    
    
    Development and production of semiconductor production-related equipment; production of small-sized copying machines and copying unitsCanon Ecology
Industry Inc., Ibaraki and Saitama
    
    369
    
    
    Recycling of toner cartridges; business machine repairNisca Corporation, Yamanashi
    
    465
    
    
    Development, design, production and sales of business machines, information products, optical equipmentMiyazaki Daishin Canon Co., Ltd., Miyazaki
    
    130
    
    
    Digital video camcorders, digital cameras, electronics packagingCanon ANELVA Corporation
    
    490
    
    
    Electron devices, panel devices, electronic components, for R&DCanon Machinery Inc.
    
    293
    
    
    Semiconductor, electronic components, energy relationSED Inc.
    
    739
    
    
    Flat-screen SED(Surface-conduction Electron-emitter Display)panels
 21




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##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedOverseas
    
    (Thousands ofsquare feet)[Europe]Canon Giessen GmbH, Giessen, Germany
    
    362
    
    
    Production and remanufacturing of copying machines; refilling of toner cartridges; remanufacturing of semiconductor production equipmentCanon Bretagne S.A.S., Liffre, France
    
    506
    
    
    Production of low-speed copying machines and toner cartridges; recycling of toner cartridges[America]Canon Virginia, Inc.,Virginia, U.S.
    
    828
    
    
    Production of toner cartridges, toner for copying machines[Asia]Canon Inc., Taiwan, Taiwan
    
    415
    
    
    Production of SLR and compact cameras, EFS and other lenses, precision-metal moldsCanon Opto (Malaysia) Sdn. Bhd., Selangor,
Malaysia
    
    561
    
    
    Production of Digital cameras, EF lenses, optical lens partsCanon Dalian
Business Machines, Inc. , Dalian China
    
    1,250
    
    
    Production and recycling of toner cartridges; production of LBPs, MFDsCanon Zhuhai, Inc., Zhuhai, China
    
    836
    
    
    Production of Compact cameras, digital cameras, LBPs, MFDs, image scanners, contact image sensorsTianjin Canon Inc., Tianjin, China
    
    148
    
    
    Production and sales of copying machinesCanon
Hi-Tech Thailand Ltd., Ayutthaya, Thailand
    
    1,301
    
    
    Ink Jet printers, personal-use copying machines, facsimile machines, MFDsCanon
Ayutthaya Thailand Ltd., Thailand
    
    182
    
    
    Ink Jet printers, personal-use copying machines, facsimile machines, MFDsCanon
Engineering Thailand Ltd., Ayutthaya,
Thailand
    
    130
    
    
    Metal molds, plastic injection mold partsCanon
Zhougshan Business Machines Co., Ltd., Zhougshan, China
    
    729
    
    
    Production of LBPsCanon
Vietnam Co., Ltd., Hanoi, Vietnam
    
    1,772
    
    
    Production of Ink Jet printers, LBPsCanon
(Suzhou) Inc., Suzhou, China
    
    805
    
    
    Production of Color and monochrome digital copying machinesCanon
Finetech(Suzhou) Business Machines Inc.
, Suzhou, China
    
    351
    
    
    Production of digital printers, peripherals, service partsThai Nisca Co.Ltd., Ayutthaya, Thailand
    
    190
    
    
    Production and sales of optical equipment and OA equipmentCanon
Finetech Industries Development Co., Ltd., Shenzhen, China
    
    216
    
    
    Production and sales of copying machines, semi-finished products, parts
  22




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##### Table of Contents



Item 5. Operating and Financial Review and Prospects
 
 A. Operating Results
  
 Overview
   Economic environment
  Market environment
  Summary of operations
  Key performance indicators
  KEY PERFORMANCE INDICATORS
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Net sales (Millions of yen)
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191
    
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072
    
    
    ¥
    2,940,128Gross profit to net sales ratio
    
    
    49.6
    %
    
    
    48.5
    %
    
    
    49.4
    %
    
    
    50.3
    %
    
    
    47.6
    %R&D expense to net sales ratio
    
    
    7.4
    %
    
    
    7.6
    %
    
    
    7.9
    %
    
    
    8.1
    %
    
    
    7.9
    %Operating profit to net sales ratio
    
    
    17.0
    %
    
    
    15.5
    %
    
    
    15.7
    %
    
    
    14.2
    %
    
    
    11.8
    %Inventory turnover within days
    
    45 days
    
    
    47 days
    
    
    49 days
    
    
    49 days
    
    
    51 daysDebt to total assets ratio
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1.1
    %
    
    
    3.1
    %
    
    
    5.0
    %Stockholders equity to total assets ratio
    
    
    66.0
    %
    
    
    64.4
    %
    
    
    61.6
    %
    
    
    58.6
    %
    
    
    54.1
    %
 
 Note: Inventory turnover within days; Inventory divided by net sales for the previous six months,
multiplied by 182.5. 23




---



##### Table of Contents



Critical accounting policies and estimates
           24




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25




---



##### Table of Contents



Consolidated result of operations
 
 Fiscal 2006 compared with fiscal 2005
  2006
    
    
    Change
    
    
    2005(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191Operating profit
    
    
    707,033
    
    
    
    +21.3
    
    
    
    583,043Income before income taxes
and minority interests
    
    
    719,143
    
    
    
    +17.5
    
    
    
    612,004Net income
    
    
    455,325
    
    
    
    +18.5
    
    
    
    384,096Net income per share:Basic
    
    
    341.95
    
    
    
    +18.5
    
    
    
    288.63Diluted
    
    
    341.84
    
    
    
    +18.5
    
    
    
    288.36
  Sales
    Cost of sales
  Gross profit
  Operating expenses
  Operating profit
  Other income (deductions)
  Income before income taxes and minority interests
  26




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##### Table of Contents



Income taxes
  Net income
    
    
    The business machines product groupincludes office imaging products, computer
peripherals and business information products.
 
    
    Office imaging products include office network digital MFDs, color
network digital MFDs, office copying machines, personal-use copying machines and
full-color copying machines.
    
    Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.
    
    Business information products include micrographic equipment, personal computers and
calculators.
 
    
    The cameras product groupincludes single lens reflex
(SLR) cameras, compact cameras, digital cameras and
digital video camcorders.
    
    The optical and other products product groupincludes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.
 Sales by product
  2006
    
    
    Change
    
    
    2005(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,185,925
    
    
    
    +2.8
    %
    
    ¥
    1,153,240Computer peripherals
    
    
    1,398,408
    
    
    
    +12.3
    
    
    
    1,244,906Business information products
    
    
    106,754
    
    
    
    +2.4
    
    
    
    104,255Total business machines
    
    
    2,691,087
    
    
    
    +7.5
    
    
    
    2,502,401Cameras
    
    
    1,041,865
    
    
    
    +18.5
    
    
    
    879,186Optical and other products
    
    
    423,807
    
    
    
    +13.7
    
    
    
    372,604Total
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191
     27




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##### Table of Contents



Sales by region
  2006
    
    
    Change
    
    
    2005(Millions of yen, except percentage data)Japan
    
    ¥
    932,290
    
    
    
    +8.9
    %
    
    ¥
    856,205Americas
    
    
    1,283,646
    
    
    
    +12.0
    
    
    
    1,145,950Europe
    
    
    1,314,305
    
    
    
    +11.3
    
    
    
    1,181,258Others
    
    
    626,518
    
    
    
    +9.8
    
    
    
    570,778Total
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191
       Operating profit by product
    28




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##### Table of Contents



Fiscal 2005 compared with fiscal 2004
  2005
    
    
    Change
    
    
    2004(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    3,754,191
    
    
    
    +   8.3
    %
    
    ¥
    3,467,853Operating profit
    
    
    583,043
    
    
    
    +   7.2
    
    
    
    543,793Income before income taxes and minority interests
    
    
    612,004
    
    
    
    +  10.8
    
    
    
    552,116Net income
    
    
    384,096
    
    
    
    +  11.9
    
    
    
    343,344Net income per share:Basic
    
    
    288.63
    
    
    
    +  11.6
    
    
    
    258.53Diluted
    
    
    288.36
    
    
    
    +  11.8
    
    
    
    257.85
  Sales
    Cost of sales
  Gross profit
  Operating expenses
  Operating profit
  Other income (deductions)
  Income before income taxes and minority interests
  29




---



##### Table of Contents



Income taxes
  Net income
  Product information
  
    
    The business machines product groupincludes office imaging products, computer
peripherals and business information products.
 
    
    Office imaging products include office network digital MFDs, color network digital
MFDs, office copying machines, personal-use copying machines and full-color copying
machines.
    
    Computer peripherals include laser beam printers, single function inkjet printers,
inkjet multifunction peripherals and image scanners.
    
    Business information products include micrographic equipment, personal computers and
calculators.
 
    
    The cameras product groupincludes SLR cameras, compact cameras, digital cameras and
digital video camcorders.
    
    The optical and other products product groupincludes steppers for
semiconductor chip production, mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical equipment.
  Sales by product
  2005
    
    

    Change
    
    

    2004(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,153,240
    
    
    
    + 2.9
    %
    
    ¥
    1,120,972Computer peripherals
    
    
    1,244,906
    
    
    
    + 8.3
    
    
    
    1,149,914Business information products
    
    
    104,255
    
    
    
    -10.9
    
    
    
    117,067Total business machines
    
    
    2,502,401
    
    
    
    +4.8
    
    
    
    2,387,953Cameras
    
    
    879,186
    
    
    
    + 15.2
    
    
    
    763,079Optical and other products.
    
    
    372,604
    
    
    
    +17.6
    
    
    
    316,821Total
    
    ¥
    3,754,191
    
    
    
    +8.3
    %
    
    ¥
    3,467,853
     30




---



##### Table of Contents



Sales by region
  2005
    
    
    Change
    
    
    2004(Millions of yen, except percentage data)Japan
    
    ¥
    856,205
    
    
    
    +  0.8
    %
    
    ¥
    849,734Americas
    
    
    1,145,950
    
    
    
    +  8.2
    
    
    
    1,059,425Europe
    
    
    1,181,258
    
    
    
    +  8.0
    
    
    
    1,093,295Others
    
    
    570,778
    
    
    
    +  22.6
    
    
    
    465,399Total
    
    ¥
    3,754,191
    
    
    
    +  8.3
    %
    
    ¥
    3,467,853
       Operating profit by product
    31




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##### Table of Contents



Segment information by product and geographic area
   As of/for the year ended December 31, 2006OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,691,087
    
    
    ¥
    1,041,865
    
    
    ¥
    423,807
    
    
    
    
    
    
    ¥
    4,156,759Intersegment
    
    
    
    
    
    
    
    
    
    
    190,687
    
    
    ¥
    (190,687
    )
    
    
    Total
    
    
    2,691,087
    
    
    
    1,041,865
    
    
    
    614,494
    
    
    
    (190,687
    )
    
    
    4,156,759Operating cost and expenses
    
    
    2,091,858
    
    
    
    773,127
    
    
    
    573,019
    
    
    
    11,722
    
    
    
    3,449,726Operating profit
    
    ¥
    599,229
    
    
    ¥
    268,738
    
    
    ¥
    41,475
    
    
    ¥
    (202,409
    )
    
    ¥
    707,033Assets
    
    ¥
    1,617,198
    
    
    ¥
    542,866
    
    
    ¥
    501,008
    
    
    ¥
    1,860,843
    
    
    ¥
    4,521,915Depreciation and amortization
    
    
    127,873
    
    
    
    28,756
    
    
    
    37,018
    
    
    
    68,647
    
    
    
    262,294Capital expenditure
    
    
    154,259
    
    
    
    31,517
    
    
    
    36,272
    
    
    
    157,609
    
    
    
    379,657
 As of/for the year ended December 31, 2005OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,502,401
    
    
    ¥
    879,186
    
    
    ¥
    372,604
    
    
    
    
    
    
    ¥
    3,754,191Intersegment
    
    
    
    
    
    
    
    
    
    
    158,114
    
    
    ¥
    (158,114
    )
    
    
    Total
    
    
    2,502,401
    
    
    
    879,186
    
    
    
    530,718
    
    
    
    (158,114
    )
    
    
    3,754,191Operating cost and expenses
    
    
    1,960,373
    
    
    
    705,480
    
    
    
    491,898
    
    
    
    13,397
    
    
    
    3,171,148Operating profit
    
    ¥
    542,028
    
    
    ¥
    173,706
    
    
    ¥
    38,820
    
    
    ¥
    (171,511
    )
    
    ¥
    583,043Assets
    
    ¥
    1,427,277
    
    
    ¥
    480,957
    
    
    ¥
    517,527
    
    
    ¥
    1,617,792
    
    
    ¥
    4,043,553Depreciation and amortization
    
    
    123,037
    
    
    
    27,662
    
    
    
    28,011
    
    
    
    47,231
    
    
    
    225,941Capital expenditure
    
    
    201,887
    
    
    
    57,678
    
    
    
    15,955
    
    
    
    108,264
    
    
    
    383,784
 As of/for the year ended December 31, 2004OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,387,953
    
    
    ¥
    763,079
    
    
    ¥
    316,821
    
    
    
    
    
    
    ¥
    3,467,853Intersegment
    
    
    
    
    
    
    
    
    
    
    138,419
    
    
    ¥
    (138,419
    )
    
    
    Total
    
    
    2,387,953
    
    
    
    763,079
    
    
    
    455,240
    
    
    
    (138,419
    )
    
    
    3,467,853Operating cost and expenses
    
    
    1,866,869
    
    
    
    632,281
    
    
    
    426,408
    
    
    
    (1,498
    )
    
    
    2,924,060Operating profit
    
    ¥
    521,084
    
    
    ¥
    130,798
    
    
    ¥
    28,832
    
    
    ¥
    (136,921
    )
    
    ¥
    543,793Assets
    
    ¥
    1,338,817
    
    
    ¥
    399,207
    
    
    ¥
    418,418
    
    
    ¥
    1,430,579
    
    
    ¥
    3,587,021Depreciation and amortization
    
    
    115,830
    
    
    
    21,880
    
    
    
    24,895
    
    
    
    30,087
    
    
    
    192,692Capital expenditure
    
    
    134,128
    
    
    
    39,783
    
    
    
    52,264
    
    
    
    92,555
    
    
    
    318,730
  (1)
    
    General corporate expenses of ¥ 202,328 million, ¥ 171,522 million and ¥ 136,929 million in
the years ended December 31, 2006, 2005 and 2004, respectively, are included in Corporate and
Eliminations. For the fiscal year ended December 31, 2004, a gain of ¥ 17,141 million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.(2)
    
    Corporate assets of ¥ 1,860,933 million, ¥ 1,239,255 million and ¥ 1,430,599 million as of
December 31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
Corporate and Eliminations.(3)
    
    The segments are defined under Japanese GAAP. In grouping of segment information by product,
Japanese GAAP requires that consideration be given to similarities of product types and
characteristics, manufacturing methods, sales markets, and other factors that are similar.
 32




---



##### Table of Contents



As of/for the year ended December 31, 2006Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    1,037,657
    
    
    ¥
    1,277,867
    
    
    ¥
    1,313,919
    
    
    ¥
    527,316
    
    
    
    
    
    
    ¥
    4,156,759Intersegment
    
    
    2,311,482
    
    
    
    4,764
    
    
    
    3,586
    
    
    
    792,018
    
    
    ¥
    (3,111,850
    )
    
    
    Total
    
    
    3,349,139
    
    
    
    1,282,631
    
    
    
    1,317,505
    
    
    
    1,319,334
    
    
    
    (3,111,850
    )
    
    
    4,156,759Operating cost and expenses
    
    
    2,558,685
    
    
    
    1,236,138
    
    
    
    1,272,463
    
    
    
    1,275,817
    
    
    
    (2,893,377
    )
    
    
    3,449,726Operating profit
    
    ¥
    790,454
    
    
    ¥
    46,493
    
    
    ¥
    45,042
    
    
    ¥
    43,517
    
    
    ¥
    (218,473
    )
    
    ¥
    707,033Assets
    
    ¥
    2,644,116
    
    
    ¥
    432,001
    
    
    ¥
    682,381
    
    
    ¥
    339,314
    
    
    ¥
    424,103
    
    
    ¥
    4,521,915
 As of/for the year ended December 31, 2005Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    979,748
    
    
    ¥
    1,139,784
    
    
    ¥
    1,178,672
    
    
    ¥
    455,987
    
    
    
    
    
    
    ¥
    3,754,191Intersegment
    
    
    2,046,173
    
    
    
    7,424
    
    
    
    2,206
    
    
    
    646,530
    
    
    ¥
    (2,702,333
    )
    
    
    Total
    
    
    3,025,921
    
    
    
    1,147,208
    
    
    
    1,180,878
    
    
    
    1,102,517
    
    
    
    (2,702,333
    )
    
    
    3,754,191Operating cost and expenses
    
    
    2,362,019
    
    
    
    1,110,415
    
    
    
    1,147,658
    
    
    
    1,071,155
    
    
    
    (2,520,099
    )
    
    
    3,171,148Operating profit
    
    ¥
    663,902
    
    
    ¥
    36,793
    
    
    ¥
    33,220
    
    
    ¥
    31,362
    
    
    ¥
    (182,234
    )
    
    ¥
    583,043Assets
    
    ¥
    2,419,012
    
    
    ¥
    406,101
    
    
    ¥
    569,750
    
    
    ¥
    312,472
    
    
    ¥
    336,218
    
    
    ¥
    4,043,553
 As of/for the year ended December 31, 2004Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    919,153
    
    
    ¥
    1,057,066
    
    
    ¥
    1,090,712
    
    
    ¥
    400,922
    
    
    
    
    
    
    ¥
    3,467,853Intersegment
    
    
    1,882,973
    
    
    
    8,863
    
    
    
    4,161
    
    
    
    591,677
    
    
    ¥
    (2,487,674
    )
    
    
    Total
    
    
    2,802,126
    
    
    
    1,065,929
    
    
    
    1,094,873
    
    
    
    992,599
    
    
    
    (2,487,674
    )
    
    
    3,467,853Operating cost and expenses
    
    
    2,206,141
    
    
    
    1,025,628
    
    
    
    1,071,552
    
    
    
    965,080
    
    
    
    (2,344,341
    )
    
    
    2,924,060Operating profit
    
    ¥
    595,985
    
    
    ¥
    40,301
    
    
    ¥
    23,321
    
    
    ¥
    27,519
    
    
    ¥
    (143,333
    )
    
    ¥
    543,793Assets
    
    ¥
    1,793,679
    
    
    ¥
    341,616
    
    
    ¥
    533,865
    
    
    ¥
    271,566
    
    
    ¥
    646,295
    
    
    ¥
    3,587,021
  (1)
    
    General corporate expenses of ¥ 202,328 million, ¥ 171,522 million and ¥ 136,929 million in
the years ended December 31, 2006, 2005 and 2004, respectively, are included in Corporate and
Eliminations. For the fiscal year ended December 31, 2004, a gain of ¥ 17,141 million is also
included, which relates to the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities.(2)
    
    Corporate assets of ¥ 1,860,933 million, ¥ 1,239,255 million and ¥ 1,430,599 million as of
December 31, 2006, 2005 and 2004, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
Corporate and Eliminations.(3)
    
    Segment information by geographic area is determined by the location of the Company or its
relevant subsidiary making the sale. The segments are defined under Japanese GAAP. In grouping
of segment information by geographic area, Japanese GAAP requires that consideration be given
to geographic proximity, as well as similarities of economic activities, interrelationships of
business activities and other similar factors.
 33




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##### Table of Contents



Foreign operations and foreign currency transactions
   
 Recent developments
   
 B. Liquidity and capital resources
           34




---



##### Table of Contents



C. Research and development, patents and licenses
  Canon has established the following as key strategies:
    
    Realize the overwhelming No.1 position worldwide in all current core businesses,
    
    Expand operations through diversification and
    
    Identify new business domains and accumulate necessary technological capabilitiesCanon is striving to achieve these strategies as follows:
    
    Realize the No.1 position worldwide in all current core businesses: Product R&D
divisions will work together with the corporate R&D headquarters to bolster product
competitiveness through development of superior next-generation products.
    
    Expand operations through diversification: Canon is studying existing technologies to
expand business opportunities and develop required technologies for new SED businesses to
make SEDs the windows for images and information in living rooms.
    
    Identify new business domains and accumulate necessary technological capabilities: Canon
has established a Strategic Committee for New Businesses. In
addition, Canon is developing and
strengthening relationships with universities and other research institutes to carry on
fundamental research and develop cutting-edge technologies. Canon has signed a
comprehensive partnership agreement with Tokyo Institute of Technology in 2005 regarding
joint research on advanced materials and imaging technologies. Canon has also tied up with
Kyoto University to develop next-generation medical-image processing technologies.
    
    
    Core Technology Development Headquarters, where component engineering and base
technology R&D, such as optics technology and nanotechnology, is conducted
    
    Leading-Edge Technology Development Headquarters, where most advanced technology
R&D, aiming to create new technological capabilities, is conducted
    
    Platform Technology Development Headquarters, where platform technology R&D, such
as system Large-Scale Integration (LSI) chips, network technology and visual information
technology, is conducted
    
    Device Technology Development Headquarters, where key device R&D, such as for
semiconductor devices, is conducted
  ®
 35




---



##### Table of Contents



D. Trend information
 
 Trend information
      Business machines segment
            36




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##### Table of Contents



Cameras segment
           Optical and other products segment
     
 Forward looking statements
  37




---



##### Table of Contents



E. Off-balance sheet arrangements
   
 F. Contractual obligations
  Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsContractual
obligations:Long-Term Debt:Capital Lease Obligations
    
    ¥
    10,585
    
    
    
    5,263
    
    
    
    4,850
    
    
    
    465
    
    
    
    7Other Long-Term Debt
    
    
    20,467
    
    
    
    10,000
    
    
    
    10,432
    
    
    
    22
    
    
    
    13Operating Lease Obligations
    
    
    60,378
    
    
    
    16,025
    
    
    
    22,565
    
    
    
    10,532
    
    
    
    11,256Purchase commitments for :Property Plant and Equipment.
    
    
    107,685
    
    
    
    107,685
    
    
    
    
    
    
    
    
    
    
    
    Parts and Raw Materials
    
    
    85,403
    
    
    
    85,403
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    284,518
    
    
    
    224,376
    
    
    
    37,847
    
    
    
    11,019
    
    
    
    11,276
    38




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##### Table of Contents



Item 6. Directors, Senior Management and Employees
 
 A. Directors and senior management
  Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Fujio Mitarai
    
    Chairman & CEO
    
    4/1961
    
    Entered the Company(Sept. 23, 1935)
    
    
    
    1/1979
    

President of Canon U.S.A., Inc.3/1981
    
    Director3/1985
    
    Managing Director1/1989
    
    In charge of HQ administration3/1989
    
    Senior Managing Director3/1993
    
    Executive Vice President9/1995
    
    President & CEO3/2006
    
    Chairman of the Board & President & CEO5/2006
    
    Chairman & CEO*Tsuneji Uchida
    
    President & COO
    
    4/1965
    
    Entered the Company(Oct. 30, 1941)
    
    
    
    4/1995
    
    Group Executive of Lens Products Group3/1997
    
    Director4/1997
    
    Deputy Chief Executive of Camera Operations HQ/
Group Executive of Photo Products Group4/1999
    
    Chief Executive of Camera Operations HQ7/1999
    
    In charge of promotion of digital photo
business1/2000
    
    In charge of promotion of digital photo home
business1/2001
    
    Chief Executive of Image Communications
Products HQ3/2001
    
    Managing Director3/2003
    
    Senior Managing Director3/2006
    
    Executive Vice President5/2006
    
    President & COO *Toshizo Tanaka
    
    Executive Vice President
    
    4/1964
    
    Entered the Company(Oct. 8, 1940)
    

(Group Executive of Finance & Accounting HQ 
Group Executive
of Policy and Economy Research
HQ)
    
    1/1992
    
    Deputy Group Executive of Finance & Accounting HQ3/1995
    
    Director4/1995
    
    Group Executive of Finance & Accounting HQ*3/1997
    
    Managing Director3/2001
    
    Senior Managing Director1/2007
    
    Group Executive of Policy and Economy Research HQ*3/2007
    
    Executive Vice President*Nobuyoshi Tanaka
    
    Senior Managing Director
    
    4/1970
    
    Entered the Company(Dec. 23, 1945)
    
    (Group Executive of Corporate Intellectual Property & Legal
HQ)
    
    1/1991
    
    Senior General Manager of Semiconductor Production Equipment Development Center3/1993
    
    Director4/1993
    
    Chief Executive of Optical Products HQ4/1999
    
    Group Executive of Corporate Intellectual
Property & Legal HQ*3/2001
    
    Managing Director3/2006
    
    Senior Managing Director*Junji Ichikawa
    
    Senior Managing Director
    
    4/1965
    
    Entered Shiba Electronics Co., Ltd.(Feb. 9, 1943)
    
    (Chief Executive of Optical Products HQ)
    
    1/1970
    
    Entered the Company4/1994
    
    Group Executive of Peripheral Group 13/1997
    
    Director4/1997
    
    Deputy Chief Executive of Peripheral Products
HQ4/2000
    
    Chief Executive of Peripheral Products HQ3/2001
    
    Managing Director4/2003
    
    Group Executive of Production Management HQ4/2004
    

 Chief Executive of Optical Products HQ*3/2006
    
    Senior Managing Director*
 39




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Hajime Tsuruoka
    
    Senior Managing Director
    
    3/1970
    
    Entered Meiji Seika Kaisha Ltd.(July 9, 1943)
    
    
    
    11/1973
    
    Entered the Company4/1995
    
    President of Canon Italia S.p.A.3/1997
    
    Director9/1997
    
    President of Canon Deutschland GmbH3/1999
    
    President of Canon Europa N.V.*3/2001
    
    Managing Director3/2006
    
    Senior Managing Director*Akiyoshi Moroe
    
    Managing Director
    
    4/1968
    
    Entered the Company(Sept. 28, 1944)
    
    (Group Executive of General
Affairs HQ, Group Executive of
External Relations HQ)
    
    7/1996
    
    Deputy Group of Executive of
Human Resource
Management & Organization
HQ3/1999
    
    Director4/1999
    
    Group Executive of General Affairs HQ*10/2000
    
    Group Executive of Information & Communications
Systems HQ3/2003
    
    Managing Director*5/2006
    
    Group Executive of External Relations HQ*Kunio Watanabe
    
    Managing Director
    
    4/1969
    
    Entered the Company(Oct. 3, 1944)
    
    (Group Executive of Corporate
Strategy & Development HQ,
    
    4/1995
    
    Group Executive of Corporate
Strategy & Development
HQ*Deputy Group Executive of
Policy and Economy Research HQ)
    
    3/19993/2003
    
    DirectorManaging Director*1/2007
    
    Deputy Group Executive of Policy and Economy
Research HQ*Yoroku Adachi
    
    Managing Director
    
    4/1970
    
    Entered the Company(Jan. 11, 1948)
    
    
    
    3/2001
    
    Chairman of Canon Singapore Pte. Ltd.
Chairman of Canon Hong Kong Co., Ltd.
Director4/2003
    
    President of Canon (China) Co., Ltd.3/2005
    
    Managing Director *4/2005
    
    President of Canon U.S.A., Inc.*Yasuo Mitsuhashi
    
    Managing Director
    
    4/1974
    
    Entered the Company(Nov. 23, 1949)
    
    (Chief Executive of Peripheral
Products HQ)
    
    2/2001
    
    Chief Executive of Chemical Products HQ3/2001
    
    Director4/2003
    
    Chief Executive of Peripheral Products HQ*3/2005
    
    Managing Director *Tomonori Iwashita
    
    Managing Director
    
    4/1972
    
    Entered the Company(Jan. 28, 1949)
    
    (Chief Executive of Image
    
    4/1999
    
    Senior General Manager ofCommunications
Products HQ)
    
    
    
    Camera Development CenterGroup Executive of Global
    
    1/2001
    
    Group Executive of PhotoEnvironment Promotion HQ)
    
    
    
    Products Group3/2003
    
    Director4/2003
    

Deputy Chief Executive of Image Communication Products HQ4/2006
    
    Chief Executive of Image
Communication Products HQ*3/2007
    

Managing Director*3/2007
    
    Group Executive of Global Environment Promotion HQ*Masahiro Osawa
    
    Managing Director
    
    4/1971
    
    Entered the Company(May 26, 1947)
    
    (Group Executive of
Global Procurement HQ)
    
    7/1997
2/2003
    
    Vice President of Canon
U.S.A., Inc.
Senior Vice President of Canon U.S.A., Inc.7/2003
    
    Deputy Group Executive of Finance & Accounting HQ3/2004
    
    Director4/2004
    
    Group Executive of Global Procurement HQ*3/2007
    
    Managing Director*Shigeyuki Matsumoto
    
    Managing Director
    
    4/1977
    
    Entered the Company(Nov. 15, 1950)
    
    (Group Executive of Device Technology
Development Headquarters)
    
    1/2002
    
    Group Executive of Device
Technology Development
Headquarters*3/2004
    
    Director3/2007
    
    Managing Director*
 40




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Katsuichi Shimizu
    
    Director
    
    4/1970
    
    Entered the Company(Nov. 13, 1946)
    

(Chief
Executive of Inkjet
Products HQ)
    
    4/2001
    
    Deputy Chief Executive of
Office Imaging Products HQ
HQ3/2003
    
    Director*4/2003
    
    Chief Executive of Inkjet Products HQ*Ryoichi Bamba
    
    Director
    
    4/1972
    
    Entered the Company(Nov. 25, 1946)
    
    
    
    4/1998
    
    Senior Vice President of Canon U.S.A., Inc.2/2003
    
    Executive Vice President of Canon U.S.A., Inc.*3/2003
    
    Director*Toshio Honma
    
    Director
    
    4/1972
    
    Entered the Company(Mar. 10, 1949)
    
    (Group Executive of L
Printer
Products HQ)
    
    4/2001
    
    Deputy Chief Executive of i
Printer Products HQ3/2003
    
    Director*4/2003
    
    Group Executive of Business Promotion HQ7/2003
    
    Group Executive of L Printer Business Promotion HQ1/2007
    
    Group Executive of L Printer Products HQ*Keijiro Yamazaki
    
    Director
    
    4/1971
    
    Entered the Company(Oct. 14, 1948)
    
    (Group Executive of Human Resource Management & Organization HQ,
    
    4/1999
    
    General
Manager of Human Resource Management & Organization Div.1/2000
    
    Deputy Group Executive of Human Resource
Management & Organization HQ3/2004
    
    Director*4/2004
    
    Group Executive of Information &
Communications Systems HQ3/2006
    
    Group Executive of Human Resource Management &
Organization HQ*Shunichi Uzawa
    
    Director
    
    8/1978
    
    Entered the Company(Jan. 26, 1949)
    
    (Group Executive of Core
Technology
Development
HQ)
    
    1/1998
    
    Senior
General Manager of

Nano-technology Research
Center4/2001
    
    Deputy Group Executive of Display Development HQ3/2004
    
    Director*4/2004
    
    Group Executive of SED Development HQ10/2004
    
    President of SED Inc.1/2006
    
    Group Executive of Core Technology Development HQ*Masaki Nakaoka
    
    Director
    
    4/1975
    
    Entered the Company(Jan. 3, 1950)
    
    (Group Executive of Office
Imaging Products HQ)
    
    1/1997
    
    Senior
General Manager of
Office Imaging
Products
Development Center 14/1999
    
    Group Executive of Office Imaging Products Group 14/2001
    
    Deputy Chief Executive of Office Imaging
Products HQ3/2004
    
    Director*4/2005
    
    Chief Executive of Office Imaging Products HQ*Toshiyuki Komatsu
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 19, 1950)
    
    (Group Executive of
Leading-Edge Technology
Development HQ)
    
    1/1998
    
    Senior General Manager of
Canon Research Center1/2000
    
    Deputy Group Executive of Core Technology
Development HQ3/2004
    
    Director*4/2004
    
    Group Executive of Leading-Edge
Technology Development HQ*7/2005
    
    Group Executive of Core Technology
Development HQHaruhisa Honda
    
    Director
    
    4/1974
    
    Entered the Company(Oct. 14, 1948)
    
    (Chief Executive of
Chemical Products
Operations
Group Executive of
Product
Engineering
HQ)
    
    4/1995
    
    Senior
General Manager of
Cartridge Development
Center3/2004
    
    Director*4/2004
    
    Chief Executive of Chemical
Products Operations*3/2007
    
    Group
Executive of Production Engineering HQ*
 41




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Tetsuro Tahara
    
    Director
    
    4/1971
    
    Entered the Company(Jan. 31, 1949)
    
    (Group Executive of Global
Manufacturing & Logistics
HQ)
    
    4/1999
    
    Senior General Manager of
Office
Imaging Products
Production Management
Center4/2002
    
    Deputy Chief Executive of
Office Imaging Products HQ4/2003
    
    President of Canon (Suzhou) Inc.3/2006
    
    Director*4/2006
    
    Group Executive of Global
Manufacturing & Logistics HQ*Seijiro Sekine
    
    Director
    
    4/1972
    
    Entered the Company(Oct. 20, 1948)
    
    (Group Executive of
Information &
Communication Systems HQ)
    
    4/1995
    
    General Manager of Business
Information Systems
Division1/2001
    
    Deputy Group Executive of Information
& Communication Systems HQ10/2004
    
    Group Executive of Logistics HQ3/2006
    
    Director*4/2006
    
    Group Executive of Information
& Communication Systems HQ,
Deputy Group Executive of Global
Manufacturing & Logistics HQ1/2007
    
    Group Executive of Information &
Communication Systems HQ*Shunji Onda
    
    Director
    
    4/1972
    
    Entered Canon Sales Co., Inc.(Mar. 13, 1950)
    

(Deputy Group Executive of Finance &
    
    
    
    (renamed Canon Marketing
Japan Inc.)Accounting
HQ)
    
    7/1980
    
    Entered the Company1/1999
    
    General Manager of Peripheral Products
Chief Executive Office1/2002
    
    General Manager of Finance Division4/2004
    
    Senior General Manager of Optical Products
Business Administration Center3/2006
    
    Director*4/2006
    
    Deputy Group Executive of Finance &
Accounting HQ*Kazunori Fukuma
    
    Director
    
    4/1972
    
    Entered Toshiba Corporation(Feb. 24, 1950)
    
    
    
    6/2005
    
    Executive Officer & Corporate Vice President
of Toshiba Corporation1/2006
    
    President of SED Inc.*1/2007
    
    Entered the Company3/2007
    
    Director*Hideki Ozawa
    
    Director
    
    4/1973
    
    Entered Canon Sales Co., Inc.(Apr. 28, 1950)
    
    
    
    
    
    (renamed Canon Marketing Japan Inc.)7/1980
    
    Entered the Company4/2004
    
    President of Canon Singapore Pte. Ltd.4/2005
    
    President of Canon (China) Co.,Ltd*.3/2007
    
    Director*Masaya Maeda
    
    Director
    
    4/1975
    
    Entered the Company(Oct. 17, 1952)
    
    (Group Executive of Digital Imaging
Business Group)
    
    1/2002
    
    Senior General Manager of Digital Consumer
Products Development Center
of Toshiba Corporation7/2003
    
    Deputy Group Executive of Digital Imaging
Business Group1/2006
    
    Group Executive of Digital Imaging Business Group*3/2007
    
    Director*
 42




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    

    commencement

    
    (*current position/function)Teruomi Takahashi
    
    Corporate Auditor
    
    9/1971
    
    Entered the Company(June 10, 1943)
    
    
    
    3/1999
    
    Director4/1999
    
    Chief Executive of Chemical Products HQ2/2001
    
    Chief Executive of BJ Products HQ4/2001
    
    Chief Executive of i Printer Products HQ4/2003
    
    Chief Executive of Chemical Products HQ3/2004
    
    Corporate Auditor *Kunihiro Nagata
    
    Corporate Auditor
    
    4/1970
    
    Entered the Company(Mar.16, 1948)
    
    
    
    1/1991
    
    General Manager of Business Machines
Accounting Dept.4/1995
    
    Senior General Manager of Business
Machines Accounting & Production
Planning Center10/2000
    
    General Manager of Corporate Planning Division1/2003
    
    Deputy Group Executive of Corporate
Strategy Development HQ3/2004
    
    Corporate Auditor *Tadashi Ohe
    
    Corporate Auditor
    
    4/1969
    
    Registration as a lawyer*(May 20, 1944)
    
    
    
    4/1989
    
    Instructor
of Judicial Research and Training Institute3/1994
    
    Corporate Auditor, the Company*Yoshinobu Shimizu
    
    Corporate Auditor
    
    3/1973
    
    Registered as Certified Public Accountant*(Oct. 26, 1944)
    
    
    
    6/1990
    
    Representative Partner of Showa Ota & Co.5/2002
    
    Deputy Chief Executive Officer of Century
Ota Showa & Co. (renamed Ernst & Young ShinNihon)3/2006
    
    Corporate Auditor, the Company*Minoru Shishikura
    
    Corporate Auditor
    
    4/1976
    
    Entered The Dai-Ichi Mutual
Life Insurance Co.(Sept. 13, 1953)
    
    
    
    4/1998
    
    General Manager of Metropolitan Corporate
Loan Dept. of The Dai-Ichi Mutual Life Insurance Co.4/2000
    
    General Manager of Loan Department of The
Dai-Ichi Mutual Life Insurance Co.4/2002
    
    General Manager of Credit Department of The
Dai-Ichi Mutual Life Insurance Co.3/2006
    
    Corporate Auditor, the Company*
 Term
     Board of Directors and Corporate Auditors
     43




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##### Table of Contents



B. Compensation
    
 C. Board practices
  44




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##### Table of Contents



D. Employees
  Total
    
    
    Japan
    
    
    Americas
    
    
    Europe
    
    
    OthersDecember 31, 2006Business machines
    
    
    79,293
    
    
    
    30,046
    
    
    
    7,409
    
    
    
    9,202
    
    
    
    32,636Cameras
    
    
    16,841
    
    
    
    5,422
    
    
    
    1,652
    
    
    
    1,381
    
    
    
    8,386Optical and other products
    
    
    16,494
    
    
    
    9,768
    
    
    
    1,164
    
    
    
    703
    
    
    
    4,859Corporate
    
    
    5,871
    
    
    
    5,517
    
    
    
    44
    
    
    
    
    
    
    
    310Total
    
    
    118,499
    
    
    
    50,753
    
    
    
    10,269
    
    
    
    11,286
    
    
    
    46,191December 31, 2005Business machines
    
    
    77,906
    
    
    
    29,964
    
    
    
    7,297
    
    
    
    8,988
    
    
    
    31,657Cameras
    
    
    18,308
    
    
    
    5,263
    
    
    
    1,552
    
    
    
    1,405
    
    
    
    10,088Optical and other products
    
    
    13,762
    
    
    
    8,249
    
    
    
    999
    
    
    
    435
    
    
    
    4,079Corporate
    
    
    5,607
    
    
    
    5,161
    
    
    
    90
    
    
    
    94
    
    
    
    262Total
    
    
    115,583
    
    
    
    48,637
    
    
    
    9,938
    
    
    
    10,922
    
    
    
    46,086December 31, 2004Business machines
    
    
    74,772
    
    
    
    29,928
    
    
    
    7,833
    
    
    
    8,997
    
    
    
    28,014Cameras
    
    
    16,534
    
    
    
    5,008
    
    
    
    1,400
    
    
    
    1,402
    
    
    
    8,724Optical and other products
    
    
    11,397
    
    
    
    6,458
    
    
    
    908
    
    
    
    391
    
    
    
    3,640Corporate
    
    
    5,554
    
    
    
    4,709
    
    
    
    117
    
    
    
    108
    
    
    
    620Total
    
    
    108,257
    
    
    
    46,103
    
    
    
    10,258
    
    
    
    10,898
    
    
    
    40,998
    45




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##### Table of Contents



E. Share ownership
  Name
    
    Position
    
    Number of sharesFujio Mitarai
    
    Chairman & CEO
    
    
    92,300Tsuneji Uchida
    
    President & COO
    
    
    9,600Toshizo Tanaka
    
    Executive Vice President
    
    
    17,752Nobuyoshi Tanaka
    
    Senior Managing Director
    
    
    19,432Junji Ichikawa
    
    Senior Managing Director
    
    
    17,096Hajime Tsuruoka
    
    Senior Managing Director
    
    
    12,700Akiyoshi Moroe
    
    Managing Director
    
    
    16,932Kunio Watanabe
    
    Managing Director
    
    
    13,352Yoroku Adachi
    
    Managing Director
    
    
    10,742Yasuo Mitsuhashi
    
    Managing Director
    
    
    8,677Tomonori Iwashita
    
    Managing Director
    
    
    6,250Masahiro Osawa
    
    Managing Director
    
    
    5,342Shigeyuki Matsumoto
    
    Managing Director
    
    
    4,152Katsuichi Shimizu
    
    Director
    
    
    9,937Ryoichi Bamba
    
    Director
    
    
    5,400Toshio Honma
    
    Director
    
    
    10,492Keijiro Yamazaki
    
    Director
    
    
    5,850Shunichi Uzawa
    
    Director
    
    
    6,392Masaki Nakaoka
    
    Director
    
    
    3,400Toshiyuki Komatsu
    
    Director
    
    
    2,900Haruhisa Honda
    
    Director
    
    
    5,789Tetsuro Tahara
    
    Director
    
    
    1,652Seijiro Sekine
    
    Director
    
    
    4,990Shunji Onda
    
    Director
    
    
    4,402Kazunori Fukuma
    
    Director
    
    
    1,000Hideki Ozawa
    
    Director
    
    
    719Masaya Maeda
    
    Director
    
    
    1,000Teruomi Takahashi
    
    Corporate Auditor
    
    
    10,846Kunihiro Nagata
    
    Corporate Auditor
    
    
    2,150Tadashi Ohe
    
    Corporate Auditor
    
    
    24,300Yoshinobu Shimizu
    
    Corporate Auditor
    
    
    1,100Minoru Shishikura
    
    Corporate Auditor
    
    
    1,600Total
    
    
    338,246
  46




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 
 A. Major shareholders
  Name of major shareholder
    
    Shares owned
    
    
    Percentage(In thousands)The Dai-Ichi Mutual Life Insurance Co.
    
    
    93,312
    
    
    
    7.0
    %Japan Trustee Services Bank, Ltd.
    
    
    82,773
    
    
    
    6.2
    %(Trust Account)The Master Trust Bank of Japan, Ltd.
    
    
    74,645
    
    
    
    5.6
    %(Trust Account)Moxley & Co.
    
    
    68,908
    
    
    
    5.2
    %State Street Bank and Trust Company 505103
    
    
    34,955
    
    
    
    2.6
    %State Street Bank and Trust Company
    
    
    34,198
    
    
    
    2.6
    %Mizuho Corporate Bank, Ltd.
    
    
    28,419
    
    
    
    2.1
    %Nomura Securities Co., Ltd.
    
    
    27,175
    
    
    
    2.0
    %Sompo Japan Insurance Inc.
    
    
    22,910
    
    
    
    1.7
    %BNP Paribas
Securities (Japan) Ltd
    
    
    21,105
    
    
    
    1.6
    %
    
 B. Related party transactions
    
 C. Interests of experts and counsel
  47




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##### Table of Contents



Item 8. Financial Information
 
 A. Consolidated financial statements and other financial information
 
 Consolidated financial statements
   
 Legal proceedings
  
    
    In December 2002, the European Commission instituted an investigation into the
printer and supply market. Canon received a questionnaire in connection with the
investigation of the printer and supply market in January 2003 and Canon has submitted its
response. The investigation is yet to be closed.
    
    In January 2003, the Dusseldorf District Court in Germany issued rulings in Canons
favor in two patent infringement actions filed by Canon against Pelikan Hardcopy
Deutschland GmbH and Pelikan Hardcopy European Logistics & Services GmbH (collectively,
Pelikan Hardcopy). Pelikan Hardcopy has appealed against the decision. In November 2003,
the Dusseldorf District Court in Germany issued a ruling in Canons favor in another
patent infringement action filed by Canon against Pelikan Hardcopy. Pelikan Hardcopy has
appealed against the decision. The Dusseldorf High Court issued rulings in Canons favor
in one of the three appeals by Pelikan Hardcopy. Pelikan Hardcopy has applied for further
appeal to the Supreme Court. In November 2005, the Dusseldorf High Court issued a ruling
in Canons favor in another of the three appeals by Pelikan hard copy. The ruling has
become finally binding, and now the procedure for enforcing the ruling is underway. The
remaining one of the appeals has been suspended by the Court since April 2004.
    
    In February 2003, a lawsuit was filed by St. Clair Intellectual Property Consultants,
Inc. (St. Clair) against the Company and one of its subsidiaries in the United States
District Court of Delaware, which accused the Company of infringement of patents related
to certain technology. In connection with this case, in October 2004, a jury
preliminarily found damages against the Company of approximately ¥ 4,000 million based on a
percentage of certain product sales in the United States through 2003. Subsequent to this
jury finding, St. Clair also made a motion to the court for damages relating to certain
2004 sales, using the same royalty rate awarded by the jury. In March 2006, the Company
and St. Clair entered into a settlement agreement, pursuant to which the lawsuit was
withdrawn in July 2006.
    
    In October 2003, a lawsuit was filed by a former employee against the Company at the
Tokyo District Court in Japan. The lawsuit alleges that the former employee is entitled
to ¥ 45,872 million as compensation for an invention related to certain technology used by
the Company, and the former employee has sued for a partial payment of ¥ 1,000 million and
interest thereon. On January 30, 2007, the Tokyo District Court in Japan ordered the
Company to pay the former employee approximately ¥ 33.5 million and interest thereon. On
the same day, the Company appealed the decision.
    
    In Germany, Verwertungsgesellschaft Wort (VG Wort), a collecting agency
representing certain copyright holders, has filed a series of lawsuits seeking to impose
copyright levies upon digital products such as PCs and printers, that allegedly enable the
reproduction of copyrighted materials, against the companies importing and distributing
these digital products. In May 2004, VG Wort filed a civil lawsuit against
Hewlett-Packard GmbH seeking levies on multi-function printers. This is an industry test
case under which Hewlett-Packard GmbH represents other companies sharing common interests,
and Canon has undertaken to be bound by the final decision of this court case. The court
of first instance and the court of appeals held that the multi-function printers were
subject to a levy. In particular, the court of appeals ordered Hewlett-Packard GmbH to
pay the amount equivalent to the levies imposed on photocopiers (EUR 38.35 to EUR 613.56
per unit, depending on printing speed and color printing capability). This lawsuit is
currently under appeal before the German Federal Supreme Court. With regard to
single-function printers, VG Wort filed a separate lawsuit in January 2006 against Canon,
seeking payment of copyright levies, and the court of first instance in Düsseldorf ruled
in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such
decision in December 2006. In a similar court case, which does not include Canon, seeking
copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and
Kyocera Mita Deutschland GmbH, the court of appeals in Düsseldorf rejected such alleged
levies on January 23, 2007. Canon, other companies and the industry associations have
expressed opposition to such extension of the levy scope and the final conclusion of these
court cases including the amount of levies to be imposed, remains uncertain.
    
    In April 2004, Canon filed two patent infringement actions against RecycleAssist
Co., Ltd. (Recycle Assist) before the Tokyo District Court. In December 2004, the Tokyo
District Court issued rulings in Recycle Assists favor in the two actions. In December
2004, Canon appealed against the decisions of the two actions. In January 2006, the
Intellectual Property High Court issued a ruling in favor of Canon in one of the two
appeal cases. In February 2006, Recycle Assist further appealed against this ruling of
the Intellectual Property High Court. Canon has withdrawn the remaining appeal case in
view of the judicial economy.
    
    In April 2005, a lawsuit was filed by Nano-Proprietary Inc. (NPI) against the
Company and Canon U.S.A. Inc. in the United States District Court of
Texas alleging that SED Inc., a joint venture company established by the Company and Toshiba
Corporation, is not regarded as a Subsidiary under the Patent License Agreement between
the Company and NPI (the Agreement) and that the extension of the license to SED Inc.
constitutes a breach of the Agreement. NPI also alleges that there was fraudulent conduct
by the Company in executing the Agreement, and requests rescission of the Agreement and
compensatory damages. This case is still pending and the final outcome, including any
liability to the Company, is not yet determined, but in November 2006, the Court denied the
Companys Motion for a summary judgment that SED Inc. is a Subsidiary of the Company. In
January 2007, the Company purchased all the shares of SED Inc. owned by Toshiba Corporation,
making SED Inc. a 100% owned subsidiary of the Company. However, on February 22, 2007, the
court issued a summary judgment stating that SED Inc. (before the above stock purchase) was
not a Subsidiary of the Company, and that the Agreement has been terminated due to a
material breach of the Agreement by the Company. The remaining pending issues at the
district court are whether the Company was engaged in fraudulent conduct and whether
compensatory damages should be granted. The Company will appeal to the appellate court
immediately after the current proceeding at the district court has been concluded regardless
of any judgments rendered by the district court.
 48




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##### Table of Contents



Dividend policy
      
 B. Significant changes
  49




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##### Table of Contents



Item 9. The Offer and Listing
 
 A. Offer and listing details
 
 Trading in domestic markets
   TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    
    (Reference data)
    
    
    (Reference data)(Japanese yen)
    
    
    (Points)
    
    
    (Japanese yen)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low2002 Year
    
    ¥
    3,500
    
    
    ¥
    2,413
    
    
    
    1,144.02
    
    
    
    807.35
    
    
    ¥
    11,979.85
    
    
    ¥
    8,303.392003 Year
    
    
    4,140
    
    
    
    2,607
    
    
    
    1,114.40
    
    
    
    770.46
    
    
    
    11,161.71
    
    
    
    7,607.882004 Year
    
    
    3,880
    
    
    
    3,273
    
    
    
    1,225.97
    
    
    
    1,017.84
    
    
    
    12,195.66
    
    
    
    10,299.432005 1(st) quarter
    
    
    3,860
    
    
    
    3,460
    
    
    
    1,206.93
    
    
    
    1,128.75
    
    
    
    11,975.46
    
    
    
    11,212.632(nd) quarter
    
    
    4,000
    
    
    
    3,587
    
    
    
    1,202.46
    
    
    
    1,104.30
    
    
    
    11,911.90
    
    
    
    10,770.583(rd) quarter
    
    
    4,127
    
    
    
    3,587
    
    
    
    1,430.80
    
    
    
    1,174.16
    
    
    
    13,678.44
    
    
    
    11,540.934(th) quarter
    
    
    4,780
    
    
    
    3,960
    
    
    
    1,673.18
    
    
    
    1,363.66
    
    
    
    16,445.56
    
    
    
    12,996.292005 Year
    
    
    4,780
    
    
    
    3,460
    
    
    
    1,673.18
    
    
    
    1,104.30
    
    
    
    16,445.56
    
    
    
    10,770.582006 1(st) quarter
    
    
    5,287
    
    
    
    4,567
    
    
    
    1,735.25
    
    
    
    1,538.85
    
    
    
    17,125.64
    
    
    
    15,059.522(nd) quarter
    
    
    6,013
    
    
    
    5,173
    
    
    
    1,783.72
    
    
    
    1,439.00
    
    
    
    17,563.37
    
    
    
    14,045.533(rd) quarter
    
    
    6,160
    
    
    
    5,240
    
    
    
    1,655.27
    
    
    
    1,473.59
    
    
    
    16,414.94
    
    
    
    14,437.244(th) quarter
    
    
    6,780
    
    
    
    5,840
    
    
    
    1,685.76
    
    
    
    1,526.37
    
    
    
    17,301.69
    
    
    
    15,615.562006 Year
    
    
    6,780
    
    
    
    4,567
    
    
    
    1,783.72
    
    
    
    1,439.00
    
    
    
    17,563.37
    
    
    
    14,045.53
 TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    
    (Reference data)
    
    
    (Reference data)(Japanese yen)
    
    
    (Points)
    
    
    (Japanese yen)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low2006 July
    
    ¥
    5,810
    
    
    ¥
    5,240
    
    
    
    1,606.86
    
    
    
    1,473.59
    
    
    ¥
    15,710.39
    
    
    ¥
    14,437.24August
    
    
    5,850
    
    
    
    5,350
    
    
    
    1,645.43
    
    
    
    1,540.12
    
    
    
    16,244.84
    
    
    
    15,154.06September
    
    
    6,160
    
    
    
    5,700
    
    
    
    1,655.27
    
    
    
    1,546.03
    
    
    
    16,414.94
    
    
    
    15,513.87October
    
    
    6,700
    
    
    
    6,190
    
    
    
    1,672.02
    
    
    
    1,596.24
    
    
    
    16,901.53
    
    
    
    16,028.32November
    
    
    6,420
    
    
    
    5,840
    
    
    
    1,629.29
    
    
    
    1,526.37
    
    
    
    16,512.51
    
    
    
    15,615.56December
    
    
    6,780
    
    
    
    5,960
    
    
    
    1,685.76
    
    
    
    1,594.72
    
    
    
    17,301.69
    
    
    
    16,185.922007 January
    
    
    6,750
    
    
    
    6,290
    
    
    
    1,749.18
    
    
    
    1,650.82
    
    
    
    17,617.64
    
    
    
    16,758.46February
    
    
    6,700
    
    
    
    6,070
    
    
    
    1,823.89
    
    
    
    1,712.28
    
    
    
    18,300.39
    
    
    
    17,199.66March
    
    
    6,600
    
    
    
    6,020
    
    
    
    1,755.70
    
    
    
    1,656.74
    
    
    
    17,558.04
    
    
    
    16,532.91
 Note:
    
    Canon has made a three-for-two stock split on July 1, 2006. The information above has been
adjusted to reflect the stock
split.
 50




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##### Table of Contents



Trading in foreign markets
    NYSE(Canon Inc.)(U.S. dollars)Period
    
    High
    
    
    Low2002 Year
    
    $
    26.933
    
    
    $
    20.1002003 Year
    
    
    35.333
    
    
    
    22.4872004 Year
    
    
    36.260
    
    
    
    29.6272005 1(st) quarter
    
    
    36.327
    
    
    
    33.6872(nd) quarter
    
    
    37.140
    
    
    
    34.0003(rd) quarter
    
    
    36.700
    
    
    
    32.6404(th) quarter
    
    
    40.280
    
    
    
    34.3802005 Year
    
    
    40.280
    
    
    
    32.6402006 1(st) quarter
    
    
    44.620
    
    
    
    39.6302(nd) quarter
    
    
    53.100
    
    
    
    42.1603(rd) quarter
    
    
    52.380
    
    
    
    44.3104(th) quarter
    
    
    57.320
    
    
    
    50.8402006 Year
    
    
    57.320
    
    
    
    39.630
 (Canon Inc.)(U.S. dollars)Period
    
    High
    
    
    Low2006 July
    
    $
    50.870
    
    
    $
    44.310August
    
    
    49.310
    
    
    
    47.260September
    
    
    52.380
    
    
    
    48.400October
    
    
    56.500
    
    
    
    52.800November
    
    
    54.500
    
    
    
    50.840December
    
    
    57.320
    
    
    
    51.9702007 January
    
    
    56.990
    
    
    
    52.020February
    
    
    55.400
    
    
    
    50.720March
    
    56.190
    
    
    51.770
    
 B. Plan of distribution
  
 C. Markets
  51




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##### Table of Contents



Item 10. Additional Information
 
 A. Share capital
  
 B. Memorandum and articles of association
 Objects and Purposes in Canon Inc. (the Company)s Articles of Incorporation
  (1)
    
    Manufacture and sale of optical machineries and instruments of various kinds.(2)
    
    Manufacture and sale of acoustic, electrical and electronic machineries and instruments of
various kinds.(3)
    
    Manufacture and sale of precision machineries and instruments of various kinds.(4)
    
    Manufacture and sale of medical machineries and instruments of various kinds.(5)
    
    Manufacture and sale of general machineries, instruments and equipments of various kinds.(6)
    
    Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of
the preceding items.(7)
    
    Production and sale of software products.(8)
    
    Manufacture and sale of pharmaceutical products(9)
    
    Telecommunications business, and information service business such as information processing service business, information providing
service business, etc.(10)
    
    Contracting for telecommunications works, electrical works and machinery and equipment installation works.(11)
    
    Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.(12)
    
    Manpower providing business, property leasing business and travel business.(13)
    
    Business relative to investigation, analysis of the environment and purification process of soil, water, etc.(14)
    
    Any and all business relative to each of the preceding items.
 Provisions Regarding Directors
 kabushiki kaisya
     Holding of Shares by Foreign Investors
  Rights of Shareholders
  52




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##### Table of Contents



General
     Distributions of Surplus
    Restriction on Distributions of Surplus
        53




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##### Table of Contents



renketsu haito kisei tekiyo kaisha
  Stock Splits
  Japanese Unit Share System
  Transferability of Shares Representing Less than One Unit
   Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its
Shares
  Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares
up to a Whole Unit
  54




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Voting Rights of a Holder of Shares Representing Less than One Unit
    
    
    to receive annual and interim dividends,
    
    to receive cash or other assets in case of consolidation or split of shares, exchange or
transfer of shares or corporate merger,
    
    to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and
    
    to participate in any distribution of surplus assets upon liquidation.
 Ordinary and Extraordinary General Meeting of Shareholders
  Voting Rights
   
    
    a reduction of stated capital,
    
    amendment of the Articles of Incorporation (except amendments which the board of directors are
authorized to make under the Corporation Law of Japan as described inStock SplitsandJapanese
Unit Share Systemabove),
    
    the removal of a Director or Corporate Auditor,
    
    establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,
    
    a dissolution, merger or consolidation,
    
    a corporate separation,
    
    the transfer of the whole or an important part of the Companys business,
    
    the taking over of the whole of the business of any other corporation,
    
    any issuance of new shares at a specially favourable price, stock acquisition
rights (shinkabu yoyakuken) with specially
favourable conditions or bonds with stock
acquisition rights (shinkabu yoyakuken-tsuki shasai) with
specially favourable conditions to
persons other than shareholders,
    
    release of part of Directors or Corporate Auditors liabilities to the Company,
    
    distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make
such distribution in cash instead of in kind,
    
    purchase of shares by the Company from a specific shareholder other than its subsidiaries,
    
    consolidation of shares, and
 55




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##### Table of Contents




    
    discharge of a portion of liabilities of Directors, Corporate Auditors or independent auditors that are owed to the Company.
   Subscription Rights
  Stock Acquisition Rights
  Liquidation Rights
  Liability to Further Calls or Assessments
  Share Registrar
  Record Date
   Repurchase by the Company of Shares
    56




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##### Table of Contents



C. Material contracts
  
 D. Exchange controls
            
   57




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##### Table of Contents



E. Taxation
       
    
    certain financial institutions;
    
    insurance companies;
    
    dealers and traders in securities or foreign currencies;
    
    persons holding Canon shares or ADSs as part of a hedge, straddle, conversion or other
integrated transaction;
    
    persons whose functional currency for U.S. federal income tax purposes is not the U.S.
dollar;
    
    partnerships or other entities classified as partnerships for U.S. federal income tax
purposes;
    
    persons liable for the alternative minimum tax;
    
    tax-exempt organizations;
    
    persons holding Canon shares or ADSs that own or are deemed to own 10% or more of any
class of Canon stock; or
    
    persons who acquired Canon shares or ADSs pursuant to the exercise of any employee stock
option or otherwise as compensation.
   
    
    a citizen or resident of the United States;
    
    a corporation, or other entity taxable as a corporation, created or organized in or under
the laws of the United States or any politicalsubdivision thereof; or
    
    an estate or trust the income of which is subject to U.S. federal income taxation regardless
of its source.
  58




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Taxation of Distributions
    Sale and Other Disposition of Canon Shares or ADSs
  Passive Foreign Investment Company Rules
    Information Reporting and Backup Withholding
   59




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##### Table of Contents



F. Dividends and paying agents
  
 G. Statement by experts
  
 H. Documents on display
  
 
  
 
 I. Subsidiary information
  
 Item 11. Quantitative and Qualitative Disclosures about Market Risk
 
 Market risk exposures
  
 Equity price risk
    2006
    
    
    2005Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    295
    
    
    ¥
    294
    
    
    ¥
    71
    
    
    ¥
    71Due after one year through five years
    
    
    5,606
    
    
    
    7,104
    
    
    
    1,811
    
    
    
    3,243Due after five years
    
    
    2,891
    
    
    
    2,947
    
    
    
    3,352
    
    
    
    3,376Equity securities
    
    
    12,648
    
    
    
    29,852
    
    
    
    11,474
    
    
    
    26,550¥
    21,440
    
    
    ¥
    40,197
    
    
    ¥
    16,708
    
    
    ¥
    33,240
  2006
    
    
    2005Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    10,151
    
    
    ¥
    10,151
    
    
    ¥
    
    
    
    ¥
    Due after one year through five years
    
    
    10,311
    
    
    
    10,311
    
    
    
    20,961
    
    
    
    20,961¥
    20,462
    
    
    ¥
    20,462
    
    
    ¥
    20,961
    
    
    ¥
    20,961
 60




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##### Table of Contents



Foreign currency exchange rate and interest rate risk
    Millions of yenU.S.$
    
    
    euro
    
    
    Others
    
    
    TotalForwards to sell foreign currencies:Contract amounts
    
    ¥
    392,402
    
    
    
    286,148
    
    
    
    38,586
    
    
    
    717,136Estimated fair value
    
    
    (6,692
    )
    
    
    (8,671
    )
    
    
    (392
    )
    
    
    (15,755
    )Forwards to buy foreign currencies:Contract amounts
    
    ¥
    34,004
    
    
    
    3,204
    
    
    
    13,981
    
    
    
    51,189Estimated fair value
    
    
    (310
    )
    
    
    (111
    )
    
    
    (1,051
    )
    
    
    (1,472
    )
      61




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##### Table of Contents



Long-term debt (including due within one year)
 Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2006:Japanese yen notes
    
    
    2.61
    %
    
    ¥
    20,000
    
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ¥
    20,319Japanese yen convertible
debentures
    
    
    1.30
    
    
    
    318
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,819Other long-term
debt
    
    
    1.34
    
    
    
    10,734
    
    
    ¥
    5,263
    
    
    
    3,132
    
    
    
    1,832
    
    
    ¥
    418
    
    
    ¥
    69
    
    
    ¥
    20
    
    
    
    10,657Total
    
    
    
    
    
    ¥
    31,052
    
    
    ¥
    15,263
    
    
    ¥
    13,450
    
    
    ¥
    1,832
    
    
    ¥
    418
    
    
    ¥
    69
    
    
    ¥
    20
    
    
    ¥
    32,795
 Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    
    Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2005:Japanese yen notes
    
    
    2.61
    %
    
    ¥
    20,000
    
    
    
    
    
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ¥
    20,848Japanese yen convertible
debentures
    
    
    1.30
    
    
    
    649
    
    
    
    
    
    
    
    
    
    
    
    649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,052Other long-term
debt
    
    
    1.40
    
    
    
    11,425
    
    
    ¥
    4,992
    
    
    
    3,318
    
    
    
    1,702
    
    
    ¥
    895
    
    
    ¥
    417
    
    
    ¥
    101
    
    
    
    11,294Total
    
    
    
    
    
    ¥
    32,074
    
    
    ¥
    4,992
    
    
    ¥
    13,318
    
    
    ¥
    12,351
    
    
    ¥
    895
    
    
    ¥
    417
    
    
    ¥
    101
    
    
    ¥
    35,194
 Note:
    
    All long-term debt is fixed rate.
 
 Item 12. Description of Securities Other than Equity Securities
  62




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PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
        
 Item 15. Controls and Procedures
 Evaluation of disclosure controls and procedures
   Managements Report on Internal Control over Financial Reporting
   63




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##### Table of Contents



Internal Control-Integrated
Framework
   Changes in internal controls over financial reporting
  
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  
 Item 16C. Principal Accountant Fees and Services
 Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
   
    
    All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the
Public Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions,
and any engagement of an Independent Registered Public Accounting
Firm for any audit or non-audit service involving estimated fees
exceeding ¥ 10,000,000 per single engagement must be approved by
the full board of corporate auditors.
    
    Certain other services may be pre-approved under detailed
categories of audit and non-audit services established annually by
the board of corporate auditors, as long as those services do not
exceed specified maximum yen limits for aggregate fees relating to
each of those categories. Any engagement of an Independent
Registered Public Accounting Firm by these means must be reported
to the board of corporate auditors at its next regularly scheduled
meeting.
    
    For services that are not covered by the above two means of
pre-approval, the board of corporate auditors has delegated
pre-approval authority to the Chairman of the board of corporate
auditors. Any engagement of an Independent Registered Public
Accounting Firm by the Chairman is required to be reported to the
board of corporate auditors at its next regularly scheduled
meeting.
   64




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##### Table of Contents



Fees
and Services.
  Year ended
    
    
    Year endedDecember 31, 2006
    
    
    December 31, 2005(Millions of yen)Audit fees
    
    ¥
    2,052
    
    
    ¥
    968Audit-related fees
    
    
    69
    
    
    
    439Tax fees
    
    
    53
    
    
    
    49All other fees
    
    
    3
    
    
    
    92Total
    
    ¥
    2,177
    
    
    ¥
    1,548
 Audit fees
 Audit-related fees
 Tax fees
 All other fees
  65




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##### Table of Contents



Item 16D. Exemptions from the Listing Standards for Audit Committees
   
    
    the board of corporate auditors is established pursuant to applicable Japanese law and Canons
Articles of Incorporations;
    
    under Japanese legal requirements, the board of corporate auditors is separate from the board of
directors;
    
    the board of corporate auditors is not elected by the management of Canon and no executive
officer of Canon is a member of the board of corporate auditors;
    
    all of the members of the board of corporate auditors meet specific independence requirements
from Canon and the Canon Group, the management and the auditing firm, as set forth by Japanese
legal provisions;
    
    the board of corporate auditors, in accordance with and to the extent permitted by Japanese law,
is responsible for the appointment, retention and oversight of the work of Canons external
auditors engaged for the purpose of issuing audit reports on Canons annual financial statements;
    
    the board of corporate auditors adopted a complaints procedure (which became effective prior to
July 31, 2005) in accordance with Rule 10A-3(b)(3) of the Exchange Act; and
    
    the board of corporate auditors is authorized to engage independent counsel and other advisers,
as it deems appropriate.
    
    the board of corporate auditors is provided for appropriate funding for payment of (i)
compensation to Canons independent registered public accounting
firm engaged for the purpose of issuing audit reports on
Canons annual financial statements, (ii) compensation to independent counsel and other advisers
engaged by the board of corporate auditors, and (iii) ordinary administrative expenses of the board
of corporate auditors in carrying out its duties.
  66




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##### Table of Contents



Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Period
    
    (a) Total Number of
    
    
    (b) Average Price
    
    
    (c) Total Numbers of
    
    
    (d) Maximum Numbers ofShares Purchased
    
    
    Paid per Share
    
    
    Shares Purchased as
    
    
    Shares that MayPart of Publicly
    
    
    Yet Be PurchasedAnnounced Plans or
    
    
    Under the Plans or(Shares)
    
    
    (Yen)
    
    
    Programs
    
    
    ProgramsJanuary 1 - January 31
    
    
    2,115
    
    
    
    4,714
    
    
    
    
    
    
    
    February 1 - February 28
    
    
    2,760
    
    
    
    4,775
    
    
    
    
    
    
    
    March 1 - March 31
    
    
    2,910
    
    
    
    4,930
    
    
    
    
    
    
    
    April 1 - April 30
    
    
    3,597
    
    
    
    5,517
    
    
    
    
    
    
    
    May 1 - May 31
    
    
    3,276
    
    
    
    5,664
    
    
    
    
    
    
    
    June 1 - June 30
    
    
    1,638
    
    
    
    5,181
    
    
    
    
    
    
    
    July 1 - July 31
    
    
    12,770
    
    
    
    5,540
    
    
    
    
    
    
    
    August 1 - August 31
    
    
    10,602
    
    
    
    5,521
    
    
    
    
    
    
    
    September 1- September 30
    
    
    15,930
    
    
    
    5,858
    
    
    
    
    
    
    
    October 1 - October 31
    
    
    14,382
    
    
    
    6,434
    
    
    
    
    
    
    
    November 1 - November 30
    
    
    8,047
    
    
    
    6,270
    
    
    
    
    
    
    
    December 1 - December 31
    
    
    5,884
    
    
    
    6,476
    
    
    
    
    
    
    
    
      67




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##### Table of Contents



PART III
 
 Item 17. Financial Statements
 Consolidated financial statement of Canon Inc. and Subsidiaries:
    
    Page numberReport of
Independent Registered Public Accounting Firm
    
    69Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    71Consolidated Statements of Income for the years ended December
31, 2006, 2005 and 2004
    
    72Consolidated Statements of Stockholders Equity for the years
ended December 31, 2006, 2005 and 2004
    
    73Consolidated Statements of Cash Flows for the years ended
December 31, 2006, 2005 and 2004
    
    74Notes to Consolidated Financial Statements
    
    75Schedule:Schedule II Valuation and Qualifying Accounts for the years ended
December 31, 2006, 2005 and 2004
    
    120
  68




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69




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70




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December 312006
    
    
    2005(Millions of yen)AssetsCurrent assets:Cash and cash equivalents
    
    ¥
    1,155,626
    
    
    ¥
    1,004,953Marketable securities (Notes 3 and 10)
    
    
    10,445
    
    
    
    172Trade receivables, net (Note 4)
    
    
    761,947
    
    
    
    689,427Inventories (Note 5)
    
    
    539,057
    
    
    
    510,195Prepaid expenses and other current assets (Notes 1, 7 and 13)
    
    
    315,274
    
    
    
    253,822Total current assets
    
    
    2,782,349
    
    
    
    2,458,569Noncurrent receivables (Note 19)
    
    
    14,335
    
    
    
    14,122Investments (Notes 3 and 10)
    
    
    110,418
    
    
    
    104,486Property, plant and equipment, net (Notes 6 and 7)
    
    
    1,266,425
    
    
    
    1,148,821Other assets (Notes 7, 8, 9, 12 and 13)
    
    
    348,388
    
    
    
    317,555Total assets
    
    ¥
    4,521,915
    
    
    ¥
    4,043,553Liabilities and stockholders equityCurrent liabilities:Short-term loans and current portion of long-term debt (Note 10)
    
    ¥
    15,362
    
    
    ¥
    5,059Trade payables (Note 11)
    
    
    493,058
    
    
    
    505,126Income taxes (Note 13)
    
    
    133,745
    
    
    
    110,844Accrued expenses (Note 19)
    
    
    303,353
    
    
    
    248,205Other current liabilities (Notes 6 and 13)
    
    
    217,789
    
    
    
    209,394Total current liabilities
    
    
    1,163,307
    
    
    
    1,078,628Long-term debt, excluding current installments (Note 10)
    
    
    15,789
    
    
    
    27,082Accrued pension and severance cost (Note 12)
    
    
    83,876
    
    
    
    80,430Other noncurrent liabilities (Note 13)
    
    
    55,536
    
    
    
    52,395Total liabilities
    
    
    1,318,508
    
    
    
    1,238,535Minority interests
    
    
    216,801
    
    
    
    200,336Commitments and contingent liabilities (Note 19)Stockholders equity:Common stockAuthorized 3,000,000,000 shares;
issued 1,333,445,830 shares in 2006 and 1,333,114,169 shares in 2005 (Note 14)
    
    
    174,603
    
    
    
    174,438Additional paid-in capital (Note 14)
    
    
    403,510
    
    
    
    403,246Legal reserve (Note 15)
    
    
    43,600
    
    
    
    42,331Retained earnings (Note 15)
    
    
    2,368,047
    
    
    
    2,018,289Accumulated other comprehensive income (loss) (Note 16)
    
    
    2,718
    
    
    
    (28,212
    )Treasury stock, at cost 1,794,390 shares in 2006 and 1,718,523 shares in 2005
    
    
    (5,872
    )
    
    
    (5,410
    )Total stockholders equity
    
    
    2,986,606
    
    
    
    2,604,682Total liabilities and stockholders equity
    
    ¥
    4,521,915
    
    
    ¥
    4,043,553
 See accompanying notes to consolidated financial statements.
 71




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##### Table of Contents



Year ended December 312006
    
    
    2005
    
    
    2004(Millions of yen)Net sales
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191
    
    
    ¥
    3,467,853Cost of sales (Notes 9, 12 and 19)
    
    
    2,096,279
    
    
    
    1,935,148
    
    
    
    1,754,510Gross profit
    
    
    2,060,480
    
    
    
    1,819,043
    
    
    
    1,713,343Operating expenses:Selling, general and administrative expenses (Notes
1, 9, 12 and 19)
    
    
    1,045,140
    
    
    
    949,524
    
    
    
    894,250Research and development expenses
    
    
    308,307
    
    
    
    286,476
    
    
    
    275,3001,353,447
    
    
    
    1,236,000
    
    
    
    1,169,550Operating profit
    
    
    707,033
    
    
    
    583,043
    
    
    
    543,793Other income (deductions):Interest and dividend income
    
    
    27,153
    
    
    
    14,252
    
    
    
    7,118Interest expense
    
    
    (2,190
    )
    
    
    (1,741
    )
    
    
    (2,756
    )Other, net (Notes 1, 3 and 18)
    
    
    (12,853
    )
    
    
    16,450
    
    
    
    3,96112,110
    
    
    
    28,961
    
    
    
    8,323Income before income taxes and minority interests
    
    
    719,143
    
    
    
    612,004
    
    
    
    552,116Income taxes (Note 13)
    
    
    248,233
    
    
    
    212,785
    
    
    
    194,014Income before minority interests
    
    
    470,910
    
    
    
    399,219
    
    
    
    358,102Minority interests
    
    
    15,585
    
    
    
    15,123
    
    
    
    14,758Net income
    
    ¥
    455,325
    
    
    ¥
    384,096
    
    
    ¥
    343,344(Yen)Net income per share (Note 17):Basic
    
    ¥
    341.95
    
    
    ¥
    288.63
    
    
    ¥
    258.53Diluted
    
    
    341.84
    
    
    
    288.36
    
    
    
    257.85Cash dividends per share
    
    
    83.33
    
    
    
    66.67
    
    
    
    43.33
 See accompanying notes to consolidated financial statements.
 72




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AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalCommon
    
    
    paid-in
    
    
    Legal
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    stockholdersstock
    
    
    capital
    
    
    reserve
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    equity(Millions of yen)Balance at December 31, 2003
    
    ¥
    168,892
    
    
    ¥
    396,939
    
    
    ¥
    39,998
    
    
    ¥
    1,410,442
    
    
    ¥
    (143,275
    )
    
    ¥
    (7,451
    )
    
    ¥
    1,865,545Conversion of convertible debt and other
    
    
    4,972
    
    
    
    4,966
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,938Stock exchanged under exchange offering
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,691
    
    
    
    2,805Capital transaction by consolidated subsidiaries and
affiliated companies
    
    
    
    
    
    
    (246
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (246
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,950
    )
    
    
    
    
    
    
    
    
    
    
    (52,950
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    1,202
    
    
    
    (1,202
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    343,344
    
    
    
    
    
    
    
    
    
    
    
    343,344Other comprehensive income (loss), net of tax (Note 16)Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,050
    
    
    
    
    
    
    
    4,050Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    686
    
    
    
    
    
    
    
    686Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (396
    )
    
    
    
    
    
    
    (396
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,623
    
    
    
    
    
    
    
    37,623Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385,307Repurchase of treasury stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (503
    )
    
    
    (503
    )Balance at December 31, 2004
    
    
    173,864
    
    
    
    401,773
    
    
    
    41,200
    
    
    
    1,699,634
    
    
    
    (101,312
    )
    
    
    (5,263
    )
    
    
    2,209,896Conversion of convertible debt and other
    
    
    574
    
    
    
    574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,148Capital transaction by consolidated subsidiaries and
affiliated companies
    
    
    
    
    
    
    899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    899Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,310
    )
    
    
    
    
    
    
    
    
    
    
    (64,310
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    1,131
    
    
    
    (1,131
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384,096
    
    
    
    
    
    
    
    
    
    
    
    384,096Other comprehensive income (loss), net of tax (Note 16)Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,979
    
    
    
    
    
    
    
    53,979Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,397
    )
    
    
    
    
    
    
    (1,397
    )Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (481
    )
    
    
    
    
    
    
    (481
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,999
    
    
    
    
    
    
    
    20,999Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457,196Repurchase of treasury stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    (147
    )Balance at December 31, 2005
    
    
    174,438
    
    
    
    403,246
    
    
    
    42,331
    
    
    
    2,018,289
    
    
    
    (28,212
    )
    
    
    (5,410
    )
    
    
    2,604,682Conversion of convertible debt and other
    
    
    165
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,298
    )
    
    
    
    
    
    
    
    
    
    
    (104,298
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    1,269
    
    
    
    (1,269
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455,325
    
    
    
    
    
    
    
    
    
    
    
    455,325Other comprehensive income (loss), net of tax (Note 16)Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,630
    
    
    
    
    
    
    
    48,630Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,992
    
    
    
    
    
    
    
    1,992Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (489
    )
    
    
    
    
    
    
    (489
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,575
    )
    
    
    
    
    
    
    (3,575
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501,883Adjustment to initially apply SFAS 158,
net of tax (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,628
    )
    
    
    
    
    
    
    (15,628
    )Repurchase of treasury stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    (462
    )Balance at December 31, 2006
    
    ¥
    174,603
    
    
    ¥
    403,510
    
    
    ¥
    43,600
    
    
    ¥
    2,368,047
    
    
    ¥
    2,718
    
    
    ¥
    (5,872
    )
    
    ¥
    2,986,606
 See accompanying notes
consolidated financial statements. 73




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##### Table of Contents



Year ended December 312006
    
    
    2005
    
    
    2004(Millions of yen)Cash flows from operating activities:Net income
    
    ¥
    455,325
    
    
    ¥
    384,096
    
    
    ¥
    343,344Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    262,294
    
    
    
    225,941
    
    
    
    192,692Loss on disposal of property, plant and equipment
    
    
    16,182
    
    
    
    13,784
    
    
    
    24,597Deferred income taxes
    
    
    (6,945
    )
    
    
    (766
    )
    
    
    9,060Increase in trade receivables
    
    
    (40,969
    )
    
    
    (48,391
    )
    
    
    (53,595
    )(Increase) decrease in inventories
    
    
    (5,542
    )
    
    
    27,558
    
    
    
    (40,050
    )(Decrease) increase in trade payables
    
    
    (2,313
    )
    
    
    16,018
    
    
    
    65,873Increase in income taxes
    
    
    22,657
    
    
    
    1,998
    
    
    
    21,689Increase in accrued expenses
    
    
    36,165
    
    
    
    31,241
    
    
    
    8,196Decrease in accrued pension and severance cost
    
    
    (20,309
    )
    
    
    (16,221
    )
    
    
    (16,924
    )Other, net
    
    
    (21,304
    )
    
    
    (29,580
    )
    
    
    6,647Net cash provided by operating activities
    
    
    695,241
    
    
    
    605,678
    
    
    
    561,529Cash flows from investing activities:Purchases of fixed assets
    
    
    (424,862
    )
    
    
    (395,055
    )
    
    
    (256,714
    )Proceeds from sale of fixed assets
    
    
    12,507
    
    
    
    14,827
    
    
    
    7,431Purchases of available-for-sale securities
    
    
    (7,768
    )
    
    
    (5,680
    )
    
    
    (388
    )Purchases of held-to-maturity securities
    
    
    
    
    
    
    
    
    
    
    (21,544
    )Proceeds from sale of available-for-sale securities
    
    
    4,047
    
    
    
    12,337
    
    
    
    9,735Increase in time deposits
    
    
    (35,863
    )
    
    
    (6,090
    )
    
    
    Acquisitions of subsidiaries, net of cash acquired
    
    
    (2,485
    )
    
    
    (17,657
    )
    
    
    Proceeds from sale of subsidiary common stock
    
    
    
    
    
    
    
    
    
    
    9,731Purchases of other investments
    
    
    (8,911
    )
    
    
    (19,531
    )
    
    
    (8,628
    )Other, net
    
    
    2,530
    
    
    
    15,708
    
    
    
    7,410Net cash used in investing activities
    
    
    (460,805
    )
    
    
    (401,141
    )
    
    
    (252,967
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    1,053
    
    
    
    1,716
    
    
    
    2,115Repayments of long-term debt
    
    
    (5,861
    )
    
    
    (15,187
    )
    
    
    (43,175
    )Decrease in short-term loans
    
    
    (828
    )
    
    
    (12,011
    )
    
    
    (3,046
    )Dividends paid
    
    
    (104,298
    )
    
    
    (64,310
    )
    
    
    (52,950
    )Purchases of treasury stock, net
    
    
    (462
    )
    
    
    (147
    )
    
    
    (494
    )Other, net
    
    
    2,909
    
    
    
    (4,000
    )
    
    
    (4,718
    )Net cash used in financing activities
    
    
    (107,487
    )
    
    
    (93,939
    )
    
    
    (102,268
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    23,724
    
    
    
    6,581
    
    
    
    (8,818
    )Net increase in cash and cash equivalents
    
    
    150,673
    
    
    
    117,179
    
    
    
    197,476Cash and cash equivalents at beginning of year
    
    
    1,004,953
    
    
    
    887,774
    
    
    
    690,298Cash and cash equivalents at end of year
    
    ¥
    1,155,626
    
    
    ¥
    1,004,953
    
    
    ¥
    887,774Supplemental disclosure for cash flow information (Note 21):Cash paid during the year for:Interest
    
    ¥
    2,146
    
    
    ¥
    1,919
    
    
    ¥
    2,981Income taxes
    
    
    244,236
    
    
    
    211,540
    
    
    
    164,450
 See accompanying notes to consolidated financial statements.
 74




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies(a)
    
    Description of BusinessCanon Inc. (the Company) and subsidiaries (collectively Canon) is one of the worlds
leading manufacturers in such fields as office imaging products, computer peripherals,
business information products, cameras, and optical related products. Office imaging products
consist mainly of copying machines and digital multifunction devices. Computer peripherals
consist mainly of laser beam and inkjet printers. Business information products consist
mainly of computer information systems, micrographics and calculators. Cameras consist mainly
of single lens reflex (SLR) cameras, compact cameras, digital cameras and video camcorders.
Optical related products include steppers and aligners used in semiconductor chip production,
projection aligners used in the production of liquid crystal displays (LCDs), broadcasting
lenses and medical equipment. Canons consolidated net sales for the years ended December 31,
2006, 2005 and 2004 were distributed as follows: office imaging products 28%, 31% and 33%,
computer peripherals 34%, 33% and 33%, business information products 3%, 3% and 3%, cameras
25%, 23% and 22%, and optical and other products 10%, 10% and 9%, respectively.Sales are made principally under the Canon brand name, almost entirely through sales
subsidiaries. These subsidiaries are responsible for marketing and distribution, and
primarily sell to retail dealers in their geographical area. Approximately 75%, 74% and 73%
of consolidated net sales for the years ended December 31, 2006, 2005 and 2004 were generated
outside Japan, with 31%, 30% and 30% in the Americas, 31%, 32% and 31% in Europe, and 13%, 12%
and 12% in other areas, respectively.Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales
constituted approximately 22%, 21% and 21% of consolidated net sales for the years ended
December 31, 2006, 2005 and 2004, respectively.Canons manufacturing operations are conducted primarily at 23 plants in Japan and 17 overseas
plants which are located in countries or regions such as the United States, Germany, France,
Taiwan, China, Malaysia, Thailand and Vietnam.(b)
    
    Basis of PresentationThe Company and its domestic subsidiaries maintain their books of account in conformity with
financial accounting standards of Japan. Foreign subsidiaries maintain their books of account
in conformity with financial accounting standards of the countries of their domicile.Certain adjustments and reclassifications have been incorporated in the accompanying
consolidated financial statements to conform with U.S. generally accepted accounting
principles. These adjustments were not recorded in the statutory books of account.
 75




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(c)
    
    Principles of ConsolidationThe consolidated financial statements include the accounts of the Company, its majority owned
subsidiaries and those variable interest entities where the Company or its consolidated
subsidiaries are the primary beneficiaries under Financial Accounting Standards Board (FASB)
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of Variable Interest
Entities. All significant intercompany balances and transactions have been eliminated.(d)
    
    Use of EstimatesThe preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the period. Significant estimates and assumptions are
reflected in valuation and disclosure of revenue recognition, allowance for doubtful
receivables, valuation of inventories, environmental liabilities, valuation of deferred tax
assets and employee retirement and severance benefit plans. Actual results could differ
materially from those estimates.(e)
    
    Cash Equivalents and Time DepositsAll highly liquid investments acquired with an original maturity of three months or less are
considered to be cash equivalents. Time deposits with an original maturity of more than three
months are ¥41,953 million and ¥6,090 million at December 31, 2006 and 2005, respectively, and
are included in prepaid expenses and other current assets in the accompanying consolidated
balance sheets.(f)
    
    Translation of Foreign CurrenciesAssets and liabilities of the Companys subsidiaries located outside Japan with functional
currencies other than Japanese yen are translated into Japanese yen at the rates of exchange
in effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are reported in other comprehensive income
(loss).Gains and losses resulting from foreign currency transactions, including foreign exchange
contracts, and translation of assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency exchange losses, net were ¥25,804
million, ¥3,710 million and ¥17,800 million for the years ended December 31, 2006, 2005 and
2004, respectively.
 76




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(g)
    
    Marketable Securities and InvestmentsCanon classifies investments in debt and marketable equity securities as available-for-sale,
or held-to-maturity securities. Canon does not hold any trading securities which are bought
and held primarily for the purpose of sale in the near term. Available-for-sale securities
are recorded at fair value. Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of other comprehensive income (loss) until
realized. Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.Available-for-sale and held-to-maturity securities are regularly reviewed for
other-than-temporary declines in carrying value based on criteria that include the length of
time and the extent to which the market value has been less than cost, the financial condition
and near-term prospects of the issuer and Canons intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated recovery in market value. When
such a decline exists, Canon recognizes an impairment loss to the extent by which the cost
basis of the investment exceeds the fair value of the investment. Fair value is determined
based on quoted market prices, projected discounted cash flows or other valuation techniques
as appropriate.Realized gains and losses are determined on the average cost method and reflected in earnings.Other securities are stated at cost and reviewed periodically for impairment.(h)
    
    Allowance for Doubtful ReceivablesAllowance for doubtful trade and finance receivables is maintained for all customers based on
a combination of factors, including aging analysis, macroeconomic conditions, significant
one-time events, and historical experience. An additional reserve for individual accounts is
recorded when Canon becomes aware of a customers inability to meet its financial obligations,
such as in the case of bankruptcy filings. If circumstances related to customers change,
estimates of the recoverability of receivables would be further adjusted. When all collection
options are exhausted including legal recourse, the accounts or portions thereof are deemed to
be uncollectible and charged against the allowance.(i)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined principally
by the average method for domestic inventories and the first-in, first-out method for overseas
inventories.
 77




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(j)
    
    Investments in Affiliated CompaniesInvestments in affiliated companies over which Canon has the ability to exercise significant
influence, but does not hold a controlling financial interest, are accounted for by the equity
method.(k)
    
    Impairment of Long-Lived AssetsLong-lived assets, such as property, plant and equipment, and acquired intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the fair value of
the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.(l)
    
    Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Depreciation is calculated principally by
the declining-balance method, except for certain assets which are depreciated by the
straight-line method over the estimated useful lives of the assets. The depreciation period
ranges from 3 years to 60 years for buildings and 2 years to 20 years for machinery and
equipment.Assets leased to others under operating leases are stated at cost and depreciated to the
estimated residual value of the assets by the straight-line method over the period ranging
from 2 years to 5 years.(m)
    
    Goodwill and Other Intangible AssetsGoodwill and other intangible assets with indefinite useful lives are not amortized, but are
instead tested for impairment annually in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist. Intangible assets with finite useful lives,
consisting primarily of software and license fees, are amortized using the straight-line
method over the estimated useful lives, which range from 3 years to 5 years for software and 5
years to 10 years for license fees. Certain costs incurred in connection with developing or
obtaining internal use software are capitalized. These costs consist of payments made to
third parties and the salaries of employees working on such software development. Costs
incurred in connection with developing internal use software are capitalized at the
application development stage. In addition, Canon develops or obtains certain software to be
sold where related costs are capitalized after establishment of technological feasibility.
 78




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(n)
    
    Environmental LiabilitiesLiabilities for environmental remediation and other environmental costs are accrued when
environmental assessments or remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present values.(o)
    
    Income TaxesDeferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.Canon records a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not realizable.(p)
    
    Issuance of Stock by Subsidiaries and Equity InvesteesThe change in the Companys proportionate share of a subsidiarys or equity investees equity
resulting from the issuance of stock by the subsidiary or equity investee is accounted for as
an equity transaction.(q)
    
    Net Income per ShareBasic net income per share is computed by dividing net income by the weighted-average number
of common shares outstanding during each year. Diluted net income per share includes the
effect from potential issuance of common stock based on the assumption that all convertible
debentures were converted into common stock.(r)
    
    Revenue RecognitionCanon generates revenue principally through the sale of consumer products, equipment,
supplies, and related services under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and
risk of loss have been transferred to the customer, the sales price is fixed or determinable,
and collectibility is probable.
 79




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(r)
    
    Revenue Recognition (continued)For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative
fair value if such element meets the criteria for treatment as a separate unit of accounting
as prescribed in the Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Otherwise, revenue is deferred until the
undelivered elements are fulfilled as a single unit of accounting.Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or
delivery, depending upon when title and risk of loss transfer to the customer.Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is
installed at the customer site and the specific criteria of the equipment functionality are
successfully tested and demonstrated by Canon. Service revenue is derived primarily from
maintenance contracts on equipment sold to customers and is recognized as services are
provided.Canon offers service maintenance contracts for most office imaging products, for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts is recognized as services are provided.Revenue from the sale of equipment under sales-type leases is recognized at the inception of
the lease. Income on sales-type leases and direct-financing leases is recognized over the
life of each respective lease using the interest method. Leases not qualifying as sales-type
leases or direct-financing leases are accounted for as operating leases and related revenue is
recognized over the lease term.Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other known factors at the time of
sale. In addition, Canon provides price protection to certain resellers of its products, and
records reductions to sales for the estimated impact of price protection obligations when
announced.Estimated product warranty costs are recorded at the time revenue is recognized and are
included in selling, general and administrative expenses. Estimates for accrued product
warranty costs are based on historical experience, and are affected by ongoing product failure
rates, specific product class failures outside of the baseline experience, material usage and
service delivery costs incurred in correcting a product failure.
 80




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(s)
    
    Research and Development CostsResearch and development costs are expensed as incurred.(t)
    
    Advertising CostsAdvertising costs are expensed as incurred. Advertising
expenses were ¥116,809 million, ¥106,250 million
and ¥111,770 million for the years ended December 31, 2006, 2005 and 2004,
respectively.(u)
    
    Shipping and Handling CostsShipping and handling costs totaled ¥62,626 million, ¥50,052 million and ¥46,953 million for
the years ended December 31, 2006, 2005 and 2004, respectively, and are included in selling,
general and administrative expenses in the consolidated statements of income.(v)
    
    Derivative Financial InstrumentsAll derivatives are recognized at fair value and are included in prepaid expenses and other
current assets, or other current liabilities in the consolidated balance sheets. On the date
the derivative contract is entered into, Canon designates the derivative as either a hedge of
the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair
value hedge), or a hedge of a forecasted transaction or the variability of cash flows to be
received or paid related to a recognized asset or liability (cash flow hedge). Canon
formally documents all relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various hedge transactions. Canon
also formally assesses, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes
in fair values or cash flows of hedged items. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon
discontinues hedge accounting prospectively.Changes in the fair value of a derivative that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk, are recorded in
earnings. Changes in the fair value of a derivative that is designated and qualifies as a
cash-flow hedge are recorded in other comprehensive income (loss), until earnings are affected
by the variability in cash flows of the hedged item. Gains and losses from hedging
ineffectiveness are included in other income (deductions). Gains and losses excluded from the
assessment of hedge effectiveness (time value component) are included in other income
(deductions).
 81




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1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(v)
    
    Derivative Financial Instruments (continued)Canon also uses certain derivative financial instruments which are not designated as hedges.
Canon records these derivative financial instruments in the consolidated balance sheets at
fair value. The changes in fair values are immediately recorded in earnings.(w)
    
    GuaranteesCanon recognizes, at the inception of a guarantee, a liability for the fair value of the
obligation it has undertaken in issuing guarantees.(x)
    
    New Accounting StandardsIn June 2006, the FASB ratified the EITF consensus on EITF Issue No. 06-2, Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (EITF 06-2).
EITF 06-2 provides guidance for an accrual of compensated absences that require a minimum
service period but have no increase in the benefit even with additional years of service.
EITF 06-2 is effective for fiscal years beginning after December 15, 2006, and is required to
be adopted by Canon in the first quarter beginning January 1, 2007. The adoption of EITF 06-2
will not have a material impact on Canons consolidated results of operations and financial
condition.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006 and is required to be adopted by Canon in the first quarter beginning
January 1, 2007. The adoption of FIN 48 will not have a material impact on Canons
consolidated results of operations and financial condition.
 82




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1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(x)
    
    New Accounting Standards (continued)In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15, 2007 and is required to be
adopted by Canon in the first quarter beginning January 1, 2008. Canon is currently
evaluating the effect that the adoption of SFAS 157 will have on its consolidated results of
operations and financial condition but does not expect SFAS 157 to have a material impact.In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R) (SFAS 158). SFAS 158 requires plan sponsors of defined benefit pension and other
postretirement benefit plans (collectively, postretirement benefit plans) to recognize the
funded status of their postretirement benefit plans in the consolidated balance sheet, measure
the fair value of plan assets and benefit obligations as of the date of the fiscal year-end
consolidated balance sheet, and provide additional disclosures. On December 31, 2006, Canon
adopted the recognition and disclosure provisions of SFAS 158. The effect of adopting SFAS
158 on Canons financial condition at December 31, 2006 has been included in the accompanying
consolidated financial statements. SFAS 158 did not have an effect on Canons consolidated
financial condition at December 31, 2005. SFAS 158s provisions regarding the change in the
measurement date of postretirement benefit plans will not have a material impact on Canons
consolidated results of operations and financial condition as Canon already uses a measurement
date of December 31 for the majority of its plans. See Note 12 for further discussion of the
effect of adopting SFAS 158 on Canons consolidated financial statements.In September 2006, the Securities and Exchange Commission (SEC) staff published Staff
Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides
guidance on the consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB 108 requires
quantification of the effects of financial statement errors on each of the balance sheets and
statements of income and the related financial statement disclosures. SAB 108 was adopted by
Canon in the year ended December 31, 2006. The adoption of SAB 108 did not have a material
impact on Canons consolidated results of operations and financial condition.
 83




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1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(x)
    
    New Accounting Standards (continued)In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities-Including an amendment of FASB Statement No. 115 (SFAS 159).
SFAS 159 provides companies with an option to report selected financial assets and liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been
elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by Canon in the first quarter beginning
January 1, 2008. Canon is currently evaluating the effect that the adoption of SFAS 159 will
have on its consolidated results of operations and financial condition but does not expect
SFAS 159 to have a material impact.(y)
    
    ReclassificationCertain reclassifications have been made to the prior years consolidated financial statements
to conform with the presentation used for the year ended December 31, 2006.2.
    
    Foreign OperationsAmounts included in the consolidated financial statements relating to subsidiaries operating in
foreign countries are summarized as follows:
 2006
    
    2005
    
    2004(Millions of yen)December 31:Total assets
    
    ¥
    1,995,927
    
    
    ¥
    1,751,011
    
    
    ¥
    1,500,197Net assets
    
    
    907,845
    
    
    
    767,711
    
    
    
    632,657Year ended December 31:Net sales
    
    ¥
    3,119,102
    
    

    ¥
    2,774,443
    
    

    ¥
    2,548,700Net income
    
    
    114,916
    
    
    
    81,916
    
    
    
    70,227
 84




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3.
    
    Marketable Securities and Investments
  December 31, 2006Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Government bonds
    
    ¥
    224
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    224Bank debt securities
    
    
    71
    
    
    
    
    
    
    
    1
    
    
    
    70295
    
    
    
    
    
    
    
    1
    
    
    
    294Held-to-maturity:Corporate debt securities
    
    
    10,151
    
    
    
    
    
    
    
    
    
    
    
    10,151¥
    10,446
    
    
    ¥
    
    
    
    ¥
    1
    
    
    ¥
    10,445Noncurrent:Available-for-sale:Government bonds
    
    ¥
    335
    
    
    ¥
    
    
    
    ¥
    15
    
    
    ¥
    320Corporate debt securities
    
    
    4,090
    
    
    
    35
    
    
    
    1
    
    
    
    4,124Fund trusts
    
    
    4,072
    
    
    
    1,536
    
    
    
    1
    
    
    
    5,607Equity securities
    
    
    12,648
    
    
    
    17,479
    
    
    
    275
    
    
    
    29,85221,145
    
    
    
    19,050
    
    
    
    292
    
    
    
    39,903Held-to-maturity:Corporate debt securities
    
    
    10,311
    
    
    
    
    
    
    
    
    
    
    
    10,311¥
    31,456
    
    
    ¥
    19,050
    
    
    ¥
    292
    
    
    ¥
    50,214
 85




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3.
    
    Marketable Securities and Investments (continued)
 December 31, 2005Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Bank debt securities
    
    ¥
    71
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    71Equity securities
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    101¥
    172
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    172Noncurrent:Available-for-sale:Government bonds
    
    ¥
    525
    
    
    ¥
    7
    
    
    ¥
    
    
    
    ¥
    532Corporate debt securities
    
    
    85
    
    
    
    3
    
    
    
    
    
    
    
    88Fund trusts
    
    
    4,553
    
    
    
    1,446
    
    
    
    
    
    
    
    5,999Equity securities
    
    
    11,373
    
    
    
    15,086
    
    
    
    10
    
    
    
    26,44916,536
    
    
    
    16,542
    
    
    
    10
    
    
    
    33,068Held-to-maturity:Corporate debt securities
    
    
    20,961
    
    
    
    
    
    
    
    
    
    
    
    20,961¥
    37,497
    
    
    ¥
    16,542
    
    
    ¥
    10
    
    
    ¥
    54,029
 86




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3.
    
    Marketable Securities and Investments (continued)
  Available-for-sale securitiesCost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    295
    
    
    ¥
    294Due after one year through
five years
    
    
    5,606
    
    
    
    7,104Due after five years
    
    
    2,891
    
    
    
    2,947¥
    8,792
    
    
    ¥
    10,345
 Held-to-maturity securitiesCost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    10,151
    
    
    ¥
    10,151Due after one year through
five years
    
    
    10,311
    
    
    
    10,311¥
    20,462
    
    
    ¥
    20,462
     87




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4.
    
    Trade Receivables
  December 312006
    
    
    2005(Millions of yen)Notes
    
    ¥
    24,241
    
    
    ¥
    27,328Accounts
    
    
    751,555
    
    
    
    673,827775,796
    
    
    
    701,155Less allowance for doubtful
receivables
    
    
    (13,849
    )
    
    
    (11,728
    )¥
    761,947
    
    
    ¥
    689,427
 5.
    
    Inventories
  December 312006
    
    
    2005(Millions of yen)Finished goods
    
    ¥
    359,471
    
    
    ¥
    359,934Work in process
    
    
    160,231
    
    
    
    132,520Raw materials
    
    
    19,355
    
    
    
    17,741¥
    539,057
    
    
    ¥
    510,195
 6.
    
    Property, Plant and Equipment
  December 312006
    
    
    2005(Millions of yen)Land
    
    ¥
    231,026
    
    
    ¥
    199,595Buildings
    
    
    1,077,585
    
    
    
    997,351Machinery and equipment
    
    
    1,261,176
    
    
    
    1,164,480Construction in progress
    
    
    79,582
    
    
    
    59,5582,649,369
    
    
    
    2,420,984Less accumulated depreciation
    
    
    (1,382,944
    )
    
    
    (1,272,163
    )¥
    1,266,425
    
    
    ¥
    1,148,821
  88




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7. Finance Receivables and Operating Leases
  December 312006
    
    
    2005(Millions of yen)Total minimum lease payments receivable
    
    ¥
    216,697
    
    
    ¥
    204,774Unguaranteed residual values
    
    
    14,377
    
    
    
    13,849Executory costs
    
    
    (2,923
    )
    
    
    (2,785
    )Unearned income
    
    
    (24,930
    )
    
    
    (23,632
    )203,221
    
    
    
    192,206Less allowance for doubtful receivables
    
    
    (7,871
    )
    
    
    (8,372
    )195,350
    
    
    
    183,834Less amount due within one year
    
    
    (72,808
    )
    
    
    (69,211
    )¥
    122,542
    
    
    ¥
    114,623
   Financing
    
    
    Operatingleases
    
    
    leases(Millions of yen)Year ending December 31:2007
    
    ¥
    86,961
    
    
    ¥
    5,6892008
    
    
    64,107
    
    
    
    2,9962009
    
    
    41,212
    
    
    
    1,6992010
    
    
    18,368
    
    
    
    7702011
    
    
    5,518
    
    
    
    70Thereafter
    
    
    531
    
    
    
    24¥
    216,697
    
    
    ¥
    11,248
 89




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8. Acquisitions
    90




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##### Table of Contents



9. Goodwill and Other Intangible Assets
   December 31, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Grosscarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    amount
    
    
    amortization(Millions of yen)Software
    
    ¥
    140,756
    
    
    ¥
    76,120
    
    
    ¥
    121,729
    
    
    ¥
    70,535License fees
    
    
    23,681
    
    
    
    11,257
    
    
    
    20,567
    
    
    
    11,329Other
    
    
    24,899
    
    
    
    4,919
    
    
    
    23,291
    
    
    
    4,997¥
    189,336
    
    
    ¥
    92,296
    
    
    ¥
    165,587
    
    
    ¥
    86,861
 91




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##### Table of Contents



9. Goodwill and Other Intangible Assets (continued)
    Year ended December 312006
    
    
    2005(Millions of yen)Balance at beginning of year
    
    ¥
    40,161
    
    
    ¥
    24,233Goodwill acquired during the year
    
    
    2,297
    
    
    
    15,391Recognition of acquired companys tax benefits
    
    
    (1,038
    )
    
    
    Translation adjustments and other
    
    
    (619
    )
    
    
    537Balance at end of year
    
    ¥
    40,801
    
    
    ¥
    40,161
  92




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10. Short-Term Loans and Long-Term Debt
   December 312006
    
    
    2005(Millions of yen)Loans, principally from banks, maturing
in installments through 2018; bearing
weighted average interest of 1.34% and
1.40% at December 31, 2006 and 2005,
respectively, partially secured by
mortgage of property, plant and
equipment
    
    ¥
    149
    
    
    ¥
    2,6412.95% Japanese yen notes, due 2007
    
    
    10,000
    
    
    
    10,0002.27% Japanese yen notes, due 2008
    
    
    10,000
    
    
    
    10,0001.30% Japanese yen convertible
debentures, due 2008
    
    
    318
    
    
    
    649Capital lease obligations
    
    
    10,585
    
    
    
    8,78431,052
    
    
    
    32,074Less amount due within one year
    
    
    (15,263
    )
    
    
    (4,992
    )¥
    15,789
    
    
    ¥
    27,082
  (Millions of yen)Year ending December 31:2007
    
    ¥
    15,2632008
    
    
    13,4502009
    
    
    1,8322010
    
    
    4182011
    
    
    69Thereafter
    
    
    20¥
    31,052
 93




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##### Table of Contents



10. Short-Term Loans and Long-Term Debt (continued)
    11. Trade Payables
  December 312006
    
    
    2005(Millions of yen)Notes
    
    ¥
    15,902
    
    
    ¥
    17,567Accounts
    
    
    477,156
    
    
    
    487,559¥
    493,058
    
    
    ¥
    505,126
 94




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12. Employee Retirement and Severance Benefits
     95




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##### Table of Contents



12. Employee Retirement and Severance Benefits (continued)
    Before
    
    
    
    
    
    Afterapplication of
    
    
    
    
    
    application ofSFAS 158
    
    Adjustments
    
    SFAS 158(Millions of yen)Other assets
    
    ¥
    5,230
    
    
    ¥
    (2,206
    )
    
    ¥
    3,024Accrued expenses
    
    
    
    
    
    
    (90
    )
    
    
    (90
    )Accrued pension and severance cost
    
    
    (57,031
    )
    
    
    (26,845
    )
    
    
    (83,876
    )Deferred income taxes
    
    
    6,408
    
    
    
    9,516
    
    
    
    15,924Minority interests
    
    
    1,517
    
    
    
    3,997
    
    
    
    5,514Accumulated other comprehensive
income (loss)
    
    
    10,914
    
    
    
    15,628
    
    
    
    26,542
 96




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12. Employee Retirement and Severance Benefits (continued)
 Obligations and funded status
  December 312006
    
    
    2005(Millions of yen)Change in benefit obligations:Benefit obligations at beginning of year
    
    ¥
    620,493
    
    
    ¥
    582,212Service cost
    
    
    27,399
    
    
    
    25,801Interest cost
    
    
    17,309
    
    
    
    16,172Plan participants contributions
    
    
    1,412
    
    
    
    1,161Amendments
    
    
    (954
    )
    
    
    (6,212
    )Actuarial gain
    
    
    23,586
    
    
    
    3,340Benefits paid
    
    
    (13,064
    )
    
    
    (12,239
    )Acquisition
    
    
    714
    
    
    
    10,106Foreign currency exchange rate changes
    
    
    11,696
    
    
    
    167Other
    
    
    
    
    
    
    (15
    )Benefit obligations at end of year
    
    
    688,591
    
    
    
    620,493Change in plan assets:Fair value of plan assets at beginning
of year
    
    
    545,518
    
    
    
    418,798Actual return on plan assets
    
    
    18,858
    
    
    
    93,844Employer contributions
    
    
    44,981
    
    
    
    40,059Plan participants contributions
    
    
    1,412
    
    
    
    1,161Benefits paid
    
    
    (13,064
    )
    
    
    (12,239
    )Acquisition
    
    
    320
    
    
    
    3,486Foreign currency exchange rate changes
    
    
    9,624
    
    
    
    409Fair value of plan assets at end of year
    
    
    607,649
    
    
    
    545,518Funded status at end of year
    
    ¥
    (80,942
    )
    
    ¥
    (74,975
    )
 97




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##### Table of Contents



12.
Employee Retirement and Severance Benefits (continued)
  (Millions of yen)Other assets
    
    ¥
    3,024Accrued expenses
    
    
    (90
    )Accrued pension and severance cost
    
    
    (83,876
    )¥
    (80,942
    )
  (Millions of yen)Actuarial loss
    
    ¥
    139,305Prior service cost
    
    
    (94,935
    )Net transition obligation
    
    
    3,610¥
    47,980
  (Millions of yen)Funded status
    
    ¥
    (74,975
    )Unrecognized actuarial loss
    
    
    110,424Unrecognized prior service cost
    
    
    (101,552
    )Unrecognized net transition obligation
    
    
    3,955Net amount recognized
    
    ¥
    (62,148
    )
  (Millions of yen)Other assets
    
    ¥
    3,089Accrued pension and severance cost
    
    
    (80,430
    )Accumulated
other comprehensive income (loss)
    
    
    15,193Net amount recognized
    
    ¥
    (62,148
    )
 98




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12. Employee Retirement and Severance Benefits (continued)
  December 312006
    
    
    2005(Millions of yen)Accumulated benefit obligation
    
    ¥
    641,199
    
    
    ¥
    578,627
  December 312006
    
    
    2005(Millions of yen)Plans with projected benefit
obligations in excess of plan assets:Projected benefit obligations
    
    ¥
    656,722
    
    
    ¥
    587,162Fair value of plan assets
    
    
    572,756
    
    
    
    510,287Plans with accumulated benefit
obligations in excess of plan assets:Accumulated benefit obligations
    
    
    608,812
    
    
    
    545,375Fair value of plan assets
    
    
    568,615
    
    
    
    506,634
 99




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12. Employee Retirement and Severance Benefits (continued)
 Components of net periodic benefit cost
  Year ended December 312006
    
    
    2005
    
    
    2004(Millions of yen)Service cost
    
    ¥
    27,399
    
    
    ¥
    25,801
    
    
    ¥
    26,571Interest cost
    
    
    17,309
    
    
    
    16,172
    
    
    
    19,108Expected return on plan assets
    
    
    (26,199
    )
    
    
    (19,651
    )
    
    
    (17,054
    )Amortization of net transition
obligation
    
    
    345
    
    
    
    345
    
    
    
    344Amortization of prior service cost
    
    
    (7,549
    )
    
    
    (8,007
    )
    
    
    (6,814
    )Recognized actuarial loss
    
    
    3,779
    
    
    
    10,542
    
    
    
    12,505Settlement loss resulting from
plan termination
    
    
    
    
    
    
    
    
    
    
    2,784Settlement loss resulting from
transfer of substitutional
portion of EPFs to the Japanese
government
    
    
    
    
    
    
    
    
    
    
    69,651¥
    15,084
    
    
    ¥
    25,202
    
    
    ¥
    107,095
  (Millions of yen)Net transition obligation
    
    ¥
    345Prior service cost
    
    
    (13,491
    )Actuarial loss
    
    
    6,100
  100




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12. Employee Retirement and Severance Benefits (continued)
 Assumptions
  December 312006
    
    2005Discount rate
    
    
    2.8
    %
    
    
    2.7
    %Assumed rate of increase in future compensation levels
    
    
    3.4
    %
    
    
    3.3
    %
  Year ended December 312006
    
    2005
    
    2004Discount rate
    
    
    2.7
    %
    
    
    2.7
    %
    
    
    2.7
    %Assumed rate of increase in futurecompensation levels
    
    
    3.3
    %
    
    
    3.0
    %
    
    
    2.0
    %Expected long-term rate of return on
plan assets
    
    
    4.8
    %
    
    
    4.6
    %
    
    
    3.6
    %
  Plan assets
  December 31
    
    Target2006
    
    2005
    
    allocationAsset category:Equity securities
    
    
    40.5
    %
    
    
    50.8
    %
    
    
    37.5
    %Debt securities
    
    
    40.5
    %
    
    
    34.6
    %
    
    
    44.5
    %Cash
    
    
    0.4
    %
    
    
    0.7
    %
    
    
    0.1
    %Life insurance company
general accounts
    
    
    15.9
    %
    
    
    13.5
    %
    
    
    15.7
    %Other
    
    
    2.7
    %
    
    
    0.4
    %
    
    
    2.2
    %100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 101




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12. Employee Retirement and Severance Benefits (continued)
   Contributions
  Estimated future benefit payments
  Year ending December 31:
    
    (Millions of yen)2007
    
    ¥
    10,7092008
    
    
    12,5142009
    
    
    13,9142010
    
    
    15,2162011
    
    
    16,8002012  2016
    
    
    109,869
 102




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##### Table of Contents



13. Income Taxes
  Year ended December 31, 2006Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income
taxes and minority
interests
    
    ¥
    556,759
    
    
    ¥
    162,384
    
    
    ¥
    719,143Income taxes:Current
    
    ¥
    201,022
    
    
    ¥
    54,156
    
    
    ¥
    255,178Deferred
    
    
    (73
    )
    
    
    (6,872
    )
    
    
    (6,945
    )¥
    200,949
    
    
    ¥
    47,284
    
    
    ¥
    248,233
 Year ended December 31, 2005Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income
taxes and minority
interests
    
    ¥
    492,709
    
    
    ¥
    119,295
    
    
    ¥
    612,004Income taxes:Current
    
    ¥
    172,595
    
    
    ¥
    40,956
    
    
    ¥
    213,551Deferred
    
    
    3,441
    
    
    
    (4,207
    )
    
    
    (766
    )¥
    176,036
    
    
    ¥
    36,749
    
    
    ¥
    212,785
 Year ended December 31, 2004Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income
taxes and minority
interests
    
    ¥
    447,864
    
    
    ¥
    104,252
    
    
    ¥
    552,116Income taxes:Current
    
    ¥
    162,679
    
    
    ¥
    22,275
    
    
    ¥
    184,954Deferred
    
    
    (1,065
    )
    
    
    10,125
    
    
    
    9,060¥
    161,614
    
    
    ¥
    32,400
    
    
    ¥
    194,014
 103




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##### Table of Contents



13. Income Taxes (continued)
    Year ended December 312006
    
    2005
    
    2004Japanese statutory income tax rate
    
    
    40.0
    %
    
    
    40.0
    %
    
    
    42.0
    %Increase (reduction) in income taxes
resulting from:Expenses not deductible for tax
purposes
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Tax benefits not recognized on
operating losses of subsidiaries
    
    
    
    
    
    
    
    
    
    
    0.1Income of foreign subsidiaries
taxed at lower than Japanese
statutory tax rate
    
    
    (2.1
    )
    
    
    (1.9
    )
    
    
    (2.1
    )Tax credit for research and
development expenses
    
    
    (4.1
    )
    
    
    (3.9
    )
    
    
    (4.0
    )Other
    
    
    0.4
    
    
    
    0.3
    
    
    
    (1.3
    )Effective income tax rate
    
    
    34.5
    %
    
    
    34.8
    %
    
    
    35.1
    %
 104




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##### Table of Contents



13. Income Taxes (continued)
  December 312006
    
    
    2005(Millions of yen)Prepaid expenses and other current assets
    
    ¥
    66,839
    
    
    ¥
    52,116Other assets
    
    
    67,568
    
    
    
    61,325Other current liabilities
    
    
    (4,133
    )
    
    
    (3,500
    )Other noncurrent liabilities
    
    
    (39,299
    )
    
    
    (36,329
    )¥
    90,975
    
    
    ¥
    73,612
  December 312006
    
    
    2005(Millions of yen)Deferred tax assets:Inventories
    
    ¥
    20,077
    
    
    ¥
    13,459Accrued business tax
    
    
    10,654
    
    
    
    8,599Accrued pension and severance cost
    
    
    33,633
    
    
    
    34,257Research and development  costs
capitalized for tax purposes
    
    
    31,068
    
    
    
    23,629Property, plant and equipment
    
    
    26,577
    
    
    
    21,839Accrued expenses
    
    
    21,277
    
    
    
    20,132Net operating losses carried forward
    
    
    1,767
    
    
    
    1,388Other
    
    
    28,061
    
    
    
    24,362Total gross deferred tax assets
    
    
    173,114
    
    
    
    147,665Less valuation allowance
    
    
    (6,500
    )
    
    
    (3,345
    )Net deferred tax assets
    
    
    166,614
    
    
    
    144,320Deferred tax liabilities:Undistributed earnings of foreign
subsidiaries
    
    
    (9,138
    )
    
    
    (6,806
    )Net unrealized gains on securities
    
    
    (7,521
    )
    
    
    (6,480
    )Tax deductible reserve
    
    
    (11,955
    )
    
    
    (14,307
    )Financing lease revenue
    
    
    (35,990
    )
    
    
    (35,395
    )Other
    
    
    (11,035
    )
    
    
    (7,720
    )Total gross deferred tax liabilities
    
    
    (75,639
    )
    
    
    (70,708
    )Net deferred tax assets
    
    ¥
    90,975
    
    
    ¥
    73,612
 105




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13. Income Taxes (continued)
    (Millions of yen)Within one year
    
    ¥
    2,979After one year through five years
    
    
    967After five years through ten years
    
    
    101Indefinite period
    
    
    1,520Total
    
    ¥
    5,567
   106




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14. Common Stock
   15. Legal Reserve and Retained Earnings
     107




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##### Table of Contents



16. Other Comprehensive Income (Loss)
  Year ended December 312006
    
    
    2005
    
    
    2004(Millions of yen)Foreign currency translation
adjustments:Balance at beginning of year
    
    ¥
    (25,772
    )
    
    ¥
    (79,751
    )
    
    ¥
    (83,801
    )Adjustments for the year
    
    
    48,630
    
    
    
    53,979
    
    
    
    4,050Balance at end of year
    
    
    22,858
    
    
    
    (25,772
    )
    
    
    (79,751
    )Net unrealized gains and losses on
securities:Balance at beginning of year
    
    
    6,073
    
    
    
    7,470
    
    
    
    6,784Adjustments for the year
    
    
    1,992
    
    
    
    (1,397
    )
    
    
    686Balance at end of year
    
    
    8,065
    
    
    
    6,073
    
    
    
    7,470Net gains and losses on derivative
instruments:Balance at beginning of year
    
    
    (1,174
    )
    
    
    (693
    )
    
    
    (297
    )Adjustments for the year
    
    
    (489
    )
    
    
    (481
    )
    
    
    (396
    )Balance at end of year
    
    
    (1,663
    )
    
    
    (1,174
    )
    
    
    (693
    )Minimum pension liability adjustments:Balance at beginning of year
    
    
    (7,339
    )
    
    
    (28,338
    )
    
    
    (65,961
    )Adjustments for the year
    
    
    (3,575
    )
    
    
    20,999
    
    
    
    37,623Adjustment to initially apply SFAS 158
    
    
    10,914
    
    
    
    
    
    
    
    Balance at end of year
    
    
    
    
    
    
    (7,339
    )
    
    
    (28,338
    )Pension liability adjustments:Adjustment to initially apply SFAS 158
    
    
    (26,542
    )
    
    
    
    
    
    
    Balance at end of year
    
    
    (26,542
    )
    
    
    
    
    
    
    Total accumulated other comprehensive
income (loss):Balance at beginning of year
    
    
    (28,212
    )
    
    
    (101,312
    )
    
    
    (143,275
    )Adjustments for the year
    
    
    46,558
    
    
    
    73,100
    
    
    
    41,963Adjustment to initially apply SFAS 158
    
    
    (15,628
    )
    
    
    
    
    
    
    Balance at end of year
    
    ¥
    2,718
    
    
    ¥
    (28,212
    )
    
    ¥
    (101,312
    )
 108




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16. Other Comprehensive Income (Loss) (continued)
  Year ended December 31Before-tax
    
    
    Tax (expense)
    
    Net-of-taxamount
    
    
    or benefit
    
    amount(Millions of yen)2006:Foreign currency translation adjustments
    
    ¥
    49,518
    
    
    ¥
    (888
    )
    
    ¥
    48,630Net unrealized gains and losses on securities:Amount arising during the year
    
    
    3,708
    
    
    
    (1,502
    )
    
    
    2,206Reclassification adjustments for gains
and losses realized in net income
    
    
    (388
    )
    
    
    174
    
    
    
    (214
    )Net change during the year
    
    
    3,320
    
    
    
    (1,328
    )
    
    
    1,992Net gains and losses on derivative
instruments:Amount arising during the year
    
    
    (7,126
    )
    
    
    2,858
    
    
    
    (4,268
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    6,309
    
    
    
    (2,530
    )
    
    
    3,779Net change during the year
    
    
    (817
    )
    
    
    328
    
    
    
    (489
    )Minimum pension liability adjustments
    
    
    (4,391
    )
    
    
    816
    
    
    
    (3,575
    )Other comprehensive income (loss)
    
    ¥
    47,630
    
    
    ¥
    (1,072
    )
    
    ¥
    46,5582005:Foreign currency translation adjustments
    
    ¥
    55,345
    
    
    ¥
    (1,366
    )
    
    ¥
    53,979Net unrealized gains and losses on securities:Amount arising during the year
    
    
    9,005
    
    
    
    (3,892
    )
    
    
    5,113Reclassification adjustments for gains
and losses realized in net income
    
    
    (10,793
    )
    
    
    4,283
    
    
    
    (6,510
    )Net change during the year
    
    
    (1,788
    )
    
    
    391
    
    
    
    (1,397
    )Net gains and losses on derivative
instruments:Amount arising during the year
    
    
    (9,137
    )
    
    
    3,658
    
    
    
    (5,479
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    8,333
    
    
    
    (3,335
    )
    
    
    4,998Net change during the year
    
    
    (804
    )
    
    
    323
    
    
    
    (481
    )Minimum pension liability adjustments
    
    
    40,364
    
    
    
    (19,365
    )
    
    
    20,999Other comprehensive income (loss)
    
    ¥
    93,117
    
    
    ¥
    (20,017
    )
    
    ¥
    73,100
 109




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16. Other Comprehensive Income (Loss) (continued)
 Year ended December 31Before-tax
    
    
    Tax (expense)
    
    
    Net-of-taxamount
    
    
    or benefit
    
    
    amount(Millions of yen)2004:Foreign currency translation adjustments
    
    ¥
    4,400
    
    
    ¥
    (350
    )
    
    ¥
    4,050Net unrealized gains and losses on securities:Amount arising during the year
    
    
    5,022
    
    
    
    (2,202
    )
    
    
    2,820Reclassification adjustments for gains
and losses realized in net income
    
    
    (3,698
    )
    
    
    1,564
    
    
    
    (2,134
    )Net change during the year
    
    
    1,324
    
    
    
    (638
    )
    
    
    686Net gains and losses on derivative
instruments:Amount arising during the year
    
    
    (1,673
    )
    
    
    708
    
    
    
    (965
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    929
    
    
    
    (360
    )
    
    
    569Net change during the year
    
    
    (744
    )
    
    
    348
    
    
    
    (396
    )Minimum pension liability adjustments
    
    
    78,179
    
    
    
    (40,556
    )
    
    
    37,623Other comprehensive income (loss)
    
    ¥
    83,159
    
    
    ¥
    (41,196
    )
    
    ¥
    41,963
 110




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##### Table of Contents



17. Net Income per Share
   Year ended December 312006
    
    
    2005
    
    
    2004(Millions of yen)Net income
    
    ¥
    455,325
    
    
    ¥
    384,096
    
    
    ¥
    343,344Effect of dilutive securities:1.20% Japanese yen
convertible debentures, due 2005
    
    
    
    
    
    
    5
    
    
    
    241.30% Japanese yen
convertible debentures, due 2008
    
    
    8
    
    
    
    18
    
    
    
    72Diluted net income
    
    ¥
    455,333
    
    
    ¥
    384,119
    
    
    ¥
    343,440(Number of shares)Average common shares outstanding
    
    
    1,331,542,074
    
    
    
    1,330,760,715
    
    
    
    1,328,047,686Effect of dilutive securities:1.20% Japanese yen
convertible debentures, due 2005
    
    
    
    
    
    
    185,755
    
    
    
    694,2351.30% Japanese yen
convertible debentures, due 2008
    
    
    474,796
    
    
    
    1,118,931
    
    
    
    3,187,917Diluted common shares outstanding
    
    
    1,332,016,870
    
    
    
    1,332,065,401
    
    
    
    1,331,929,838(Yen)Net income per share:Basic
    
    ¥
    341.95
    
    
    ¥
    288.63
    
    
    ¥
    258.53Diluted
    
    
    341.84
    
    
    
    288.36
    
    
    
    257.85
 111




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18. Derivatives and Hedging Activities
 Risk management policy
  Foreign currency exchange rate risk management
  Interest rate risk management
  Fair value hedge
  112




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##### Table of Contents



18. Derivatives and Hedging Activities (continued)
 Cash flow hedge
   Derivatives not designated as hedges
   December 312006
    
    
    2005(Millions of yen)To sell foreign currencies
    
    ¥
    717,136
    
    
    ¥
    645,188To buy foreign currencies
    
    
    51,189
    
    
    
    46,424
 113




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##### Table of Contents



19. Commitments and Contingent Liabilities
 Commitments
    (Millions of yen)Year ending December 31:2007
    
    ¥
    16,0252008
    
    
    12,9752009
    
    
    9,5902010
    
    
    5,9622011
    
    
    4,570Thereafter
    
    
    11,256Total future minimum lease payments
    
    ¥
    60,378
 114




---



##### Table of Contents



19. Commitments and Contingent Liabilities (continued)
 Guarantees
    Year ended December 312006
    
    
    2005(Millions of yen)Balance at beginning of year
    
    ¥
    16,746
    
    
    ¥
    14,264Addition
    
    
    15,213
    
    
    
    18,510Utilization
    
    
    (14,266
    )
    
    
    (15,580
    )Other
    
    
    451
    
    
    
    (448
    )Balance at end of year
    
    ¥
    18,144
    
    
    ¥
    16,746
 Legal proceedings
  115




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19. Commitments and Contingent Liabilities (continued)
    116




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##### Table of Contents



19. Commitments and Contingent Liabilities (continued)
  20. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
 Fair value of financial instruments
  December 312006
    
    
    2005Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Millions of yen)Long-term debt, including
current installments
    
    ¥
    (31,052
    )
    
    ¥
    (32,795
    )
    
    ¥
    (32,074
    )
    
    ¥
    (35,194
    )Foreign exchange contracts:Assets
    
    
    307
    
    
    
    307
    
    
    
    2,250
    
    
    
    2,250Liabilities
    
    
    (17,534
    )
    
    
    (17,534
    )
    
    
    (10,062
    )
    
    
    (10,062
    )
  117




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##### Table of Contents



20.
    
    Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
(continued)
 Long-term debt
  Foreign exchange contracts
  Limitations
  Concentrations of credit risk
  21. Supplemental Cash Flow Information
  118




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##### Table of Contents



22. Subsequent Event
   23. Event (Unaudited) Subsequent to the Date of the Report of Independent Registered Public
Accounting Firm
  119




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##### Table of Contents



Balance at
    
    
    Add
    
    
    Deduct
    
    
    Add
    
    
    Balancebeginning of
    
    
    charge to
    
    
    bad debts
    
    
    translation
    
    
    at end ofperiod
    
    
    income
    
    
    written off
    
    
    adjustments
    
    
    period(Millions of yen)Year ended December 31, 2006:Allowance for doubtful receivables
    
    ¥
    11,728
    
    
    ¥
    3,384
    
    
    ¥
    2,058
    
    
    ¥
    795
    
    
    ¥
    13,849Year ended December 31, 2005:Allowance for doubtful receivables
    
    ¥
    11,657
    
    
    ¥
    560
    
    
    ¥
    1,180
    
    
    ¥
    691
    
    
    ¥
    11,728Year ended December 31, 2004:Allowance for doubtful receivables
    
    ¥
    14,423
    
    
    ¥
    449
    
    
    ¥
    3,515
    
    
    ¥
    300
    
    
    ¥
    11,657
 120




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##### Table of Contents



Item 18. Financial Statements
  
 Item 19. Financial Statements and Exhibits
             1.1
    
    Articles of Incorporation of Canon Inc. (Translation)1.2
    
    Regulations Of the Board of Directors of Canon Inc. (Translation)2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)8
    
    List of Significant Subsidiaries (See Organizational Structure in Item 4.C. of this
Form 20-F)11.1
    
    Canon Group Code of Conduct (Translation) , incorporated by reference from the annual
report on Form20-F (Commission file number 0-15122) filed on June 10, 200411.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation), incorporated by
reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 200412
    
    302 Certifications13
    
    906 Certification
 121




---



##### Table of Contents



CANON INC.
(Registrant)By:
    
    /s/ Toshizo Tanaka(Executive Vice President & CFO)Canon INC.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan
  122




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EXHIBIT INDEX
 Exhibit number
    
    TitleExhibit 1.1
    
    Articles of Incorporation of Canon Inc. (Translation)Exhibit 1.2
    
    Regulations of the Board of Directors of Canon Inc. (Translation)Exhibit 2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)Exhibit 8
    
    List of Significant Subsidiaries (See Organizational Structure in Item
4.C. of this Form 20-F)Exhibit 11.1
    
    Canon Group Code of Conduct (Translation) , incorporated by reference from
the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004Exhibit 11.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct)
(Translation), incorporated by reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004Exhibit 12
    
    302 CertificationsExhibit 13
    
    906 Certification
 123