##### Table of Contents



o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 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, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ____________ to ____________
 Commission
file number 0-15122
 CANON KABUSHIKI KAISHA
(Name of Registrant in Japanese as specified in its charter) CANON INC.
(Name of Registrant in English as specified in its charter) JAPAN
(Jurisdiction of incorporation or organization) 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class
    
    Name of each exchange on which registered(1) Common Stock (the shares)
    
    New York Stock Exchange*(2) American Depositary Shares (ADSs), each of which represents one share
    
    New York Stock Exchange
 Securities registered or to be registered pursuant to Section 12(g) of the Act. None
(Title of Class)  Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
(Title of Class)  *  Not for trading, but only for technical purposes in connection with the registration of ADSs.
 Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the
annual report.
 
As of December 31, 2004, 887,977,251 shares of common stock, including 37,217,757
ADSs, were outstanding.
 
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  þ          No  o Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17  þ          Item 18  o




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TABLE OF CONTENTS 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
    
    
    10A.
    
    History and development of the Company
    
    
    10B.
    
    Business overview
    
    
    11Products
    
    
    11Marketing and distribution
    
    
    13Service
    
    
    14Net sales by product group and geographic area
    
    
    15Seasonality
    
    
    15Sources of supply
    
    
    15Competition
    
    
    16Patents and licenses
    
    
    17Environmental 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 2004 compared with fiscal 2003
    
    
    26Fiscal 2003 compared with fiscal 2002
    
    
    29Foreign operations and foreign currency transactions
    
    
    34Recent developments
    
    
    34B.
    
    Liquidity and capital resources
    
    
    35C.
    
    Research and development, patents and licenses, etc.
    
    
    36D.
    
    Trend information
    
    
    36Trend information
    
    
    36Forward looking statements
    
    
    38E.
    
    Off-balance sheet arrangements
    
    
    38F.
    
    Contractual obligations
    
    
    38Item 6.    Directors, Senior Management and Employees
    
    
    40A.
    
    Directors and senior management
    
    
    40B.
    
    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
 i




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Page numberItem 8.    Financial Information
    
    
    48A.
    
    Consolidated
financial statements and other financial information
    
    
    48Consolidated
financial statements
    
    
    48Legal proceedings
    
    
    48Dividend policy
    
    
    48B.
    
    Significant changes
    
    
    48Item 9.    The Offer and Listing
    
    
    49A.
    
    Offer and listing details
    
    
    49Trading in domestic markets
    
    
    49Trading in foreign markets
    
    
    50B.
    
    Plan of distribution
    
    
    50C.
    
    Markets
    
    
    50Item 10.  Additional Information
    
    
    51A.
    
    Share capital
    
    
    51B.
    
    Memorandum and articles of association
    
    
    51C.
    
    Material contracts
    
    
    55D.
    
    Exchange controls
    
    
    55E.
    
    Taxation
    
    
    56F.
    
    Dividends and paying agents
    
    
    58G.
    
    Statement by experts
    
    
    58H.
    
    Documents on display
    
    
    58I.
    
    Subsidiary information
    
    
    58Item 11.  Quantitative and Qualitative Disclosures About Market Risk
    
    
    58Market risk exposures
    
    
    58Equity price risk
    
    
    58Foreign exchange rate and interest rate risk
    
    
    59Item 12.  Description of Securities Other than Equity Securities
    
    
    61PART IIItem 13.  Defaults, Dividend Arrearages and Delinquencies
    
    
    61Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    61Item 15.  Controls and Procedures
    
    
    62Item 16A.  Audit Committee Financial Expert
    
    
    62Item 16B.  Code of Ethics
    
    
    62Item 16C.  Principal Accountant Fees and Services
    
    
    62Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    63PART IIIItem 17.  Financial Statements
    
    
    64Reports of
Independent Registered Public Accounting Firms
    
    
    65Consolidated Balance Sheets
    
    
    67Consolidated Statements of Income
    
    
    68Consolidated
Statements of Stockholders Equity
    
    
    69Consolidated Statements of Cash Flows
    
    
    70Notes to Consolidated Financial Statements
    
    
    71Valuation and Qualifying Accounts
    
    
    112Item 18.  Financial Statements
    
    
    113Item 19.  Financial Statements and Exhibits
    
    
    113SIGNATURES
    
    
    114EXHIBIT INDEX
    
    
    115EX-1.1 Articles of IncorporationEX-2 Regulations for Handling of SharesEX-12 302 CertificationsEX-13 906 Certification
  ii




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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION All information contained in this Annual Report is as of December 31, 2004 unless otherwise
specified. References in this discussion to the Company are to Canon Inc. and, unless otherwise indicated,
references to the financial condition or operating results of Canon refer to Canon Inc. and its consolidated subsidiaries. On April 29, 2005, the noon buying rate for yen in New York City as reported by the Federal Reserve
Bank of New York was Yen104.64= U.S.$1. The Companys fiscal year end is December 31. In this Annual Report fiscal 2004 refers to the
Companys fiscal year ended December 31, 2004, and other fiscal years of the Company are referred to in a corresponding manner. 
 FORWARD-LOOKING INFORMATION This Annual Report contains forward-looking statements and information relating to Canon that are
based on beliefs of its management as well as
assumptions made by and information currently available to Canon Inc. When used in this Annual
Report, the words anticipate, believe, estimate,
expect, intend, may, plan, project and should and similar expressions, as they relate
to Canon or its management, are intended to
identify forward-looking statements. Such statements reflect the current views and assumptions of
the Company with respect to future events and are subject to
risks and uncertainties. Many factors could cause the actual results, performance or achievements
of Canon to be materially different from any
future results, performance or achievements that may be expressed or implied by such
forward-looking statements, including, among others, changes in
general economic and business conditions, changes in currency exchange rates and interest rates,
introduction of competing products by other companies,
lack of acceptance of new products or services by Canons targeted customers, inability to meet
efficiency and cost reduction objectives, changes in
business strategy and various other factors, both referenced and not referenced in this Annual
Report. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume
any obligation to update these forward-looking statements. 1




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PART I 
 Item 1.   Identity of Directors, Senior Management and Advisers Not applicable. 
 Item 2.   Offer Statistics and Expected Timetable Not applicable. 
 Item 3.   Key Information 
 A.   Selected financial data The following selected consolidated financial data has been derived from the consolidated
financial statements of Canon as of each of the dates and
for each of the periods indicated below. This information should be read in conjunction with and
qualified in its entirety by reference to the Consolidated
Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this
Annual Report. These financial statements have been audited by Ernst & Young ShinNihon, Independent
Registered Public Accounting Firm as of and for the year ended December 31, 2004. The financial
statements for periods prior to the year ended December 31, 2004
were audited by KPMG AZSA & Co., Independent Registered Public
Accounting Firm. Selected financial data *1:
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Millions of yen except average number of shares and per share data)Net sales
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072
    
    
    ¥
    2,940,128
    
    
    ¥
    2,907,573
    
    
    ¥
    2,696,420Operating profit
    
    
    543,793
    
    
    
    454,424
    
    
    
    346,359
    
    
    
    281,839
    
    
    
    234,131Income before cumulative effect of change
in accounting principle
    
    
    343,344
    
    
    
    275,730
    
    
    
    190,737
    
    
    
    163,869
    
    
    
    134,088Net income
    
    
    343,344
    
    
    
    275,730
    
    
    
    190,737
    
    
    
    167,561
    
    
    
    134,088Advertising
expenses
    
    
    111,770
    
    
    
    100,278
    
    
    
    71,725
    
    
    
    66,837
    
    
    
    67,840Research and
development expenses
    
    
    275,300
    
    
    
    259,140
    
    
    
    233,669
    
    
    
    218,616
    
    
    
    194,552Depreciation of property,
plant and equipment
    
    
    174,397
    
    
    
    168,636
    
    
    
    158,469
    
    
    
    147,286
    
    
    
    144,043Capital
expenditures
    
    
    318,730
    
    
    
    210,038
    
    
    
    198,702
    
    
    
    207,674
    
    
    
    170,986Long-term debt,
excluding current installments
    
    
    28,651
    
    
    
    59,260
    
    
    
    81,349
    
    
    
    95,526
    
    
    
    142,925Common stock
    
    
    173,864
    
    
    
    168,892
    
    
    
    167,242
    
    
    
    165,287
    
    
    
    164,796Stockholders equity
    
    
    2,209,896
    
    
    
    1,865,545
    
    
    
    1,591,950
    
    
    
    1,458,476
    
    
    
    1,298,914Total assets
    
    
    3,587,021
    
    
    
    3,182,148
    
    
    
    2,942,706
    
    
    
    2,844,756
    
    
    
    2,832,125Average number of common shares
in thousands
    
    
    885,365
    
    
    
    878,649
    
    
    
    876,716
    
    
    
    875,960
    
    
    
    872,606Per share data:Income before cumulative effect
of change in accounting principle:Basic
    
    ¥
    387.80
    
    
    ¥
    313.81
    
    
    ¥
    217.56
    
    
    ¥
    187.07
    
    
    ¥
    153.66Diluted
    
    
    386.78
    
    
    
    310.75
    
    
    
    214.80
    
    
    
    184.55
    
    
    
    151.51Net income:Basic
    
    ¥
    387.80
    
    
    ¥
    313.81
    
    
    ¥
    217.56
    
    
    ¥
    191.29
    
    
    ¥
    153.66Diluted
    
    
    386.78
    
    
    
    310.75
    
    
    
    214.80
    
    
    
    188.70
    
    
    
    151.51Cash dividends declared
    
    
    65.00
    
    
    
    50.00
    
    
    
    30.00
    
    
    
    25.00
    
    
    
    21.00Cash dividends declared (U.S.$)*2
    
    $
    0.601
    
    
    $
    0.464
    
    
    $
    0.254
    
    
    $
    0.196
    
    
    $
    0.179
 Notes: 1.
    
    The above financial data have been derived from the financial statements that were
prepared in conformity with accounting principles generally accepted in the United States
of America.2.
    
    Annual cash dividends declared (U.S.$) are translated from yen based on 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. 2




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The following table provides the noon buying rates for Japanese yen in New York City as
reported by the Federal Reserve Bank of New York expressed in Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for
Japanese yen per U.S.$1 during the months indicated. Yen exchange rates per U.S. dollar:
    
    Average
    
    
    Term end
    
    
    High
    
    
    Low2000
    
    
    108.37
    
    
    
    114.35
    
    
    
    101.70
    
    
    
    114.622001
    
    
    122.18
    
    
    
    131.04
    
    
    
    114.26
    
    
    
    131.472002
    
    
    124.81
    
    
    
    118.75
    
    
    
    115.71
    
    
    
    134.772003
    
    
    115.83
    
    
    
    107.13
    
    
    
    106.93
    
    
    
    121.422004
    - Year
    
    
    107.63
    
    
    
    102.68
    
    
    
    102.56
    
    
    
    114.30- 1(st) half
    
    
    
    
    
    
    109.43
    
    
    
    103.70
    
    
    
    114.30- July
    
    
    
    
    
    
    111.39
    
    
    
    108.21
    
    
    
    111.88- August
    
    
    
    
    
    
    109.00
    
    
    
    109.00
    
    
    
    111.53- September
    
    
    
    
    
    
    110.20
    
    
    
    109.22
    
    
    
    111.48- October
    
    
    
    
    
    
    106.04
    
    
    
    106.04
    
    
    
    111.34- November
    
    
    
    
    
    
    103.04
    
    
    
    102.58
    
    
    
    106.91- December
    
    
    
    
    
    
    102.68
    
    
    
    102.56
    
    
    
    105.592005
    - January
    
    
    
    
    
    
    103.55
    
    
    
    104.93
    
    
    
    102.26- February
    
    
    
    
    
    
    104.25
    
    
    
    105.84
    
    
    
    103.70- March
    
    
    
    
    
    
    107.22
    
    
    
    107.49
    
    
    
    103.87- April
    
    
    
    
    
    
    104.64
    
    
    
    108.67
    
    
    
    104.64
 
 B.   Capitalization and indebtedness Not applicable. 
 C.   Reasons for the offer and use of proceeds Not applicable. 
 D.   Risk Factors Canon is one of the worlds leading manufacturers of plain paper copying machines, digital
multifunction devices, laser beam printers, bubble jet printers, cameras, steppers and aligners. Primarily because of the nature of the business areas and geographical areas in which Canon
operates and the highly competitive nature of the industry to which it belongs, Canon is exposed to
a variety of risks and uncertainties in carrying out its businesses, including, but not limited to,
the following: Risks Related to Canons Industries Canon has invested and will continue to invest heavily in next-generation technologies. If the
market for these technologies does not develop as Canon expects or if its competitors produce these
or competing technologies in a more timely or effective manner, Canons operating results could be
materially adversely affected. Canon has made and will continue to make investments in next-generation technology research
and development initiatives. Canons competitors may achieve research and development breakthroughs
in these technologies more quickly than Canon, or may achieve advances in competing technologies
that render products under development by Canon uncompetitive. In step with the continuous
evolution in technologies, Canon has increased the size of its investment in development and
manufacturing. If Canons business strategies diverge from market needs, Canon may not recover some
or all of its investment, lose business opportunities, or both, which may materially adversely
affect Canons operating results. Although differentiation in technology and product development is
an important part of Canons strategy, Canon must also accurately assess the demand for and
perceived market acceptance of new technologies and products that it develops. If Canon pursues
technologies or develops products that do not become commercially accepted, its operating results
could be adversely affected. If Canon does not effectively manage transitions in its products and services, its revenue
and profits may decline. Many of the businesses in which Canon competes are characterized by rapid technological
advances in hardware performance, software functionality and product features, the frequent
introduction of new products, short product life cycles, and continual improvement in product price
characteristics relative to product performance. If Canon does not make an effective transition
from existing products and services to new offerings, its revenue and profits may decline. Among
the risks associated with the introduction of new products and services are delays in development
or manufacturing, low product marketability due to poor product quality, variations in
manufacturing costs, delays in customer purchases in anticipation of new introductions, difficulty
in predicting customer demand for new product offerings and difficulty in effective management of
inventory levels in line with anticipated demand. Canons revenue and gross margin also may suffer
due to the timing of product or service introductions by its competitors. This risk is exacerbated
when a product has a short life cycle or a competitor introduces a new product just before Canons
introduction of a similar product. Furthermore, sales of Canons new products and services may
replace sales of, or result in discounting of, some of its current product offerings, sometimes
offsetting the benefits derived from the introduction of a successful new product or service. Canon
must also ensure that its new products are not duplicative or do not overlap with existing products
and operations. Given the competitive nature of Canons businesses, if any of these risks
materialize, future demand for its products and services will be reduced and its results of
operations may decline. 3




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Canons businesses, especially the digital multifunction device and camera businesses in which
Canon operates, is highly competitive. Presently, the analog copying machines and conventional film camera segments of the market are
mature, with anticipated declining industry revenues as the market transitions to digital
technology. Some of Canons new digital products replace or compete with its traditional analog
products. Changes in the mix of products from analog to digital, and the pace of that change as
well as competitive developments could cause actual results to vary from those expected. The recent
trend of rapid digitalization has lowered entry barriers in the digital camera segment, resulting
in the entry of new competitors, such as electronics manufacturers, and an overall increase in the
number of competitors to Canons business. As a result, Canon may not be able to maintain its
position as an industry leader in many of its business categories. Although Canon believes that it
has successfully kept pace with this trend toward digitalization, it may not be able to compete
successfully in the future if it does not continue to invest in research and development
activities, implement cost-cutting measures and introduce attractive and high value-added products
to the market on a continuous basis. In addition, the unexpected emergence of strong competitors
through mergers and acquisitions or the formation of business alliances may change the competitive
environment of the businesses in which Canon engages, thereby affecting Canons future results of
operations. Because the semiconductor industry is highly cyclical, Canon may be adversely affected by any
downturn in the industry. The semiconductor industry is characterized by up and down business cycles, the timing, length
and volatility of which are difficult to predict. Recurring periods of oversupply of integrated
circuits have at times led to significantly reduced demand for capital equipment, including the
steppers and aligners Canon produces. Despite this cyclicality, Canon must maintain significant
levels of research and development expenditures in order to maintain its competitive position.
Canons business and operating results could be materially adversely affected by future downturns
in the semiconductor industry and related fluctuations in the demand for capital equipment in
general, and particularly by memory manufacturers. Downturns in the semiconductor industry have caused Canons customers to change their
operational strategies, which in turn may affect Canons business. Many device manufacturers have changed their business models to focus on the design of
semiconductors, while consigning the production of semiconductors to lower-cost foundries. Canon
cannot accurately predict the future effect of these trends on its business. However, as research
and development, manufacturing and sales activities become increasingly globalized in response to
these trends, shifting particularly to emerging markets, unexpected global developments, such as
adverse regulatory or legal changes and unanticipated events, such as natural disasters, may
adversely affect Canons business operations. 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
customers requirements, Canon may lose customers and its business may suffer. Canons steppers and mask aligners are affected by rapid technological change and can quickly
become obsolete. Canon believes its future success in the
steppers and aligners business depends on its ability to continue to enhance its existing products
and develop new products using new and more advanced technologies. In particular, as semiconductor
pattern sizes continue to decrease, the demand for more technologically advanced steppers is likely
to increase. Although Canon will continue to offer cost effective products by managing
manufacturing costs through its technology, Canons existing stepper and mask aligner products
could become obsolete sooner than anticipated because of faster than anticipated changes in one or
more of the technologies related to Canons products or in the market demand for products based on
a particular technology. Any failure by Canon to develop the advanced technologies required by its
customers at progressively lower costs and to supply sufficient quantities to a worldwide customer
base could adversely affect Canons net sales and profitability. Growing diversification in recording media may adversely affect Canons video camcorder
business. As part of the overall digitization of the consumer electronics market, the analog video
camcorder is being rapidly replaced by the digital video camcorder. At the same time, new digital
standards that compete with the MiniDV standard that Canon has adopted, such as DVD (Digital
Versatile Drive), SD (Secure Digital) memory card, HDD (Hard Disk Drive), and new recording format
such as HDV, have appeared. If these competing standards gain wide acceptance in the market, sales
of Canons products using the MiniDV standard may decline. In addition, Canon may be required to
incur significant research and development expenditures to develop new products that are compatible
with such new standards. Such trends may have an adverse affect on Canons video camcorder
business as well as its operating results. Canons camera and printer business depends upon seasonal consumer spending Canon generally experiences seasonal trends in the sale of its consumer- oriented products
such as cameras and printers, especially in the U.S. and European markets. Canons sales in second
half of the year tends to be higher than that of in first half of the year. Product sales may be
impacted by such seasonal purchasing patterns, making planning and inventory management difficult
and future financial results less predictable. Risks Related to Canons Business Canon derives a significant percentage of its revenues from Hewlett-Packard. Canon depends on Hewlett-Packard for a significant part of its business. For fiscal 2004,
approximately 21% of Canons net sales were to Hewlett-Packard. As a result, its business, results
of operations and financial condition may be affected by the policies, business, results of
operations and financial condition of Hewlett-Packard. Any decision by Hewlett-Packard management
to limit or reduce the scope of its relationship with Canon would adversely affect Canons business
and results of operations. 4




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Canon depends on a limited number of suppliers for certain key components. Canon relies on a limited number of outside vendors which meet Canons strict criteria for
quality, efficiency and environmental friendliness for certain critical components used in its
products. In some cases, Canon may be forced to discontinue its production of some or all of its
products if certain key parts vendors that supply parts across Canons product line experience
unforeseen difficulties, or if such parts experience quality problems or are in short supply.
Canons reliance on a limited number of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, the risk of untimely delivery of
these subassemblies and components, and the risk for a substantial increase in price of these
components to occur. If such risks arise, Canons operating results will be adversely affected. Although competition is increasing in the market for sales of supplies and services following
initial product placement, given Canons high market share in sales of such supplies, Canon may be
subject to antitrust-related suits, investigations or proceedings which may adversely affect its
operating results or reputation. A portion of Canons net sales consists of sales of supplies and the provision of services
occurring after the initial equipment placement. As these supplies and services have become more
commoditized, the number of competitors in these markets has increased. Canons success in
maintaining these post-placement sales will depend on its ability to compete successfully with
these competitors, some of which may offer lower-priced products or services. Despite the increase
in competitors as described above, Canon currently possesses a high market share in the market for
supplies. Accordingly, Canon may be subject to suits, investigations or proceedings under relevant
antitrust laws and regulations. Any such suits, investigations or proceedings may lead to
substantial costs and have an adverse effect on Canons operating results or reputation. Recent increases in counterfeit Canon products may adversely affect Canons brand image and
its revenues. In recent years, Canon has experienced a worldwide increase in the emergence of counterfeit
Canon products. Such counterfeit products may diminish Canons brand name, particularly if
purchasers of such products are unaware of their counterfeit status and attribute the counterfeit
products poor product quality to Canon. Canon has been taking measures to halt the spread of
counterfeit products. However, there is no assurance that such measures will be successful, and the
continued production and sale of such products could negatively affect Canons brand image as well
as its revenues. Per unit production costs are highest when a new product is introduced, and if such
new products are not successful or if Canon fails to achieve cost reductions over time, Canons
gross profits may be adversely affected. The unit cost of Canons products has historically been the highest when they are newly
introduced into production and have at times had a negative impact on its gross profit, operating
results and cash flow. Cost reductions and enhancements typically come over time through:  
    
    engineering improvements;
    
    economies of scale;
    
    improvements in manufacturing processes; and
    
    improved serviceability of products. Initial shipments of Canons new products adversely affect its profit or cash flow, and if
sales of such new products are not successful, Canon may be unable thereafter to improve its gross
profit, operating results and cash flow. Cyclical patterns in sales of Canons products make planning and inventory management
difficult and future financial results less predictable. Canon generally experiences seasonal trends in the sale of its consumer- oriented products.
The resulting uneven sales pattern makes it difficult to predict
near-term demand and places pressure on Canons inventory management and logistics systems. If
predicted demand is substantially greater than actual orders, there will be excess inventory,
thereby putting downward pressure on selling prices and reducing Canons revenue. Alternatively, if
orders substantially exceed predicted demand, Canons ability to fulfill orders may be limited,
which could adversely affect net sales and increase the risk of unanticipated variations in its
results of operation. Many of the factors that create and affect seasonal trends are beyond Canons
control. Canons business may be subject to changes in sales environment. In certain geographic areas, particularly in Europe and the United States, a substantial
portion of market share is concentrated in a relatively small number of large distributors. Canons
sales of products to these distributors constitutes a significant percentage of Canons overall
sales. As a result, any disruptions in its relationships with these large distributors in a
specific sales territory could adversely affect Canons ability to meet its sales targets. Any
increase in the level of market share concentrated in these large distributors could result in
Canon losing its pricing power and adversely affect its profits. In addition, the rapid
proliferation of Internet-based businesses may render conventional distribution channels obsolete.
These and other changes in Canons sales environment could adversely affect Canons results of
operations. Canon is subject to financial and reputational risks due to product quality and liability
issues. Although Canon has established a Quality Risk Management Division to coordinate its efforts to
minimize risks that may arise from product quality and liability issues, there can be no assurance
that Canon will be able to eliminate or mitigate occurrences of these issues and consequent
damages. If such factors adversely affect Canons operating activities, generate expenses such as
those for product recalls, service, and compensation, or hurt its brand image, its financial
results and condition or reputation for quality products may be adversely affected. 5




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Canons success depends on the value of its brand name, and if the value of the brand name
were to diminish, its revenues, operating results and
prospects would be adversely affected. Canons success in its markets depends in part on Canons brand name and its value. In
addition, as a manufacturer and distributor of consumer products, Canons operating results are
susceptible to adverse publicity regarding the quality of its products. There can be no assurance
that such adverse publicity will not occur or that such claims will not be made in the future.
Furthermore, Canon cannot predict the impact of such adverse publicity on its business and results
of operations. A substantial portion of Canons business activity is conducted outside Japan, exposing Canon
to the risks of international operations. A substantial portion of Canons business activity is conducted outside Japan, including in
developing and emerging markets in Asia. There are a number of risks inherent in doing business in
those markets, including the following:  
    
    less developed technological
infrastructure, which can affect production or other activities or
result in lower customer acceptance of Canons services;
    
    difficulties in recruiting and retaining personnel;
    
    potentially adverse tax consequences;
    
    longer payment cycles;
    
    unfavorable political or economic factors; and
    
    unexpected legal or regulatory changes. Canons inability to manage successfully the risks inherent in its international activities
could adversely affect its business and operating results. In order to produce Canons products competitively and to reduce costs, Canon has established new
production facilities in China. Canon is also focusing on strengthening its sales activity in
China. However, with Chinas entry into the WTO, conditions within China are in the process of
changing. Under these conditions, unexpected events, including political or legal change, labor
shortage or strikes or changes in economic conditions, may occur. In particular, a large
revaluation of the yuan, or a sudden change in the tax system or other regulatory regimes of a
significant magnitude could adversely affect Canons overall performance. In addition, the spread of an epidemic disease, such as severe acute respiratory syndrome
(SARS), in China or elsewhere in Asia could have a negative effect on Canons business activity.
Canon has previously imposed travel restrictions to and from, certain countries affected by SARS,
and similar medical crises in the future may disrupt manufacturing processes and markets for
Canons products. Given the importance of Canons Asian sales, production facilities and supply
relationships, especially in China, Canons business may be more exposed to this risk than the
global economy generally. Canon may unintentionally infringe international trade laws and regulations, and any such
infringement may lead to an adverse effect on its business. The extent of the effect on Canons
business will depend upon the nature of the infringement and the severity of fines or other
sanctions that might be imposed upon Canon. A major infringement could result in the temporary
suspension of Canons trading rights in one or more jurisdictions. In addition to any sanctions
prescribed by law, adverse publicity regarding an alleged infringement of trade laws and
regulations by Canon may also have a negative effect on Canon brand and image. All of the above factors regarding international operations could have an adverse impact on
Canons business results. Canon depends on efficient logistics services to distribute its products worldwide. Canon depends on efficient logistics services to distribute its products worldwide. If
problems arise with Canons computerized logistics system, or regional disputes or labor disputes,
such as a dockworkers strike, occur, it could lead to a disruption of Canons operations and
result not only in increased logistical costs, but also in a loss of sales opportunities due to
delays in delivery. Also, because demand for Canons consumer products can fluctuate throughout the
year, the failure to adjust bookings for vessels and the preparation of warehouse space to reflect
such fluctuations could result in either the loss of sales opportunities, or the increase of
unnecessary costs. In addition, the increasingly higher levels of precision required of semiconductor production
equipment like steppers or mask aligners and the resulting increase in the value of this equipment
in recent years have resulted in a concurrent increase in the need for sensitive handling and
transportation of these products. Due to their precision nature, even a very trivial shock to
these products during the handling and transportation process could result in loss on the entire
product. If unforeseen accidents during the handling and transportation process render a
significant portion of Canons higher-end precision products unmarketable, Canon may not be able to
fully recover its investment in the research, development and production of these precision
products. The rise in crude oil prices has become a recurring event, due primarily to the inflow of
speculative funds into the global markets. As a result of this rise in oil prices, the cost of
airfreight has increased in the form of a fuel surcharge. Such changes in the sales environment in
which Canon operates could adversely affect Canons results of operations. Canon is engaging in the reduction of carbon dioxide emissions by implementing such measures
as a new transportation system, including an efficient new rail container system. A failure by
Canon to meet its targets may have a negative effect on Canons brand and image and its business. 6




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Economic trends in Canons major markets may adversely affect its net sales. Economic downturns and declines in consumption in Canons major markets, including Japan, the
United States and Europe, may affect the levels of both corporate and consumer sales. Purchases of
Canons consumer products, such as cameras and printers, are to a very significant degree
discretionary. A decline in the level of consumption caused by the worsening of general economic
conditions could adversely affect Canons results of operations. Canons operating results are also affected by the level of business activity of its
customers, which in turn is affected by the level of economic activity in the industries and
markets that they serve. A decline in the level of business activity of Canons customers caused by
the worsening of the global economy could adversely affect Canons results of operations. Risks Related to Environmental Issues Canons business is subject to environmental laws and regulations. Canon is subject to certain Japanese and foreign environmental requirements in areas such as
energy resource conservation, reduction of hazardous substances, collection and recycling of
products, clean air, water protection and waste disposal. Canon believes that it has taken adequate
precautions to comply with these regulations in the course of its ordinary business operations.
Furthermore, Canon does not believe that any environmental laws or regulations currently in effect
will have a material adverse effect on its operating results. However, Canon cannot predict whether
any pending or future legislation will be adopted or what effect such legislation would have on it.
In some cases, such as with the European Union Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment (RoHS) Directive detailed implementation
standards relating to methods of analysis, methods to demonstrate compliance and maximum
concentration values have not been determined. Canon attempts to implement compliance measures that
Canon believes will meet or surpass the implementation standards that will be adopted for these
regulations. If Canons measures do not meet such standards when they are adopted, however, Canon
may be required to take further action and incur additional costs to comply with these regulations. Environmental clean-up and remediation costs relating to Canons properties and associated
litigation could decrease Canons net cash flow, adversely affect its results of operations and
impair its financial condition. Canon is subject to liability for the investigation and clean-up of environmental
contamination at each of the properties that it owns or operates, at certain properties Canon
formerly owned or operated and at off-site locations where Canon arranged for the disposal of
hazardous substances. If Canon were to be held responsible for damages in any future litigation or
proceedings, such costs may not be covered by insurance and may be material. In addition, Canon may face liability for alleged personal injury or property damage due to
exposure to chemicals or other hazardous substances at or from its facilities. Canon may also face
liability for personal injury, property damage, natural resource damage or for clean-up costs for
the alleged migration of contamination or other hazardous substances from its facilities. A
significant increase in the number or success of these claims and costs could adversely affect
Canons results of operations or 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. Because of the emphasis on product innovation in the markets for Canons products, many of
which are subject to frequent technological innovations, patents and other intellectual property
are an important competitive factor. Canon relies primarily on technology it has developed, and
Canon seeks to protect such technology through a combination of patents, trademarks and other
intellectual property rights. Canon faces the risks that:  
    
    competitors will be able to develop similar technology independently;
    
    Canons pending patent applications may not be issued;
    
    the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and
    
    intellectual property laws may not adequately protect Canons intellectual property, particularly in some emerging markets. In case if Canon is not aware of actual or potential infringement of, or adverse claim to, its
rights in such technologies, any interference in Canons rights to use such technologies could
adversely affect its operating results. In addition, Canon may need to litigate in order to enforce its patents, copyrights or other
intellectual property rights, to protect its trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement, which can be
expensive and time-consuming. In the event any government agency or third party were adjudicated
to have a valid claim against Canon, Canon could be required to: 7




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
    refrain from selling the affected product in certain markets;
    make royalty payments or pay monetary damages;
    seek to develop non-infringing technologies, which may not be feasible; or
    seek to acquire licenses to the infringed technology, which may not be available on commercially reasonable terms, if at all. Canon also licenses its patents to third parties in exchange for payment or cross-licensing.
The terms and conditions of such licensing or changes in the conditions for renewals of such
licenses could affect Canons business. Canons businesses, company image and result of operations could be adversely affected by any
of these developments. Disputes involving payment of consideration for employee inventions may materially affect
Canons brand image as well as its business. Canon may face disputes involving payment of consideration given to employee inventions for
which the intellectual property rights have been transferred to Canon. This risk is particularly
relevant in countries such as Japan and Germany, where patent laws require companies to pay
consideration to employees for the assignment of the employees invention to the company. Canon
maintains company rules on and an evaluation system for employee inventions. Canon believes it has
been making adequate payments to employees for assignment of inventions based on these rules and a
fair and objective assessment of amounts to be paid. There can be no assurance, however, that
disputes will not arise with respect to the amount of payments to employees. Other Risks Canon depends on the attraction and retention of highly qualified professionals. Canons future operating results depend in significant part upon the continued contributions
of its employees. In addition, Canons future operating results depend in part on its ability to
attract, train and retain other qualified personnel in development, production, sales and
management for Canons operations. The competition for these human resources in the high-tech
industries in which Canon competes has been increasingly intense in recent years. Moreover, due to
the accelerating pace of technological change, the importance of training new personnel in a timely
manner to meet product research and development requirements will increase. A failure by Canon to
recruit and train qualified personnel or the loss of key employees could adversely affect Canons
business, and results of operations. Canons physical facilities, information systems and information security systems are subject
to damage as a result of disasters, outages or similar events. Canons headquarters functions, its information systems and its research and development
centers are located in or near Tokyo, Japan, where the possibility of disaster or damage from
earthquakes is generally higher than in other parts of the world. In addition, Canons facilities
or offices, including those for research and development, material procurement, manufacturing,
logistics, sales, and services are located throughout the world and subject to the possibility of
disaster or outage or similar disruption as a result of any of a number of events, including
natural disasters, computer viruses and terrorist attacks. Although Canon is working to establish
appropriate backup structures for its facilities and information systems, there is no assurance
that Canon will be able to completely prevent or mitigate the effect of events or developments such
as the aforementioned disasters, leakage of harmful substances, shutdowns of information systems,
and leakage, falsifications, and disappearances of internal databases. Although Canon has
implemented backup plans to permit the production of products at multiple production facilities,
such plans do not cover all product models. In addition, such backup arrangements may not be
adequate to maintain production quantity levels. Such factors may adversely affect Canons
operating activities, generate expenses relating to physical or personal damage, or hurt Canons
brand image, and its operating results may be adversely affected. Canons operating and financing activities expose Canon to foreign currency exchange and
interest rate risks that may adversely affect its revenues and profitability. Canon is exposed to the risks of foreign currency exchange rate fluctuations. Canons
consolidated financial statements, which are presented in Japanese yen, are affected by foreign
exchange rate fluctuations. These fluctuations can affect the yen value of Canons equity
investments denominated in foreign currencies and monetary assets and liabilities arising from
business transactions in foreign currencies. They can also affect the costs and sales proceeds of
products that are denominated in foreign currencies. In addition, as a result of translating
foreign currency financial statements of Canons foreign subsidiaries into Japanese yen, its
reporting currency, assets and liabilities, and revenues and expenses will fluctuate. Canon is also
exposed to risk of interest rate fluctuations, which may affect the value of Canons financial
assets and liabilities, in particular, long-term debt. The cooperation and alliances with, and strategic investments in, third parties undertaken by
Canon may not produce successful results. Canon carries out many activities with other companies in the form of alliances, joint
ventures, and strategic investments. These activities are important for Canons technological
development process. However, weak business trends or disappointing performance by partners may
adversely affect the success of these activities. In addition, the success of these activities may
be adversely affected by the inability of Canon and its partners to successfully define and reach
common objectives. An unexpected cancellation of a major business alliance may disrupt Canons
overall business plans and may also result in a delayed return-on-investment. 8




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Canon can be adversely affected by fluctuations in the stock and bond markets. Canons assets include investments in publicly traded securities. As a result, Canons
operating results and general financial position may be affected by fluctuations in the stock and
bond markets. In addition, if valuations of investment assets decrease due to conditions in, for
example, stock or bond markets, additional funding and accruals with respect to Canons pension and
other obligations may be required, and such funding and accruals may adversely affect Canons
operating results and consolidated financial condition. Confidential information may be inadvertently disclosed which could lead to damage claims or
harm Canons reputation, and may have an adverse effect upon Canon s business. In connection with certain projects, Canon may receive confidential or sensitive information
(such as personal information) from its customers relating
to these customers or to other parties. In addition, Canon uses computer systems and electronic
data in managing information relating to its employees. Although Canon makes every effort to keep
this information confidential through company procedures designed to prevent accidental release of
confidential or sensitive information, such information may be inadvertently disclosed without
Canons knowledge. If this occurs, Canon may be subject to claims for damages from the parties or
the employees affected, suffer harm to its reputation or be subject to liabilities and/or penalties
under applicable statutes. Inadvertent disclosure of secret information regarding new technology, as well as market and
customer information, would also have a material adverse effect upon Canons business. 9




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Item 4.   Information on the Company 
 A.   History and development of the Company Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Japanese
Commercial Code. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo
146-8501, Japan. The telephone number is +81-3-3758-2111. The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell
Japans first focal plane shutter 35mm still camera, which was developed by its predecessor
company, Precision Optical Research Laboratories, which was organized in 1933. In the late 1950s, Canon entered the business machines field utilizing technology obtained
through the development of photographic and optical
products. With the successful introduction of electronic calculators in 1964, Canon continued to
expand its operations to include plain paper copying machines, faxes, laser beam printers, bubble jet printers, computers, video camcorders and digital
cameras. The following are important events in the development of Canons business in recent years.  
    
    In 2000, the Canon Inc. Optics R&D Center, a research and development, or R&D facility
for optical technology, was established in Tochigi, Japan.
    
    In 2000, Canon Inc. changed the listing of its American Depository Receipts (ADRs) to
the New York Stock Exchange (NYSE) from the Nasdaq National Markets.
    
    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
will focus 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. In fiscal 2004, 2003 and 2002, Canons capital expenditures were Yen 318,730 million, Yen
210,038 million and Yen 198,702 million, respectively. In fiscal 2004, capital expenditures were
mainly used to expand production capabilities in both domestic and overseas regions, and to bolster
Canons R&D-related infrastructure. In addition, Canon has been continually investing in tools and
dies for business machines, in which the amount invested is generally the same each year. For fiscal 2005, Canon projects that its capital expenditures will amount to approximately Yen
375,000 million. This amount is expected to be spent for investments in new production plants and
new facilities of Canon. Canon anticipates that the funds needed for these capital expenditures
will be generated internally through operations. 10




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B.   Business overview Canon is one of the worlds leading manufacturers of plain paper copying machines, digital
multifunction devices, or MFDs, laser beam printers, bubble jet
printers, cameras and steppers. Canon sells its products principally under the Canon brand name and through sales
subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail
dealers in an assigned territory. Approximately 73% of consolidated net sales in fiscal 2004 were
generated outside Japan; approximately 30% in the Americas, 31% in Europe and 12% in other areas
including Asia. Canons strategy is to develop innovative, high value-added products which incorporate
advanced technologies. Canons research and development activities range from basic research to product-oriented
research directed at keeping and increasing the technological leadership of Canons products in the
market. Canon manufactures the majority of its products in Japan, but in an effort to reduce currency
exchange risks and production cost, Canon has increased overseas production and the use of local
parts. Canon has manufacturing subsidiaries in the United States, Germany, France, Taiwan, China,
Malaysia, Thailand and Vietnam, and a manufacturing joint venture in Korea. As a concerned member of the world community, Canon emphasizes recycling, and has increased
its use of clean energy sources and cleaner manufacturing processes. Canon has also adopted
programs to collect and recycle used cartridges and to refurbish used copy machines. In addition,
Canon has completely removed environmentally unfriendly chemicals from its manufacturing processes. 
 Products Canons products are divided into the following three product groups: business machines,
cameras, and optical and other products. -Business machines - The business machines product group is divided into three sub-groups consisting of office
imaging products, computer peripherals and business information products. Office imaging products Canon manufactures, markets and services a wide range of office network digital MFDs, color
network digital MFDs, office copying machines, personal-use copying machines and full-color
copying machines. The office-use market is subject to rapid change, and customer preferences have been shifting
from copying machines to digital MFDs, as well as from monochrome to color products. To respond to
these trends, Canon has been strengthening its lineup of digital MFDs in the imageRUNNER (iR)
series, which have versatile functions, such as copying, printing, scanning, faxing and
data-sharing functions on the Internet and intranets. Canon is also marketing diverse expansion
modules, software and business solutions to increase customer value. For the development of MFDs,
Canon makes effective use of a wide range of technologies from the fields of optics, mechatronics,
electronic photo processing, chemical materials and image processing. Canons MFDs are
differentiated chiefly by the use of leading-edge System On a Chip technology in the imageRUNNER
controller, which acts as the brain of networked MFDs. The controller provides easy integration
with customers IT environments together with speedy, high-quality image processing. This boosts
office productivity, thereby garnering acclaim from business customers. Sales of color office imaging products continued to grow rapidly and sales of monochrome
digital devices were stable. Canon has expanded its color office imaging products lineups by
introducing the iRC3100 and iRC6800 series worldwide to further increase color MFD sales. Canon has
also introduced new monochrome MFD models to strengthen its industry leading monochrome MFD product
lineup. Canon has a powerful line of full-color copying machines and color digital MFDs for users
ranging from professional graphic designers to business offices. The trend in printing industry is
gradually moving away from large-lot printing using expensive machinery to small-lot printing on
demand and personalized printing. Canons high-end MFDs and color digital MFDs can be applied to
the print on demand market. In addition, Canon aims to respond to the growing demand for color
imaging for business needs with products using its renowned S Toner, featuring spherical particles
and a microscopic wax-based structure, and its oil-less fixing engine. Canon has a leading market share in monochrome MFDs and copying machines including machines
for personal use. While the color shift is in progress, especially in Japan, the demand for
monochrome machines is stable accompanying with the expansion of their multifunction capabilities
and software development. The office imaging products category also includes the related sales of paper and chemicals,
service charges and sales of replacement parts. Computer peripherals Computer peripherals include laser beam printers, inkjet printers and scanners. Developed and fostered by Canon, laser beam printers are standard output peripherals for
offices. Canons laser beam printers are relatively small in size and have high-quality printing
capabilities attributable to Canons expertise in laser beam printing and plain paper copying
technologies. Canons adoption of a user-replaceable toner cartridge system containing optical
components makes its laser beam printers easy to maintain. Most of Canons laser beam printer sales
are on an OEM basis. Canon also distributes Canon brand laser beam printers in Japan, Europe and
Oceania. 11




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Canon started production of sub low-end monochrome laser printers in Southern China in fiscal
2003. In light of increased sales of these products, Canon also expanded its monochrome laser beam
printer production in fiscal 2004. Canon has also expanded production of primarily personal color
laser beam printers in Southern China. Production of color laser beam printers doubled in fiscal
2004. As the inventor of bubble jet printing technology, Canon believes it continues to provide
customers with the best performance the technology has to offer. Canon provides high-performance
and high value added models both in single-function printers and multi-function printers. In
response to heated competition in the inkjet printer segment, Canon launched several new models in
fiscal 2004. Since bubble jet printers supporting the PictBridge digital camera-printer
communications standard were released in the second half of fiscal 2003, almost all the new
products released in fiscal 2004 were equipped with The PictBridge standard. These new models
incorporated a new print head called Canon Full-photolithography Inkjet Nozzle Engineering (FINE),
boosting image quality and print speed over those offered on previous models, and make printing
pictures from digital cameras more accessible. The keys to a successful printer are speed, image
quality and paper handling capabilities. Although ranked high among the leaders in all three
categories, Canon has targeted each category for improvements. Canon has newly established the PIXMA brand name for its inkjet SFP (single-function
printer)/MFP(multi-function printer) worldwide (PIXUS brand in Japan), with new functions and
technologies. The new PIXMA series features a dual paper path with built-in double-sided printing.
The new innovative box design of the printer allows the printer to be utilized in a wide range of
home environments. Canon markets a wide variety of scanners for a spectrum of user needs, including image
scanners in the CanoScan LiDE series using Contact Image Sensor (CIS), and scanners with
charge-coupled devices for high resolution that can also scan film in the CanoScan series. Contact
Image Sensor (CIS) is a close-contact method that reads at a 1:1 ratio, and by using it Canon has
eliminated the need for a complex optical system and allowed a significant reduction in scanner
weight and size, while at the same time making it lighter. Canon has deployed its expertise to
develop space-saving, energy-efficient scanners, as well as easy PC connection via universal serial
bus interface. However, since peaking in 2000, the scanner market has continued to shrink at a rate
of 20% to 30% per year. Under the prevailing highly competitive conditions, it is necessary for
Canon to attain a high market share. To achieve that goal, Canon has successfully introduced
several new scanner models, such as its 4800dpi flagship model. Business information products Business information products primarily consist of micrographic equipment, personal computers,
calculators, document scanners and work stations. With the movement toward digitalization, the need to scan documents into text data or image
data is expanding. Canons document scanners rapidly and efficiently digitize large volumes of
information on paper. Canon offers a wide range of scanner models, including color capable compact
sheet-fed types and a flatbed model suitable for book-type documents. Canon also offers a hybrid
model that can create microfilm records while digitizing the information. Canons diverse lineup
seeks to meet increased demands for digitizing office documents to share across Internet or
intranet platforms or to capture data from forms with optical character recognition. Canons calculator operations, from development to production and marketing, are centered in
Hong Kong. The Canons tradition of technological innovation has been inherited by its personal
information products, from calculators with printers to electronic dictionaries. Canon continues to
develop distinct, appealing personal information products that reflect trends and demand. The work stations and personal computers sold by Canon are manufactured by third parties under
the manufacturers own brand names. -Cameras- Canon manufactures and markets digital cameras and film cameras. Canon also manufactures and
markets digital video camcorders, lenses, and various camera accessories. In addition to aiming for the best possible image quality throughout its product lineup, Canon
offers digital compact cameras that are easy to use and to carry. The compact digital camera market
continued to grow significantly in 2004. Canon increased sales of compact digital cameras through
the introduction of 16 new compact digital camera models in 2004. Canon expects its PowerShot A75,
following the success of the Powershot A70 as the worldwide best selling compact digital camera in
2003, to be positioned as a top selling model in North America and Europe. In addition the stylish
slim and compact design of the Large LCD Display model PowerShot SD300 introduced in the fourth
quarterof 2004 was well received in the market. In response to the strong increase in
unit sales of digital cameras, Canon expanded its internet-based customer support service system in
order to strengthen customer services. Canon successfully introduced its improved and upgraded new
image processor DIGIC II equipped cameras to the market. DIGIC has developed into a distinguishing
feature of Canons digital cameras. Since Canon introduced the first PictBridge-equipped CP series compact photo printers in 2003,
this new distinctive printer category has been well received in the market. Canons CP series photo
printers allow users to print digital photos without having to use a PC, thereby creating a new
method of photo-processing for digital camera users. In fiscal 2004, Canon introduced five compact
photo printers, such as the CP400. The digital SLR market has expanded since the introduction of our EOS Digital Rebel in 2003.
In 2004, the worldwide market size was estimated to be about 2.4 million units, or three times the
size of the previous year. Amid these market conditions, Canon introduced three new models. These
included the EOS-1D Mark II and EOS-1Ds Mark II for the professional market as well as the EOS
20D for the advanced amateur market. Canons products in this market were strongly supported by
our large-size Complementary Metal Oxide Semiconductor(CMOS) imaging sensors, which Canon produces
internally, including a full-size 35mm sensor with 16.7 million
pixels. Another important
accomplishment was further improvements to the DIGIC, an advanced image processing engine. The
DIGIC II has enhanced capabilities for high-quality image reproduction and high-speed data
processing. The superior performance resulting from these improvements enabled Canon to establish a
leading presence at major sporting events and other venues in 2004. Although the market for conventional film cameras is declining as a result of the strong
competition from digital cameras, Canon intends to maintain its firm commitment to the film camera
business. In fiscal 2004, Canon launched its new single-lens reflex(SLR) cameras EOS ELAN 7N and
EOS REBEL T2, as well as compact film camera SURESHOT 150u and SURESHOT Z180u. Canon is
committed to remain as a leading brand in the film camera business, while closely monitoring market
trends. 12




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In the camera lens segment, technological developments, including diffractive optical
elements, image stabilizers and ultrasonic motors, have helped Canon to maintain a technical lead
over other makers. Canon offers over 50 lenses in the EF series. These high-quality,
high-performance lenses provide outstanding performance with digital cameras as well as
silver-halide cameras, greatly contributing to Canons sales. The market for interchangeable
lenses, which are used for single-lens reflex cameras, has grown and aggregate sales of the
interchangeable lens manufacturers have increased every year for the past three years. In 2004,
Canon launched a total of five new interchangeable lens models to the market, two of these were
launched in the second half of 2004 and designed especially for digital single-lens reflex cameras.
Demand for digital single-lens reflex cameras has recently increased significantly. In response to
this trend, Canon intends to expand its sales and market share by introducing interchangeable
lenses especially designed for competitively priced digital single-lens reflex cameras, the market
of which Canon expects to expand. Canon also provides full line-up of digital video camcorders from versatile, compact and
stylish models to its flagship models for professionals. Canons digital video camcorders
incorporate the same optical technologies and digital signal processing technology as its
world-renowned cameras, and come equipped with its one-chip digital imaging processor (DIGIC DV) to
ensure high image quality for both video and still images. Canons digital video camcorders are
favored by many users for its optical performance, and red-green-blue primary color filters. The
adoption of megapixel charge coupled devices (CCD), secure digital (SD) memory cards and universal
serial bus (USB) connectivity offers a wealth of possibilities for the creation and management of
still images, as well as video. In
2002, Canon achieved, based on units sold, the highest market share for digital video
camcorders in the United States, partially as a result of the strong performance of its entry class
model ZR series. In 2003, Canon achieved, based on units sold, a market share of 20% in the
Japanese digital video camcorder market, primarily based on the success of its high-specification
IXY DVM2 model, which is sold as the OPTURA300 in the United States. In 2004, Canon strengthened
middle class line up by launching variety of digital video camcorders with higher number of pixels.
As a result, total product line includes entry class models such as the 1 and 2 Mega pixel models
as well as models with more advanced functions and performance. To strengthen its profitability,
Canon launched the XL2 model as a successor to the XL1s model which is well accepted by high-end
users. Canon intends to continue to further strengthen its digital video camcorder product line-up
with the MiniDV as the key product and to further expand sales of digital video camcorders. Quality and performance such as high resolution, high brightness, and greater detail or
sharpness are the key competitive factors in the market for projectors. At the end of fiscal 2004,
Canon launched its independently developed projector, the SX50, that is equipped with reflective
liquid crystals on silicon or LCOS technology, to strengthen its product lineups. The SX50 features
Canons proprietary optical system called AISYS to achieve significant improvements in brightness,
size and a price as compared to conventional SXGA+ high resolution projectors that were considered
to be dark, large and expensive. -Optical and other products- Canons optical and other products includes semiconductor production equipment, medical
equipment and electronic components. Semiconductor production equipment includes steppers and mask aligners. Steppers are used to
expose circuits on silicon substrates. Canon has commercialized a Krypton Fluoride excimer-laser
stepper and an Argon Fluoride excimer-laser scanning stepper and an i-line stepper. At the top of
its class, the new Argon Fluoride excimer-laser scanning stepper makes possible top-level
throughput rates of over 140 wph (wafers per hour) for 300 mm wafers. In fiscal 2004, Canon
introduced the FPA-6000ES6, as its latest 300 mm-compatible lithography tool. The Canon FPA-6000ES6
is a Krypton Fluoride scanning stepper enabling volume production at the 100 nm process node. As a
result of strong investment by the semiconductor manufacturers in 2004, Canons stepper sales and
market share increased significantly compared with prior year. Canon, together with nine other
Japanese semiconductor-industry companies, formed the Extreme Ultraviolet Lithography System
Development Association. The consortium aims to develop key technology for next-generation
lithography. Mask aligners are used to produce liquid crystal displays, or LCDs, and Canons model for
large-sized LCD substrates are sold particularly well in line with increased demand for large flat
panels for PC display and LCD televisions. In fiscal 2004, Canon launched its MPA-8000 series as
its most advanced mask aligner. Canon believes that, based on global units, it is the world leader in television broadcasting
lenses, which are used to capture images from sports and news events, concerts and studio
broadcasts. In fiscal 2004, the market for television broadcasting lenses recovered from the slump
after 9/11, as a result of economic recovery and a global trend to introduce digital broadcasting
equipment. In fiscal 2004, Canon launched 13 new lens models primarily for television broadcasting
digital cameras and maintained its position as the market leader for television broadcasting
lenses. Medical equipment sold by Canon includes X-ray cameras, retinal cameras, autofractmeters and
image-processing equipments for computerized diagnostic systems. Canons pioneering digital
radiography system takes X-ray photography and medical diagnosis into the digital age. Other products sold by Canon include electronic components, such as magnetic heads for audio
and video tape recorders and micro-motors for printers and other components, which are sold
primarily to equipment manufacturers. Canon has also been developing a cost efficient solar-power
system that incorporates amorphous silicon technology which is used in Canons high-end monochrome
copying machines. 
 Marketing and distribution Canon sells its products primarily through subsidiaries with responsibility for specific
geographic areas. Each subsidiary is responsible for its own market research and for determining
its sales channels, advertising and promotional activities. In Japan, Canon sells its products primarily through Canon Sales Co., Inc., mainly to dealers
and retail outlets. 13




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In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., Canon Canada,
Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets. In Europe, Canon sells its products primarily through Canon Europa N.V., which sells primarily
through subsidiaries or independent distributors to dealers and retail outlets in each locality. In
addition, copying machines are sold directly to end-users by Canon (U.K.) Ltd. in the United
Kingdom, and by Canon France S.A.S. in France. In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those
areas. In addition, copying machines are sold directly to end-users by Canon Australia Pty. Ltd. in
Australia. Canon also sells laser beam printers on an OEM basis to Hewlett-Packard Company.
Hewlett-Packard Company resells these printers under the HP LaserJet Printers name. During fiscal
2004, such sales constituted approximately 21% of Canons consolidated net sales, as compared to
20% in the previous fiscal year. Canon established sales subsidiaries for its semiconductor production equipment in Korea,
Taiwan and China that report directly to Canons headquarter to ensure prompt customer service in
these markets. In fiscal 2004, in order to strengthen marketing and management capabilities, Canon
also reorganized its optical products headquarters, by integrating the product planning division,
which plans the future products from a technological point of view, and the operational management
division, which plans marketing strategy, taking into account the market environment, to form a new
Sales & Marketing organization. Canon enhanced its distribution system by promoting continuing education of its sales
personnel and improving inventory management and business planning through the weekly analysis of
Canons sales data. 
 Service In Japan and overseas, product service is provided in part by independent retail outlets and
designated service centers that receive technical training assistance from Canon. Canon also
services its products directly. Most of Canons business machines carry warranties of varying terms depending upon the model
and the country of sale. Cameras and camera accessories carry a one-year warranty based on normal
use. Canon services its copying machines and supplies replacement drums, parts, toner and paper. In
Japan, most customers enter into a maintenance service contract under which Canon provides
maintenance services, replacement drums and parts in return for a per-copy charge. Copying machines
which are not covered by a service contract may be serviced from time to time by Canon or local
dealers for a fee. 14




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##### Table of Contents



NET SALES BY PRODUCT GROUP Years ended December 312004
    
    
    change
    
    
    2003
    
    
    change
    
    
    2002(Millions of yen except percentage data)Business machines:Office imaging products
    
    ¥
    1,120,972
    
    
    
    +3.6
    %
    
    ¥
    1,081,995
    
    
    
    +5.8
    %
    
    ¥
    1,023,131Computer peripherals
    
    
    1,149,914
    
    
    
    +5.6
    
    
    
    1,089,312
    
    
    
    +3.2
    
    
    
    1,055,956Business information products
    
    
    117,067
    
    
    
    -5.2
    
    
    
    123,493
    
    
    
    -16.1
    
    
    
    147,1082,387,953
    
    
    
    +4.1
    
    
    
    2,294,800
    
    
    
    +3.1
    
    
    
    2,226,195Cameras
    
    
    763,079
    
    
    
    +16.8
    
    
    
    653,540
    
    
    
    +34.5
    
    
    
    485,778Optical and other products
    
    
    316,821
    
    
    
    +26.9
    
    
    
    249,732
    
    
    
    +9.5
    
    
    
    228,155Total
    
    ¥
    3,467,853
    
    
    
    +8.4
    
    
    ¥
    3,198,072
    
    
    
    +8.8
    
    
    ¥
    2,940,128
 NET SALES BY GEOGRAPHIC AREA Years ended December 312004
    
    
    change
    
    
    2003
    
    
    change
    
    
    2002(Millions of yen except percentage data)JapanUnaffiliated customers
    
    ¥
    919,153
    
    
    
    +7.3
    %
    
    ¥
    856,851
    
    
    
    +8.6
    %
    
    ¥
    789,066Intersegment
    
    
    1,882,973
    
    
    
    +13.3
    
    
    
    1,662,172
    
    
    
    +12.7
    
    
    
    1,475,091Total
    
    
    2,802,126
    
    
    
    +11.2
    
    
    
    2,519,023
    
    
    
    +11.3
    
    
    
    2,264,157AmericasUnaffiliated customers
    
    ¥
    1,057,066
    
    
    
    +1.2
    %
    
    ¥
    1,044,998
    
    
    
    +3.7
    %
    
    ¥
    1,007,572Intersegment
    
    
    8,863
    
    
    
    +9.4
    
    
    
    8,101
    
    
    
    -17.3
    
    
    
    9,791Total
    
    
    1,065,929
    
    
    
    +1.2
    
    
    
    1,053,099
    
    
    
    +3.5
    
    
    
    1,017,363EuropeUnaffiliated customers
    
    ¥
    1,090,712
    
    
    
    +12.6
    %
    
    ¥
    968,938
    
    
    
    +13.6
    %
    
    ¥
    852,931Intersegment
    
    
    4,161
    
    
    
    +7.8
    
    
    
    3,861
    
    
    
    -16.8
    
    
    
    4,639Total
    
    
    1,094,873
    
    
    
    +12.5
    
    
    
    972,799
    
    
    
    +13.4
    
    
    
    857,570OthersUnaffiliated customers
    
    ¥
    400,922
    
    
    
    +22.5
    %
    
    ¥
    327,285
    
    
    
    +12.6
    %
    
    ¥
    290,559Intersegment
    
    
    591,677
    
    
    
    +17.6
    
    
    
    503,119
    
    
    
    +17.9
    
    
    
    426,914Total
    
    
    992,599
    
    
    
    +19.5
    
    
    
    830,404
    
    
    
    +15.7
    
    
    
    717,473EliminationsUnaffiliated customers
    
    ¥
    
    
    
    
    
    %
    
    ¥
    
    
    
    
    
    %
    
    ¥
    Intersegment
    
    
    (2,487,674
    )
    
    
    
    
    
    
    (2,177,253
    )
    
    
    
    
    
    
    (1,916,435
    )Total
    
    
    (2,487,674
    )
    
    
    
    
    
    
    (2,177,253
    )
    
    
    
    
    
    
    (1,916,435
    )ConsolidatedUnaffiliated customers
    
    ¥
    3,467,853
    
    
    
    +8.4
    %
    
    ¥
    3,198,072
    
    
    
    +8.8
    %
    
    ¥
    2,940,128Intersegment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    3,467,853
    
    
    
    +8.4
    
    
    
    3,198,072
    
    
    
    +8.8
    
    
    
    2,940,128
 Note: Net sales geographic area is determined by the location of the Canon entity originating the sale. Total operating profit by category is discussed in Item 5A Operating Results. 
 Seasonality Canons sales for the 4th quarter are usually higher than those in the other three quarters,
mainly owing to strong demand for consumer products, such as cameras and bubble jet printers,
during the year-end holiday season. In Japan, corporate demand for office products peaks in the 1st
quarter, as many Japanese companies close their books in March. Sales also tend to increase at the
start of the new school year in each of the respective regions. 
 Sources of supply Canon purchases a variety of parts and raw materials, such as glass, aluminum, plastic, steel
and chemicals for use in product manufacturing. All finished and semi-finished products purchased
from outside sources are produced in accordance with Canons designs and specifications. Canon
purchases parts and raw materials worldwide for its global production activities. Canon assesses
and selects suppliers based on a number of criteria, including environmental friendliness, quality,
cost, stability of supply and financial condition. Canon has not experienced any difficulty obtaining parts or raw materials and believes that it
will be able to continue to obtain the same in sufficient quantities to meet its needs. 15




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Canon also places significant emphasis on in-house development of production tools.
Canon purchased a mold-production company last year, adding to its ability to produce many of the
metal molds needed for production. Canon also produces many of the tuning and measuring tools
needed for the development, maintenance and repair of its production equipment. Key tools such as
these are not marketed for sale; they are reserved for use within the Canon Group. Canons ability
to develop its own production tools helps establish quality control and allows for speed and
flexibility when retooling is necessary  a crucial advantage in its cell production processes.
Cell production is the production system in which the entire production process is undertaken by
small groups of employees. In-house tool development may also help cut costs over time and prevent
the leakage of Canons core proprietary technologies. 
 Competition Canon encounters intense competition in all areas of its business activity throughout the
world. Canons competitors range from some of the worlds major multinational corporations to
smaller, highly specialized companies. Canon competes in a number of different business areas,
whereas many of its competitors are relatively more focused on one or more individual industries.
Consequently, Canon may face significant competition from entities that apply greater financial,
technological, sales and marketing or other resources than Canon to their activities in a
particular market segment. The principal elements of competition which Canon faces in each of its markets are technology,
quality, reliability, performance, price and customer service and support. Canon believes that much
of its ability to compete effectively depends on conducting successful research and development
activities that enable it to create new or improved products and release them on a timely basis and
at commercially attractive prices. The competitive environments in which each product group operates are described below:    Business machines The markets for office imaging products, computer peripherals and business information
products are highly competitive. Canons primary competitors in these markets are Xerox
Corporation/ Fuji Xerox Corporation, Hewlett-Packard Company, Lexmark International Group Inc.,
Ricoh Company, Ltd., and Epson Corporation. Canon believes that it is one of the leading global
manufacturers of digital MFDs, laser beam printers, bubble jet printers, image scanners and
facsimile machines. In addition to the general elements of competition described above, Canons
ability to compete successfully in these markets also depends significantly on whether it can
provide effective, broad-based business solutions to its customers that solve multiple
interrelated client needs. In particular, the ability to provide equipment and software that
connect effectively to networks (ranging in scope from local area networks to the Internet) is
often a key to Canons competitive strength in these markets. In China, whose markets are expected
to expand since joining of the World Trade Organization, the current market leaders are Toshiba Tec
Corporation, Sharp Corporation and Konica Minolta Holdings, Inc. Canon is joining this top group by
the introduction of products suited to the market and by the reinforcement of sales and service
channels.    Cameras Competition in the camera industry is intense, with many established market participants
offering similar products. Canons primary competitors in digital cameras are Sony Corporation,
Fuji Photo Film Co., Ltd., Olympus Corporation, Nikon Corporation, Casio Computer Co., Ltd.,
Matsushita Electric Industrial Co., Ltd., and Eastman Kodak Company. The digital SLR market has expanded since the introduction of our EOS Digital Rebel in 2003.
In 2004, the worldwide market size was estimated to be about 2.4 million units, or three times the
size of the previous year. Amid these market conditions, Canon introduced three new models. As a
result, Canon believes that it has gained more than 50% of the market share. Currently,
Canon is positioned as a leading manufacturer in both number of units
and sales amounts in the market of compact digital cameras. Also, Canon is the current leader in the digital single-lens reflex
camera segment. Canon believes that developing cameras with increasingly high resolution and faster
image processing are critical to its ability to remain competitive in the fast-growing digital
camera market segment. Canons primary competitor in the lens market is Nikon Corporation whose popular class digital
single-lens reflex cameras are selling well. Another major competitor is Sigma Corporation, which
sells products that are compatible with Canons single-lens reflex camera lens. Canons primary competitors in conventional film cameras are Nikon Corporation, Konica Minolta
Holdings, Inc., Pentax Corporation, Olympus Corporation and Fuji Photo Film Co., Ltd. Hindered by
the surging popularity of digital cameras, the conventional film camera market continued to shrink
in fiscal 2004. The introduction of new models, however, enabled Canon to successfully retain a
leading global market-share for SLR cameras, and maintain its position as one of the leading
compact film camera manufacturers, while maintaining profitability. Canons primary competitors in digital video camcorders are Sony Corporation, Matsushita
Electric Industrial Co., Ltd. and Victor Company of Japan Ltd. In fiscal 2004, Canon continued to
expand its sales in overall market in digital video camcorders    Steppers and Aligners The market for steppers and aligners, used in the manufacture of semiconductor devices and
LCDs, is highly competitive. The market is characterized by a relatively small number of dominant
suppliers, since the development of steppers and aligners requires extremely precise design and
manufacturing techniques and, as a result, very high levels of capital investment. 16




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Canons primary competitors in the market for steppers and aligners are Nikon Corporation and
ASML Holding N.V., or ASML. Nikon Corporation has a reputation for its excellent technology,
especially optical lenses, and Intel Corporation, the worlds leading semiconductor manufacturer,
is one of their major customers. ASML has in recent years improved its competitive position by
taking advantage of government subsidies and by focusing on the rapidly growing foundry
manufacturer industry. In fiscal 2002, ASML further increased its competitive position by acquiring
SVG Lithography Systems Inc. As a result of the acquisition, ASML is now one of the largest
semiconductor manufacturing equipment companies in Europe. Because of the substantial capital expenditures required to install and integrate equipment
into a semiconductor production line, semiconductor manufacturers tend to purchase their stepper
and aligner production equipment from the vendor that originally supplied the chip fabrication
equipment. Canon competes principally on its ability to meet and exceed product specifications,
including resolution and throughput, quality, reliability and system maintenance cost. Because of
the very rapid pace of technological innovation in the semiconductor industry, Canon also believes
that its ability to provide new products on a timely basis is also a key competitive consideration
for customers seeking to integrate stepper and aligner production systems into the planning and
design of their new facilities. 
 Patents and licenses Canon holds a large number of patents (including utility model rights), design rights and
trademarks in Japan and abroad to protect the products that arise from its research and development
and utilizes these intellectual property rights as important strategic management tools. For
instance, Canon has been utilizing its intellectual property rights such as patents to expand its
products business operations and to form alliances and exchange technologies, with other companies. According to the Statistical Report issued annually by the United States Patent and Trademark
Office, Canon has been consistently ranked as second or third in recent years in terms of the
number of patents issued in the United States, as Canon maintained reputation as a famous
technology-oriented company. Canon has granted licenses with respect to its patents to various Japanese and foreign
companies, particularly in areas such as electrophotography, laser beam printers, multifunction
printers, facsimiles and cameras. Some examples include: Oki Electric Industry Co., Ltd.
    
    (LED printers, multifunction printers and facsimiles)Matsushita Electric Industrial Co., Ltd.
    
    (electrophotography)Ricoh Company, Ltd.
    
    (electrophotography)Sanyo Electric Co., Ltd.
    
    (electronic still camera)Samsung Electronics Co., Ltd.
    
    (laser beam printers, multifunction printers and facsimiles)Brother Industries, Ltd.
    
    (electrophotography and facsimiles)Kyocera Mita Corporation
    
    (electrophotography)
 Canon has also been granted licenses with respect to patents held by other companies. Some examples include: Jerome H. Lemelson Patent Incentives, Inc.
    
    (computer systems, image recording apparatus, and communication apparatus)Energy Conversion Devices, Inc.
    
    (solar battery)Honeywell Inc.
    
    (camera and video products)Gilbert P. Hyatt U.S. Philips Corporation
    
    (microcomputer)Nano-Proprietary Inc.
    
    (FED technology)
 Canon has also entered into cross-licensing agreements with other major industry participants. Some examples include: International Business Machines Corporation
    
    (information handling systems)Hewlett-Packard Company
    
    (bubble jet printers)Xerox Corporation
    
    (business machines)Matsushita Electric Industrial Co., Ltd.
    
    (video tape recorders and video cameras)Eastman Kodak Co.
    
    (electro-photography and image processing technology)Ricoh Company, Ltd.
    
    (electrophotography products, facsimiles and word processors)
 Canon has placed high priority on the management of its intellectual property as part of its
management strategies to enhance its global business operations. Some products which are material
to Canons operating results, incorporate patented technology which is critical to the continued
success of these products. Typically, these products incorporate technology reflected in dozens of
different patents. Canon does not believe that its business, as a whole, is dependent on, or that
its profitability would be materially affected by the revocation, termination, expiration or
infringement upon, any particular patent, copyright, license or intellectual property rights or
group thereof. 
 Environmental regulations Canon is subject to a wide variety of laws and regulations as well as industry standards
relating to energy and resource conservation, recycling, global warming, pollution prevention,
pollution remediation, and environmental health and safety. Some of the environmental laws which
affect Canons businesses are summarized below. 17




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##### Table of Contents



1.
    European Union Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment , or RoHS Directive, and Directive on Waste Electrical and
Electronic Equipment, or WEEE Directive. These directives were adopted by the European Parliament in December 2002. Member states were
required to bring into force the laws necessary to comply with these directives by August 13, 2004.
Commencing July 1, 2006, companies must ensure that their electrical and electronic equipment sold
in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated
biphenyls or polybrominated diphenyl ethers if placed on the market after that date. Pursuant to
the RoHS Directive, Canon will be required to adapt its products so that they do not contain the
prohibited hazardous substances. The WEEE Directive requires that by August 13, 2005, companies that sell electrical and
electronic equipment bearing their trade names in the European Union must arrange and pay for the
collection, treatment, recycling, recovery and disposal of their equipment and achieve designated
recycling rates by December 31, 2006. Pursuant to the WEEE Directive, Canon will be required to
establish collection and recycling systems for waste electrical and electronic equipment and
achieve the recycling ratio of waste electrical and electronic equipment by the designated dates.
The increased cost associated with the WEEE directive may adversely affect Canons results of
operations. 2.   Soil Pollution Prevention Law of Japan The Soil Pollution Prevention Law of Japan, administered by the Japanese Ministry of the
Environment,went into effect in February 2003. The law requires an owner of land to have the soil
investigated by a designated organization for the purpose of measuring the level of soil pollution
when the land is to be transferred or to be used for another purpose. The results of such
investigation are reported to the prefectural governor. If the soil pollution is not within
standards specified in the law, the governor will designate the land as a designated area,
publicly announce such designation and make available upon request the investigation report. The
substances designated in the law consist of 25 chemical groups, including substances such as lead,
arsenic, and trichloro ethylene. If there is a possibility that the soil pollution of the
designated area may affect human health, the governor will issue an order to the land owner to take
remedial actions. In response to the law, Canon has commenced a detailed survey and measurement of soil and
groundwater to determine the existence of pollution at all of Canon Groups operational sites in
Japan. The survey and measurement will entail considerable cost. Additional costs may arise as
remedial measures become necessary. These factors may adversely affect Canons results of
operations and financial conditions. See
Risk Factors  Risks Related to Environmental Issues
 Environmental clean-up and
remediation costs relating to Canons properties and associated litigation could decrease Canons
net cash flow, adversely affect its results of operations and impair its financial condition. 3.   Law for Promotion of Effective Utilization of Resources of Japan The Law for Promotion of Effective Utilization of Resources of Japan, or the Resources Law,
administered by the Japanese Ministry of Economy, Trade and Industry, was enacted in April 2001.
The Resources Law requires specified recycling industries, including the copying machine industry,
to enact measures designed to promote waste reduction, reuse and recycling of raw materials. These
requirements will increase Canons costs and may have an adverse affect on its results of
operations and financial conditions. 4.   Law on Promoting Green Purchasing of Japan The Law on Promoting Green Purchasing of Japan, administered by the Japanese Ministry of the
Environment, took effect in April 2001. The law encourages both national and local governments to
procure products with low environmental burdens. Businesses are required to provide information
that is necessary to determine the environmental impact of products that they manufacture. In response to the law, Canon expects in the future to:  
    
    manufacture products that consume less electricity to prevent global warming and to conserve energy,
    
    use recycled parts and recycled materials,
    
    reduce the types of raw materials used in order to conserve resources,
    
    accelerate the date by which the requirements of the law are implemented to promote the elimination of hazardous substances. The law also requires Canon to collect its used products and recycle them, establish
alternative technologies for hazardous substances used in products and standardize the substances
used in its products. These measures will entail additional costs and may adversely affect its
results of operations and financial conditions. 5.   Draft European Union Directive on Batteries and Accumulators and Spent Batteries and
Accumulators On November 21, 2003, the European Commission proposed a draft Directive on Batteries and
Accumulators and Spent Batteries and Accumulators to replace a similar existing directive. Whereas
the existing directive applies only to batteries with a certain mercury, cadmium and lead content,
the new directive applies to all batteries and accumulators placed on the European Community
market. When enacted, the new directive will require specified labels on all batteries. In
addition, the directive establishes specific targets for collection, treatment and recycling of
batteries and accumulators. Canon expects that compliance with the directive will increase its
financial costs such as recycling fees and guarantees of products placed on the market. 6.   Clean Production Promotion Law of China The Clean Production Promotion Law of China, administered by the standing committee of the
National peoples congress, effective as of January 1, 2003, provides, among other things, for
environmentally conscious design, elimination of hazardous substances, ease of disassembly,
material identification, collection and recycling. The Chinese government is expected to publish a
list of products to be collected, but it is yet unclear what action Canon needs to take at the
present time. 18




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7.   Draft Management Methods for the Prevention and Control of Pollution from the Production of
Electronic Information Products of China Modeled on the European Union RoHS Directive described above, the Chinese Ministry of Information
Industry and State Environmental Protection Administration are drafting a proposal  Management
Methods for the Prevention and Control of Pollution from the Production of Electronic Information
Products  that regulates the content of electronic information products. It will probably be
enacted by the end of 2004 and will be implemented, concurrently with the EU RoHS Directive, as of
July 1, 2006. The chemical substances covered are the same as those of the EU RoHS. The
guideline, which regulates the detailed implementation, is being prepared. Actions we are taking
for the products for the EU will also need to be taken for products for China. 8.   Executive Order of the United States The 13221 Energy Efficient Standby Power Devices Executive Order, published on August 2, 2001 and
amended on September 3, 2004
(Administered by U.S. Department of Energy ) requires the Federal Government to purchase consumer
products that use no more than one watt (two watt for a product with a facsimile function) in their
standby power consuming mode. Canons products such as laser beam printer, MFP and FAX need to have
a hard switch or they need to incorporate energy conserving designs which reduce the energy
consumption at the standby mode to meet the require watts. 9.   Draft REACH Regulation A draft of the Registration, Evaluation, Authorization and Restriction of Chemicals, or REACH,
Regulation was publicized by the European Union on October 29, 2003. If and when this regulation is
enacted, manufacturers and importers in the European Union will be required to register certain
chemicals used in their products. It is currently unclear how the provisions of the regulation will
be implemented and it is currently unclear what effects the regulation may have on Canon. If
adopted in its current draft form, a European Chemicals Agency would be established pursuant to the
regulation. 10.   The European Framework for the Setting of Requirements for Energy-Using Products The European Union is currently considering a directive that would establish a framework for the
setting of requirements for energy-using products. This framework, if adopted, would apply to all
products that use energy and specific measures regulating these products would be implemented by
the European Union member states. Until these implementing measures are adopted, it is difficult to
estimate the potential effect of the proposed directive. 11.   United Nations Framework Convention on Climate Change The Kyoto Protocol to the United Nations Framework Convention on Climate Change has been issued as
part of the Third Conference of the Parties in Kyoto, December 1997, or COP3, report. Currently, no specific laws or regulations have been established pursuant to the COP3 report.
However, Canon expects that the Japanese government will adopt measures to reduce CO2 emissions,
such as energy-saving measures for Japanese operational sites or CO2 emissions trading to implement
the COP3 report. On a national level, Japans government is considering the enactment and
tightening of environmental laws and regulations pursuant to Japans New Climate Change Policy
Program. Until specific measures are adopted, it is difficult to estimate the potential effect of
these laws and regulations. New environmental legislation and regulations such as the RoHS Directive in Europe and
similar legislation and regulation in other countries will have an impact on Canons production
methods. Lead-free solder, for example, which is to replace traditional toxic lead solder, demands
different and more complex manufacturing processes due to its higher melting point. Although the
details of the RoHS Directive are yet unclear, Canon has proceeded to develop a green, toxic-free
procurement policy with other industry leaders. In addition, Canon has long been an industry leader in the recycling of laser cartridges and
other consumable items, as well as in the actual materials used for the production and packaging of
its products. In 1990, Canon pioneered the collecting and recycling of used toner cartridges, and
has to date recycled over 120,000 tons of those cartridges. Today, the toner cartridges Canon
collects are 100% recycled in four facilities worldwide. 
 C.   Organizational structure Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent
company. As of December 31, 2004, Canon had 184 consolidated subsidiaries and 17 affiliated
companies accounted for by the equity method. The following table lists the significant subsidiaries owned by Canon Inc., all of which are
consolidated, as of December 31, 2004. Proportion of
    
    
    Proportion ofownership interest
    
    
    voting powerName of company
    
    Head office location
    
    owned
    
    
    heldCanon Sales Co., Inc.
    
    Tokyo, Japan
    
    
    50.3
    %
    
    
    51.2
    %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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D.   Property, plants and equipment Canons manufacturing is conducted primarily at 18 plants in Japan and 14 plants in other
countries. Canon owns all of the buildings and the land on which its plants are located, with the
exception of certain leases of land and floor space of certain of its subsidiaries. The names and
locations of Canons plants
and other facilities, their approximate floor space and the principal activities and products
manufactured therein as at December 31, 2004 are as follows: Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Shimomaruko Headquarters, Tokyo(Corporate Headquarters)
    
    
    2,005
    
    
    R&D, corporate administration and other functionsMizonokuchi HRD center, Kanagawa
    
    
    78
    
    
    HRD Training and administrationKosugi Office, Kanagawa
    
    
    398
    
    
    Development of software for office imaging productsFuji-Susono Research Park, Shizuoka
    
    
    1,014
    
    
    R&D in electro-photographic technologiesAtsugi Office, Kanagawa
    
    
    137
    
    
    Development of basic and advanced technologies for future businessesHiratsuka Development Center, Kanagawa
    
    
    717
    
    
    Development of displays and electronic devicesAyase Office, Kanagawa
    
    
    394
    
    
    R&D and manufacturing of semiconductor devicesOptics R&D Center, Tochigi
    
    
    473
    
    
    R&D in optical technologies, development of broadcasting equipmentTamagawa Plant, Kanagawa
    
    
    434
    
    
    Development of inkjet printers and inkjet chemical productsYako Development Center, Kanagawa
    
    
    517
    
    
    Development of inkjet printers and inkjet chemical productsUtsunomiya Plant, Tochigi
    
    
    586
    
    
    Production of EF lenses, video camcorder lenses, broadcasting lenses, lenses for business machines and other specialized optical lensesToride Plant, Ibaraki
    
    
    2,094
    
    
    R&D in electro-photographic technologies, mass-production trials and support; Production of chemical productsAmi Plant, Ibaraki
    
    
    1,353
    
    
    Production of office imaging products, chemical products and semiconductor production equipment;
Design and production of factory automation equipment and metal moldsUtsunomiya Optical Products Plant, Tochigi
    
    
    1,418
    
    
    R&D, production, sales and servicing of semiconductor equipment;
Sales of broadcasting equipment; R&D and sales of medical equipmentNagahama Office, Shiga
    
    
    67
    
    
    Development of solar cells
 20




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##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Canon Electronics Inc.,Saitama and Gunma
    
    
    1,070
    
    
    Development, production and sales of camera components, magnetic heads, sensors, micrographics, document scanners, LBPs, laser scanner units, portable data terminals and semiconductor equipmentCanon Finetech Inc.,Ibaraki, Tokyo, Yamanashi and Fukui
    
    
    866
    
    
    Production and sales of business machines, business machine peripherals, chemical products and business-use printersCanon Precision Inc.,Tokyo and Aomori
    
    
    635
    
    
    Development, production and sales of motors;Production of toner cartridges and sensorsCanon Optron Inc., Ibaraki
    
    
    150
    
    
    Polishing of optical crystals (for steppers, cameras and telescopes) and vapor deposition materialsCanon Chemicals Inc., Ibaraki
    
    
    1,383
    
    
    Production of toner cartridges, advanced-function parts, plastic precision-molded parts and metal moldsCanon Components Inc., Saitama
    
    
    426
    
    
    Production of image sensor units, printed circuit boards and inkjet printer consumablesOita Canon Inc., Oita
    
    
    629
    
    
    Production of SLR cameras, digital SLR and compact cameras, digital video camcorders and visual communication camerasNagahama Canon Inc., Shiga
    
    
    920
    
    
    Production of laser beam printers, laser beam printer consumables and inkjet printer consumablesOita Canon Materials Inc., Oita
    
    
    1,306
    
    
    Production of copying machine and laser beam printer consumablesUeno Canon Materials Inc., Mie
    
    
    559
    
    
    Production of copying machine and laser beam printer consumablesFukushima Canon Inc., Fukushima
    
    
    954
    
    
    Production of inkjet printers and inkjet printer consumables;
Analysis of software and fontsCanon Semiconductor Equipment Inc., Ibaraki
    
    
    1,200
    
    
    Development and production of semiconductor production-related equipment;
Production of small-sized copying machines and copying unitsCanon Ecology Industry Inc.,Ibaraki and Saitama
    
    
    374
    
    
    Recycling of toner cartridges, business machine repairNisca Corporation, Yamanashi
    
    
    489
    
    
    Development, design, production and sales of business machines,
information products and optical equipment
 21




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Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedOverseas
    
    (Thousands ofsquare feet)[Europe]Canon Giessen GmbH,
Giessen, Germany
    
    
    359
    
    
    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.,
    
    
    1,010
    
    
    Production of laser beam printers and laser beam printer and
copying machine consumables;
Remanufacturing of copying machines; Recycling of laser beam printer consumables[Asia]Canon Inc., Taiwan, Taiwan
    
    
    432
    
    
    Production of SLR and compact cameras, EFS and other lenses,
and precision-metal moldsCanon Opto (Malaysia) Sdn. Bhd.,
Selangor, Malaysia
    
    
    551
    
    
    Production of digital cameras, EF lenses and optical lens partsCanon Dalian Business Machines, Inc.,
Dalian China
    
    
    1,077
    
    
    Production and recycling of laser beam printer consumables;
Production of laser beam printers and MFDsCannon Zhuhai, Inc., Zhuhai, China
    
    
    678
    
    
    Production of compact cameras, digital cameras, laser beam printers,
MFDs, image scanners and contact image sensorsTianjin Canon Co., Ltd., Tianjin, China
    
    
    148
    
    
    Production and sales of copying machinesCanon Hi-Tech (Thailand) Ltd.,
Ayutthaya, Thailand
    
    
    984
    
    
    Production of inkjet printers, personal-use copying machines,
facsimile machines and MFDsCanon Engineering (Thailand) Ltd.,
Ayutthaya, Thailand
    
    
    128
    
    
    Production of metal molds and plastic injection mold partsCanon Zhongshan Business Machines
Co., Ltd., Zhongshan, China
    
    
    470
    
    
    Production of laser beam printersCanon Vietnam Co., Ltd., Hanoi, Vietnam
    
    
    286
    
    
    Production of inkjet printersCanon (Suzhou) Inc., Suzhou, China
    
    
    647
    
    
    Production of color and monochrome digital copying machinesCanon Finetech (Suzhou) Business
Machines Inc., Suzhou, China
    
    
    275
    
    
    Production of digital printers, peripherals and service partsThai Nisca Co. Ltd., Ayutthaya, Thailand
    
    
    190
    
    
    Production and sales of optical equipment and OA equipmentCanon Finetech Industries Development Co.,
Ltd., Shenzhen, China
    
    
    215
    
    
    Production and sales of copying machines, semi-finished products and parts
 22




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Canon considers its manufacturing and other facilities to be well maintained and believes
that its plant capacity is adequate for its current requirements.
At December 31, 2004, land, buildings and related equipment with a book value of Yen 11,247
million were subject to mortgages securing Yen 3,607 million of Canons indebtedness. 
 Item 5.   Operating and Financial Review and Prospects 
 A.   Operating Results The following discussion and analysis provides information that management believes to be
relevant to understanding Canons consolidated financial condition and result of operations. 
 Overview Canon is one of the worlds leading manufacturers of copying machines, laser beam printers,
inkjet printers, cameras, steppers and aligners. Canon earns revenues primarily from the
manufacture and sale of these products domestically and internationally. Canons basic management
policy is to contribute to the prosperity and well-being of the world while endeavoring to become a
truly excellent global corporate group targeting continued growth and development. Canon divides its businesses into three product groups: business machines, cameras and optical
and other products. The business machines product group has three sub-groups: office imaging
products, computer peripherals and business information products. Economic environment Looking back at the global economy in 2004, although the U.S. economy experienced a temporary
slowdown in the second half of the year due to the diminishing effectiveness of tax cuts, the high
price of crude oil, and rising interest rates, economic growth was realized as consumer spending
increased modestly, and an upturn in corporate earnings fueled continued growth in private-sector
capital spending. Economic growth in Europe remained moderate through 2004, held back somewhat in
the second half by a sluggish world economy combined with high crude oil prices and the negative
impact of the appreciation in value of the euro. In Asia, Chinas economy continued to achieve
steady growth, driven by strong consumer spending and increased capital investment, while other
Asian economies were also in recovery mode. In Japan, while the economy slowed down somewhat in the
second half due to the global downward economic trend, the economy continued to recover gradually,
supported by stable consumer spending and an increase in capital investment. Market environment With respect to the markets in which Canon operates, although sales of digital cameras slowed
in Japan due to a rising household penetration rate, demand overseas, especially in Europe,
continued to grow significantly during fiscal 2004. Demand for network digital multifunction
devices (MFDs) remained strong, especially in the office market, fueled by the shift toward
multifunctionality and color. Although the market for computer peripherals, including printers,
grew overall, mainly among color models, the segment experienced severe price competition and a
shift in demand for lower priced models offering improved functionality. In the field of optical
equipment, capital spending for semiconductor-production equipment recovered strongly owing to such
factors as the sustained high demand for memory devices resulting from replacement demand for
personal computers, and a growing digital consumer electronics market, along with the high rate of
capacity utilization by semiconductor manufacturers. Moreover, increased demand for liquid crystal
display (LCD) televisions fueled growth in the market for projection aligners, which are used in
the production of LCDs. Summary of operations Canon achieved record highs in both consolidated net sales and net income, and a fifth
consecutive year of sales and profit growth, mainly due to a significant increase in sales of
digital cameras and color network digital MFDs, along with a substantial increase in sales of
semiconductor-production equipment. In fiscal 2004, Canon achieved 8.4% growth in net sales, to Yen
3,467,853 million, and a 24.5% increase in net income, to Yen 343,344 million. Canons gross profit
increased by 6.5%, to Yen 1,713,343 million. Key performance indicators Following are the key performance indicators that Canon uses in managing its business. The
changes from year to year in these key performance indicators are set forth in the table shown
below. KEY PERFORMANCE INDICATORS 2004
    
    
    2003
    
    
    2002
    
    
    2001Net sales (Millions of yen)
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072
    
    
    ¥
    2,940,128
    
    
    ¥
    2,907,573Gross profit to net sales ratio
    
    
    49.4
    %
    
    
    50.3
    %
    
    
    47.6
    %
    
    
    44.0
    %R&D expense to net sales ratio
    
    
    7.9
    %
    
    
    8.1
    %
    
    
    7.9
    %
    
    
    7.5
    %Operating profit to net sales ratio
    
    
    15.7
    %
    
    
    14.2
    %
    
    
    11.8
    %
    
    
    9.7
    %Inventory turnover within days
    
    49 days
    
    49 days
    
    51 days
    
    57 daysDebt to total assets ratio
    
    
    1.1
    %
    
    
    3.1
    %
    
    
    5.0
    %
    
    
    10.4
    %
 Note: Inventory turnover within days: Inventory divided by net sales for the previous six months, multiplied by 182.5. -Revenues- As Canon seeks to become a truly excellent global company, one indicator which Canons
management places strong emphasis on is revenue. Following are some of the key performance
indicators relating to revenues that management considers to be important. 23




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Net
sales  Canon derives net sales primarily from the sale of products, and providing of
services relating to its products. Sales vary based on such factors as product demand, the number
and size of transactions within the reporting period, product reputation for new products, and
changes in sales prices. Other factors
involved are market share and market environment. In addition, management considers an
evaluation of net sales by product group important in assessing Canons performance in sales in
various product groups in light of market trends. Gross
profit ratio (ratio of gross profit to net sales)  Through its reforms in product
development, Canon has been striving to shorten product development lead times in order to launch
new, competitively priced products at a faster pace. In addition, Canon has achieved cost
reductions through efficiency enhancements in production. Canon believes that these achievements
have contributed to improving Canons gross profit ratio, and Canon intends to continue to pursue
further shortening of product development lead times and reductions in production costs. Operating profit ratio (ratio of operating profit to net sales) and research and development,
or R&D, expense to net sales ratio.  Canon is focusing on two areas for improvement. On the one
hand, Canon strives to control and reduce its selling, general and administrative expenses. On the
other hand, Canons R&D policy is designed to maintain a high level of spending in core technology
in order to sustain Canons leading position in its current fields of business, and to explore
possibilities in other markets. Canon believes such investments will be the basis for future
success in its business and operations. -Cash Flow Management- Canon also places significant emphasis on cash flow management. The following are the key
performance indicators relating to cash flow management that management believes to be important. Inventory turnover within days is a key performance indicator because it is a measure of
supply-chain management efficiency. Inventories have inherent risks of becoming obsolete,
deteriorating or otherwise decreasing in value significantly, which may adversely affect Canons
operating results. To mitigate these risks, management believes that it is important to continue
reducing inventories and shorten production lead times in order to achieve early recovery of
related product expenses by strengthening supply-chain management. Canons management seeks to meet its liquidity and capital requirements primarily with cash
flow from operations and also seeks debt-free operations. For a manufacturing company such as
Canon, the process for realizing profit on any endeavor can be lengthy, involving as it does R&D,
manufacturing, and sales activities. Management, therefore, believes that it is important to have
sufficient financial strength so that it does not have to rely on external funding. Canon has
continued to reduce its reliance on external funding for capital investments in favor of generating
the necessary funds from its own operations. 
 Critical accounting policies and estimates The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, and based on the selection and application of
significant accounting policies, which require management to make significant estimates and
assumptions. Canon believes that the following are some of the more critical judgment areas in the
application of its accounting policies that currently affect its financial condition and results of
operations. Revenue recognition Canon generates revenue principally through the sale of consumer products, equipment,
supplies, and related services under separate contractual arrangements. Canon recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss
have been transferred to the customer, the sales price is fixed or determinable, and collectibility
is probable. For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative fair
value if such element meets the criteria for treatment as a separate unit of accounting as
prescribed in the Emerging Issues Task Force Issue 00-21 (EITF 00-21), Revenue Arrangements with
Multiple Deliverables. Otherwise, revenue is deferred until the undelivered elements are
fulfilled as a single unit of accounting. Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the customer. Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is installed
at the customer site and the specific criteria of the equipment functionality are successfully
tested and demonstrated by Canon. Service revenue is derived primarily from maintenance contracts
on equipment sold to customers and is recognized over the term of the contract. Most office imaging products are sold with service maintenance contracts for which the
customer typically pays a base service fee plus a variable amount based on usage. Revenue from
these service maintenance contracts are recognized as services are provided. Revenues from the sale of equipment under sales-type leases are 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 lease or
direct-financing lease 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. A liability for estimated product warranty cost is recorded at the time revenue is recognized and
is included in accrued expenses. Estimates for accrued product warranty cost are based on
historical experience, and are affected by ongoing product failure rates, specific product class
failures outside of the baseline experience, material usage and service delivery costs incurred in
correcting a product failure. 24




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##### Table of Contents



Allowance for doubtful receivables Allowance for doubtful receivables is determined using a combination of factors to ensure that
Canons trade and financing receivables are not overstated due to uncollectibility. Canon maintains
a bad debt reserve for all customers based on a variety of factors, including the length of time
receivables are past due, trends in overall weighted average risk rating of the total portfolio,
macroeconomic conditions, significant one-time events and historical experience. Also, Canon
records specific reserves for individual accounts when Canon becomes aware of a customers
inability to meet its financial obligations to Canon, such as in the case of bankruptcy filings or
deterioration in the customers operating results or financial position. If circumstances related
to customers change, estimates of the recoverability of receivables would be further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined principally by
the average method for domestic inventories and the first-in, first-out method for overseas
inventories. Market value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely
reviews its inventories for their salability and for indications of obsolescence to determine if
inventories should be written-down to market value. Judgments and estimates must be made and used
in connection with establishing such allowances in any accounting period. In estimating the market
value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage
or changes in market demand for its inventories. Environmental liabilities Canon is subject to liability for the investigation and clean-up of environmental
contamination at each of the properties that Canon owns or operates, as well as at certain
properties Canon formerly owned or operated. Canon employs extensive internal environmental
protection programs that focus on preventive measures. Canon conducts environmental assessments for
a number of its locations and operating facilities. If Canon was to be held responsible for damages
in any future litigation or proceedings, such costs may not be covered by insurance and may be
material. The liability for environmental remediation and other environmental costs is accrued when
it is considered probable and costs can be reasonably estimated. Deferred tax assets Canon currently has significant deferred tax assets, which are subject to periodic
recoverability assessments. Realization of Canons deferred tax assets is principally dependent
upon its achievement of projected future taxable income. Canons judgments regarding future
profitability may change due to future market conditions, its ability to continue to successfully
execute its operating restructuring activities and other factors. Any changes, in any of these
factors may require possible recognition of significant valuation allowance to these deferred tax
asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the
amounts which will not be realized are charged to income tax expense and will adversely affect net
income. Employee retirement and severance benefit plans Canon has significant employee retirement and severance benefit obligations which are
recognized based on actuarial valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets. Management must consider current
market conditions, including changes in interest rates, in selecting these assumptions. Other
assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal
rate. Changes in these assumptions inherent in the valuation are reasonably likely to occur from
period to period. These changes in assumptions may lead to changes in related employee retirement
and severance benefit costs in the future. Actual results that differ from the assumptions are accumulated and amortized over future
periods and, therefore, generally affect future pension expenses. While management believes that
the assumptions used are appropriate, the differences may affect employee retirement and severance
benefit costs in the future. In preparing its financial statements for fiscal 2004, Canon estimated a discount rate of 2.7%
and an expected long-term rate of return on plan assets of 3.6%. In estimating the discount rate,
Canon uses available information about rates of return on high-quality fixed-income governmental
and corporate bonds currently available and expected to be available during the period to the
maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan
assets based on managements expectations of the long-term return of the various plan asset
categories in which it invests. Management develops expectations with respect to each plan asset
category based on actual historical returns and its current expectations for future returns. Decreases in discount rates lead to increases in actuarial pension benefit obligations which,
in turn, could lead to an increase in service cost and amortization cost through amortization of
actuarial gain or loss, a decrease in interest cost, and vice versa. A decrease of 50 basis points
in the discount rate increases the projected benefit obligation by approximately 11%. The net
effect of changes in the discount rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent periods, as permitted by Statement of
Financial Accounting Standards No. 87, Employers Accounting for Pensions. A Decrease in expected return on plan assets may increase net periodic benefit cost by
decreasing expected return amounts, while differences between expected value and actual fair value
of those assets could affect pension income (expense) in the following years, and vice versa. For
fiscal 2005, if a change of 50 basis points in the expected long-term rate of return on plan assets
is to occur, that may cause a change of approximately Yen2,090 million in net periodic benefit
cost. Canon multiplies managements expected long-term rate of return on plan assets by the value
of its plan assets to arrive at the expected return on plan assets that is included in pension
income (expense). Canon defers recognition of the difference between this expected return on plan
assets and the actual return on plan assets. The net deferral of unrecognized asset gains (losses)
affects the value of plan assets in fiscal years and, ultimately, future pension income (expense). The Company and certain of its domestic subsidiaries realized a net gain of Yen 17,141 million
for fiscal 2004 due to the return to the Japanese Government of a portion of the Employees Pension
Funds. Accrued pension and severance cost decreased in fiscal 2004 compared to fiscal 2003, as a
result of the return. 25




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##### Table of Contents



Consolidated result of operations 
 Fiscal 2004 compared with fiscal 2003 Summarized results of operations for fiscal 2004 and fiscal 2003 are as follows: 2004
    
    
    Change
    
    
    2003(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    3,467,853
    
    
    
    +8.4
    %
    
    ¥
    3,198,072Operating profit
    
    
    543,793
    
    
    
    +19.7
    
    
    
    454,424Income before income taxes and minority interest
    
    
    552,116
    
    
    
    +23.2
    
    
    
    448,170Net income
    
    
    343,344
    
    
    
    +24.5
    
    
    
    275,730Net income per share:Basic
    
    
    387.80
    
    
    
    +23.6
    
    
    
    313.81Diluted
    
    
    386.78
    
    
    
    +24.5
    
    
    
    310.75
 Note: See note of
Item 3A Selected Financial Data. Sales  Overseas operations are significant to Canons operating results and generated approximately
73% of total net sales in fiscal 2004. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations. The average value of the yen in fiscal 2004 was Yen 108.12 to the U.S. dollar, and Yen 134.57
to the euro, representing an appreciation of 7% against the U.S. dollar, and a depreciation of 3%
against the euro, compared with the previous year. These effects of foreign exchange rate
fluctuations unfavorably impacted net sales by approximately Yen 57,000 million. Net sales
denominated in foreign currency decreased by approximately Yen 77,700 million in U.S. dollars,
increased by Yen 20,300 million in euro, and increased by Yen 400 million in other foreign
currencies. Cost of sales  Gross profit  Selling, general and administrative expenses  Operating profit  Other income (deductions)  26




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##### Table of Contents



Income before income taxes and minority interests  Income taxes  Net income  Product information On a consolidated basis, Canon divides its businesses into three product groups: business
machines, cameras and optical and other products. 
    
    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, 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. Effective January 2004, Canon has changed the classification of its information system
business. The information system business which had been included in Optical and other products,
was reclassified as Business machines (Office imaging products) in order to better reflect its
relation with the other products of the business machines group. Accordingly, information for
previous fiscal years has been reclassified to conform with the current classification. Sales by product Canons sales by product group are summarized as follows: 2004
    
    
    Change
    
    
    2003(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,120,972
    
    
    
    +3.6
    %
    
    ¥
    1,081,995Computer peripherals
    
    
    1,149,914
    
    
    
    +5.6
    
    
    
    1,089,312Business information products
    
    
    117,067
    
    
    
    -5.2
    
    
    
    123,493Total business machines
    
    
    2,387,953
    
    
    
    +4.1
    
    
    
    2,294,800Cameras
    
    
    763,079
    
    
    
    +16.8
    
    
    
    653,540Optical and other products
    
    
    316,821
    
    
    
    +26.9
    
    
    
    249,732Total
    
    ¥
    3,467,853
    
    
    
    +8.4
    %
    
    ¥
    3,198,072
 Sales of business machines, constituting 69% of consolidated net sales, increased 4.1%, to Yen
2,387,953 million in fiscal 2004. Sales of office imaging products increased 3.6%, to Yen 1,120,972 million. Demand for network
digital MFDs continues to shift from monochrome machines to color models, as well as towards
higher-end features. The Color imageRUNNER(iR) C3200/iRC3200N recorded strong sales in both the
domestic Japanese and overseas markets. The iRC3100 and the high end model iRC6800, introduced in
Japan in the second half of fiscal 2003, were also launched in Europe and the United States in the
first half of fiscal 2004 and have also recorded strong sales. The iRC3220/iRC3220N, which succeeds
the iRC3200, and the iRC2620/iRC2620N were launched in September 2004 and have also recorded strong
sales. Among monochrome network digital MFDs, such low-end models as the iR1600/2000 series
recorded considerable sales increases, while mid-level models, such as the iR2200 series, and
high-end models, such as the iR5000 series, also achieved strong sales. Color office imaging
products accounted for 24% and 20% and monochrome office imaging products accounted for 62% and 67%
of office imaging products sales in fiscal 2004 and 2003, respectively. Sales of facsimiles and
information system business accounted for 14% and 13% of sales of office imaging products in both
fiscal 2004 and 2003. Sales of computer peripherals increased 5.6% to Yen 1,149,914 million. Despite the effects of
the yens appreciation against the U.S. dollar and a shift in demand toward lower priced models in
the monochrome and color segment, laser beam printer sales substantially increased due to an
increase in sales of color models. Inkjet printers recorded an approximately 20% increase in unit
sales, primarily as a result of sales of the PIXMA iP3100 and iP4100 models, especially in Japan
and Europe, and the PIXMA MP700 and MultiPASS MP370 high-speed multifunction systems. The adverse
effect of severe price competition on sales of computer peripherals was more than offset by a rise
in unit sales. Sales of business information products decreased 5.2%, to Yen 117,067 million in fiscal 2004,
mainly due to the intentional curtailing of personal computer sales in the domestic market. 27




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Sales of cameras continued to achieve significant sales growth of 16.8%, totaling Yen 763,079
million. Amid the continued strong demand for digital models worldwide, sales of compact digital
cameras showed significant growth, boosted by the launch of eight new PowerShot-series models for
fiscal 2004, including
the PowerShot S500 Digital ELPH and PowerShot A75. Canons digital SLR cameras also continued
to enjoy robust growth, bolstered by strong sales of the EOS Digital Rebel, and the EOS 20D which
is successor of the EOS 10D. As a result, unit sales of digital cameras grew by nearly 60% compared
with the previous year. Digital cameras accounted for 69% and 61% and conventional film cameras
accounted for 16% and 21% of camera sales in fiscal 2004 and 2003, respectively. Video camcorders
accounted for the remaining 15% and 18% of camera sales in fiscal 2004 and 2003, respectively. In
the field of digital video camcorders, new models such as the Optura 500/400, Elura 70/65/60 and
Optura 40/30 achieved favorable sales during fiscal 2004. Sales of cameras constituted 22% of
consolidated net sales in fiscal 2004, an increase of 2% from fiscal 2003, primarily due to
increased sales of digital cameras. Sales of optical and other products increased by 26.9%, to Yen 316,821 million. Sales of
aligners for the production of LCDs realized notable growth as the PC monitor industry continued to
shift from cathode-ray tube (CRT) to LCD computer displays, and the LCD television market continued
to expand. Sales of steppers, used for the production of semiconductors, also increased as
investment in semiconductor-production equipment showed a recovery owing to the improved conditions
in the semiconductor-device market. Sales of optical and other products constituted 9% of
consolidated net sales in fiscal 2004, an increase of 1% from fiscal 2003, primarily due to
increased sales of aligners for LCDs and steppers. Sales by region A summary of net sales by region in fiscal 2004 and fiscal 2003 is provided below: 2004
    
    
    Change
    
    
    2003(Millions of yen, except percentage data)Japan
    
    ¥
    849,734
    
    
    
    +6.0
    %
    
    ¥
    801,400Americas
    
    
    1,059,425
    
    
    
    +1.4
    
    
    
    1,045,166Europe
    
    
    1,093,295
    
    
    
    +12.8
    
    
    
    969,042Others
    
    
    465,399
    
    
    
    +21.7
    
    
    
    382,464Total
    
    ¥
    3,467,853
    
    
    
    +8.4
    %
    
    ¥
    3,198,072
   A geographical analysis indicates that net sales in fiscal 2004 increased in every region. In Japan, net sales increased by 6.0% in fiscal 2004 from fiscal 2003. The results were mainly
attributable to increased sales of office imaging products and digital cameras. Color network
digital MFDs, which include the Color imageRUNNER(iR) C3200/iRC3200N, Canons first color offering
in the powerful imageRUNNER-series lineup, have contributed to increased sales of office imaging
products. In the Americas, net sales increased by 8.3% on a local currency basis, mainly due to
increased sales of digital cameras, and laser beam printers. Sales of digital cameras experienced
continued strong demand and benefited from the effect of newly-launched products such as
PowerShot-series models and Canons digital SLR. On a yen basis, after accounting for the
appreciation of the yen against the U.S. dollar, net sales in the Americas increased by 1.4%. In Europe, net sales increased by 11.6% on a local currency basis mainly due to increased
sales of digital cameras, Color network digital MFDs and laser beam printers. On a yen basis, after
accounting for the depreciation of the yen against the euro, net sales in Europe grew 12.8% in
fiscal 2004. Sales in other areas increased by 21.7% on a yen basis in fiscal 2004, reflecting overall
sales growth, particularly in digital cameras and semiconductor equipment. Operating profit by product Operating profit for business machines in fiscal 2004 increased Yen 35,519 million to Yen
521,084 million. Despite the effects of the stronger yen, the gross profit ratio (ratio of gross
profit to net sales) remained at prior year levels, due to cost reduction efforts, and the
sales-to-expense ratio declined, contributing to an increase in operating profit. Operating profit for cameras increased Yen 4,480 million to Yen 130,798 million. Despite the
negative effects of the stronger yen and price competition, along with the impact of increased
advertising and sales-promotion spending, an increase in unit sales of digital cameras contributed
to improved profitability. Optical and other products generated operating profits of Yen 28,832 million in fiscal 2004,
as compared to losses of Yen 9,883 million in fiscal 2003, due to a significant increase in sales
of aligners and steppers. 28




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##### Table of Contents



Fiscal 2003 compared with fiscal 2002 Summarized results of operations for fiscal 2003 and fiscal 2002 are as follows: 2003
    
    
    Change
    
    
    2002(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    3,198,072
    
    
    
    +8.8
    %
    
    ¥
    2,940,128Operating profit
    
    
    454,424
    
    
    
    +31.2
    
    
    
    346,359Income before income taxes and minority interest
    
    
    448,170
    
    
    
    +35.8
    
    
    
    330,017Net income
    
    
    275,730
    
    
    
    +44.6
    
    
    
    190,737Net income per share:Basic
    
    
    313.81
    
    
    
    +44.2
    
    
    
    217.56Diluted
    
    
    310.75
    
    
    
    +44.7
    
    
    
    214.80
 Note: See note of
Item 3A Selected Financial Data. Sales  Overseas operations are significant to Canons operating results and generated approximately
73% of total net sales in fiscal 2003. Such sales are denominated in the applicable local currency
and are subject to fluctuations in the value of the yen in relation to such other currencies.
Despite efforts to reduce the impact of currency fluctuations on operating results, including
localizing some manufacturing and procuring parts and materials from overseas suppliers, Canon
believes such fluctuations have had and will continue to have a significant effect on results of
operations. The average value of the yen in 2003 was Yen 115.61 to the U.S. dollar, and Yen 131.02
to the euro, representing an appreciation of 8% against the U.S. dollar, and a depreciation of 10%
against the euro, compared with the previous year. These effects of foreign exchange rate
fluctuations unfavorably impacted net sales by approximately Yen 25,100 million. Net sales
decreased by approximately Yen 105,800 million in U.S. dollars, increased by Yen 76,400 million in
euro, and increased by Yen 4,300 million in other foreign currencies. Cost of sales  Gross profit  Selling, general and administrative expenses  Operating profit  Other income (deductions)  29




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##### Table of Contents



Income before income taxes and minority interests  Income taxes  Net income  Product information On a consolidated basis, Canon divides its businesses into three product groups: business
machines, cameras and optical and other products. 
    
    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, 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. Effective January 2003, Canon reclassified certain products that were historically included in
business systems, now called business information products. Facsimiles, including certain personal
digital MFDs, are now classified as office imaging products. Products based on inkjet technology
are now classified as inkjet printers in computer peripherals. In connection with these business
alignment adjustments, copying machines were renamed office imaging products and business systems
were renamed business information products. Information for previous fiscal years has been
reclassified to conform to the current classification. Sales by product Canons sales by product group are summarized as follows: 2003
    
    
    Change
    
    
    2002(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,081,995
    
    
    
    +5.8
    %
    
    ¥
    1,023,131Computer peripherals
    
    
    1,089,312
    
    
    
    +3.2
    
    
    
    1,055,956Business information products
    
    
    123,493
    
    
    
    -16.1
    
    
    
    147,108Total business machines
    
    
    2,294,800
    
    
    
    +3.1
    
    
    
    2,226,195Cameras
    
    
    653,540
    
    
    
    +34.5
    
    
    
    485,778Optical and other products
    
    
    249,732
    
    
    
    +9.5
    
    
    
    228,155Total
    
    ¥
    3,198,072
    
    
    
    +8.8
    %
    
    ¥
    2,940,128
 Sales of business machines, constituting 72% of consolidated net sales, increased 3.1%, to Yen
2,294,800 million in fiscal 2003. Sales of office imaging products increased 5.8%, to Yen 1,081,995 million. Demand for network
digital MFDs shifted from monochrome machines to color models, as well as towards higher-end
features. The Color imageRUNNER(iR) C3200/iRC3200N, Canons first color offerings in the high-end
imageRUNNER(iR)-series lineup, was well received in Japan and overseas markets, and contributed
significantly to increased sales of office imaging products. Among monochrome network digital MFDs,
the high-end iR5000 series and iR105 models continued to record strong sales during the fiscal
2003. Color office imaging products accounted for 20% and 17% and monochrome office imaging
products accounted for 72% and 75% of office imaging products sales in fiscal 2003 and 2002,
respectively. Sales of facsimiles remained flat and accounted for the remaining 8% of sales of
office imaging products in both fiscal 2003 and 2002. Sales of computer peripherals increased 3.2%, to Yen 1,089,312 million. While sales of laser
beam printers were flat in the previous year due to inventory adjustment by Canons OEM partner, a
recovery in orders fueled robust growth in terms of unit sales during fiscal 2003, especially among
personal models. Although unit sales of inkjet printers increased due to favorable acceptance of
such models as the i560, i860, and MultiPASS MP700/MP730 (high-speed multifunction inkjet systems),
severe price competition resulted in a slight decrease in amount of sales. Sales of computer
peripherals as a whole mainly increased, due to increased sales of laser beam printers. The adverse
effect of severe price competition on sales of computer peripherals was more than offset by a rise
in unit sales. As a result, sales of computer peripherals in fiscal 2003 increased by 3.2%. Sales of business information products decreased 16.1%, to Yen 123,493 million, in fiscal
2003, mainly due to managements decision to curtail sales of personal computers on a stand-alone
basis, because such sales were unprofitable, and to concentrate more on providing comprehensive
business solutions. 30




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##### Table of Contents



Sales of cameras continued to achieve significant sales growth of 34.5%, totaling Yen 653,540
million. Amid the continued strong demand for digital cameras
worldwide, Canon launched several new compact digital cameras in fiscal 2003, including six
new PowerShot-series models and three new DIGITAL ELPH-series. These new products, led by the
PowerShot S400 DIGITAL ELPH and PowerShot A70, contributed significantly to an increase in sales.
Canons digital single-lens reflex cameras also enjoyed sales growth, supported by the introduction
of new product lineups, including the EOS 10D, launched in the first half of 2003, and the EOS
Digital Rebel, launched in September 2003. Sales of conventional film cameras continued to decline
amid the increasing popularity of digital models. Digital cameras accounted of 61% and 45% and
conventional film cameras accounted for 21% and 31% of camera sales in fiscal 2003 and 2002,
respectively. Video camcorders accounted for the remaining 18% and 24% of camera sales in fiscal
2003 and 2002, respectively. In the field of digital video camcorders, the eight new products Canon
launched in fiscal 2003, including the OPTURA 300, as well as the ZR Series (ZR60, ZR65, ZR70),
contributed to increased sales. Sales of cameras constituted 20% of consolidated net sales in
fiscal 2003, an increase of 4% from fiscal 2002, primarily due to increased sales of digital
cameras. Sales of optical and other products increased 9.5%, to Yen 249,732 million. Sales of aligners
for the production of LCDs displayed notable growth as the PC monitor industry continued its shift
from cathode-ray tube (CRT) to LCD computer displays, and the LCD television market continued to
expand. Sales of steppers, used for the production of semiconductors, also increased as the
semiconductor market began to show signs of a turnaround. Sales of optical and other products
constituted 8% of consolidated net sales in fiscal 2003 and increased 9.5% from fiscal 2002,
primarily due to increased sales of aligners for LCDs and steppers. Sales by region A summary of net sales by region in fiscal 2003 and fiscal 2002 is provided below: 2003
    
    
    Change
    
    
    2002(Millions of yen, except percentage data)Japan
    
    ¥
    801,400
    
    
    
    +9.4
    %
    
    ¥
    732,551Americas
    
    
    1,045,166
    
    
    
    +3.5
    
    
    
    1,010,166Europe
    
    
    969,042
    
    
    
    +13.1
    
    
    
    857,167Others
    
    
    382,464
    
    
    
    +12.4
    
    
    
    340,244Total
    
    ¥
    3,198,072
    
    
    
    +8.8
    %
    
    ¥
    2,940,128
 Note: This summary of net sales by region of destination is determined by the location of the customer. A geographical analysis indicates that net sales in fiscal 2003 increased in every region. In Japan, net sales increased by 9.4% in fiscal 2003 despite a decrease in sales of personal
computers due to Canons intentional curtailment of such sales in Japan. The results were mainly
attributable to increased sales of office imaging products and digital cameras. Color network
digital MFDs, which include the Color imageRUNNER(iR) C3200/iRC3200N, have been well received,
contributing to increased sales of office imaging products. In the Americas, net sales increased by 11.9% on a local currency basis, mainly due to
increased sales of digital cameras, network digital MFDs and laser beam printers. Sales of digital
cameras experienced continued strong demand and benefited from the effect of newly-launched
products. After accounting for the appreciation of the yen against the U.S. dollar, net sales in
the Americas increased by 3.5%. In Europe, net sales increased by 5.4% on a local currency basis, mainly due to increased
sales of digital cameras and laser beam printers. After accounting for the depreciation of the yen
against the euro, net sales in Europe grew 13.1% in fiscal 2003. Sales in other areas increased by 12.4% on a yen basis in fiscal 2003, reflecting overall
sales growth, particularly in digital cameras and semiconductor equipment. Operating profit by product Operating profit for business machines in fiscal 2003 increased Yen 74,549 million to Yen
485,565 million. Operating profit ratio also improved by 2.7% to 21.2%. Sales of business machines
in fiscal 2003 totaled Yen 2,294,800 million, an increase of 3.1%. In addition to cost-cutting
measures and the introduction of new price-competitive products, which contributed to an
improvement in the gross profit ratio, a steady increase in sales volume resulted in an increase in
operating profit in fiscal 2003 of 18.1%. Operating profit for cameras increased Yen 56,028 million to Yen 126,318 million.
Significantly improved profitability for camera products resulted from the rapid growth in sales of
digital cameras, along with a significant improvement in the gross profit ratio, made possible
through effective cost-saving initiatives in development and production reforms activities.
Consequently, operating profit in the camera segment increased by 79.7%. Optical and other products generated operating losses of Yen 9,883 million in 2003, an
improvement from losses of Yen 11,652 million in fiscal 2002, despite increased sales of 9.5% for
the segment. These continuing operating losses are primarily the result of severe price competition
and a one-time expense for the disposal of inventories relating to obsolete scanning steppers. 31




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##### Table of Contents



Segment information by product and geographic area Segment information by product and by geographic area for the years ended December 31, 2004,
2003 and 2002 are shown below. The following table provides segment information by product: 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
 As of/for the year ended December 31, 2003OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,294,800
    
    
    ¥
    653,540
    
    
    ¥
    249,732
    
    
    
    
    
    
    ¥
    3,198,072Intersegment
    
    
    
    
    
    
    
    
    
    
    132,389
    
    
    ¥
    (132,389
    )
    
    
    Total
    
    
    2,294,800
    
    
    
    653,540
    
    
    
    382,121
    
    
    
    (132,389
    )
    
    
    3,198,072Operating cost and expenses
    
    
    1,809,235
    
    
    
    527,222
    
    
    
    392,004
    
    
    
    15,187
    
    
    
    2,743,648Operating profit
    
    ¥
    485,565
    
    
    ¥
    126,318
    
    
    ¥
    (9,883
    )
    
    ¥
    (147,576
    )
    
    ¥
    454,424Assets
    
    ¥
    1,266,881
    
    
    ¥
    317,672
    
    
    ¥
    412,117
    
    
    ¥
    1,185,478
    
    
    ¥
    3,182,148Depreciation and amortization
    
    
    118,806
    
    
    
    17,712
    
    
    
    20,276
    
    
    
    26,810
    
    
    
    183,604Capital expenditure
    
    
    106,013
    
    
    
    25,894
    
    
    
    31,170
    
    
    
    46,961
    
    
    
    210,038
 As of/for the year ended December 31, 2002OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,226,195
    
    
    ¥
    485,778
    
    
    ¥
    228,155
    
    
    
    
    
    
    ¥
    2,940,128Intersegment
    
    
    
    
    
    
    
    
    
    
    139,608
    
    
    ¥
    (139,608
    )
    
    
    Total
    
    
    2,226,195
    
    
    
    485,778
    
    
    
    367,763
    
    
    
    (139,608
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,815,179
    
    
    
    415,488
    
    
    
    379,415
    
    
    
    (16,313
    )
    
    
    2,593,769Operating profit
    
    ¥
    411,016
    
    
    ¥
    70,290
    
    
    ¥
    (11,652
    )
    
    ¥
    (123,295
    )
    
    ¥
    346,359Assets
    
    ¥
    1,296,829
    
    
    ¥
    263,532
    
    
    ¥
    338,377
    
    
    ¥
    1,043,968
    
    
    ¥
    2,942,706Depreciation and amortization
    
    
    106,865
    
    
    
    14,118
    
    
    
    19,817
    
    
    
    24,460
    
    
    
    165,260Capital expenditure
    
    
    104,877
    
    
    
    15,627
    
    
    
    23,767
    
    
    
    54,431
    
    
    
    198,702
 Notes: (1)
    
    Effective January 2004, Canon has changed the classification of its information system
business. The information system business which had been included in Optical and other
products, was reclassified as Business machines (Office imaging products) in order to
better reflect its relation with the other products of the business machines group.
Accordingly, information for previous fiscal years has been reclassified to conform with the
current classification.(2)
    
    General corporate expenses of Yen 136,929 million, Yen 147,616 million and Yen 123,193
million for fiscal 2004,2003 and 2002, respectively, are included in Corporate and
Eliminations. For fiscal 2004, a gain of Yen 17,141 million is also included, which relates
to the Transfer to the Japanese Government of a Portion of Employee Pension Fund Liabilities.(3)
    
    Corporate assets of Yen 1,430,599 million, Yen 1,185,506 million and Yen 1,044,036 million
as of December 31, 2004, 2003 and 2002, respectively, which mainly consist of cash and cash
equivalents, marketable securities, investments and corporate properties, are included in
Corporate and Eliminations.(4)
    
    The segments are defined under Japanese GAAP.
 32




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The following table provides segment information by geographic area: 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
 As of/for the year ended December 31, 2003Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    856,851
    
    
    ¥
    1,044,998
    
    
    ¥
    968,938
    
    
    ¥
    327,285
    
    
    
    
    
    
    ¥
    3,198,072Intersegment
    
    
    1,662,172
    
    
    
    8,101
    
    
    
    3,861
    
    
    
    503,119
    
    
    ¥
    (2,177,253
    )
    
    
    Total
    
    
    2,519,023
    
    
    
    1,053,099
    
    
    
    972,799
    
    
    
    830,404
    
    
    
    (2,177,253
    )
    
    
    3,198,072Operating cost and expenses
    
    
    2,025,442
    
    
    
    998,492
    
    
    
    946,282
    
    
    
    806,281
    
    
    
    (2,032,849
    )
    
    
    2,743,648Operating profit
    
    ¥
    493,581
    
    
    ¥
    54,607
    
    
    ¥
    26,517
    
    
    ¥
    24,123
    
    
    ¥
    (144,404
    )
    
    ¥
    454,424Assets
    
    ¥
    1,600,726
    
    
    ¥
    306,140
    
    
    ¥
    546,625
    
    
    ¥
    249,755
    
    
    ¥
    478,902
    
    
    ¥
    3,182,148
 As of/for the year ended December 31, 2002Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    789,066
    
    
    ¥
    1,007,572
    
    
    ¥
    852,931
    
    
    ¥
    290,559
    
    
    
    
    
    
    ¥
    2,940,128Intersegment
    
    
    1,475,091
    
    
    
    9,791
    
    
    
    4,639
    
    
    
    426,914
    
    
    ¥
    (1,916,435
    )
    
    
    Total
    
    
    2,264,157
    
    
    
    1,017,363
    
    
    
    857,570
    
    
    
    717,473
    
    
    
    (1,916,435
    )
    
    
    2,940,128Operating cost and expenses
    
    
    1,867,817
    
    
    
    969,542
    
    
    
    836,341
    
    
    
    699,420
    
    
    
    (1,779,351
    )
    
    
    2,593,769Operating profit
    
    ¥
    396,340
    
    
    ¥
    47,821
    
    
    ¥
    21,229
    
    
    ¥
    18,053
    
    
    ¥
    (137,084
    )
    
    ¥
    346,359Assets
    
    ¥
    1,485,238
    
    
    ¥
    346,021
    
    
    ¥
    460,521
    
    
    ¥
    202,388
    
    
    ¥
    448,538
    
    
    ¥
    2,942,706
 Notes: (1)
    
    General corporate expenses of Yen 136,929 million, Yen 147,616 million and Yen 123,193
million for fiscal 2004, 2003 and 2002, respectively, are included in Corporate and
Eliminations. For fiscal 2004, a gain of Yen 17,141 million is also included, which relates
to the Transfer to the Japanese Government of a Portion of Employee Pension Fund Liabilities.(2)
    
    Corporate assets of Yen 1,430,599 million, Yen 1,185,506 million and Yen 1,044,036 million
as of December 31, 2004, 2003 and 2002, 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.
 33




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Foreign operations and foreign currency transactions Canons marketing activities are performed by subsidiaries in various regions in local
currencies, while the cost of sales is generally in yen. Given Canons
current operating structure, appreciation of the yen has a negative impact on net sales and
the gross profit ratio. To reduce the financial risks from changes in foreign exchange rates, Canon
utilizes derivative financial instruments, which are comprised principally of forward currency
exchange contracts. The return on foreign operation sales is usually lower than that from domestic operations
because foreign operations consist mainly of marketing activities. Return on foreign operation
sales is calculated by dividing net income of foreign subsidiaries, after factoring in a
consolidation adjustment between foreign subsidiaries, by net sales of foreign subsidiaries.
Marketing activities are generally less profitable than production activities, which are mainly
conducted by the Company and its domestic subsidiaries. The returns on foreign operation sales in
fiscal 2004, 2003 and 2002 were 2.8%, 3.2% and 2.7%, respectively. This compares with returns of
9.9%, 8.6% and 6.5% on total operations for the respective years. 
 Recent developments 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. 34




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B.   Liquidity and capital resources Cash and cash equivalents in fiscal 2004 increased Yen 197,476 million to Yen 887,774 million,
compared with Yen 690,298 million in fiscal 2003 and
Yen 521,271 million in fiscal 2002. Canons cash and cash equivalents are typically
denominated in Japanese yen, with the remainder denominated in foreign currencies such as the U.S.
dollar. Net cash provided by operating activities in fiscal 2004 increased by Yen 95,880 million from
the previous year to Yen 561,529 million. Cash flow from operating activities consisted of the
following components: the major component of Canons cash inflow is cash received from customers,
while the major components of Canons cash outflow are payments for parts and materials, selling,
general and administrative expenses, and income taxes. For fiscal 2004, cash inflow from cash received from customers increased, due to the increase
in net sales. This increase in cash inflow was within the range of the increase in net sales, as
there were no significant changes in Canons collection rates. Cash outflow for payments for parts
and materials also increased, as a result of an increase in net sales. However, this increase was
less than the increase in net sales, due to the effects of cost reduction. Cost reduction reflects
a decline in unit prices of parts and raw materials, as well as a streamlining of the process of
using these parts and materials through promoting efficiency in operations. Cash outflow for
payroll payments increased, due to the increase in the number of employees. The employees in the
Asian region increased, due to the expansion of production in the region. Cash outflow for
payments for selling, general and administrative expenses increased, due to the increase in
advertising and marketing expenses, reflecting managements policy to strengthen Canons corporate
brand image. Cash outflow for payments of income taxes increased, due to the increase in taxable
income. Net cash used in investing activities in fiscal 2004 was Yen 252,967 million, compared with
Yen 199,948 million in fiscal 2003 and Yen 230,220 million in fiscal 2002, consisting primarily of
capital expenditures. Capital expenditures in fiscal 2004 totaled Yen 318,730 million, mainly due
to expanding production capabilities in Japan and overseas, as well as to bolster Canons
R&D-related infrastructure. In November 2004, Canon also entered into an agreement whereby certain
assets were deposited into an irrevocable trust to meet the debt service requirements of 1.88%
Japanese yen notes, 2.95% Japanese yen notes, and 2.27% Japanese yen notes in the aggregate amount
of Yen 25,000 million. Pursuant to this agreement, Canon used cash aggregating to Yen 26,637
million. As a result, free cash flow, or cash flow from operating activities minus cash flow from
investing activities, totaled Yen 308,562 million for fiscal 2004 as compared to Yen 265,701
million for fiscal 2003. Net cash used in financing activities totaled Yen 102,268 million in fiscal 2004, mainly
resulting from Canons active efforts to repay loans toward the goal of improving Canons financial
position. The Company also paid dividends in fiscal 2004 of 65 yen per share, which was an increase
of 15 yen per share over the prior year. Canon seeks to meet its liquidity and capital requirements principally with cash flow from
operations and, to a lesser extent, with short-term loans and long-term debt. Consistent with this
objective, Canon continued to reduce its reliance on external funding for capital investments in
favor of relying upon internally generated cash flows. This approach is supplemented with
group-wide treasury and cash management activities undertaken at the parent company level. Canon
believes that its working capital is sufficient for its present requirements. To the extent Canon relies on external funding for its liquidity and capital requirements, it
generally has access to various funding sources, including issuance of additional share capital,
long-term debt or short-term loans. While Canon has been able to obtain funding from its
traditional financing sources and from the capital markets, and believes it will continue to be
able to do so in the future, there can be no assurance that adverse economic or other conditions
will not affect Canons liquidity or long-term funding in the future. Short-term loans (including current portion of long-term debt) amounted to Yen 9,879 million
at December 31, 2004 compared to Yen 39,136 million at December 31, 2003. Long-term debt (excluding
their current portions) amounted to Yen 28,651 million at December 31, 2004 compared to Yen 59,260
million at December 31, 2003. Canons long-term debt generally consists of secured or partially-secured term loans from
banks, bearing interest at fixed rates and floating rates, as well as fixed rate-notes and
convertible debentures which Canon has issued in the domestic market with original maturities of
five to fifteen years. In order to facilitate access to global capital markets, Canon obtains credit ratings from two
rating agencies, Moodys Investors Services, Inc. (Moodys) and Standard and Poors Rating
Services (S&P). In addition, Canon maintains a rating from Rating and Investment Information,
Inc. (R&I), a rating agency in Japan, for access to the Japanese capital market. As of January 14, 2005, Canons debt ratings are: Moodys: Aa2 (long-term); S&P: AA
(long-term), A-1+ (short-term); and R&I: AA+ (long-term). Canon does not have any rating downgrade
triggers that would accelerate the maturity of a material amount of its debt. A downgrade in
Canons credit ratings or outlook could, however, increase the cost of its borrowings. Capital expenditure in fiscal 2004 amounted to Yen 318,730 million compared with Yen 210,038
million in fiscal 2003 and Yen 198,702 million in fiscal 2002. In fiscal 2004, capital expenditures
were mainly used to expand production capabilities in both domestic and overseas regions, and to
bolster Canons R&D-related infrastructure. In addition, Canon has been continually investing in
tools and dies for business machines, in which the amount invested is generally the same each year.
For fiscal 2005, Canon projects capital expenditures of approximately Yen 375,000 million. The
projected capital expenditures include an investment in new production plants and new facilities of
Canon. Employer contributions to Canons worldwide defined benefit pension plans were Yen 31,018
million in fiscal 2004, Yen 29,944 million in fiscal 2003 and Yen 33,661 million in fiscal 2002.
During fiscal 2005, Canon expects to make cash contributions of approximately Yen 36,183 million to
its defined benefit pension plans. 35




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Working capital in fiscal 2004 increased Yen 145,513 million, to Yen 1,248,987 million,
compared with Yen 1,103,474 million in fiscal 2003 and Yen 903,134 million in fiscal 2002. This
increase was primarily a result of an increase in cash and cash equivalents and a decrease in
short-term loans. Canon believes its working capital will be sufficient for its requirements for
the foreseeable future. Canons capital requirements are primarily dependent on managements
business plans regarding the levels and timing of capital expenditures and investments. The working
capital ratio (ratio of current assets to current liabilities) for fiscal 2004 was 2.27, compared
to 2.33 for fiscal 2003 and 2.13 for fiscal 2002. Return on assets (Net income divided by the average of total assets as of December 31, 2004,
2003 and 2002) increased to 10.1% in fiscal 2004, compared to 9.0% in fiscal 2003 and 6.6% in
fiscal 2002. This increase was due mainly to an increase in net income. Return on stockholders
equity increased to 16.8% in fiscal 2004, compared with 15.9% in fiscal 2003 and 12.5% in fiscal
2002. Debt to total assets ratio was 1.1%, 3.1% and 5.0% as of December 31, 2004, 2003 and 2002,
respectively. Canon had short-term loans and long-term debt of Yen 38,530 million as of December
31, 2004, Yen 98,396 million as of December 31, 2003 and Yen 148,103 million as of December 31,
2002. 
 C. Research and development, patents and licenses, etc. Canon is now in Phase II of its Excellent Global Corporation Plan, which started in 2001 and
will end in 2005. The management plan aims to guide Canon to the No.1 position worldwide in all
core business areas, to build on its R&D capabilities and to continually create new businesses and
to further strengthen its financial position. With respect to its R&D goals, Canon formulated as part of its management plan the Canon Over
IP concept, through which Canon intends to connect its digital products to the Internet and lay
the foundations for Internet-businesses for the future. Canon envisions Canon products and systems
interconnected over networks, as well as a variety of Web services that expand its business domains
while creating new value for customers. Canon has R&D centers worldwide that closely collaborate in their R&D activities. Some
regional R&D centers conduct basic research into technology, and others apply their expertise to
develop new products and businesses. The Companys R&D activities are conducted in the following four organizations: 

Core Technology Development Headquarters (where component engineering and base
technology R&D, such as optics technology, nanotechnology and production engineering, is
conducted)

Leading-Edge Technology Development Headquarters (where most advanced technology R&D
aiming to create new technological capabilities, is conducted)

Platform Technology Development Headquarters (where platform technology R&D, such as
system Large Scale Integration (LSI) chips, network technology and visual information
technology, is conducted)

Device Technology Development Headquarters (where key device R&D, such as for
semiconductor devices, is conducted) Canon had R&D expenditures of Yen 275,300 million in fiscal 2004, Yen 259,140 million in
fiscal 2003 and Yen 233,669 million in fiscal 2002. The ratio of R&D expenditure to total net sales
for fiscal 2004, 2003 and 2002 was 7.9%, 8.1% and 7.9%, respectively. Canon seeks to produce new products that are protected by patents and to set market product
standards in order to enhance its market position. The United States Patent and Trademark Office
(USPTO) announced that Canon obtained the third-greatest number of private sector patents in 2004.
This achievement marks Canons thirteenth consecutive year as one of the top three patent-receiving
private-sector organizations. Canon aims to realize production procedures that dramatically reduce the need for prototypes,
in the design process, through the effective utilization of 3D-CAD systems, in order to accelerate
product development and curtail costs. 
 D. Trend information 
 Trend information For Canon, 2005 marks the fifth and the final year of Phase II of its Excellent Global
Corporation Plan (2001-2005). Canon will continue to move forward with several initiatives designed
to ensure that it meets its goals, including enhancements of efficiencies in all areas of Canons
operations, from R&D and production processes to head-office administrative operations, by
simultaneously targeting improved productivity and the elimination of waste. In the area of
development, Canon will target the further shortening of product development periods and
improvements in design quality. Canon will also continue to strive to substantially reduce product
development costs by implementing digital trial production procedures that make it unnecessary to
create prototypes. As for production, Canon will focus its energies on the in-house production of
key components and development of innovative high-efficiency factory automation equipment to
realize even greater cost reductions. With regard to marketing activities, in addition to promoting
marketing reforms through structural reorganization and strengthening marketing channels, Canon is
also working to expand and strengthen its solutions business and improve its hardware solutions
offerings through greater customization to better meet customer needs. Canon also views the
protection of the environment as an essential part of its management activities and will continue
to develop environmentally-conscious products and introduce resource-recycling systems while
actively expanding its green procurement and purchasing programs. Business machines segment Office imaging products In the office imaging products segment, it has become more important to provide added value in
the form of networking, integration, color printing, and high-speed models. Also, in addition to
the mid-level models for office market which enjoys steady growth, Canon expects that the market
will expand into higher-end models and low-end multi-function models. The market for color digital
devices continued to grow rapidly, and sales of monochrome digital multifunction devices were
stable, reflecting the market trend shifting from single-function to multifunction. 36




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To maintain and enhance a competitive edge and to meet more sophisticated customer demands,
Canon is strengthening its marketing capabilities by reinforcing its hardware and software product
lineups and by improving functionality. Canon strengthened the product lineups of its color digital
devices in addition to its existing full line of monochrome machines and maintained its market
share by executing business strategies in line with the current market trend. Manufacturing in the new Canon Suzhou facility in China has been progressing satisfactorily.
While competitors seek to transfer manufacturing facilities to China, Canon regards its
manufacturing bases in Japan important as well, in order to pursue total cost reduction through the
strengthening and reinforcing of its technology, in particular through the collaboration of its
R&D, manufacturing and quality management divisions. Computer peripheral products In the inkjet printer market, Canon expects a continuation of declines in market prices, a
shift from single-function printers to multi-function printers, and an expanding size of the
digital photo market. To manage these trends, Canon has newly established the PIXMA brand name for
its inkjet single-function printers/multi-function printers worldwide (other than in Japan in which
already introduced as PIXUS brand) with new functions and technologies. Canons laser beam printer business has a strong position in the market. In the monochrome
laser beam printer market, Canon expects that the transition to a low price segment will expand
sales in the consumer market and in the emerging markets. In the color laser beam printer market,
Canon expects continued strong growth in demand. In general, competition will become more intense
as competitors implement aggressive price strategies in order to establish themselves as market
leaders. Canon seeks to remain competitive by developing technologies that can be deployed in a
timely fashion to produce innovative products in all segments. Canon is also working to lower costs
by automating production of consumables and to secure procurement of essential parts through
internal sourcing. Canon expects that the size of the scanner market will continue to contract, but Canon has
increased its share in the market with the new CanoScan LiDE series introduced in fiscal 2003. The size of the worldwide facsimile market has remained stable, as expansion in Asia, mainly
China, has offset declines in other regions. Due to price declines for inkjet multi-function
printers with facsimile function, prices are also declining for stand-alone machines. Business information products With regard to personal computers, demand from corporate clients on the Japanese market held
steady, but a decline in sales was caused by Canons change in marketing strategy from selling
single products to a solutions business involving the proposal of unique combinations of various
products. This trend is expected to continue in fiscal 2005. Cameras segment The entire digital camera market continues to expand. While the growth rate has slowed in
Japan and the United States, emerging markets, especially China and Eastern Europe, have
experienced strong growth. In addition, the emergence of new photo imaging systems, such as PC free
direct printing systems, expand the digital imaging functionality through network connectivity,
along with the improvement of the user-friendly image processing interfaces and software. Canon expects the market for compact digital cameras to expand in the intermediate term. In
general, declines in prices and intense competition are causing a decrease in profitability in the
industry. The compact photo printer market is developing rapidly. Canon expects that the ratio of
Compact Photo printers that are connected to digital cameras will reach approximately 30% within a
few years, and Canon intends to take the initiative to lead the expansion of this market. Canon played a major role in the rapid expansion of the digital single lens reflex (SLR)
market in fiscal 2004. The market size almost tripled from fiscal 2003, surpassing the size of the
single lens reflex camera market for film cameras. Through the introduction of the new models,
Canon is determined to maintain a leading position in the expanding market for digital single lens
reflex cameras in fiscal 2005. Canon expects the market for digital cameras to experience price competition as well as
technological competition focused on image quality and high performance. Though profit levels in
the industry have recently declined, Canon has succeeded in maintaining profitability by carrying
out production and procurement reforms. The market for film cameras is contracting as a result of the rapid shift to digital cameras.
Canon anticipates this trend to continue, both for film single lens reflex cameras and for film
compact cameras. Canon expects the interchangeable lens market to grow as a result of the rapid market
penetration of digital single lens reflex cameras. In response to the rapid shift of the single
lens reflex camera market from film to digital, Canon began to introduce interchangeable lenses
exclusively for digital single lens reflex cameras in the last half of fiscal 2003, and so far has
introduced four models in this market. Canon seeks to expand its sales and market share by
introducing products especially made for popular class digital single lens reflex cameras. For video camcorders, analog camcorder sales have been further replaced by sales of digital
camcorders in fiscal 2004. This substitution effect continues worldwide, including the significant
transition in United States, where the speed of transition used to be moderate. While Mini DV (Mini
Digital Video) is currently the main recording media, camcorders with new media such as DVD
(Digital Versatile Drive), SD (Secure Digital) memory card, HDD (Hard Disk Drive), and new
recording format such as HDV are beginning to emerge. Canon expects that Mini DV (Mini Digital
Video) will remain the mainstream format while the emerging new media will drive a further
expansion of the entire camcorder market. Canon will seek to continue sales growth with a stronger
product lineup for the Mini DV market, while continuing to invest in R&D to follow new trends in
the market. 37




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Canon expects that the market for liquid crystal projectors will continue to grow by about 30%
per year on a unit basis, while market prices will continue to decline, resulting in moderate
growth in monetary terms. In fiscal 2004, Canon introduced the reflective liquid crystals (LCOS
(Liquid Crystal on Silicon)) type projector the market, the SX50 was developed independently by
Canon. Based on its advanced optical technologies, Canon intends to expand its liquid crystal
projector business with products that will be distinguished by high brightness, high resolution,
and high picture quality and that will be easy to use (stress-free). Optical and other products segment As semiconductor manufacturers grow more cautious in their capital investment spending, Canon
expects the pace of new orders for semiconductor-production equipment to slow moderately in fiscal
2005. In general, the trend toward high resolution and higher speed equipment will likely to
continue in the semiconductor industry. In order to manage theses trends, Canon introduced the
FPA-6000AS4 Stepper, Canons fastest ArF Stepper which also has the highest NA (0.85) and an
ultra-low aberration lens system. The FPA-6000AS4 Stepper is targeted for the most advanced IC
mass-production. For fiscal 2004, sales of aligners for the production of LCDs realized significant growth as
the PC monitor industry continued to shift from CRT to LCD displays, and the LCD television market
continued to expand. In the LCD production mask aligner market, demand is expected to decline
gradually as the trend toward increased capital investment tapers off. Canon expects the overall market size for TV broadcasting lenses to remain relatively stable
in the long run. Since fiscal 2002, the market has expanded slightly, recovering from a slump after
9/11 and benefiting from a trend to the digitalization of broadcasting equipment. The gradual
increase in the TV lens market in part reflected studio equipment replacement by major TV stations
in Japan, and outside broadcast vehicle equipment replacement in the United States. In coming
years, Canon anticipates local station equipment replacement in Japan and studio equipment
replacement in the United States. Equipment replacement in Europe, China and other Asian nations
will likely follow. China, with the 2008 Olympics in Beijing, is an attractive market for Canons
100x television broadcasting zoom lens. Though Canon already has a major market share worldwide for
this class of lens, Canon intends to continue to strengthen its position in this market. 
 Forward looking statements The foregoing discussion and other disclosure in this report contains forward-looking
statements that reflect managements current views with respect to certain future events and
financial performance. Actual results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are based upon assumptions
of future events that may not prove to be accurate. The following important factors could cause
actual results to differ materially from those projected or implied in any forward-looking
statements: exchange rate fluctuations; the uncertainty of Canons ability to implement its plans
to localize production and other measures to reduce the impact of exchange rate fluctuations;
uncertainty as to economic conditions, in Canons major markets; uncertainty of continued demand
for Canons high-value-added products; uncertainty as to the recovery of computer and related
markets; uncertainty of recovery in demand for Canons semiconductor production equipment; Canons
ability to continue to develop products and to market products that incorporate new technology on a
timely basis, are competitively priced and achieve market acceptance; the possibility of losses
resulting from foreign currency transactions designed to reduce financial risks from changes in
foreign exchange rates; and inventory risk due to shifts in market demand. For other trend information, please see Item 5 Operating and Financial Review and
Prospects-A. Operating Results. 
 E. Off-balance sheet arrangements As part of its ongoing business, Canon does not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Canon provides guarantees to third parties of bank loans of its employees, affiliates and
other companies. Canon would have to perform under a guarantee, if the borrower defaults on a
payment within the contract periods of 1 year to 30 years in the case of employees with housing
loans, and of 1 year to 10 years in the case of affiliates and other companies. The maximum amount
of undiscounted payments Canon would have had to make in the event of default by all borrowers was
Yen 43,634 million at December 31, 2004. The carrying amounts of the liabilities recognized for
Canons obligations as a guarantor under those guarantees are insignificant. 
 F. Contractual obligations The following summarizes Canons contractual obligations at December 31, 2004. (Millions of yen)Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsContractual Obligations:Long-Term DebtCapital Lease Obligations
    
    ¥
    8,585
    
    
    ¥
    4,144
    
    
    ¥
    3,782
    
    
    ¥
    635
    
    
    ¥
    24Other Long-Term Debt
    
    
    29,945
    
    
    
    5,735
    
    
    
    12,665
    
    
    
    11,544
    
    
    
    1Operating Lease Obligations
    
    
    49,532
    
    
    
    12,714
    
    
    
    15,858
    
    
    
    10,671
    
    
    
    10,289Purchase commitments forProperty Plant and Equipment
    
    
    39,286
    
    
    
    39,286
    
    
    
    
    
    
    
    
    
    
    
    Parts and Raw Materials
    
    
    55,666
    
    
    
    55,666
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    183,014
    
    
    ¥
    117,545
    
    
    ¥
    32,305
    
    
    ¥
    22,850
    
    
    ¥
    10,314
 38




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##### Table of Contents



Canon provides warranties generally less than one year against defects in materials and
workmanship on most of its consumer products. A liability for estimated product warranty related
cost is established at the time revenue is recognized and is included in accrued expenses.
Estimates for accrued product warranty cost are primarily based on historical experience, and are
affected by ongoing product failure rates, specific product class failures outside of the baseline
experience, material usage and service delivery costs incurred in correcting a product failure. As
of December 31, 2004, the accrued product warranty cost amounted to Yen 14,264 million. At December 31, 2004, commitments outstanding for the purchase of property, plant and
equipment approximated Yen 39,286 million, and commitments outstanding for the purchase of parts
and raw materials approximated Yen 55,666 million, both for use in the ordinary course of its
business. Canon anticipates that funds needed to fulfill these commitments will be generated
internally through operations. On September 14, 2004, the Company and Toshiba Corporation (Toshiba) entered into an
agreement to jointly establish SED Inc. for the development, production and marketing of
next-generation flat-screen SED (Surface-conduction Electron-emitter Display) panels. The Company
and Toshiba initially contributed approximately Yen 500 million in cash, each. Under the agreement,
the Company is further committed to contribute 50% of the financing requirements for SED Inc.
through the establishment of a prototype production line. Canons management believes that current financial resources, cash generated from operations
and Canons potential capacity for additional debt and/or equity financing will be sufficient to
fund current and future capital requirements. 39




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##### Table of Contents



Item 6. Directors, Senior Management and Employees 
 A.   Directors and senior management Directors and corporate auditors of the Company as of March 31, 2005 and their respective
business experience are listed below. Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Fujio Mitarai
    
    President & C.E.O.
    
    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 & C.E.O.*Yukio Yamashita
    
    Senior Managing Director
    
    3/1962
    
    Entered the Company(May 15, 1939)
    
    (Group Executive of Human
    
    8/1980
    
    President of Canon (UK) Ltd.Resource Management &
    
    3/1991
    
    DirectorOrganization HQ)
    
    1/1996
    
    Group Executive of Human Resource
Management & Organization HQ*3/1997
    
    Managing Director3/1999
    
    Senior Managing Director*Toshizo Tanaka
    
    Senior Managing Director
    
    4/1964
    
    Entered the Company(Oct. 8, 1940)
    
    (Group Executive of Finance &
Accounting 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 Director*Tsuneji Uchida
    
    Senior Managing Director
    
    4/1965
    
    Entered the Company(Oct. 30, 1941)
    
    (Chief Executive of Image
    
    4/1995
    
    Group Executive of Lens Products GroupCommunication Products
    
    3/1997
    
    DirectorOperations HQ)
    
    4/1997
    
    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 HQ*3/2001
    
    Managing Director3/2003
    
    Senior Managing Director*Yusuke Emura
    
    Managing Director
    
    4/1967
    
    Entered the Company(Nov. 30, 1944)
    
    (Group Executive of Global
    
    1/1989
    
    Toride plant managerEnvironment Promotion HQ)
    
    3/1993
    
    Director4/1994
    
    Ami plant manager4/1995
    
    Deputy Chief Executive of Office Imaging
Products HQ4/1996
    
    Chief Executive of Office Imaging Products HQ3/1999
    
    Managing Director*4/1999
    
    Group Executive of Production Management HQ1/2002
    
    Group Executive of Global Environment
Promotion HQ*
 40




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Nobuyoshi Tanaka
    
    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 Director*Junji Ichikawa
    
    Managing Director
    
    4/1965
    
    Entered Shiba Electronics Co., Ltd.(Feb. 9, 1943)
    
    (Chief Executive of Optical
    
    1/1970
    
    Entered the CompanyProducts HQ)
    
    4/1994
    
    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 Director*4/2003
    
    Group Executive of Production Management HQ4/2004
    
    Chief Executive of Optical Products HQ*Hajime Tsuruoka
    
    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
    
    Director10/1997
    
    President of Canon Deutschland GmbH3/1999
    
    President of Canon Europa N.V.*3/2001
    
    Managing Director*Akiyoshi Moroe
    
    Managing Director
    
    4/1968
    
    Entered the Company(Sept. 28, 1944)
    
    (Group Executive of General
Affairs 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*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*3/1999
    
    Director3/2003
    
    Managing Director*Hironori Yamamoto
    
    Managing Director
    
    4/1969
    
    Entered the Company(Dec. 23, 1943)
    
    (Group Executive of Core Technology
Development HQ)
    
    1/1998
    
    Deputy Group Executive of Production
Management HQ3/1999
    
    Director7/1999
    
    Group Executive of Core Technology
Development HQ*/Deputy Group
Executive of Display Development HQ4/2001
    
    Group Executive of Display Development HQ3/2004
    
    Managing Director*Yoroku Adachi
    
    Managing Director
    
    4/1970
    
    Entered the Company(Jan. 11, 1948)
    
    
    
    3/2001
    
    Chairman of Canon Singapore Pte. Ltd. *Chairman of Canon HongKong Co., Ltd. *Director4/2003
    
    President of Canon (China) Co., Ltd. *3/2005
    
    Managing Director *
 41




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##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Yasuo Mitsuhashi
    
    Managing Director
    
    4/1974
    
    Entered the Company(Nov. 23, 1949)
    
    (Chief Executive of Peripheral
    
    2/2001
    
    Chief Executive of Chemical Products HQProducts HQ)
    
    3/2001
    
    Director4/2003
    
    Chief Executive of Peripheral Products HQ*3/2005
    
    Managing Director *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 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*Tomonori Iwashita
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 28, 1949)
    
    (Deputy Chief Executive of Image Communication Products HQ)
    
    4/1999
    
    Senior General Manager of Camera Development Center1/2001
    
    Group Executive of Photo Products Group3/2003
    
    Director*4/2003
    
    Deputy Chief Executive of Image
Communication Products HQ*Toshio Honma
    
    Director
    
    4/1972
    
    Entered the Company(Mar. 10, 1949)
    
    (Group Executive of L Printer
    
    4/2001
    
    Deputy Chief Executive of i Printer Products HQBusiness Promotion HQ)
    
    3/2003
    
    Director*7/2003
    
    Group Executive of L Printer Business Promotion HQ*Shigeru Imaiida
    
    Director
    
    4/1972
    
    Entered the Company(Sep. 16, 1948)
    
    (Group Executive of Production
Management HQ)
    
    8/1999
    
    Senior General Manager of Production Engineering
Center3/2003
    
    Director*4/2004
    
    Group Executive of Production Management HQ*Masahiro Osawa
    
    Director
    
    4/1971
    
    Entered the Company(May 26, 1947)
    
    (Group Executive of
    
    7/1997
    
    Vice President of Canon U.S.A., Inc.Global Procurement HQ)
    
    2/2003
    
    Senior Vice President of Canon
U.S.A., Inc.7/2003
    
    Deputy Group Executive of Finance & Accounting HQ3/2004
    
    Director*4/2004
    
    Group Executive of Global Procurement HQ*Keijiro Yamazaki
    
    Director
    
    4/1971
    
    Entered the Company(Oct. 14, 1948)
    
    (Group Executive of Information &
Communications Systems 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*Shunichi Uzawa
    
    Director
    
    8/1978
    
    Entered the Company(Jan. 26, 1949)
    
    
    
    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. *Masaki Nakaoka
    
    Director
    
    4/1975
    
    Entered the Company(Jan. 3, 1950)
    
    (Deputy Group Executive 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 HQ*3/2004
    
    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)Toshiyuki Komatsu
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 19, 1950)
    
    (Group Executive of Leading-Edge
    
    1/1998
    
    Senior General Manager of Canon Research CenterTechnology Development HQ)
(Deputy Group Executive of
    
    1/2000
    
    Deputy Group Executive of Core Technology
Development HQ*Core Technology Development HQ)
    
    3/2004
    
    Director*4/2004
    
    Group Executive of Leading-Edge
Technology Development HQ*Shigeyuki Matsumoto
    
    Director
    
    4/1977
    
    Entered the Company(Nov. 15, 1950)
    
    (Group Executive of Device Technology
Development
    
    1/2002
    
    Group Executive of Device Technology
Development Headquarters*Headquarters)
    
    3/2004
    
    Director*Haruhisa Honda
    
    Director
    
    4/1974
    
    Entered the Company(Oct. 14, 1948)
    

(Chief Executive of
Chemical Products Operations)
    
    4/1995
    
    Senior General Manager of Cartridge
Development Center3/2004
    
    Director*4/2004
    
    Chief Executive of Chemical
Products Operations*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 Training Institution3/1994
    
    Corporate Auditor, the Company*Tetsuo Yoshizawa
    
    Corporate Auditor
    
    4/1968
    
    Entered The Dai-Ichi Mutual Life Insurance Co.(Sept. 5, 1945)
    
    
    
    4/1991
    
    General Manager of Investment Planning Division4/1992
    
    General Manager Osaka of General Corporate Group III4/1995
    
    General Manager of Financing Corporate Division3/1998
    
    Corporate Auditor, the Company*
 43




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##### Table of Contents



Term All directors and corporate auditors are elected by the general meeting of shareholders. The term of office of Directors is one year. The current term of all Directors expires in
March 2006. The term of office of Corporate Auditors is four years. The current term for Mr. Ohe
expires in March 2007, while current terms for Mr. Takahashi, Mr. Nagata and Mr. Yoshizawa, who
were newly elected in the general meeting of shareholders in March 2004, expire in March 2008. Board members and corporate auditors may serve any number of consecutive terms. There is no arrangement or understanding between any Director or Corporate Auditor and any
major shareholder, customer, supplier or other material stakeholders in connection with the
selection of such Director or corporate auditor. Board of Directors and Corporate Auditors The Companys articles of incorporation provide for a board of directors of not more than 30
members and for not more than four corporate auditors. Currently the number of board members is 25,
and the number of corporate auditors is four. There is no maximum age limit for members of the
board. Board members and corporate auditors may be removed from office at any time by a resolution
of a general meeting of shareholders. The board of directors has ultimate responsibility for the administration of the Companys
affairs. By resolution, the board of directors designates, from among its members, representative
directors, who have authority individually to represent the Company generally in the conduct of its
affairs. Under the Commercial Code of Japan, board members must refrain from engaging in any business
competing with the Company unless approved by a board resolution, and no board member may vote on a
proposal, arrangement or contract in which that board member is deemed to be materially interested. The Commercial Code requires a resolution of the board of directors for a company to acquire
or dispose of material assets, to borrow substantial amounts of money, to employ or discharge
important employees such as corporate officers, and to establish, change or abolish material
corporate organizations such as a branch office. The corporate auditors are not required to be and are not certified public accountants. At
least one of the corporate auditors must be a person who has not been a board member or employee of
the Company or any of its subsidiaries during the five-year period prior to election as a corporate
auditor. After the conclusion of the ordinary general meeting of shareholders to be held with
respect to the first fiscal year ending on or after May 1, 2005,
at least half of corporate
auditors must be persons who have not been either board members or employees of the Company or any
of its subsidiaries. A corporate auditor may not at the same time be a board member or an employee
of the Company or any of its subsidiaries. The corporate auditors have the statutory duty of
examining the Companys financial statements and the Companys business reports to be submitted
annually by the board of directors at the general meetings of shareholders and of reporting their
opinions to the shareholders. They also have the statutory duty of supervising the administration
by the board members of the Companys affairs. They shall participate in the meetings of the board
of directors but are not entitled to vote. The corporate auditors constitute the board of corporate auditors. Under The Law to Revise
Part of the Commercial Code and the Law Regarding Exceptional Rules of the Commercial Code
Concerning Auditing, etc. of Stock Corporation, the board of corporate auditors has a statutory
duty to prepare and submit its audit report to the board of directors each year. A corporate
auditor may note an opinion in the auditor report if a corporate auditors opinion is different
from the opinion expressed in the audit report. The board of corporate auditors is empowered to
establish audit principles, the method of examination by corporate auditors of the Companys
affairs and financial position and other matters concerning the performance of the corporate
auditors duties. The Company does not have an audit committee. The amount of remuneration payable to the Companys board members as a group and that of the
Companys corporate auditors as a group in respect of a fiscal year is subject to approval by a
general meeting of shareholders. Within those authorized amounts, the compensation for each board
member and corporate auditor is determined by the board of directors and a consultation of the
corporate auditors, respectively. The Company does not have a remuneration committee. 
 B. Compensation In the fiscal year ended December 31, 2004, the Company paid approximately Yen 1,465 million,
in total to directors and corporate auditors. This amount includes bonuses but excludes retirement
allowances. Directors and corporate auditors are not covered by the Companys retirement program. However,
in accordance with customary Japanese business practices, directors and corporate auditors receive
lump-sum retirement benefits, subject to shareholder approval. The Company paid retirement benefits
aggregating Yen 310 million to two directors during the fiscal year ended December 31, 2004. The Company does not have a stock option plan for directors, corporate auditors or any other
employees. 
 C. Board practices See Item 6A Directors and senior management and Item 6B  Compensation. 44




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##### Table of Contents



D. Employees Following table lists the number of Canons full-time employees as of December 31, 2004, 2003
and 2002. Total
    
    
    Japan
    
    
    Americas
    
    
    Europe
    
    
    OthersDecember 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
    
    
    
    40,998December 31, 2003Business machines
    
    
    70,214
    
    
    
    29,734
    
    
    
    7,820
    
    
    
    9,520
    
    
    
    23,140Cameras
    
    
    15,856
    
    
    
    4,698
    
    
    
    1,318
    
    
    
    1,006
    
    
    
    8,834Optical and other products
    
    
    11,308
    
    
    
    6,580
    
    
    
    908
    
    
    
    619
    
    
    
    3,201Corporate
    
    
    5,189
    
    
    
    4,368
    
    
    
    134
    
    
    
    162
    
    
    
    525Total
    
    
    102,567
    
    
    
    45,380
    
    
    
    10,180
    
    
    
    11,307
    
    
    
    35,700December 31, 2002Business machines
    
    
    67,782
    
    
    
    28,814
    
    
    
    7,856
    
    
    
    10,186
    
    
    
    20,926Cameras
    
    
    13,746
    
    
    
    4,360
    
    
    
    1,140
    
    
    
    1,103
    
    
    
    7,143Optical and other products
    
    
    11,552
    
    
    
    7,038
    
    
    
    1,021
    
    
    
    441
    
    
    
    3,052Corporate
    
    
    4,722
    
    
    
    4,231
    
    
    
    134
    
    
    
    159
    
    
    
    198Total
    
    
    97,802
    
    
    
    44,443
    
    
    
    10,151
    
    
    
    11,889
    
    
    
    31,319
 Note:  There was an increase of approximately 5,700 employees as of the end of fiscal 2004 as
compared to the end of fiscal 2003. This increase is mainly due to
employment increases in the Asian region to accommodate production increases. Canon had approximately 34,800 temporary employees on average during fiscal 2004. This number
includes seasonal workers as well as temp-staff employees such as security staff, meal service
staff and janitorial staff. The Company and its subsidiaries have its own independent labor union. Canon has not
experienced a labor strike since its establishment. The Company
believes that the relationship between Canon and its labor union is good. 45




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##### Table of Contents



E. Share ownership
 The following table lists the number of shares owned by the directors and corporate auditors
of the Company as of March 31, 2005. The total is 218,949
shares constituting 0.02% of all outstanding shares. Name
    
    Position
    
    Number of sharesFujio Mitarai
    
    President & C.E.O.
    
    
    59,800Yukio Yamashita
    
    Senior Managing Director
    
    
    11,420Toshizo Tanaka
    
    Senior Managing Director
    
    
    11,668Tsuneji Uchida
    
    Senior Managing Director
    
    
    5,200Yusuke Emura
    
    Managing Director
    
    
    11,433Nobuyoshi Tanaka
    
    Managing Director
    
    
    11,455Junji Ichikawa
    
    Managing Director
    
    
    9,631Hajime Tsuruoka
    
    Managing Director
    
    
    6,695Akiyoshi Moroe
    
    Managing Director
    
    
    10,555Kunio Watanabe
    
    Managing Director
    
    
    7,535Hironori Yamamoto
    
    Managing Director
    
    
    4,200Yoroku Adachi
    
    Director
    
    
    5,095Yasuo Mitsuhashi
    
    Director
    
    
    4,385Katsuichi Shimizu
    
    Director
    
    
    4,525Ryoichi Bamba
    
    Director
    
    
    2,500Tomonori Iwashita
    
    Director
    
    
    2,900Toshio Honma
    
    Director
    
    
    6,195Shigeru Imaiida
    
    Director
    
    
    3,435Masahiro Osawa
    
    Director
    
    
    2,995Keijiro Yamazaki
    
    Director
    
    
    2,400Shunichi Uzawa
    
    Director
    
    
    2,635Masaki Nakaoka
    
    Director
    
    
    1,700Toshiyuki Komatsu
    
    Director
    
    
    1,200Shigeyuki Matsumoto
    
    Director
    
    
    1,835Haruhisa Honda
    
    Director
    
    
    1,926Teruomi Takahashi
    
    Corporate Auditor
    
    
    7,231Kunihiro Nagata
    
    Corporate Auditor
    
    
    1,200Tadashi Ohe
    
    Corporate Auditor
    
    
    14,300Tetsuo Yoshizawa
    
    Corporate Auditor
    
    
    2,900Total
    
    
    218,949
 The Company and certain of its subsidiaries encourage its employees to purchase shares of
their Common Stock
in the market through an employees stock purchase association. 46




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions 
 A. Major shareholders The table below shows the number of The Companys shares held by the top ten holders of the
Companys shares and their percentage ownership as of December 31, 2004: Name of major shareholder
    
    Shares owned
    
    
    Percentage(In thousands)The Dai-Ichi Mutual Life Insurance Co.
    
    
    59,090
    
    
    
    6.7
    %Japan Trustee Services Bank, Ltd.
    
    
    50,367
    
    
    
    5.7
    %(Trust Account)The Master Trust Bank of Japan, Ltd.
    
    
    41,299
    
    
    
    4.7
    %(Trust Account)Moxley and Co.
    
    
    37,237
    
    
    
    4.2
    %State Street Bank and Trust Company 505103
    
    
    34,004
    
    
    
    3.8
    %Mizuho
Corporate Bank, Ltd.
    
    
    28,946
    
    
    
    3.3
    %Nomura Securities Co., Ltd.
    
    
    19,521
    
    
    
    2.2
    %The Chase Manhattan Bank, N.A. London
    
    
    19,176
    
    
    
    2.2
    %State Street Bank and Trust Company
    
    
    17,288
    
    
    
    2.0
    %Sompo Japan Insurance Inc.
    
    
    15,273
    
    
    
    1.7
    %
 Canons major shareholders do not have different voting rights from other shareholders. As of December 31, 2004, 22.8% of the outstanding shares of common stock were held of record
by 257 residents of the United States of America. The Company is not directly or indirectly owned or controlled by any other corporation, by any
government, or by any other natural or legal person or
persons severally or jointly. 
  B. Related party transactions
 Since the beginning of Canons last full fiscal year, Canon has not transacted with, nor does
Canon currently plan to transact with a related party
(other than certain transactions with subsidiaries of the Company). For purposes of this paragraph,
a related party includes: (a) enterprises that directly or
indirectly through one or more intermediaries, control or are controlled by, or are under common
control with, Canon; (b) associates; (c) individuals owning,
directly or indirectly, an interest in the voting power of Canon that gives them significant
influence over Canon, and close members of any such individuals
family; (d) key management personnel, that is, those persons having authority and responsibility
for planning, directing and controlling the activities of
Canon, including directors and senior management of companies and close member of such individuals
families; (e) enterprises in which a substantial interest
in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over
which such a person is able to exercise significant influence. This includes enterprises owned by
directors or major shareholders of Canon and enterprises that have a member of key management in
common with Canon. Close members of an individuals family are those that may be expected to
influence, or be influenced by, that person in their dealings with Canon. An associate is an
unconsolidated enterprise in which Canon has a significant influence or which has significant
influence over Canon. Significant influence over an enterprise is the power to participate in the
financial and operating policy decisions of the enterprise but is less than control over those
policies. Shareholders beneficially owning a 10% interest in the voting power of the Company are
presumed to have a significant influence on Canon. To the Companys knowledge, no person owned a 10% interest in the voting power of the Company
as of March 31, 2005. In the ordinary course of business on an arms length basis, Canon purchases and sells
materials, supplies and services from and to its affiliates accounted for by the equity method.
There are 17 affiliates which are accounted for by the equity method. Canon does not consider the
amounts of the transactions with the above affiliates to be material to its business. 
 C. Interests of experts and counsel Not Applicable. 47




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##### Table of Contents



Item 8. Financial Information 
 A. Consolidated
financial statements and other financial information 
 Consolidated financial statements This Annual Report contains consolidated financial statements as of December 31, 2004 and 2003
and for each of the three years in the period ending
December 31, 2004 prepared in accordance with accounting principles generally accepted in the
United States of America and audited in accordance with
the standards of the Public Company Accounting Oversight Board
(United States) by an Independent
Registered Public Accounting Firms. The financial statements as of and for the year ended December
31, 2004, have been audited by Ernst & Young ShinNihon, while
the financial statements for periods ended prior to December 31, 2004, were audited by KPMG AZSA & Co., and audit reports covering each of the
periods are included in Item 17 of this report. Refer to Item 17, Consolidated Financial Statements and Notes to Consolidated Financial
Statements. 
 Legal proceedings Other than as described below, neither the Company nor its subsidiaries are involved in any
litigation or other legal proceedings that, if determined adversely to the Company or its
subsidiaries, would individually or in the aggregate have a material adverse effect on the Company
or its operations.  

On December 17, 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 on January 3, 2003 and Canon has submitted its response. The
investigation is yet to be closed.

On January 16, 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 the decision. On November 20, 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 the decision. The
Dusseldorf High Court issued rulings in Canons favor in one patent infringement among three
of the appeals by Pelikan Hardcopy. Another one of the appeals has been suspended by the
Court since April 19, 2004 and the remaining appeal is still pending.

In October 2003, on-the-spot investigation was made against Canon by the Japanese Fair Trade
Commission (FTC). Their allegation against us was that Canon was interfering with the
businesses of the cartridge remanufacturers by frequently changing the design of color LBP
cartridges. This investigation was terminated by FTC on October 21, 2004, without taking any
action.

In November 2003, a former employee of Canon filed a lawsuit against Canon before the
Tokyo District Court, demanding remuneration for his invention. The former employee claims
that the reward he received for his invention was significantly less than the reasonable
remuneration to which he should have been entitled under the applicable patent law, and that
Canon should pay the difference. While the former employee estimates that the difference
could amount to some Yen 45.9 billion in total, he is currently seeking Yen 1 billion. This
case is pending.

In February 2003, a lawsuit was filed by St. Clair Intellectual Property Consultants,
Inc. (St.Clair) against Canon Inc. and Canon U.S.A., Inc. in the United States District
Court of Delaware, which accused Canon of infringement of patents related to certain
technology. In connection with this case, in October 2004, a jury preliminarily found
damages against Canon of approximately Yen 3.6 billion 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 which could result in additional damages. There are
additional defenses that are yet to be litigated in a follow-up trial solely to the judge;
thus, a final decision by the court, as to both infringement and the total amount of
damages, has not yet been reached. 
 Dividend policy Dividends are proposed by the Board of Directors of the Company based on the year-end
non-consolidated financial statements of the Company, and are approved at the ordinary general
meeting of shareholders, which is held in March of each year. Record holders of the Companys
American Depositary Receipts (ADRs) on the dividends record date are entitled to receive payment
in full of the declared dividend. In addition to annual dividends, by resolution of the Board of
Directors, the Company may declare a cash distribution as an interim dividend. The record date for
the Companys year-end dividends and for the interim dividends are December 31 and June 30,
respectively. With regard to profit distribution, Canon gives the highest priority to cash dividend
distribution. In accordance with this policy, and based on our strong performance in fiscal year
2004, Canon has increased its full-year dividend per share from 50 yen in 2003, to 65 yen for
fiscal year 2004. As for future dividends, Canon intends to maintain a stable dividend payment policy which,
whenever possible, reflects its performance on a consolidated basis and also comprehensively takes
into account such factors as its financial situation and capital requirements to fund future
business expansion and improve profitability. As for internal cash reserves, such funds will be
used to support investment in such areas as current business expansion, new business cultivation
and strengthening its operating base. In general, however, there can be no assurance as to the
particular amounts that would be paid from year to year.
The payment of future dividends will depend on Canons earnings, financial condition, future
earnings prospects and other factors. 
 B. Significant changes


No significant change has occurred since the date of the annual financial statements.

48



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Item 9. The Offer and Listing 
 A. Offer and listing details 
 Trading in domestic markets The common stock of the Company has been listed on the Tokyo Stock Exchange, Inc. (TSE), the
principal stock exchange market in Japan, since 1949, and is traded on the First Section of the
TSE. The shares are also listed on four other regional markets in Japan. The following table lists the reported high and low sales prices of the shares on the TSE and
the closing highs and lows of the Tokyo Stock Price Index (TOPIX) and Nikkei Stock Average for the
five most recent years. TOPIX is an index of the market value of stocks listed on the First
Section of the TSE. The Nikkei Stock Average, an index of 225 selected stocks on the First Section
of the TSE, is another widely accepted index. TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    
    (Reference data)
    
    
    (Reference data)(Japanese yen)
    
    
    (Points)
    
    
    (Japanese yen)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low2000 Year
    
    ¥
    5,620
    
    
    ¥
    3,400
    
    
    
    1,757.95
    
    
    
    1,238.83
    
    
    ¥
    20,833.21
    
    
    ¥
    13,423.212001 Year
    
    
    5,330
    
    
    
    3,150
    
    
    
    1,441.00
    
    
    
    983.00
    
    
    
    14,529.41
    
    
    
    9,504.412002 Year
    
    
    5,250
    
    
    
    3,620
    
    
    
    1,144.02
    
    
    
    807.35
    
    
    
    11,979.85
    
    
    
    8,303.392003 1(st) quarter
    
    
    4,730
    
    
    
    3,910
    
    
    
    870.69
    
    
    
    770.62
    
    
    
    8,790.92
    
    
    
    7,862.432(nd) quarter
    
    
    5,820
    
    
    
    4,050
    
    
    
    908.43
    
    
    
    770.46
    
    
    
    9,137.14
    
    
    
    7,607.883(rd) quarter
    
    
    6,210
    
    
    
    5,280
    
    
    
    1,085.64
    
    
    
    904.18
    
    
    
    11,033.32
    
    
    
    9,265.564(th) quarter
    
    
    5,650
    
    
    
    4,620
    
    
    
    1,114.40
    
    
    
    953.19
    
    
    
    11,161.71
    
    
    
    9,614.602003 Year
    
    
    6,210
    
    
    
    3,910
    
    
    
    1,114.40
    
    
    
    770.46
    
    
    
    11,161.71
    
    
    
    7,607.882004 1(st) quarter
    
    
    5,670
    
    
    
    4,920
    
    
    
    1,189.38
    
    
    
    1,017.84
    
    
    
    11,869.00
    
    
    
    10,299.432(nd) quarter
    
    
    5,820
    
    
    
    5,220
    
    
    
    1,225.97
    
    
    
    1,051.57
    
    
    
    12,195.66
    
    
    
    10,489.843(rd) quarter
    
    
    5,810
    
    
    
    4,910
    
    
    
    1,197.74
    
    
    
    1,073.69
    
    
    
    11,988.12
    
    
    
    10,545.894(th) quarter
    
    
    5,540
    
    
    
    5,030
    
    
    
    1,149.85
    
    
    
    1,068.85
    
    
    
    11,500.95
    
    
    
    10,575.232004 Year
    
    
    5,820
    
    
    
    4,910
    
    
    
    1,225.97
    
    
    
    1,017.84
    
    
    
    12,195.66
    
    
    
    10,299.432005 1(st) quarter
    
    
    5,790
    
    
    
    5,190
    
    
    
    1,206.93
    
    
    
    1,128.75
    
    
    
    11,975.46
    
    
    
    11,212.63
 TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    
    (Reference data)
    
    
    (Reference data)(Japanese yen)
    
    
    (Points)
    
    
    (Japanese yen)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low
    
    
    High
    
    
    Low2004 July
    
    ¥
    5,810
    
    
    ¥
    5,300
    
    
    
    1,197.74
    
    
    
    1,114.39
    
    
    ¥
    11,988.12
    
    
    ¥
    11,018.79August
    
    
    5,440
    
    
    
    4,910
    
    
    
    1,140.58
    
    
    
    1,073.69
    
    
    
    11,279.71
    
    
    
    10,545.89September
    
    
    5,350
    
    
    
    5,030
    
    
    
    1,150.35
    
    
    
    1,083.44
    
    
    
    11.357.85
    
    
    
    10,737.78October
    
    
    5,480
    
    
    
    5,030
    
    
    
    1,149.85
    
    
    
    1,068.85
    
    
    
    11,410.40
    
    
    
    10,575.23November
    
    
    5,480
    
    
    
    5,100
    
    
    
    1,127.45
    
    
    
    1,077.17
    
    
    
    11,268.81
    
    
    
    10,690.95December
    
    
    5,540
    
    
    
    5,070
    
    
    
    1,149.63
    
    
    
    1,083.64
    
    
    
    11,500.95
    
    
    
    10,721.592005 January
    
    
    5,580
    
    
    
    5,190
    
    
    
    1,158.43
    
    
    
    1,128.75
    
    
    
    11,580.69
    
    
    
    11,212.63February
    
    
    5,610
    
    
    
    5,320
    
    
    
    1,177.41
    
    
    
    1,137.23
    
    
    
    11,754.90
    
    
    
    11,271.04March
    
    
    5,790
    
    
    
    5,490
    
    
    
    1,206.93
    
    
    
    1,165.26
    
    
    
    11,975.46
    
    
    
    11,506.85April
    
    
    5,810
    
    
    
    5,220
    
    
    
    1,225.97
    
    
    
    1,168.86
    
    
    
    12,163.89
    
    
    
    11,683.42
 49




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Trading in foreign markets The Companys ADRs are listed on the New York Stock Exchange (NYSE) and the Companys Global
Bearer Certificates (GBCs) are listed on the Frankfurt Stock Exchange. Since the Companys 1969 public offering in the United States of U.S.$9,000,000 principal
amount of its 6 1/2 % Convertible Debentures due 1984, there has been limited trading in the
over-the-counter market in the Companys ADRs. Since March 16, 1998, each ADR represent one share
of the Companys common stock. The Companys ADSs had been quoted on the National Association of
Securities Dealers Automated Quotation system (NASDAQ) since 1972 under the symbol CANNY to
September 13, 2000. On September 14, 2000, Canon listed its ADSs on the NYSE under the symbol CAJ. The table below
displays historical transition of high and low prices of
our ADSs on NASDAQ and NYSE. NASDAQ
    
    
    NYSE(Canon Inc.)
    
    
    (Canon Inc.)(U.S. dollars)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low2000 Year
    
    $
    51.750
    
    
    $
    33.500
    
    
    $
    46.938
    
    
    $
    31.0002001 Year
    
    
    
    
    
    
    
    
    
    
    42.900
    
    
    
    26.4802002 Year
    
    
    
    
    
    
    
    
    
    
    40.400
    
    
    
    30.1502003 1(st) quarter
    
    
    
    
    
    
    
    
    
    
    39.130
    
    
    
    33.7302(nd) quarter
    
    
    
    
    
    
    
    
    
    
    48.860
    
    
    
    34.4803(rd) quarter
    
    
    
    
    
    
    
    
    
    
    53.000
    
    
    
    45.5504(th) quarter
    
    
    
    
    
    
    
    
    
    
    51.300
    
    
    
    43.3502003 Year
    
    
    
    
    
    
    
    
    
    
    53.000
    
    
    
    33.7302004 1(st) quarter
    
    
    
    
    
    
    
    
    
    
    52.630
    
    
    
    46.6802(nd) quarter
    
    
    
    
    
    
    
    
    
    
    53.940
    
    
    
    46.9203(rd) quarter
    
    
    
    
    
    
    
    
    
    
    53.350
    
    
    
    44.4404(th) quarter
    
    
    
    
    
    
    
    
    
    
    54.390
    
    
    
    47.2902004 Year
    
    
    
    
    
    
    
    
    
    
    54.390
    
    
    
    44.4402005 1(st) quarter
    
    
    
    
    
    
    
    
    
    
    54.490
    
    
    
    50.530
 NASDAQ
    
    
    NYSE(Canon Inc.)
    
    
    (Canon Inc.)(U.S. dollars)Period
    
    High
    
    
    Low
    
    
    High
    
    
    Low2004 July
    
    
    
    
    
    
    
    
    
    $
    53.350
    
    
    $
    47.800August
    
    
    
    
    
    
    
    
    
    
    49.150
    
    
    
    44.440September
    
    
    
    
    
    
    
    
    
    
    49.000
    
    
    
    45.760October
    
    
    
    
    
    
    
    
    
    
    49.860
    
    
    
    47.290November
    
    
    
    
    
    
    
    
    
    
    52.350
    
    
    
    48.500December
    
    
    
    
    
    
    
    
    
    
    54.390
    
    
    
    49.1502005 January
    
    
    
    
    
    
    
    
    
    
    54.490
    
    
    
    50.530February
    
    
    
    
    
    
    
    
    
    
    53.640
    
    
    
    51.400March
    
    
    
    
    
    
    
    
    
    
    54.410
    
    
    
    52.020April
    
    
    
    
    
    
    
    
    
    
    53.090
    
    
    
    48.550
     
  B. Plan of distribution
   
  C. Markets
   50




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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 Objects of the Company provided in Article 2 of the Companys Articles of Incorporation shall
be to engage in the following business:  (1)

Manufacture and sale of optical machineries and instruments of various kinds.(2)

Manufacture and sale of acoustic, electrical and electronic machineries and instruments of
various kinds.(3)

Manufacture and sale of precision machineries and instruments of various kinds.(4)

Manufacture and sale of medical machineries and instruments of various kinds.(5)

Manufacture and sale of general machineries, instruments and equipments of various kinds.(6)

Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of
the preceding items.(7)

Production and sale of software products.(8)

Manufacture and sale of pharmaceutical products(9)

Telecommunications business, and information service business such as information processing service business, information providing
service business, etc.(10)

Contracting for telecommunications works, electrical works and machinery and equipment installation works.(11)

Sale, purchase and leasing of real properties and contracting for architectural works.(12)

Manpower providing business, property leasing business and travel business.(13)

Business relative to investigation, analysis of the environment and purification process of soil, water, etc.(14)

Any and all business relative to each of the preceding items. Provisions Regarding Directors There is no provision in the Companys Articles of Incorporation as to a Directors power to
vote on a proposal, arrangement or contract in which the Director is materially interested, but,
under the Commercial Code of Japan, a director is required to refrain from voting on such matters
at meetings of the board of directors. The Commercial Code provides that compensation for directors is determined at a general
meeting of shareholders of a company. Within the upper limit approved by the shareholders meeting,
the board of directors will determine the amount of compensation for each director. The board of
directors may, by its resolution, leave such decision to the discretion of the companys
representative director. The Commercial Code provides that the incurrence by a company of a significant loan from a
third party should be approved by the companys board of directors. The Companys Regulations of
the Board of Directors have adopted this policy. There is no mandatory retirement age for the Companys Directors under the Commercial Code or
its Articles of Incorporation. There is no requirement concerning the number of shares an individual must hold in order to
qualify him as a Director of the Company under the Commercial Code or its Articles of
Incorporation. Holding of Shares by Foreign Investors Other than the Japanese unit share system that is described in Rights of Shareholders -
Japanese Unit Share System below, there are no limitations on the rights of non-residents or
foreign shareholders to hold or exercise voting rights on the Companys shares imposed by the laws
of Japan or the Companys Articles of Incorporation or other constituent documents. Rights of Shareholders Set forth below is information relating to the Companys common stock, including brief
summaries of the relevant provisions of its Articles of Incorporation and Regulations for Handling
of Shares, as currently in effect, and of the Commercial Code of Japan and related legislation. 51




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General The Companys authorized share capital is 2,000,000,000 shares, of which 887,977,251 shares
were issued and outstanding as of December 31, 2004. Under the Commercial Code, shares must be
registered and are transferable by delivery of share certificates. In order to assert shareholders
rights against the Company, a shareholder must have its name and address registered on its register
of shareholders, in accordance with the Companys Regulations for Handling of Shares. A holder of shares may choose, at its discretion, to participate in the central clearing
system for share certificates under the Law Concerning Central Clearing of Share Certificates and
Other Securities of Japan. Participating shareholders must deposit certificates representing all of
the shares to be included in this clearing system with the Japan Securities Depository Center, Inc.
(the Securities Center). If a holder is not a participating institution in the Securities Center,
it must participate through a participating institution, such as a securities company or bank
having a clearing account with the Securities Center. All shares deposited with the Securities
Center will be registered in the name of the Securities Center on the Companys register of
shareholders. Each participating shareholder will in turn be registered on the Companys register
of beneficial shareholders and be treated in the same way as shareholders registered on its
register of shareholders. For the purpose of transferring deposited shares, delivery of share
certificates is not required. Entry of the share transfer in the books maintained by the Securities
Center for participating institutions, or in the book maintained by a participating institution for
its customers, has the same effect as delivery of share certificates. The registered beneficial
owners may exercise the rights attached to the shares, such as voting rights, and will receive
dividends (if any) and notices to shareholders directly from the Company. The shares held by a
person as a registered shareholder and those held by the same person as a registered beneficial
owner are aggregated for these purposes. Beneficial owners may at any time withdraw their shares
from deposit and receive share certificates, subject to the limitations caused by the Japanese unit
share system described below. A new law to establish a new central clearing system for shares of listed companies and to
eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the
relevant law will come into effect within five years of the date of promulgation. On the effective
date, a new central clearing system will be established and the shares of all Japanese companies
listed on any Japanese stock exchange, including the Companys shares, will be subject to the new
central clearing system. On the same day, all existing share certificates for share of all
Japanese companies listed on any Japanese stock exchange, including the Companys shares, will
become null and void and the transfer of such shares will be effected through entry in the books
maintained under the new central clearing system. The registered beneficial holder of deposited shares underlying the ADSs is the depositary for
the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders rights. Dividends Under the Companys Articles of Incorporation, its financial accounts will be closed on
December 31 of each year and dividends, if any, will be distributed to shareholders (or pledgees)
written or recorded in the register of shareholders as of the close of business on that date
following approval at its ordinary general meeting of shareholders. In addition, by resolution of
the board of directors, the Company may distribute interim dividends to the shareholders (or
pledgees) written or recorded in the register of shareholders as of June 30 each year. Dividends
will be distributed in cash. The Commercial Code provides that, until the aggregate amount of the Companys legal reserve
and additional paid-in capital is at least one-quarter of its stated capital, it may not make any distribution of profits by way of annual cash dividends or
interim dividends unless it sets aside in its legal reserve an amount equal to at least one-tenth
of any amount that it pays out as an appropriation of retained earnings, including any payment by
way of annual or interim dividends and bonuses to Directors and Corporate Auditors. The Commercial
Code will permit the Company to distribute profits by way of dividends out of the excess of the net
assets, on a non-consolidated basis, over the aggregate of:  (1)

the stated capital;(2)

the additional paid-in capital;(3)

the accumulated legal reserve;(4)

the legal reserve to be set aside in respect of the dividends concerned and proposed payment by
way of appropriation of retained earnings; and(5)

other matters specified in the Implementation Ordinance of the Commercial Code. In the case of interim dividends, the net assets are calculated by reference to the
non-consolidated balance sheet as at the last closing of the Companys accounts, but adjusted to
reflect (i) any subsequent payment by way of appropriation of retained earnings and transfer to
legal reserve in respect thereof, (ii) any subsequent transfer of retained earning to stated
capital, (iii) if it has been authorized, pursuant to a resolution of a general meeting of
shareholders, to purchase shares (see Repurchase by the Company of Shares below) the total amount
of the purchase price of such share so authorized by such resolution that may be paid by the
Company and (iv) other matters specified in the Implementation Ordinance of the Commercial Code.
Interim dividends may not be paid where there is a risk that at the end of the fiscal year there
might not be any excess of net assets over the aggregate of the amounts referred to in (1) through
(5) above. Stock Splits The Commercial Code permits the Company, by resolution of its board of directors, to make
stock splits, regardless of the value of net assets (as appearing in its latest non-consolidated
balance sheet) per share. Under the Commercial Code, when the Company issues new shares in the
future, the entire amount of issue price of those new shares is required to be accounted for as
stated capital, although it may account for an amount not exceeding one-half of the issue price as
additional paid-in capital. By resolution of the Companys board of directors, the Company may make
a stock split within an amount of stated capital or by transferring the whole or any part of
additional paid-in capital and legal reserve to stated capital. 52




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Under the Commercial Code, by resolution of the Companys board of directors, the Company may
increase the authorized shares up to the number reflecting the rate of stock splits and amend its
Articles of Incorporation by resolution of its board of directors to this effect without the
approval of a shareholders meeting. For example, if each share became three shares by way of a
stock split, the Company may increase the authorized shares from the current 2,000,000,000 shares
to 6,000,000,000 shares. Japanese Unit Share System The Companys Articles of Incorporation provided that 100 shares of common stock constitute
one unit. The Commercial Code of Japan permits the Company, by resolution of its board of
directors, to reduce the number of shares which constitutes one unit or abolish the unit share
system, and amend its Articles of Incorporation to this effect without the approval of a
shareholders meeting. Transferability of Shares Representing Less than One Unit The Company may not issue share certificates for a number of shares not constituting an
integral number of units, except in limited circumstances. Because the transfer of shares normally
requires delivery of the share certificates for the shares being transferred, shares constituting a
fraction of a unit and for which no share certificates are issued may not be transferable. Because
transfer of ADRs does not require a change in the ownership of the underlying shares, holders of
ADRs evidencing ADSs that constitute less than one unit of shares are not affected by these
restrictions in their ability to transfer the ADRs. However, because transfers of less than one unit of the underlying shares are normally prohibited
under the unit share system, the deposit agreement provides that the right of ADR holders to
surrender their ADRs and withdraw the underlying shares for sale in Japan may only be exercised as
to whole units. Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its
Shares A holder of shares representing less than one unit may at any time require the Company to
purchase its shares. These shares will be purchased at (a) the closing price of the shares reported
by the Tokyo Stock Exchange, Inc. (the Tokyo Stock Exchange) on the day when the request to
purchase is made or (b) if no sale takes place on the Tokyo Stock Exchange on that day, then the
price at which sale of shares is effected on such stock exchange immediately thereafter. In such
case, the Company will request payment of an amount equal to the brokerage commission applicable to
the shares purchased pursuant to its Regulations for Handling of Shares. However, because holders
of ADSs representing less than one unit are not able to withdraw the underlying shares from
deposit, these holders will not be able to exercise this right as a practical matter. Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares
up to a Whole Unit The Articles of Incorporation of the Company provide that a holder of shares representing less
than one unit may require the Company to sell its shares to such holder so that the holder can
raise its fractional ownership to a whole unit. These shares will be sold at (a) the closing price
of the shares reported by the Tokyo Stock Exchange on the day when the request to sell becomes
effective or (b) if no sale has taken place on the Tokyo Stock Exchange on that day, then the price
at which sale of shares is effected on such stock exchange immediately thereafter. In such case,
the Company will request payment of an amount equal to the brokerage commission applicable to the
shares sold pursuant to its Regulations for Handling of Shares. Voting Rights of a Holder of Shares Representing Less than One Unit A holder of shares representing less than one unit cannot exercise any voting rights
pertaining to those shares. In calculating the quorum for various voting purposes, the aggregate
number of shares representing less than one unit will be excluded from the number of outstanding
shares. A holder of shares representing one or more whole units will have one vote for each whole
unit represented. A holder of shares representing less than one unit does not have any rights relating to
voting, such as the right to participate in a demand for the resignation of a director, the right
to participate in a demand for the convocation of a general meeting of shareholders and the right
to join with other shareholders to propose an agenda item to be addressed at a general meeting of
shareholders. In addition, a holder of shares constituting less than one unit does not have the
right to require the Company to issue share certificates for those shares. However, a holder of shares constituting less than one unit has all other rights of a shareholder
in respect of those shares, including the following rights:  

to receive annual and interim dividends,

to receive shares and/or cash by way of retirement, consolidation, subdivision,
conversion, exchange or transfer of shares, company split or merger,

to be allotted rights to subscribe for new shares and other securities when such rights are granted to shareholders,

to participate in any distribution of surplus assets upon liquidation,

to institute a representative action by shareholders, and

to demand that a director suspend illegal and certain other acts. Ordinary and Extraordinary General Meeting of Shareholders The Company normally holds its ordinary general meeting of shareholders in March of each year
in Ohta-ku, Tokyo or in a neighbouring area. In addition, the Company may hold an extraordinary
general meeting of shareholders whenever necessary by giving at least two weeks advance notice.
Under the Commercial Code, notice of any shareholders meeting must be given to each shareholder
having voting rights or, in the case of a non-resident shareholder, to his resident proxy or
mailing address in Japan in accordance with the Companys Regulations for Handling of Shares, at
least two weeks prior to the date of the meeting. 53




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Voting Rights A shareholder is generally entitled to one vote per one unit of shares as described in this
paragraph and under Japanese Unit Share System above. In general, under the Commercial Code, a
resolution can be adopted at a general meeting of shareholders by a majority of the shares having
voting rights represented at the meeting. The Commercial Code and the Companys Articles of
Incorporation require a quorum for the election of Directors and Corporate Auditors of not less
than one-third of the total number of outstanding shares having voting rights. The Companys
shareholders are not entitled to cumulative voting in the election of Directors. A corporate
shareholder whose outstanding shares are in turn more than one-quarter directly or indirectly owned
by the Company does not have voting rights. Shareholders may exercise their voting rights through
proxies, provided that those proxies are also shareholders who have voting rights. Pursuant to the Commercial Code and the Companys Articles of Incorporation, a quorum of, not
less than one-third of the outstanding shares with voting rights must be present at a shareholders
meeting to approve any material corporate actions such as:  

a reduction of stated capital,

amendment of the articles of incorporation (except amendments which the board of directors are
authorized to make under the Commercial Code 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, and

release of part of directors or corporate auditors liabilities to their corporation. At least two-thirds of the outstanding shares having voting rights present at the meeting must approve these actions. The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders. Subscription Rights Holders of shares have no pre-emptive rights. Authorised but unissued shares may be issued at
such times and upon such terms as the board of directors determines, subject to the limitations as
to the issue of new shares at a specially favourable price mentioned in Voting Rights above.
The board of directors may, however, determine that shareholders be given subscription rights to
new shares, in which case they must be given on uniform terms to all shareholders as of a record
date of which not less than two weeks prior public notice of the date on which such subscription
rights must be given. Each of the shareholders to whom such rights are given must also be given at
least two weeks prior notice of the date on which such rights will expire. Stock Acquisition Rights The Company may issue stock acquisition rights or bonds with stock acquisition rights (in
relation to which the stock acquisition rights are undetachable). Except where the issue would be
on specially favourable conditions mentioned in Voting Rights above, the issue of stock
acquisition rights or bonds with stock acquisition rights may be authorised by a resolution of the
board of directors. Subject to the terms and conditions thereof, holders of stock acquisition
rights may acquire a prescribed number of shares by exercising their stock acquisition rights and
paying the exercise price at any time during the exercise period thereof. Upon exercise of stock
acquisition rights, the Company will be obliged to either issue the relevant number of new shares
or transfer the necessary number of existing shares held by it as treasury stock to the holder. The
entitlements accorded to stock acquisition rights attached to bonds are substantially similar to
those accorded to stock acquisition rights issued without being attached to bonds, provided that,
if so determined by the board of directors at the time of its resolution authorising the issue of
the relevant bonds with stock acquisition rights, then, upon exercise of the stock acquisition
rights, their exercise price will be deemed to have been paid by the holder thereof to the Company
in lieu of the Company redeeming the relevant bonds. Liquidation Rights In the event of liquidation, the assets remaining after payment of all debts, liquidation
expenses and taxes will be distributed among the shareholders in proportion to the number of shares
they own. Liability to Further Calls or Assessments All of the Companys currently outstanding shares, including shares represented by the ADSs,
are fully paid and nonassessable. 54




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Transfer Agent Mizuho Trust & Banking Co., Ltd. is the transfer agent for the Companys shares. Mizuho
Trusts office is located at 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan. Mizuho Trust maintains the
Companys register of shareholders and records transfers of record ownership upon presentation of
share certificates. Record Date The close of business on December 31 is the record date for the Companys year-end dividends,
if paid. June 30 is the record date for interim dividends, if paid. A holder of shares constituting
one or more whole units who is registered as a holder on the Companys register of shareholders at
the close of business as of December 31 is also entitled to exercise shareholders voting rights at
the ordinary general meeting of shareholders with respect to the fiscal year ending on December 31.
In addition, the Company may set a record date for determining the shareholders entitled to other
rights and for other purposes by giving at least two weeks public notice. The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the
third business day before a record date (or if the record date is not a business day, the fourth
business day prior thereto), for the purpose of dividends or rights offerings. Repurchase by the Company of Shares Under the Commercial Code, the Company may acquire its shares for any purposes subject to the
authorization of shareholders at an ordinary general shareholders meeting. In addition, the Company
is authorized to purchase its shares pursuant to a resolution of the board of directors pursuant to
its Articles of Incorporation. The acquisition is subject to the condition that the aggregate
amount of the purchase price must not exceed the amount of the retained earnings available for
dividend payments less the sum of any amount paid or to be paid by way of appropriation of related
earnings and any transfer of retained earnings to stated capital. In the case of shares listed on a Japanese stock exchange, acquisition shall be made through
the market or by way of tender offer by the close of the following ordinary general meeting, unless
acquisition of the shares from a specified person is authorized by the approval of two-thirds of
outstanding shares having voting rights present at the shareholders meeting at which a quorum of
at least one-third of the outstanding shares having voting rights must be present. In addition, the Company may acquire its shares by means of repurchase of any number of shares
constituting less than one unit upon the request of the holder of those shares, as described under
Japanese Unit Share System above. 
 C. Material contracts All contracts entered into by us during the two years preceding the date of this annual report
were entered into in the ordinary course of business. 
 D. Exchange controls  (a)

Information with respect to Japanese exchange regulations affecting the Companys
security holders is as follows:  The Foreign Exchange and Foreign Trade Law of Japan, as amended and effective from April
1, 1998, and the cabinet orders and ministerial ordinances thereunder (the Foreign Exchange Regulations) govern certain aspects relating
to the issuance of securities by the Company and the acquisition and holding of such
securities by non-residents of Japan and by foreign investors, as hereinafter defined.Non-residents of Japan are defined as individuals who are not resident in Japan and
corporations whose principal offices are located outside Japan. Generally, branches and other offices of Japanese corporations located
outside Japan are regarded as non-residents of
Japan, while branches and other offices located within Japan of non-resident corporations
are regarded as residents of Japan. Foreign
investors are defined to be (i) individuals not resident in Japan, (ii) corporations which
are organized under the laws of foreign
countries or whose principal offices are located outside Japan, (iii) corporations of which
50% or more of the shares are held by (i) and /
or (ii) above and (iv) corporations in respect of which (a) a majority of the officers are
non-resident individuals or (b) a majority of the
officers having the power to represent the corporation are non-resident individuals.Issuance of Securities by the Company:Under the Foreign Exchange Regulations, the issue of securities outside Japan by the
Company is, in principle, not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of
Finance. Under the Foreign Exchange Regulations as
currently in effect, payments of principal, premium and interest in respect of securities
and any additional amounts payable pursuant to
the terms thereof may in general be paid when made without any restrictions under the
Foreign Exchange Regulations.Acquisition of Shares:In general, the acquisition of shares of stock of a Japanese company listed on any
Japanese stock exchange or traded in any
over-the-counter market in Japan (listed shares) by a non-resident of Japan from a
resident of Japan is not subject to a prior
notification requirement, but subject to a post reporting requirement of the Minister of
Finance by such resident.In the case where a foreign investor intends to acquire listed shares (whether from a
resident or a non-resident of Japan, from another foreign investor or from or through a designated securities company) and as a result of
such acquisition the number of shares held, directly or indirectly, by such foreign investor would become 10% or more of the total
outstanding shares of the company, the foreign investor
must generally report such acquisition to the Minister of Finance and other Ministers having
jurisdiction over the business of the subject
company within 15 days from and including the date of such acquisition. In certain
exceptional cases, a prior notification is required in respect
of such acquisition. 55




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Acquisition of Shares upon Exercise of Rights for Subscription of Shares:The acquisition by a non-resident of Japan of shares upon exercise of his rights for
subscription of shares is exempted from the notification and reporting requirements described under Acquisition of Shares above.Dividends and Proceeds of Sales:Under the Foreign Exchange Regulations currently in effect, dividends paid on, and the
proceeds of sale in Japan of, the shares held by non-residents of Japan may be converted into any foreign currency and repatriated abroad.
The acquisition of shares by non-resident shareholders by way of stock splits is not subject to any of the aforesaid notification
requirements.  (b)

Reporting of Substantial Shareholdings:  The Securities and Exchange Law of Japan requires any person who has become,
beneficially and solely or jointly, a holder of more than 5% of the total outstanding voting shares of capital stock of a company listed on any Japanese
stock exchange to file with the relevant Local Finance Bureau of the Minister of Finance
within five business days a report concerning such share ownership. A similar report must
also be made in respect of any subsequent change of 1% or more in any such holding. Copies
of any such report must also be furnished to the issuer of such shares and all Japanese
stock exchanges on which the shares are listed. For this purpose, shares issuable exercise
of rights for subscription of shares held by such holder are taken into account in
determining both the size of a holding and a companys total outstanding share capital. 
 E. Taxation 1. Taxation in Japan Generally, a non-resident of Japan or non-Japanese corporation ( a Non-Resident Holders)
is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits
are not subject to Japanese income tax. Due to the 2001 Japanese tax legislation, a conversion
of retained earnings or legal reserve (but, not additional paid-in capital, in general) into
stated capital (whether made in connection with a stock split or otherwise) is no longer treated
as a deemed dividend payment to shareholders for Japanese tax purposes. Thus, such a conversion
does not trigger Japanese withholding taxation. Japan is party to a number of income tax treaties, conventions and agreements,
(collectively Tax Treaties), whereby the maximum withholding tax rate for dividend payments is
set at, in most cases, 15% for portfolio investors who are Non-Resident Holders. Specific
countries with which such Tax Treaties have been entered into include Australia, Belgium,
Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New
Zealand, Norway, Singapore, Spain, Sweden, Switzerland and the United Kingdom. Pursuant to the
new tax convention between the United States and Japan ratified in March 2004 (New Tax
Convention), the withholding tax rate on dividends paid by a Japanese corporation to US
residents or corporations is generally 10%, provided the recipients are portfolio investors who
do not have a permanent establishment in Japan to which the shares with respect to which such
dividends are paid are related and such recipients are qualified US residents eligible to enjoy
treaty benefits. This 10% Japanese withholding tax rate is applicable from July 1, 2004 to
dividends declared thereafter. Under the New Tax Convention, there is no withholding tax on
dividends paid by Japanese Corporations to pension funds which are qualified U.S. residents
eligible to enjoy benefits under the New Tax Conventions unless such dividends are derived from
the carrying on of a business, directly or indirectly, by such pension funds. The 15% Japanese
withholding tax rate under the old tax convention is still applicable to dividends declared
before July 1, 2004. However, under the Japanese Income Tax Law, the temporary rate of Japanese
withholding tax applicable to dividends paid with respect to listed shares, such as those paid
by the Company, to Non-Resident Holders is currently 7% which is applicable for the period from
January 1, 2004 to March 31, 2008 (15% rate(10% for eligible US residents) will apply
thereafter), except for dividends paid to any individual shareholder who holds 5% or more of the
total issued shares for which the applicable rate is 20%. While the treaty rate normally
overrides the domestic rate, due to the so-called preservation doctrine, if the tax rate under
the domestic tax law is lower than that promulgated under the applicable income tax treaty, then
the domestic tax rate is still applicable. If the domestic tax rate applies, as will generally
be the case until March 31, 2008 for most shareholders who are US residents or corporations, no
treaty application is required to be filed. 2. Taxation in the United States The following is a discussion of material U.S. federal income tax consequences of
purchasing, owning and disposing of Canon shares or ADSs to the
persons described below, but it does not purport to be a comprehensive description of all of the
tax considerations that may be relevant to a particular persons decision to acquire, hold or
dispose of such securities. The discussion applies only if you hold Canon shares or ADSs as
capital assets for U.S. federal income tax purposes and it does not address special classes of
holders, such as:  

certain financial institutions;

insurance companies;

dealers and traders in securities or foreign currencies;

persons holding Canon shares or ADSs as part of a hedge, straddle,
conversion or other integrated transaction;

persons whose functional currency for U.S. federal income tax purposes
is not the U.S. dollar;

partnerships or other entities classified as partnerships for U.S.
federal income tax purposes;

persons liable for the alternative minimum tax;

tax-exempt organizations;

persons holding Canon shares or ADSs that own or are deemed to own
10% or more of any class of Canon stock; or

persons who acquired Canon shares or ADSs pursuant to the exercise of
any employee stock option or otherwise as compensation. 56




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This discussion is based on the Internal Revenue Code of 1986, as amended, administrative
pronouncements, judicial decision and final, temporary and
proposed Treasury regulations, all as currently in effect. These laws are subject to change,
possibly on a retroactive basis. It is also based in part on representations by the depositary and
assumes that each obligation under the deposit agreement and any related agreement will be
performed in accordance with its terms. Please consult your own tax advisers concerning the U.S.
federal, state, local and foreign tax consequences of purchasing, owning and disposing of Canon
shares or ADSs in your particular circumstances. The discussion below applies to you only if you are a beneficial owner of Canon shares or ADSs
and are, for U.S. federal tax purposes:  

a citizen or resident of the United States;

a corporation, or other entity taxable as a corporation, created or organized in or under
the laws of the United States or any political
subdivision thereof; or

an estate or trust the income of which is subject to U.S. federal income taxation regardless
of its source. In general, if you hold ADSs, you will be treated for U.S. federal income tax purposes as the
holder of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be
recognized if you exchange ADSs for the underlying shares represented by those ADSs. The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be
taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs. Such actions would also be inconsistent with the
claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S.
holders. Accordingly, the analysis of the creditability of Japanese taxes and the reduced rates of
taxation applicable to dividends received by certain non-corporate U.S. holders, both as described
below, could be affected by actions that may be taken by parties to whom ADSs are pre-released. This discussion assumes that Canon was not a passive foreign investment company
for 2004, as described below. Taxation of Distributions Distributions paid on Canon Shares or ADSs, other than certain pro rata distributions of
common shares, to the extent paid out of Canons current or accumulated earnings and profits, as
determined under U.S. federal income tax principles, will be treated as dividends. The amount of
a dividend will include any amounts withheld by Canon or its paying agent in respect of Japanese
taxes. The amount of the dividend will be treated as foreign-source dividend income to you and
will not be eligible for the dividends-received deduction generally allowed to U.S. corporations.
Subject to applicable limitations that may vary depending upon a U.S. holders individual
circumstances and the concerns expressed by the U.S. Treasury, dividends paid to certain
non-corporate holders in taxable years beginning before January 1, 2009 will be taxable at a
maximum rate of 15%. Non-corporate U.S. holders should consult their own tax advisers to
determine whether they are subject to any special rules that limit their ability to be taxed at
this favorable rate. Dividends paid in Japanese yen will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the
date of receipt of the dividend by you, in the case of Canon shares, or by the depository, in the
case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. If the
dividend is converted into U.S. dollars on the date of receipt, you generally should not be
required to recognize foreign currency gain or loss in respect of the dividend income. You may
have foreign currency gain or loss if you do not convert the amount of such dividend into U.S.
dollars on the date of receipt. Japanese taxes withheld from cash dividends on Canon shares or ADSs will be creditable
against your U.S. federal income tax liability, subject to
applicable limitations that may vary depending upon your circumstances and the concerns expressed
by the U.S. Treasury. Instead of claiming a credit, you may, at your election, deduct such
Japanese taxes in computing your taxable income, subject to generally applicable limitations under
U.S. law. The limitation on foreign taxes eligible for credit is calculated separately with
respect to specific classes of income. You should consult your own tax adviser to determine
whether you are subject to any special rules that limit your ability to make effective use of
foreign tax credits. Sale and Other Disposition of Canon Shares or ADSs For U.S. federal income tax purposes, gain or loss you realize on the sale or other
disposition of Canon shares or ADSs will be capital gain or loss,
and will be long-term capital gain or loss if you held the Canon shares or ADSs for more than one
year. The amount of your gain or loss will be equal
to the difference between your tax basis in the Canon shares or ADSs disposed of and the amount
realized on the disposition. Such gain or loss will generally
be U.S. source gain or loss for foreign tax credit purposes. Passive Foreign Investment Company Rules Canon believes that it was not a passive foreign investment company (PFIC) for U.S. federal
income tax purposes for 2004. However, since PFIC status depends upon the composition of Canons
income and assets and the market value of its assets (including, among others, goodwill and equity
investments in less than 25% owned entities) from time to time, there can be no assurance that
Canon will not be considered a PFIC for any taxable year. If Canon were treated as a PFIC for any
taxable year during which you held Canon shares or ADSs, certain
adverse tax consequences could
apply to you. If Canon were treated as a PFIC for any taxable year, gain recognized by you on the sale or
other disposition of Canon shares or ADSs would be allocated ratably over you holding period for such securities. The amounts allocated to the taxable year of
the sale or other disposition and to any year before Canon became a PFIC would be taxed as
ordinary income. The amount allocated to each other taxable year would be subject to tax at the
highest rate in effect
for individuals or corporations, as appropriate, and an interest charge would be imposed on the
tax liability attributable to such allocated amounts. Further,
any distribution in respect of Canon shares or ADSs in excess of 125% of the average of the
annual distributions on such securities received by you
during the preceding three years or your holding period, whichever is shorter, would be subject to
taxation as described above. Certain elections (including
a mark-to-market election) may be available to you that may mitigate the adverse tax consequences
resulting from PFIC status. In addition, if Canon were treated as a PFIC in a taxable year in which it pays a dividend or the
prior taxable year, the 15% dividend rate discussed above with respect to dividends paid to
certain non-corporate U.S. holders would not apply. 57




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Information Reporting and Backup Withholding Payment of dividends and sales proceeds that are made within the United States or through
certain U.S.-related financial intermediaries generally are
subject to information reporting and to backup withholding unless you are a corporation or other
exempt recipient or, in the case of backup withholding, you provide a correct taxpayer
identification number and certify that no loss of exemption from backup withholding has occurred. The amount of any backup withholding from a payment to you will be allowed as a credit
against your U.S. federal income tax liability and may
entitle you to a refund, provided that the required information is furnished to the Internal
Revenue Service. 
 F. Dividends and paying agents   
 G. Statement by experts   
 H. Documents on display According to the Securities Exchange Act of 1934, as amended, the Company is subject to the
requirements of informational disclosure. The Company files
various reports and other information, including Form 20-F and Annual Reports, with the Securities
Exchange Commission and the New York Stock Exchange. These reports may be inspected at the
following sites. Securities Exchange Commission:
     450 Fifth Street, N.W., Washington D.C. 20549 New York Stock Exchange:
     20 Broad Street, New York, New York 10005 Form 20-F is also available at the Electronic Data Gathering, Analysis, Retrieval system
(EDGAR) website which is maintained by the Securities
Exchange Commission. Securities Exchange Commission Home Page:
     http://www.sec.gov 
 I. Subsidiary information   
 Item 11. Quantitative and Qualitative Disclosures About Market Risk 
 Market risk exposures Canon is exposed to market risks, including changes in foreign exchange rates, interest rates
and prices of marketable securities and investments. In order to hedge the risks of changes in
foreign exchange rates and interest rates, Canon uses derivative financial instruments. 
 Equity price risk Canon holds marketable securities included in current assets for short-term investments, which
consists generally of highly-liquid and low-risk instruments. Investments included in noncurrent
assets are held as long-term investments. Canon does not hold marketable securities and investments
for trading purposes. 58




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Maturities and fair values of such marketable securities and investments were as follows at
December 31, 2004 and 2003. Available-for-sale securities 2004
    
    
    2003Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    301
    
    
    ¥
    341
    
    
    ¥
    194
    
    
    ¥
    202Due after one year through five years
    
    
    1,607
    
    
    
    2,191
    
    
    
    1,480
    
    
    
    1,932Due after five years
    
    
    1,049
    
    
    
    1,047
    
    
    
    5,951
    
    
    
    6,002Equity securities
    
    
    10,302
    
    
    
    26,950
    
    
    
    7,569
    
    
    
    22,977¥
    13,259
    
    
    ¥
    30,529
    
    
    ¥
    15,194
    
    
    ¥
    31,113
 Held-to-maturity securities 2004
    
    
    2003Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due after one year through five years
    
    ¥
    21,460
    
    
    ¥
    21,460
    
    
    
    
    
    
    
    
 
 Foreign exchange rate and interest rate risk Canon operates internationally, exposing it to the risk of changes in foreign currency
exchange rates and interest rates. Derivative financial instruments are comprised principally of
foreign exchange contracts and interest rate swaps utilized by the Company and certain of its
subsidiaries to reduce these risks. Canon assesses foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these exposures and by evaluating hedging
opportunities. Canon does not hold or issue derivative financial instruments for trading purposes.
Canon is also exposed to credit-related losses in the event of non-performance by counterparties
to derivative financial instruments, but it is not expected that any counterparties will fail to
meet their obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions. Canons international operations expose Canon to the risk of changes in foreign currency
exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange
exposures principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts
are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canons policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months. The following table provides information about Canons major derivative financial instruments
related to foreign currency exchange transactions existing at December 31, 2004. All of the foreign
exchange contracts described in the following table have a contractual maturity date in 2005. Millions
of yenU.S.$
    
    

euro
    
    

Others
    
    

TotalForwards to sell foreign currencies:Contract amounts
    
    ¥
    315,117
    
    
    ¥
    237,851
    
    
    ¥
    31,240
    
    
    ¥
    584,208Estimated fair value
    
    
    3,526
    
    
    
    (8,147
    )
    
    
    (93
    )
    
    
    (4,714
    )Forwards to buy foreign currencies:Contract amounts
    
    ¥
    19,149
    
    
    ¥
    5,290
    
    
    ¥
    9,762
    
    
    ¥
    34,201Estimated fair value
    
    
    (136
    )
    
    
    (220
    )
    
    
    (1,075
    )
    
    
    (1,431
    )
 Canons exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to the fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps. Derivative financial instruments designated as fair value hedges principally relate to
interest rate swaps associated with fixed-rate debt obligations. Changes in fair values of the
hedged debt obligations and derivative instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or net
gains or losses excluded from the assessment of hedge effectiveness for the years ended December
31, fiscal 2004, 2003 and 2002 as the critical terms of the interest rate swaps match the terms of
the hedged debt obligations. 59




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##### Table of Contents



Changes in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted
intercompany sales and interest rate swaps associated with variable rate debt obligation, are
reported in accumulated other comprehensive income (loss). These amounts are subsequently
reclassified into earnings through other income (deductions) in the same period as the hedged items
affect earnings. Substantially all amounts recorded in accumulated other comprehensive income
(loss) at year-end are expected to be recognized in earnings over the next twelve months. Canon
excludes the time value component from the assessment of hedge effectiveness. The amounts of the hedging ineffectiveness are not material for the years ended December 31,
2004, 2003 and 2002. The amounts of net gains or losses excluded from the assessment of hedge
effectiveness (time value component) which are recorded in other income (deductions) in the
consolidated financial statements are net losses of Yen 2,096 million, Yen 490 million and Yen 668
million for the years ended December 31, 2004, 2003 and 2002, respectively. Canon has entered into certain foreign currency exchange contracts to manage its foreign
currency exposures. These foreign currency exchange contracts have not been designated as hedges.
Accordingly, the changes in fair values of the contracts are recorded in earnings immediately. Long-term debt (including due within one year) Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    
    Total
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2004:Japanese yen notes
    
    
    2.46
    %
    
    ¥
    25,200
    
    
    ¥
    5,200
    
    
    
    
    
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    
    
    
    
    
    
    
    
    ¥
    26,559Japanese yen convertible
debentures
    
    
    1.28
    
    
    
    1,796
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    1,487
    
    
    
    
    
    
    
    
    
    
    
    6,634Other long-term
debt
    
    
    2.38
    
    
    
    11,534
    
    
    
    4,370
    
    
    ¥
    5,046
    
    
    
    1,401
    
    
    
    587
    
    
    ¥
    105
    
    
    ¥
    25
    
    
    
    11,427Total
    
    
    
    
    
    ¥
    38,530
    
    
    ¥
    9,879
    
    
    ¥
    5,046
    
    
    ¥
    11,401
    
    
    ¥
    12,074
    
    
    ¥
    105
    
    
    ¥
    25
    
    
    ¥
    44,620
 Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates*
    
    
    Total
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended
December 31, 2003:Japanese yen notes
    
    
    2.39
    %
    
    ¥
    45,000
    
    
    ¥
    20,000
    
    
    ¥
    5,000
    
    
    
    
    
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    
    
    
    
    ¥
    47,076Japanese yen convertible
debentures
    
    
    1.28
    
    
    
    11,734
    
    
    
    
    
    
    
    2,577
    
    
    
    
    
    
    
    
    
    
    
    9,157
    
    
    
    
    
    
    
    38,030Other long-term
debt
    
    
    2.88
    
    
    
    38,721
    
    
    
    16,195
    
    
    
    17,180
    
    
    ¥
    2,893
    
    
    
    2,100
    
    
    
    219
    
    
    ¥
    134
    
    
    
    38,594Total
    
    
    
    
    
    ¥
    95,455
    
    
    ¥
    36,195
    
    
    ¥
    24,757
    
    
    ¥
    2,893
    
    
    ¥
    12,100
    
    
    ¥
    19,376
    
    
    ¥
    134
    
    
    ¥
    123,700
   Interest rate swaps Year ended December 31, 2003: Notional
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Expected maturity dateprincipal
    
    
    receive
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedamount
    
    
    rate
    
    
    pay rate
    
    
    Total
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    Thereafter
    
    
    fair value(Millions)
    
    
    
    
    
    
    
    
    
    
    
    
    
    (Millions of yen except notional principal amount and rate data)euro
    
    
    169
    
    
    
    2.33
    %
    
    
    3.44
    %
    
    ¥
    22,564
    
    
    ¥
    8,480
    
    
    ¥
    8,534
    
    
    ¥
    3,611
    
    
    ¥
    1,939
    
    
    
    
    
    
    
    
    
    
    ¥
    (55
    )
 60




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##### Table of Contents



Item 12. Description of Securities Other than Equity Securities Not applicable. 
 PART II 
 Item 13. Defaults, Dividend Arrearages and Delinquencies None. 
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds As a result of amendments to the Japanese Commercial Code which became effective on October 1,
1982 (the 1982 Amendments), the Deposit Agreement dated May 1, 1969, which constituted the
American Depositary Receipts for 10,000,000 ADSs, each ADS representing five shares, was amended
and restated as of October 1, 1982 (the amended Deposit Agreement). Under the 1982 Amendments, the Company was required to adopt a unit of shares
(tan-i-kabu). At its annual meeting of shareholders held
on March 30, 1982, the Company adopted 1,000 shares as one unit, effective from October 1, 1982. Recent amendments to the Japanese Commercial Code abolished the unit share system called
tan-i-kabu as of October 1, 2001, and introduced a new unit share system called tangen-kabu
(together with the 1982 Amendments, the Amendments). Pursuant to these legal changes, the Company
was deemed to have amended its Articles of Incorporation in October 2001, so that 1,000 shares
constituted one new unit. The Commercial Code permits the Board of Directors to reduce the number
of shares that will constitute a new unit or abolish the new unit share system entirety by amending
the Companys Articles of Incorporation without approval by shareholders. The Board of Directors of
the Company resolved to reduce the number of shares per unit to 100 shares and its Articles of
Incorporation has been amended accordingly. The number of shares constituting a new unit may not
exceed 1,000 shares or one-two hundredths (1/200) of the number of all issued shares. Under the unit share system, shareholders have one voting right for each unit of shares they
hold. Shares not constituting a full unit will carry all shareholders rights except for those
relating to voting rights. Pursuant to the Amendments, the Company is deemed to have amended its Articles of
Incorporation so that no share certificates will be issued with respect to any shares constituting
less than one unit. Consequently, no certificates for shares other than a full unit or an integral
multiple thereof will be issued unless the Company determines that it
is necessary to issue such certificates for protection of the holders
of shares constituting less than one unit. As the transfer of shares
normally requires delivery of the relevant share certificates, any fraction of a unit for which no share certificates are issued will not be transferable. A holder of shares constituting less than one unit may at any time require the Company
(through the participating institution in the case of a beneficial shareholder under the central clearing system) to purchase such shares at the last selling price of
a share as reported by the Tokyo Stock Exchange on the day when such request is made. Shareholders (including beneficial owners) who own less than one unit of shares may request
that Company sell them a number of shares which, when added to their less than one unit shares,
would equal one unit of shares; provided, however, that the Company is not obliged to do so if the
Company does not own its own shares in the number which it is requested to sell. A holder of shares constituting less than one unit is entitled as a shareholder to the rights
(i) to receive distribution of dividends of profit or interest, (ii) to receive shares and/or cash
by way of retirement, consolidation, division, conversion, exchange or transfer of shares, company
split or merger, (iii) to be allotted rights to subscribe for new shares and other securities when
such rights are granted to shareholders; and (iv) to participate in any distribution of surplus
assets upon liquidation. Such holder cannot exercise any voting rights pertaining to those shares.
For calculation of the quorum for various voting purposes, the aggregate number of shares
constituting less than one unit will be excluded from the number of voting rights. As a result of the Amendments, the depositary under the Deposit Agreement may be unable to
deliver share certificates with respect to those shares
otherwise deliverable upon the surrender of ADRs which do not constitute one or more complete
units. In such case, the amended Deposit Agreement provides that the depositary will promptly
advise the holder of the amount of such shares, deliver to the holder a new ADR evidencing such
shares, and notify the holder of the additional amount of ADRs which the holder must surrender in order for the depositary to effect
delivery of share certificates for all of shares represented by the holders ADSs. Effective from March 16, 1998, the Company changed the ratio of ADSs to shares from five
shares to one share. In this regard, four additional ADSs for
each ADS held were distributed to holders of ADS. Existing ADRs remain valid and do not need to be
exchanged for new ones. 61




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##### Table of Contents



Item 15. Controls and Procedures Evaluation of disclosure controls and procedures As of December 31, 2004, Canon, under the supervision and with the participation of the its
management, including the chief executive officer and the chief financial officer, performed an
evaluation of the effectiveness of its disclosure controls and procedures. Canons management
necessarily applied its judgment in assessing the costs and benefits of such controls and
procedures, which by their nature can provide only reasonable assurance regarding managements
control objectives. Based on this evaluation, Canons chief executive officer and chief financial
officer concluded that Canons disclosure controls and procedures are effective at the reasonable
assurance level for gathering, analyzing and disclosing the information Canon is required to
disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods
specified in the SECs rules and forms. Changes in internal controls over financial reporting There has been no change in Canons internal control over financial reporting that occurred
during the period covered by this Annual Report that has materially affected, or is reasonably
likely to materially affect, its internal control over financial reporting. 
 Item 16A. Audit Committee Financial Expert Canons Board of Directors has determined that Kunihiro Nagata qualifies
as an audit committee financial expert as defined by the rules of the SEC. Mr. Nagata began his
career at Canon in 1970, and since that time has worked in the field of finance and accounting for
nearly thirty years. From 1996 to 1999, Mr. Nagata served as a senior manager of the Accounting
Planning & Administration Division, the division responsible for Canons consolidated reporting.
Mr. Nagata was elected as one of Canons corporate auditors at an ordinary general meeting of
shareholders held in March 2004. See Item 6.A. for additional information regarding Mr. Nagata. 
 Item 16B. Code of Ethics Canon maintains a Canon Group Code of Conduct, or Code of Conduct, applicable to all
executives and employees. The Code of Conduct sets forth provisions relating to honest and ethical
conduct (including the handling of conflicts of interest), compliance with applicable laws, rules
and regulations and accountability for adherence to the provisions of the Code of Conduct. In
addition, on March 31, 2004, the Board of Directors adopted a Code of Ethics as a supplement to
the Code of Conduct. This Code of Ethics applies to Canons President and Chief Executive Officer,
each member of the Board of Directors (which includes the Chief Financial Officer) and general
managers belonging to Canons accounting headquarters. The Code of Ethics requires full, fair,
accurate, timely and understandable disclosure in reports and documents that Canon files with or
submits to the SEC and in Canons other communications with the public, prompt internal reporting
of violations of the Code of Conduct or Code of Ethics, and accountability for adherence to their
provisions. Both the Code of Conduct and the Code of Ethics have been filed as exhibits to this
Annual Report. 
 Item 16C. Principal Accountant Fees and Services Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors Canons board of corporate auditors consisting of four members, including two outside
corporate auditors, is responsible for the oversight of the services
of the independent auditors. The board
of corporate auditors has established Pre-Approval Policies and Procedures for Audit and Non-Audit
Services, effective as of May 28, 2003. These policies and procedures govern the board of
corporate auditors engagement of Canons external auditors to render audit or non-audit services.
Non-audit services include audit-related services, tax services and other services, as described in
greater detail below under Fees and Services. Canon and any affiliate controlled by Canon
directly, indirectly or through one or more intermediaries must follow these policies and
procedures before any engagement of Canons independent accountants for U.S. securities law
reporting purposes. The policies and procedures stipulate three means by which audit and non-audit services may be
pre-approved, depending on the content of and the fee for the services.  

All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the
Public Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions,
and any engagement of an Independent Registered Public Accounting
Firm for any audit or non-audit service involving estimated fees
exceeding 10,000,000 yen 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. 62




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##### Table of Contents



Additional services may be pre-approved by the board of corporate auditors on an individual basis. No services were provided for which pre-approval was waived pursuant to paragraph (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X. Fees and Services. The following table discloses the aggregate fees accrued or paid to Canons principal
accountant for each of the last two fiscal years and briefly describes the services performed: Year
ended
December 31, 2004
    
    

Year
ended
December 31, 2003(Millions of yen)Audit fees
    
    ¥
    690
    
    
    ¥
    553Audit-related fees
    
    
    74
    
    
    
    42Tax fees
    
    
    32
    
    
    
    397All other fees
    
    
    90
    
    
    
    61Total
    
    ¥
    886
    
    
    ¥
    1,053
  Audit feesinclude fees billed for professional services rendered for audits of Canons annual
consolidated financial statements, review of consolidated quarterly financial statements,
statutory audits of the Company and its subsidiaries.Audit-related feesinclude fees billed for assurance and related services such as due diligence,
accounting consultations and audits in connection with mergers and acquisitions, employee benefit plan audits, internal control reviews, and
consultations concerning financial accounting and reporting standards.Tax feesinclude fees billed for services related to tax compliance, including the preparation of
tax returns and claims for refund, tax planning and tax advice, including assistance with tax
audits and appeals, advice related to mergers and acquisitions, tax services for employee benefit
plans and assistance with respect to requests for rulings from tax authorities.All other feesinclude fees billed for services rendered with respect to consultation, design
and implementation relating to Canons reorganization.Ernst & Young ShinNihon served as Canons principal accountant for fiscal 2004, KPMG AZSA & CO.
served as Canons principal accountant for fiscal 2003. 
 Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers The following table sets
forth, for each of the months indicated, the total number of shares
purchased by us or on our behalf or any affiliated purchaser, the
average price paid per share, the number of shares purchased as part
of a publicly announced repurchase plan or program, the maximum number of shares or approximate Japanese Yen value that may yet be purchased under the plans or programs. (a) Total Number of
    
    
    (b) Average Price
    
    
    (c) Total Numbers of
    
    
    (d) Maximum NumbersShares Purchased
    
    
    Paid per Share
    
    
    Shares Purchased as
    
    
    of Shares that MayPart of Publicly
    
    
    Yet Be PurchasedAnnounced Plans or
    
    
    Under the Plans or(Shares)
    
    
    (Yen)
    
    
    Programs
    
    
    ProgramsJanuary 1 - January 31
    
    
    10,750
    
    
    
    5,078
    
    
    
    
    
    
    
    February 1 - February 28
    
    
    16,801
    
    
    
    5,213
    
    
    
    
    
    
    
    March 1- March 31
    
    
    20,901
    
    
    
    5,359
    
    
    
    
    
    
    
    April 1 - April 30
    
    
    23,452
    
    
    
    5,408
    
    
    
    
    
    
    
    May 1 - May 31
    
    
    8,267
    
    
    
    5,660
    
    
    
    
    
    
    
    June 1 - June 30
    
    
    5,741
    
    
    
    5,608
    
    
    
    
    
    
    
    July 1 - July 31
    
    
    2,566
    
    
    
    5,625
    
    
    
    
    
    
    
    August 1 - August 31
    
    
    1,468
    
    
    
    5,194
    
    
    
    
    
    
    
    September 1- September 31
    
    
    3,085
    
    
    
    5,232
    
    
    
    
    
    
    
    October 1 - October 31
    
    
    3,424
    
    
    
    5,280
    
    
    
    
    
    
    
    November 1 - November 30
    
    
    3,558
    
    
    
    5,311
    
    
    
    
    
    
    
    December 1 - December 31
    
    
    4,515
    
    
    
    5,291
    
    
    
    
    
    
    
    
 Canon currently does not have any publicly announced repurchase plans or programs. All of the
purchase shown above represent with the purchase of fractional shares from fractional share owners,
in accordance with the Japanese Commercial Code. 63




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##### Table of Contents



PART III 
 Item 17. Financial Statements Consolidated financial statement of Canon Inc. and Subsidiaries:
    
    Page numberReport of Ernst & Young ShinNihon, Independent Registered Public Accounting Firm
    
    
    65Report of KPMG AZSA & Co., Independent Registered Public Accounting Firm
    
    
    66Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    67Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    68Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002
    
    
    69Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    70Notes to Consolidated Financial Statements
    
    
    71Schedule:Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2004, 2003 and 2002
    
    
    112
 All other schedules are omitted as permitted by the rules and regulations of the Securities and Exchange Commission as not applicable. 64




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of
Canon Inc. We have audited the accompanying consolidated balance sheet of Canon Inc. and subsidiaries (the
Company) as of December 31, 2004, and the related consolidated statements of income,
stockholders equity, and cash flows for the year then ended, all expressed in Japanese yen. Our
audit also included the financial statement schedule listed in the Index at Item 17 for the year
ended December 31, 2004. These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a reasonable basis for our
opinion. The segment information required to be disclosed in financial statements under U.S. generally
accepted accounting principles is not presented in the accompanying consolidated financial
statements. Certain foreign issuers are presently exempted from such disclosure requirement in
Securities Exchange Act filings with the United States Securities and Exchange Commission. In our opinion, except for the omission of segment information as discussed in the preceding
paragraph, the 2004 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Canon Inc. and subsidiaries at December 31, 2004,
and the consolidated results of their operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule for the year ended December 31, 2004, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material respects the
information set for therein. /s/ Ernst & Young ShinNihon Tokyo, Japan
January 27, 2005 65




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##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders
Canon Inc.: We have audited the consolidated balance sheet of Canon Inc. and subsidiaries as of December 31,
2003, and the related consolidated statements of income, stockholders equity and cash flows for
each of the years in the two-year period ended December 31, 2003 (expressed in yen). In connection
with our audits of the consolidated financial statements, we also have audited the 2002 and 2003
financial statement schedule as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. The Companys consolidated financial statements do not disclose certain information required by
Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information. In our opinion, disclosure of this information is required by U.S.
generally accepted accounting principles. In our opinion, except for the omission of the segment information as discussed in the third
paragraph of this report, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Canon Inc. and subsidiaries as of December 31,
2003 and the results of their operations and their cash flows for each of the years in the two-year
period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the 2002 and 2003 related financial statement schedule, when considered in
relation to the 2002 and 2003 basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein. /s/ KPMG AZSA & Co.
Tokyo, Japan
January 28, 2004 66




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##### Table of Contents



Canon Inc. and Subsidiaries 
 Consolidated Balance Sheets December 312004
    
    
    2003(Millions of yen)AssetsCurrent assets:Cash and cash equivalents
    
    ¥
    887,774
    
    
    ¥
    690,298Marketable securities (Note 3)
    
    
    1,554
    
    
    
    1,324Trade receivables, net (Note 4)
    
    
    602,790
    
    
    
    539,006Inventories (Note 5)
    
    
    489,128
    
    
    
    444,244Prepaid expenses and other current assets
(Notes 7, 9 and 12)
    
    
    250,906
    
    
    
    255,905Total current assets
    
    
    2,232,152
    
    
    
    1,930,777Noncurrent receivables (Note 18)
    
    
    14,567
    
    
    
    16,543Investments (Notes 3 and 9)
    
    
    97,461
    
    
    
    78,912Property, plant and equipment, net (Notes 6, 7 and 9)
    
    
    961,714
    
    
    
    846,433Other assets (Notes 7, 8, 11 and 12)
    
    
    281,127
    
    
    
    309,483Total assets
    
    ¥
    3,587,021
    
    
    ¥
    3,182,148Liabilities and stockholders equityCurrent liabilities:Short-term loans and current portion of long-term
debt (Note 9)
    
    ¥
    9,879
    
    
    ¥
    39,136Trade payables (Note 10)
    
    
    465,396
    
    
    
    391,181Income taxes (Note 12)
    
    
    105,565
    
    
    
    83,064Accrued expenses (Note 18)
    
    
    205,296
    
    
    
    193,657Other current liabilities (Note 12)
    
    
    197,029
    
    
    
    120,265Total current liabilities
    
    
    983,165
    
    
    
    827,303Long-term debt, excluding current installments (Note 9)
    
    
    28,651
    
    
    
    59,260Accrued pension and severance cost (Note 11)
    
    
    132,522
    
    
    
    238,001Other noncurrent liabilities (Note 12)
    
    
    45,993
    
    
    
    30,843Total liabilities
    
    
    1,190,331
    
    
    
    1,155,407Minority interests
    
    
    186,794
    
    
    
    161,196Commitments
and contingent liabilities (Note 18)Stockholders equity:Common stockAuthorized
2,000,000,000 shares;issued 887,977,251 shares in 2004 and
881,338,645 shares in 2003 (Note 13)
    
    
    173,864
    
    
    
    168,892Additional paid-in capital (Note 13)
    
    
    401,773
    
    
    
    396,939Legal reserve (Note 14)
    
    
    41,200
    
    
    
    39,998Retained earnings (Note 14)
    
    
    1,699,634
    
    
    
    1,410,442Accumulated other comprehensive income (loss)
(Note 15)
    
    
    (101,312
    )
    
    
    (143,275
    )Treasury stock, at cost 1,120,867 shares in 2004 and
1,606,513 shares in 2003
    
    
    (5,263
    )
    
    
    (7,451
    )Total stockholders equity
    
    
    2,209,896
    
    
    
    1,865,545Total liabilities and stockholders equity
    
    ¥
    3,587,021
    
    
    ¥
    3,182,148
 See accompanying notes to consolidated financial statements. 67




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Canon Inc. and Subsidiaries 
 Consolidated Statements of Income Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Net sales
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072
    
    
    ¥
    2,940,128Cost of sales (Notes 8, 11 and 18)
    
    
    1,754,510
    
    
    
    1,589,172
    
    
    
    1,540,097Gross profit
    
    
    1,713,343
    
    
    
    1,608,900
    
    
    
    1,400,031Selling, general and administrative
expenses (Notes 1, 8, 11 and 18)
    
    
    1,169,550
    
    
    
    1,154,476
    
    
    
    1,053,672Operating profit
    
    
    543,793
    
    
    
    454,424
    
    
    
    346,359Other income (deductions):Interest and dividend income
    
    
    7,118
    
    
    
    9,284
    
    
    
    9,198Interest expense
    
    
    (2,756
    )
    
    
    (4,627
    )
    
    
    (6,788
    )Other, net (Notes 1, 3 and 17)
    
    
    3,961
    
    
    
    (10,911
    )
    
    
    (18,752
    )8,323
    
    
    
    (6,254
    )
    
    
    (16,342
    )Income before income taxes and
minority interests
    
    
    552,116
    
    
    
    448,170
    
    
    
    330,017Income taxes (Note 12)
    
    
    194,014
    
    
    
    162,653
    
    
    
    134,703Income before minority interests
    
    
    358,102
    
    
    
    285,517
    
    
    
    195,314Minority interests
    
    
    14,758
    
    
    
    9,787
    
    
    
    4,577Net income
    
    ¥
    343,344
    
    
    ¥
    275,730
    
    
    ¥
    190,737(Yen)Net income per share (Note 16):Basic
    
    ¥
    387.80
    
    
    ¥
    313.81
    
    
    ¥
    217.56Diluted
    
    
    386.78
    
    
    
    310.75
    
    
    
    214.80Cash dividends per share
    
    
    65.00
    
    
    
    50.00
    
    
    
    30.00
 See accompanying notes to consolidated financial statements. 68




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Canon Inc. and Subsidiaries 
 Consolidated Statements of Stockholders Equity Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Common stock:Balance at beginning of year
    
    ¥
    168,892
    
    
    ¥
    167,242
    
    
    ¥
    165,287Conversion of convertible debt
    
    
    4,972
    
    
    
    1,650
    
    
    
    1,955Balance at end of year
    
    
    173,864
    
    
    
    168,892
    
    
    
    167,242Additional paid-in capital:Balance at beginning of year
    
    
    396,939
    
    
    
    394,088
    
    
    
    392,456Conversion of convertible debt and other
    
    
    4,966
    
    
    
    1,649
    
    
    
    1,953Stock exchanged under exchange offering
    
    
    114
    
    
    
    
    
    
    
    1,052Capital transactions by consolidated
subsidiaries
    
    
    (246
    )
    
    
    1,202
    
    
    
    (1,373
    )Balance at end of year
    
    
    401,773
    
    
    
    396,939
    
    
    
    394,088Legal reserve:Balance at beginning of year
    
    
    39,998
    
    
    
    38,803
    
    
    
    38,330Transfers from retained earnings
    
    
    1,202
    
    
    
    1,195
    
    
    
    477Other
    
    
    
    
    
    
    
    
    
    
    (4
    )Balance at end of year
    
    
    41,200
    
    
    
    39,998
    
    
    
    38,803Retained earnings:Balance at beginning of year
    
    
    1,410,442
    
    
    
    1,164,445
    
    
    
    997,848Net income for the year
    
    
    343,344
    
    
    
    275,730
    
    
    
    190,737Cash dividends
    
    
    (52,950
    )
    
    
    (28,538
    )
    
    
    (23,663
    )Transfers to legal reserve
    
    
    (1,202
    )
    
    
    (1,195
    )
    
    
    (477
    )Balance at end of year
    
    
    1,699,634
    
    
    
    1,410,442
    
    
    
    1,164,445Accumulated other comprehensive income
(loss):Balance at beginning of year
    
    
    (143,275
    )
    
    
    (166,467
    )
    
    
    (135,168
    )Other comprehensive income (loss) for the
year, net of tax
    
    
    41,963
    
    
    
    23,192
    
    
    
    (31,299
    )Balance at end of year
    
    
    (101,312
    )
    
    
    (143,275
    )
    
    
    (166,467
    )Treasury stock:Balance at beginning of year
    
    
    (7,451
    )
    
    
    (6,161
    )
    
    
    (277
    )Repurchase, net
    
    
    (503
    )
    
    
    (1,290
    )
    
    
    (5,884
    )Stock exchanged under exchange offering
    
    
    2,691
    
    
    
    
    
    
    
    Balance at end of year
    
    
    (5,263
    )
    
    
    (7,451
    )
    
    
    (6,161
    )Total stockholders equity
    
    ¥
    2,209,896
    
    
    ¥
    1,865,545
    
    
    ¥
    1,591,950Disclosure of comprehensive income:Net income for the year
    
    ¥
    343,344
    
    
    ¥
    275,730
    
    
    ¥
    190,737Other comprehensive income (loss) for the
year, net of tax (Note 15):Foreign currency translation adjustments
    
    
    4,050
    
    
    
    (15,277
    )
    
    
    (15,864
    )Net unrealized gains and losses on
securities
    
    
    686
    
    
    
    7,952
    
    
    
    (1,732
    )Net gains and losses on derivative
instruments
    
    
    (396
    )
    
    
    37
    
    
    
    2,089Minimum pension liability adjustments
    
    
    37,623
    
    
    
    30,480
    
    
    
    (15,792
    )Other comprehensive income (loss)
    
    
    41,963
    
    
    
    23,192
    
    
    
    (31,299
    )Total comprehensive income for the year
    
    ¥
    385,307
    
    
    ¥
    298,922
    
    
    ¥
    159,438
 See accompanying notes to consolidated financial statements. 69




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Canon Inc. and Subsidiaries 
 Consolidated Statements of Cash Flows Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Cash flows from operating activities:Net income
    
    ¥
    343,344
    
    
    ¥
    275,730
    
    
    ¥
    190,737Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    192,692
    
    
    
    183,604
    
    
    
    165,260Loss on disposal of property, plant and
equipment
    
    
    24,597
    
    
    
    12,639
    
    
    
    13,137Deferred income taxes
    
    
    9,060
    
    
    
    (3,035
    )
    
    
    (1,788
    )Increase in trade receivables
    
    
    (53,595
    )
    
    
    (36,638
    )
    
    
    (47,077
    )(Increase) decrease in inventories
    
    
    (40,050
    )
    
    
    (15,823
    )
    
    
    14,029Increase in trade payables
    
    
    65,873
    
    
    
    1,129
    
    
    
    64,040Increase in income taxes
    
    
    21,689
    
    
    
    3,441
    
    
    
    14,935Increase in accrued expenses
    
    
    8,196
    
    
    
    37,131
    
    
    
    12,901Increase (decrease) in accrued pension
and severance cost
    
    
    (16,924
    )
    
    
    29,445
    
    
    
    20,993Other, net
    
    
    6,647
    
    
    
    (21,974
    )
    
    
    1,783Net cash provided by operating activities
    
    
    561,529
    
    
    
    465,649
    
    
    
    448,950Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (256,714
    )
    
    
    (199,720
    )
    
    
    (205,139
    )Proceeds from sale of property, plant and
equipment
    
    
    7,431
    
    
    
    9,354
    
    
    
    11,971Purchases of available-for-sale securities
    
    
    (388
    )
    
    
    (249
    )
    
    
    (2,751
    )Purchases of held-to-maturity securities
    
    
    (21,544
    )
    
    
    
    
    
    
    Proceeds from sale of available-for-sale
securities
    
    
    9,735
    
    
    
    6,544
    
    
    
    1,099Proceeds from sale of subsidiary common
stock
    
    
    9,731
    
    
    
    
    
    
    
    Purchases of other investments
    
    
    (8,628
    )
    
    
    (24,341
    )
    
    
    (30,331
    )Other, net
    
    
    7,410
    
    
    
    8,464
    
    
    
    (5,069
    )Net cash used in investing activities
    
    
    (252,967
    )
    
    
    (199,948
    )
    
    
    (230,220
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    2,115
    
    
    
    4,132
    
    
    
    10,609Repayment of long-term debt
    
    
    (43,175
    )
    
    
    (25,301
    )
    
    
    (60,690
    )Decrease in short-term loans
    
    
    (3,046
    )
    
    
    (49,224
    )
    
    
    (101,125
    )Dividends paid
    
    
    (52,950
    )
    
    
    (28,538
    )
    
    
    (23,663
    )Purchases of treasury stock, net
    
    
    (494
    )
    
    
    (1,071
    )
    
    
    (5,884
    )Other, net
    
    
    (4,718
    )
    
    
    (2,037
    )
    
    
    (2,961
    )Net cash used in financing activities
    
    
    (102,268
    )
    
    
    (102,039
    )
    
    
    (183,714
    )Effect of exchange rate changes on cash and
cash equivalents
    
    
    (8,818
    )
    
    
    5,365
    
    
    
    (19,979
    )Net increase in cash and cash equivalents
    
    
    197,476
    
    
    
    169,027
    
    
    
    15,037Cash and cash equivalents at beginning of
year
    
    
    690,298
    
    
    
    521,271
    
    
    
    506,234Cash and cash equivalents at end of year
    
    ¥
    887,774
    
    
    ¥
    690,298
    
    
    ¥
    521,271Supplemental disclosure for cash flow
information (Note 20):Cash paid during the year for:Interest
    
    ¥
    2,981
    
    
    ¥
    4,570
    
    
    ¥
    6,890Income taxes
    
    
    164,450
    
    
    
    162,247
    
    
    
    121,556
 See accompanying notes to consolidated financial statements. 70




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements  1.

Basis of Presentation and Significant Accounting Policies  (a)

Description of Business  Canon Inc. (the Company) and subsidiaries (collectively Canon) is one of the worlds
leading manufacturers in such fields as office imaging products, computer peripherals, business
information products, cameras, and optical related products. Office imaging products consist
mainly of copying machines and digital multifunction devices. Computer peripherals consist
mainly of laser beam and inkjet printers. Business information products consist mainly of
computer information systems, micrographics and calculators. Cameras consist mainly of single
lens reflex (SLR) cameras, compact cameras, digital cameras and video camcorders. Optical
related products include steppers and aligners used in semiconductor chip production,
projection aligners used in the production of liquid crystal displays (LCDs), broadcasting
lenses and medical equipment. Canons consolidated net sales for the years ended December 31,
2004, 2003 and 2002 were distributed as follows: office imaging products 33%, 34% and 35%,
computer peripherals 33%, 34% and 36%, business information products 3%, 4% and 5%, cameras
22%, 20% and 16%, and optical and other products 9%, 8% and 8%, 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 73% of consolidated net sales
for each of the years ended December 31, 2004, 2003 and 2002 were generated outside Japan, with
30%, 33% and 34% in the Americas, 31%, 30% and 29% in Europe, and 12%, 10% and 10% in other
areas, respectively.  Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales
constituted approximately 21%, 20% and 21% of consolidated net sales for the years ended
December 31, 2004, 2003 and 2002, respectively.  Canons manufacturing operations are conducted primarily at 18 plants in Japan and 14 overseas
plants which are located in the United States, Germany, France, Taiwan, China, Malaysia,
Thailand and Vietnam. 71




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (b)

Basis of Presentation  The Company and its domestic subsidiaries maintain their books of account in conformity with
financial accounting standards of Japan. Foreign subsidiaries maintain their books of account
in conformity with financial accounting standards of the countries of their domicile.  Certain adjustments and reclassifications have been incorporated in the accompanying
consolidated financial statements to conform with accounting principles generally accepted in
the United States of America. These adjustments were not recorded in the statutory books of
account.  (c)

Principles of Consolidation  The consolidated financial statements include the accounts of the Company, its majority owned
subsidiaries and those variable interest entities where the Company is the primary beneficiary
under FASB Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of
Variable Interest Entities. All significant intercompany balances and transactions have been
eliminated.  (d)

Use of Estimates  The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America 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,
deferred tax assets and employee retirement and severance benefit plans. Actual results could
differ materially from those estimates.  (e)

Cash Equivalents  All highly liquid investments acquired with an original maturity of three months or less are
considered to be cash equivalents. 72




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (f)

Translation of Foreign Currencies  Assets and liabilities of the Companys subsidiaries located outside Japan with functional
currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in
effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are reported in other comprehensive income
(loss).  Gains and losses resulting from foreign currency transactions, including foreign exchange
contracts, and translation of assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency exchange losses were Yen17,800
million, Yen20,311 million and Yen23,468 million for the years ended December 31, 2004, 2003
and 2002, respectively.  (g)

Marketable Securities and Investments  Canon classifies investments in debt and marketable equity securities as available-for-sale, or
held-to-maturity securities. Canon does not hold any trading securities which are bought and
held primarily for the purpose of sale in the near term. Available-for-sale securities are
recorded at fair value. Unrealized holding gains and losses, net of the related tax effect,
are reported as a separate component of other comprehensive income (loss) until realized.
Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.  Available-for-sale and held-to-maturity securities are regularly reviewed for
other-than-temporary declines in carrying value based on criteria that include the length of
time and the extent to which the market value has been less than cost, the financial condition
and near-term prospects of the issuer and Canons intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated recovery in market value. When
such a decline exists, Canon recognizes an impairment loss to the extent by which the cost
basis of the investment exceeds the fair value of the investment. Fair value is determined
based on quoted market prices, projected discounted cash flows or other valuation techniques as
appropriate.  Realized gain and losses are determined on the average cost method and reflected in earnings.  Other securities are stated at cost and reviewed periodically for impairment. 73




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (h)

Allowance for Doubtful Receivables  Allowance for doubtful trade and finance receivables is maintained for
all customers based on a combination of factors, including aging
analysis, macroeconomic conditions, significant one-time events, and
historical experience. An additional reserve for individual accounts
is recorded when Canon becomes aware of a customers inability to meet
its financial obligations, such as in the case of bankruptcy filings.
If circumstances related to customers change, estimates of the
recoverability of receivables would be further adjusted. When all
collection options are exhausted including legal recourse, the
accounts or portions thereof are deemed to be uncollectible and
charged against the allowance.  (i)

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

Investments in Affiliated Companies  Investments in 20% to 50% owned affiliates in which Canon has the ability to exercise
significant influence over their operating and financial policies are accounted for by the
equity method.  (k)

Impairment of Long-Lived Assets  Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount
of the asset exceeds its estimated future cash flows, an impairment charge is recognized by 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. 74




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (l)

Property, Plant and Equipment  Property, plant and equipment are stated at cost. Depreciation is calculated principally by
the declining-balance method, except for certain assets which are depreciated by the
straight-line method over the estimated useful lives of the assets. The depreciation period
ranges from 3 years to 60 years for buildings and 2 years to 20 years for machinery and
equipment.  Assets leased to others under operating leases are stated at cost and depreciated by the
straight-line method over the period ranging from 2 years to 5 years.  (m)

Goodwill and Other Intangible Assets  Goodwill and intangible assets with indefinite useful lives are not amortized, but instead
tested for impairment at least annually. 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.  (n)

Environmental Liabilities  Liabilities for environmental remediation and other environmental costs are accrued when
environmental assessments or remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present values.  (o)

Income Taxes  Deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. 75




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (o)

Income Taxes (continued)  Canon records a valuation allowance to reduce the deferred tax assets to the amount that is
more likely than not realizable.  (p)

Issuance of Stock by Subsidiaries and Equity Investees  The change in the Companys proportionate share of a subsidiarys or equity investees equity
resulting from the issuance of stock by the subsidiary or equity investee is accounted for as
an equity transaction.  (q)

Net Income per Share  Basic net income per share is computed by dividing net income by the weighted-average number of
common shares outstanding during each year. Diluted net income per share includes the effect
from potential issuance of common stock based on the assumption that all convertible debentures
were converted into common stock.  (r)

Revenue Recognition  Canon generates revenue principally through the sale of consumer products, equipment, supplies,
and related services under separate contractual arrangements. Canon recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss
have been transferred to the customer, the sales price is fixed or determinable, and
collectibility is probable.  For arrangements with multiple elements, which may include any combination of equipment,
installation and maintenance, Canon allocates revenue to each element based on its relative
fair value if such element meets the criteria for treatment as a separate unit of accounting as
prescribed in the Emerging Issues Task Force Issue No. 00-21 (EITF 00-21), Revenue
Arrangements with Multiple Deliverables. Otherwise, revenue is deferred until the undelivered
elements are fulfilled as a single unit of accounting.  Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the customer. 76




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (r)

Revenue Recognition (continued)  Revenue from sales of optical equipment such as steppers and aligners sold with customer
acceptance provisions related to their functionality is recognized when the equipment is
installed at the customer site and the specific criteria of the equipment functionality are
successfully tested and demonstrated by Canon. Service revenue is derived primarily from
maintenance contracts on equipment sold to customers and is recognized over the term of the
contract.  Most office imaging products are sold with service maintenance contracts for which the customer
typically pays a base service fee plus a variable amount based on usage. Revenue from these
service maintenance contracts are recognized as services are provided.  Revenues from the sale of equipment under sales-type leases are 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 lease
or direct-financing lease 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.  A liability for estimated product warranty cost is recorded at the time revenue is recognized
and is included in accrued expenses. Estimates for accrued product warranty cost 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.  (s)

Research and Development Costs  Research and development costs are expensed as incurred. Research and development expenses
were Yen275,300 million, Yen259,140 million and Yen233,669 million for the years ended December
31, 2004, 2003 and 2002, respectively.  (t)

Advertising Costs  Advertising costs are expensed as incurred. Advertising expenses were Yen111,770 million,
Yen100,278 million and Yen71,725 million for the years ended December 31, 2004, 2003 and 2002,
respectively. 77




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (u)

Shipping and Handling Costs  Shipping and handling costs totaled Yen46,953 million, Yen40,660 million and Yen39,170 million
for the years ended December 31, 2004, 2003 and 2002, respectively, and are included in
selling, general and administrative expenses in the consolidated statements of income.  (v)

Derivative Financial Instruments  All derivatives are recognized at fair value and are included in prepaid expenses and other
current assets, or other current liabilities on 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).  Canon also uses certain derivative financial instruments which are not designated as hedges.
Canon records these derivative financial instruments on the consolidated balance sheets at fair
value. The changes in fair values are immediately recorded in earnings.  (w)

Guarantees  Canon recognizes, at the inception of a guarantee, a liability for the fair value of the
obligation it has undertaken in issuing guarantees. 78




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (x)

New Accounting Standards  In March 2004, the Emerging Issues Task Force reached a consensus on Issue No. 03-1 (EITF
03-1), The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF 03-1 provides guidance on other-than-temporary impairment models for
marketable debt and equity securities accounted for under Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities
(SFAS 115), and non-marketable equity securities accounted for under the cost method. The
EITF developed a basic three-step model to evaluate whether an investment is
other-than-temporarily impaired. The Financial Accounting Standards Board (FASB) issued FASB
Staff Position EITF 03-1-1 in September 2004 which delayed the effective date of the
recognition and measurement provisions of EITF 03-1. The adoption of EITF 03-1 is not expected
to have a material effect on Canons consolidated results of operations and financial position.  In November 2004, the FASB issued SFAS No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4 (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). Among other provisions, the new rule requires
that items such as idle facility expense, excessive spoilage, double freight, and rehandling
costs be recognized as current-period charges regardless of whether they meet the criterion of
so abnormal as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation
of fixed production overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005
and is required to be adopted by Canon in the first quarter beginning January 1, 2006. Canon
is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated
results of operations and financial condition but does not expect SFAS 151 to have a material
impact.  In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assetsan amendment
of APB Opinion No. 29 (SFAS 153). SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception
for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary
exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods
beginning after June 15, 2005 and is required to be adopted by Canon in the first quarter
beginning January 1, 2006. Canon is currently evaluating the effect that the adoption of SFAS
153 will have on its consolidated results of operations and financial condition but does not
expect it to have a material impact. 79




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  1.

Basis of Presentation and Significant Accounting Policies (continued)  (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, 2004.  2.

Foreign Operations  Amounts included in the consolidated financial statements relating to subsidiaries operating in
foreign countries are summarized as follows: 2004
    
    
    2003
    
    
    2002(Millions of yen)Total assets
    
    ¥
    1,500,197
    
    
    ¥
    1,339,854
    
    
    ¥
    1,238,800Net assets
    
    
    632,657
    
    
    
    564,041
    
    
    
    518,927Net sales
    
    
    2,548,700
    
    
    
    2,341,221
    
    
    
    2,151,062Net income
    
    
    70,227
    
    
    
    74,274
    
    
    
    58,883
 80




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  3.

Marketable Securities and InvestmentsThe cost, gross unrealized holding gains, gross unrealized holding losses and fair value for
available-for-sale securities and held-to-maturity securities by major security type at
December 31, 2004 and 2003 were as follows: December 31, 2004Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Corporate debt securities
    
    ¥
    138
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    138Bank debt securities
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Fund trusts
    
    
    92
    
    
    
    40
    
    
    
    
    
    
    
    132Equity securities
    
    
    1,117
    
    
    
    100
    
    
    
    4
    
    
    
    1,213¥
    1,418
    
    
    ¥
    140
    
    
    ¥
    4
    
    
    ¥
    1,554Noncurrent:Available-for-sale:Governmental bond securities
    
    ¥
    536
    
    
    ¥
    26
    
    
    ¥
    25
    
    
    ¥
    537Corporate debt securities
    
    
    56
    
    
    
    19
    
    
    
    
    
    
    
    75Fund trusts
    
    
    2,064
    
    
    
    574
    
    
    
    12
    
    
    
    2,626Equity securities
    
    
    9,185
    
    
    
    16,628
    
    
    
    76
    
    
    
    25,73711,841
    
    
    
    17,247
    
    
    
    113
    
    
    
    28,975Held-to-maturity:Corporate debt securities
    
    
    21,460
    
    
    
    
    
    
    
    
    
    
    
    21,460¥
    33,301
    
    
    ¥
    17,247
    
    
    ¥
    113
    
    
    ¥
    50,435
 81




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  3.

Marketable Securities and Investments (continued) December 31, 2003Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Governmental bond securities
    
    ¥
    65
    
    
    ¥
    
    
    
    ¥
    4
    
    
    ¥
    61Corporate debt securities
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Bank debt securities
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    71Fund trusts
    
    
    51
    
    
    
    12
    
    
    
    
    
    
    
    63Equity securities
    
    
    1,044
    
    
    
    78
    
    
    
    
    
    
    
    1,122¥
    1,238
    
    
    ¥
    90
    
    
    ¥
    4
    
    
    ¥
    1,324Noncurrent:Available-for-sale:Governmental bond securities
    
    ¥
    243
    
    
    ¥
    
    
    
    ¥
    5
    
    
    ¥
    238Corporate debt securities
    
    
    5,141
    
    
    
    53
    
    
    
    
    
    
    
    5,194Fund trusts
    
    
    2,047
    
    
    
    455
    
    
    
    
    
    
    
    2,502Equity securities
    
    
    6,525
    
    
    
    15,534
    
    
    
    204
    
    
    
    21,855¥
    13,956
    
    
    ¥
    16,042
    
    
    ¥
    209
    
    
    ¥
    29,789
 82




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  3.

Marketable Securities and Investments (continued)  Maturities of debt securities and fund trust classified as available-for-sale and held-to-maturity
were as follows at December 31, 2004: Available-for-sale securitiesCost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    301
    
    
    ¥
    341Due after one year through
five years
    
    
    1,607
    
    
    
    2,191Due after five years
    
    
    1,049
    
    
    
    1,047¥
    2,957
    
    
    ¥
    3,579
 Held-to-maturity securitiesCost
    
    
    Fair value(Millions of yen)Due after one year through
five years
    
    ¥
    21,460
    
    
    ¥
    21,460
  The gross realized gains for the year ended December 31, 2004 were Yen3,867 million. The gross
realized gains for the years ended December 31, 2003 and 2002 and the gross realized losses for the
years ended December 31, 2004, 2003 and 2002 were not significant.At December 31, 2004, substantially all of the available-for-sale and held-to-maturity securities
with unrealized losses had been in a continuous unrealized loss position for less than 12 months.Aggregate cost of non-marketable equity securities accounted for under the cost method totaled
Yen14,635 million and Yen18,253 million at December 31, 2004 and 2003, respectively. Investments
with an aggregate cost of Yen14,607 million were not evaluated for impairment because (a) Canon did
not estimate the fair value of those investments as it was not practicable to estimate the fair
value of the investment and (b) Canon did not identify any events or changes in circumstances that
might have had significant adverse effect on the fair value of those investments.Investments in affiliated companies accounted for by the equity method amounted to Yen26,546
million and Yen24,806 million at December 31, 2004 and 2003, respectively. Canons share of the
net earnings (losses) in affiliated companies accounted for by the equity method, included in other
income (deductions), are earnings of Yen1,921 million for the year ended December 31, 2004 and
losses of Yen1,124 million and Yen3,521 million for the years ended December 31, 2003 and 2002,
respectively. 83




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  4.

Trade Receivables  Trade receivables are summarized as follows: December 312004
    
    
    2003(Millions of yen)Notes
    
    ¥
    30,261
    
    
    ¥
    28,880Accounts
    
    
    584,186
    
    
    
    524,549614,447
    
    
    
    553,429Less allowance for doubtful
receivables
    
    
    (11,657
    )
    
    
    (14,423
    )¥
    602,790
    
    
    ¥
    539,006
  5.

InventoriesInventories comprised the following: December 312004
    
    
    2003(Millions of yen)Finished goods
    
    ¥
    352,656
    
    
    ¥
    305,414Work in process
    
    
    121,613
    
    
    
    124,410Raw materials
    
    
    14,859
    
    
    
    14,420¥
    489,128
    
    
    ¥
    444,244
  6.

Property, Plant and EquipmentProperty, plant and equipment are stated at cost less accumulated depreciation and are summarized
as follows: December 312004
    
    
    2003(Millions of yen)Land
    
    ¥
    182,330
    
    
    ¥
    177,953Buildings
    
    
    824,969
    
    
    
    766,398Machinery and equipment
    
    
    1,053,121
    
    
    
    990,638Construction in progress
    
    
    74,599
    
    
    
    29,6272,135,019
    
    
    
    1,964,616Less accumulated depreciation
    
    
    (1,173,305
    )
    
    
    (1,118,183
    )¥
    961,714
    
    
    ¥
    846,433
 84




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  7.

Finance Receivables and Operating LeasesFinance receivables represent financing leases which consist of sales-type leases and
direct-financing leases resulting from the marketing of Canons and complementary third-party
products. These receivables typically have terms ranging from 1 to 6 years. The components of the
finance receivables, which are included in prepaid expenses and other current assets, and other
assets in the accompanying consolidated balance sheets, are as follows: December 312004
    
    
    2003(Millions of yen)Total minimum lease payments receivable
    
    ¥
    180,707
    
    
    ¥
    197,684Unguaranteed residual values
    
    
    10,816
    
    
    
    10,295Executory costs
    
    
    (2,533
    )
    
    
    (2,523
    )Unearned income
    
    
    (20,880
    )
    
    
    (23,279
    )168,110
    
    
    
    182,177Less allowance for doubtful receivables
    
    
    (6,068
    )
    
    
    (6,339
    )162,042
    
    
    
    175,838Less amount due within one year
    
    
    (61,187
    )
    
    
    (68,135
    )¥
    100,855
    
    
    ¥
    107,703
  The cost of equipment leased to customers under operating leases at December 31, 2004 and 2003 was
Yen67,364 million and Yen78,712 million, respectively. Accumulated depreciation on equipment under
operating leases at December 31, 2004 and 2003 was Yen52,493 million and Yen64,770 million,
respectively.The following is a schedule by year of the future minimum lease payments to be received under
financing leases and non-cancelable operating leases at December 31, 2004. Financing
    
    
    Operatingleases
    
    
    leases(Millions of yen)Year ending December 31:2005
    
    ¥
    70,921
    
    
    ¥
    2,4472006
    
    
    55,771
    
    
    
    1,2962007
    
    
    33,718
    
    
    
    6702008
    
    
    15,571
    
    
    
    2532009
    
    
    4,523
    
    
    
    82Thereafter
    
    
    203
    
    
    
    8¥
    180,707
    
    
    ¥
    4,756
 85




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  8.

Goodwill and Other Intangible AssetsIntangible assets acquired for the year ended December 31, 2004 totaled Yen25,234 million, which
are subject to amortization and primarily consist of internal use software of Yen19,523 million and
license fees of Yen5,072 million. The weighted average amortization period for internal use
software and license fees is approximately 4 years and 8 years, respectively.The components of acquired intangible assets subject to amortization included in other assets at
December 31, 2004 and 2003 were as follows: December 31, 2004
    
    
    December 31, 2003Gross
    
    
    
    
    
    
    Grosscarrying
    
    
    Accumulated
    
    
    carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    amount
    
    
    amortization(Millions of yen)Software
    
    ¥
    121,546
    
    
    ¥
    79,517
    
    
    ¥
    115,675
    
    
    ¥
    80,534License fees
    
    
    24,603
    
    
    
    14,183
    
    
    
    21,975
    
    
    
    14,012Other
    
    
    6,976
    
    
    
    3,585
    
    
    
    6,188
    
    
    
    3,319¥
    153,125
    
    
    ¥
    97,285
    
    
    ¥
    143,838
    
    
    ¥
    97,865
  Aggregate amortization expense for the years ended December 31, 2004, 2003 and 2002 was Yen18,295
million, Yen12,438 million and Yen6,288 million, respectively. Estimated amortization expense for
the next five years ending December 31 is Yen17,785 million in 2005, Yen14,528 million in 2006,
Yen10,311 million in 2007, Yen6,804 million in 2008, and Yen3,751 million in 2009.Intangible assets not subject to amortization other than goodwill at December 31, 2004 and 2003
were not significant. 86




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  8.

Goodwill and Other Intangible Assets (continued)The changes in the carrying amount of goodwill for the years ended December 31, 2004 and 2003 were
as follows: Year ended December 312004
    
    
    2003(Millions of yen)Balance at beginning of year
    
    ¥
    22,067
    
    
    ¥
    13,640Goodwill acquired during the year
    
    
    3,156
    
    
    
    7,839Impairment losses
    
    
    (42
    )
    
    
    Recognition of acquired companys tax
benefits
    
    
    (1,298
    )
    
    
    Translation adjustments
    
    
    350
    
    
    
    588Balance at end of year
    
    ¥
    24,233
    
    
    ¥
    22,067
  During the year ended December 31, 2004, Canon recognized Yen1,298 million of deferred tax benefits
relating to preexisting net operating tax losses of a company acquired in 2003. In connection
therewith, Canon reduced the related goodwill by the same amount. 87




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  9.

Short-Term Loans and Long-Term DebtShort-term loans consisting of bank borrowings at December 31, 2003 were Yen2,941 million. The
weighted average interest rate on short-term loans outstanding at December 31, 2003 was 2.10%.Long-term debt consisted of the following: December 312004
    
    
    2003(Millions of yen)Loans, principally from banks, maturing
in installments through 2013; bearing
weighted average interest of 3.05% and
2.88% at December 31, 2004 and 2003,
respectively, partially secured by
mortgage of property, plant and
equipment
    
    ¥
    2,949
    
    
    ¥
    27,4522.58% Japanese yen notes, due 2004
    
    
    
    
    
    
    10,0002.03% Japanese yen notes, due 2004
    
    
    
    
    
    
    10,0001.88% Japanese yen notes, due 2005
    
    
    5,000
    
    
    
    5,0001.71% Japanese yen notes, due 2005
    
    
    200
    
    
    
    2.95% Japanese yen notes, due 2007
    
    
    10,000
    
    
    
    10,0002.27% Japanese yen notes, due 2008
    
    
    10,000
    
    
    
    10,0001.20% Japanese yen convertible
debentures, due 2005
    
    
    309
    
    
    
    2,5771.30% Japanese yen convertible
debentures, due 2008
    
    
    1,487
    
    
    
    9,157Capital lease obligations
    
    
    8,585
    
    
    
    11,26938,530
    
    
    
    95,455Less amount due within one year
    
    
    (9,879
    )
    
    
    (36,195
    )¥
    28,651
    
    
    ¥
    59,260
  The aggregate annual maturities of long-term debt outstanding at December 31, 2004 were as follows: (Millions of yen)Year ending December 31:2005
    
    ¥
    9,8792006
    
    
    5,0462007
    
    
    11,4012008
    
    
    12,0742009
    
    
    105Thereafter
    
    
    25¥
    38,530
 88




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  9.

Short-Term Loans and Long-Term Debt (continued)Certain property, plant and equipment with a net book carrying value of Yen11,247 million at
December 31, 2004 was mortgaged to secure loans from banks.In November 2004, Canon entered into an agreement whereby certain assets were deposited into an
irrevocable trust to meet the debt service requirements of the: 1.88% Japanese yen notes; 2.95%
Japanese yen notes; and 2.27% Japanese yen notes in the aggregate amount of Yen25,000 million. The
assets contributed by Canon consisted of certificates of deposit and debt securities with carrying
amounts of Yen5,072 million and Yen21,460 million, respectively, at December 31, 2004. Cash flows
from such investments will be used solely to satisfy the principal and interest obligations for the
debts. Accordingly, the certificates of deposit are included in the consolidated balance sheet
under the caption of prepaid expenses and other current assets, and the debt securities are
included in the consolidated balance sheet under the caption of investments.Both short-term and long-term bank loans are made under general agreements which provide that
security and guarantees for present and future indebtedness will be given upon request of the bank,
and that the bank shall have the right to offset cash deposits against obligations that have become
due or, in the event of default, against all obligations due to the bank. Long-term agreements
with lenders other than banks also generally provide that Canon must provide additional security
upon request of the lender.The 1.20% Japanese yen convertible debentures due 2005 are convertible into approximately 206,000
shares of common stock at a conversion price of Yen1,497.00 per share at December 31, 2004.The 1.30% Japanese yen convertible debentures due 2008 are convertible into approximately 993,000
shares of common stock at a conversion price of Yen1,497.00 per share at December 31, 2004. The
debentures are redeemable at the option of the Company between January 1, 2005 and December 31,
2007 at declining premiums ranging from 3% to 1%, and at par thereafter.10.

Trade PayablesTrade payables are summarized as follows: December 312004
    
    
    2003(Millions of yen)Notes
    
    ¥
    51,081
    
    
    ¥
    47,771Accounts
    
    
    414,315
    
    
    
    343,410¥
    465,396
    
    
    ¥
    391,181
 89




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##### Table of Contents



Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance BenefitsThe Company and certain of its subsidiaries have contributory and noncontributory defined benefit
plans covering substantially all employees after one year of service. Other subsidiaries sponsor
unfunded retirement and severance plans. Benefits payable under the plans are based on employee
earnings and years of service.The contributory plans in Japan mainly represent the Employees Pension Fund plans (EPFs),
composed of the substitutional portions based on the pay-related part of the old age pension
benefits prescribed by the Welfare Pension Insurance Law and the corporate portions based on
contributory defined benefit pension arrangements established at the discretion of the Company and
its subsidiaries. The substitutional portions of the EPFs represent welfare pension plans carried
on behalf of the Japanese government. These contributory and noncontributory plans are funded in
conformity with the funding requirements of applicable Japanese governmental regulations.In January 2003, the Emerging Issues Task Force reached a final consensus on Issue No. 03-2 (EITF
03-2), Accounting for the Transfer to the Japanese Government of the Substitutional Portion of
Employee Pension Fund Liabilities, which addresses accounting for a transfer to the Japanese
government of a substitutional portion of an EPF. During the year ended December 31, 2003, the
Company and certain of its domestic subsidiaries received approval from the government for an
exemption from the obligation to pay benefits for future employee service related to the
substitutional portion. During the year ended December 31, 2004, the Company and certain of its
domestic subsidiaries received approval to separate the remaining substitutional portion related to
past service by their employees. During the year ended December 31, 2004, the Company and certain
of its domestic subsidiaries also completed the transfer of the substitutional portion of the
benefit obligation and the related government-specified portion of the plan assets which were
computed by the government, and were relieved of all related obligations. Canon has accounted for
the entire process at the completion of the transfer to the government of the substitutional
portion of the benefit obligation and the related plan assets as a single settlement transaction in
accordance with EITF 03-2. As a result, Canon recognized a settlement loss of Yen69,651 million
for the year ended December 31, 2004, which is determined based on the proportion of the projected
benefit obligation settled to the total projected benefit obligation immediately prior to the
separation. Canon also recognized a subsidy from the government of Yen86,792 million, which is
calculated as the difference between the obligation settled and the assets transferred to the
government. The net gain of Yen17,141 million is included in selling, general and administrative
expenses for the year ended December 31, 2004. 90




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued)Canon uses a measurement date of October 1 for the majority of its plans.Net periodic benefit cost for Canons employee retirement and severance defined benefit plans for
the years ended December 31, 2004, 2003 and 2002 consisted of the following components: Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Service cost  benefits earned during
the year
    
    ¥
    26,571
    
    
    ¥
    29,024
    
    
    ¥
    39,206Interest cost on projected benefit
obligation
    
    
    19,108
    
    
    
    20,806
    
    
    
    19,270Expected return on plan assets
    
    
    (17,054
    )
    
    
    (13,959
    )
    
    
    (14,523
    )Amortization of unrecognized net
obligation at transition
    
    
    344
    
    
    
    344
    
    
    
    344Amortization of prior service cost
    
    
    (6,814
    )
    
    
    (5,515
    )
    
    
    (3,246
    )Recognized actuarial loss
    
    
    12,505
    
    
    
    15,807
    
    
    
    14,743Settlement loss resulting from plan
termination
    
    
    2,784
    
    
    
    
    
    
    
    Settlement loss resulting from
transfer of substitutional portion
of EPFs to the government
    
    
    69,651
    
    
    
    
    
    
    
    ¥
    107,095
    
    
    ¥
    46,507
    
    
    ¥
    55,794
 91




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued)Reconciliations of beginning and ending balances of the benefit obligations and the fair value of
the plan assets are as follows: December 312004
    
    
    2003(Millions of yen)Change in benefit obligations:Benefit obligations at beginning of year
    
    ¥
    752,390
    
    
    ¥
    766,452Service cost
    
    
    26,571
    
    
    
    29,024Interest cost
    
    
    19,108
    
    
    
    20,806Plan participants contributions
    
    
    1,142
    
    
    
    2,102Amendments
    
    
    (2,781
    )
    
    
    (52,749
    )Actuarial gain
    
    
    (5,728
    )
    
    
    (3,398
    )Benefits paid
    
    
    (14,143
    )
    
    
    (12,484
    )Settlement on plan termination
    
    
    (6,482
    )
    
    
    Transfer of substitutional portion of EPFs to
the government
    
    
    (191,784
    )
    
    
    Foreign currency exchange rate changes
    
    
    3,957
    
    
    
    630Other
    
    
    (38
    )
    
    
    2,007Benefit obligations at end of year
    
    
    582,212
    
    
    
    752,390Change in plan assets:Fair value of plan assets at beginning of year
    
    
    472,228
    
    
    
    421,642Actual return on plan assets
    
    
    32,744
    
    
    
    31,008Employer contributions
    
    
    31,018
    
    
    
    29,944Plan participants contributions
    
    
    1,142
    
    
    
    2,102Benefit paid
    
    
    (14,143
    )
    
    
    (12,484
    )Settlement on plan termination
    
    
    (2,274
    )
    
    
    Transfer of substitutional portion of EPFs to
the government
    
    
    (104,992
    )
    
    
    Foreign currency exchange rate changes
    
    
    3,075
    
    
    
    (20
    )Other
    
    
    
    
    
    
    36Fair value of plan assets at end of year
    
    
    418,798
    
    
    
    472,228Funded status
    
    
    (163,414
    )
    
    
    (280,162
    )Unrecognized actuarial loss
    
    
    191,376
    
    
    
    297,839Unrecognized prior service cost
    
    
    (102,427
    )
    
    
    (107,360
    )Unrecognized net transition obligation being
recognized over 22 years
    
    
    4,300
    
    
    
    4,644Net amount recognized
    
    ¥
    (70,165
    )
    
    ¥
    (85,039
    )Amounts recognized in the consolidated balance
sheets consist of:Prepaid pension cost
    
    ¥
    3,142
    
    
    ¥
    2,515Accrued pension and severance cost
    
    
    (132,522
    )
    
    
    (238,001
    )Intangible assets
    
    
    57
    
    
    
    86Accumulated other comprehensive income (loss)
    
    
    59,158
    
    
    
    150,361Net amount recognized
    
    ¥
    (70,165
    )
    
    ¥
    (85,039
    )
 92




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued)The accumulated benefit obligation for all defined benefit plans was as follows: December 312004
    
    
    2003(Millions of yen)Accumulated benefit obligation
    
    ¥
    540,615
    
    
    ¥
    702,049
  The projected benefit obligations and the fair value of plan assets for the pension plans with
projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and
the fair value of plan assets for the pension plans with accumulated benefit obligations in excess
of plan assets are as follows: December 312004
    
    
    2003(Millions of yen)Plans with projected benefit
obligations in excess of plan assets:Projected benefit obligations
    
    ¥
    577,022
    
    
    ¥
    752,390Fair value of plan assets
    
    
    411,918
    
    
    
    472,228Plans with accumulated benefit
obligations in excess of plan assets:Accumulated benefit obligations
    
    
    512,216
    
    
    
    697,711Fair value of plan assets
    
    
    386,921
    
    
    
    466,970
  AssumptionsWeighted-average assumptions used to determine benefit obligations are as follows: December 312004
    
    
    2003Discount rate
    
    
    2.7%
    
    
    
    2.7%Assumed rate of increase in future compensation levels
    
    
    3.0%
    
    
    
    2.0%
 93




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued)Weighted-average assumptions used to determine net periodic benefit cost are as follows: Year ended December 312004
    
    
    2003
    
    
    2002Discount rate
    
    
    2.7%
    
    
    
    2.7%
    
    
    
    2.7%Assumed rate of increase in future
compensation levels
    
    
    2.0%
    
    
    
    2.0%
    
    
    
    3.4%Expected long-term rate of return on
plan assets
    
    
    3.6%
    
    
    
    3.6%
    
    
    
    3.5%
  Canon determines the expected long-term rate of return based on the expected long-term return of
the various asset categories in which it invests. Canon considers the current expectations for
future returns and the actual historical returns of each plan asset category.Plan assetsThe weighted-average asset allocations of Canons benefit plans at December 31, 2004 and 2003 and
target asset allocation by asset category are as follows: December 31
    
    
    Target2004
    
    
    2003
    
    
    allocationAsset category:Equity securities
    
    
    43.0%
    
    
    
    32.1%
    
    
    
    41.2%Debt securities
    
    
    37.2%
    
    
    
    27.4%
    
    
    
    36.7%Cash
    
    
    1.7%
    
    
    
    19.6%
    
    
    
    0.3%Life insurance company general accounts
    
    
    14.5%
    
    
    
    19.0%
    
    
    
    18.4%Other
    
    
    3.6%
    
    
    
    1.9%
    
    
    
    3.4%100.0%
    
    
    
    100.0%
    
    
    
    100.0%
  Canons investment policies are designed to ensure adequate plan assets are available to provide
future payments of pension benefits to eligible participants. Taking into account the expected
long-term rate of return on plan assets, Canon formulates a model portfolio comprised of the
optimal combination of equity securities and debt securities. Plan assets are invested in
individual equity and debt securities using the guidelines of the model portfolio in order to
produce a total return that will match the expected return on a mid-term to long-term basis. Canon
evaluates the gap between expected return and actual return of invested plan assets on an annual
basis to determine if such differences necessitate a revision in the formulation of the model
portfolio. Canon revises the model portfolio when and to the extent considered necessary to
achieve the expected long-term rate of return on plan assets.The plans equity securities include common stock of the Company and certain of its subsidiaries in
the amounts of Yen946 million and Yen796 million at December 31, 2004 and 2003, respectively. 94




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  11.

Employee Retirement and Severance Benefits (continued)ContributionsCanon expects to contribute Yen36,183 million to its defined benefit plans for the year ending
December 31, 2005.Estimated future benefit paymentsThe following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid: (Millions of yen)Years ending December 31:2005
    
    ¥
    8,0742006
    
    
    9,2352007
    
    
    10,5522008
    
    
    12,1182009
    
    
    13,4102010 - 2014
    
    
    86,720
  12.

Income TaxesDomestic and foreign components of income before income taxes and minority interests, and the
current and deferred income tax expense (benefit) attributable to such income are summarized as
follows: Year ended December 31, 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
 95




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  12.

Income Taxes (continued) Year ended December 31, 2003Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income
taxes and minority
interests
    
    ¥
    337,093
    
    
    ¥
    111,077
    
    
    ¥
    448,170Income taxes:Current
    
    ¥
    132,204
    
    
    ¥
    33,484
    
    
    ¥
    165,688Deferred
    
    
    (5,828
    )
    
    
    2,793
    
    
    
    (3,035
    )¥
    126,376
    
    
    ¥
    36,277
    
    
    ¥
    162,653
 Year ended December 31, 2002Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income
taxes and minority
interests
    
    ¥
    237,677
    
    
    ¥
    92,340
    
    
    ¥
    330,017Income taxes:Current
    
    ¥
    109,102
    
    
    ¥
    27,389
    
    
    ¥
    136,491Deferred
    
    
    (7,212
    )
    
    
    5,424
    
    
    
    (1,788
    )¥
    101,890
    
    
    ¥
    32,813
    
    
    ¥
    134,703
  The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the
aggregate, indicate a statutory income tax rate of approximately 42% for the years ended December
31, 2004, 2003 and 2002. 96




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  12.

Income Taxes (continued)Amendments to the Japanese tax regulations were enacted on March 24, 2003. As a result of these
amendments, the statutory income tax rate will be reduced from approximately 42% to 40% effective
from the year beginning January 1, 2005. Consequently, the statutory tax rate utilized for
deferred tax assets and liabilities expected to be settled or realized subsequent to January 1,
2005 is approximately 40%. The adjustments of deferred tax assets and liabilities for this change
in the tax rate amounted to Yen3,613 million and have been reflected in income taxes on the
consolidated statements of income for the year ended December 31, 2003.A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a
percentage of income before income taxes and minority interests is as follows: Year ended December 312004
    

    2003
    

    2002Japanese statutory income tax rate
    
    
    42.0
    %
    
    
    42.0
    %
    
    
    42.0
    %Increase (reduction) in income taxes
resulting from:Expenses not deductible for tax purposes
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.5Tax benefits not recognized on
operating losses of subsidiaries
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Income of foreign subsidiaries taxed at
lower than Japanese statutory tax rate
    
    
    (2.1
    )
    
    
    (2.5
    )
    
    
    (2.5
    )Tax credit for research and development
expenses
    
    
    (4.0
    )
    
    
    (4.0
    )
    
    
    (1.6
    )Effect of enacted changes in tax laws
and rates
    
    
    
    
    
    
    0.8
    
    
    
    Other
    
    
    (1.3
    )
    
    
    (0.3
    )
    
    
    2.2Effective income tax rate
    
    
    35.1
    %
    
    
    36.3
    %
    
    
    40.8
    %
  Net deferred income tax assets and liabilities are reflected on the accompanying consolidated
balance sheets under the following captions: December 312004
    
    
    2003(Millions of yen)Prepaid expenses and other current assets
    
    ¥
    47,679
    
    
    ¥
    44,198Other assets
    
    
    84,686
    
    
    
    124,706Other current liabilities
    
    
    (2,873
    )
    
    
    (2,575
    )Other noncurrent liabilities
    
    
    (30,049
    )
    
    
    (19,302
    )¥
    99,443
    
    
    ¥
    147,027
 97




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  12.

Income Taxes (continued)The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax
liabilities at December 31, 2004 and 2003 are presented below: December 312004
    
    
    2003(Millions of yen)Deferred tax assets:Inventories
    
    ¥
    11,364
    
    
    ¥
    13,540Accrued business tax
    
    
    10,149
    
    
    
    8,684Accrued pension and severance cost
    
    
    34,680
    
    
    
    45,149Minimum pension liability adjustments
    
    
    22,778
    
    
    
    56,526Research and development  costs
capitalized for tax purposes
    
    
    22,499
    
    
    
    20,766Property, plant and equipment
    
    
    17,406
    
    
    
    17,074Accrued expenses
    
    
    17,976
    
    
    
    15,964Net operating losses carried forward
    
    
    1,799
    
    
    
    6,279Other
    
    
    24,258
    
    
    
    21,330Total gross deferred tax assets
    
    
    162,909
    
    
    
    205,312Less valuation allowance
    
    
    (3,495
    )
    
    
    (8,401
    )Net deferred tax assets
    
    
    159,414
    
    
    
    196,911Deferred tax liabilities:Undistributed earnings of foreign
subsidiaries
    
    
    (5,638
    )
    
    
    (6,424
    )Net unrealized gains on securities
    
    
    (6,833
    )
    
    
    (6,191
    )Tax deductible reserve
    
    
    (11,975
    )
    
    
    (9,828
    )Financing lease revenue
    
    
    (30,196
    )
    
    
    (25,049
    )Other
    
    
    (5,329
    )
    
    
    (2,392
    )Total gross deferred tax liabilities
    
    
    (59,971
    )
    
    
    (49,884
    )Net deferred tax assets
    
    ¥
    99,443
    
    
    ¥
    147,027
  The net changes in the total valuation allowance for the years ended December 31, 2004, 2003, and
2002 were decreases of Yen4,906 million, Yen1,282 million and Yen3,192 million, respectively.Based upon the level of historical taxable income and projections for future taxable income over
the periods which the net deductible temporary differences are expected to reverse, management
believes it is more likely than not that Canon will realize the benefits of these deferred tax
assets, net of the existing valuation allowance at December 31, 2004. 98




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  12.

Income Taxes (continued)At December 31, 2004, Canon had net operating losses which can be carried forward for income tax
purposes of Yen5,065 million to reduce future taxable income. Periods available to reduce future
taxable income vary in each tax jurisdiction and range from one year to ten years as follows: (Millions of yen)Within one year
    
    ¥
    182After one year through five years
    
    
    4,805After five years through ten years
    
    
    78Total
    
    ¥
    5,065
  Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax
law provides a means by which the investment in a domestic subsidiary can be recovered tax free.Canon has not recognized deferred tax liabilities of Yen25,316 million for the portion of
undistributed earnings of foreign subsidiaries that arose for the year ended December 31, 2004 and
prior years because Canon currently does not expect those unremitted earnings to reverse and become
taxable to the Company in the foreseeable future. Deferred tax liabilities will be recognized when
Canon expects that it will recover those undistributed earnings in a taxable manner, such as
through receipt of dividends or sale of the investments. At December 31, 2004, such undistributed
earnings of these subsidiaries were Yen471,301 million.13.

Common StockFor the years ended December 31, 2004, 2003 and 2002, the Company issued 6,638,606 shares,
2,202,401 shares and 2,853,912 shares of common stock, respectively. The issuance of 243,360
shares during the year ended December 31, 2002 was in connection with the acquisition of the
outstanding minority ownership interest of 37% of Canon Components, Inc. The remaining issuance of
the shares of the Company was in connection with conversion of convertible debt. Conversion into
common stock of convertible debt issued subsequent to October 1, 1982 has been accounted for by
crediting one-half or more of the conversion price to the common stock account and the remainder to
the additional paid-in capital account. 99




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  14.

Legal Reserve and Retained EarningsThe Japanese Commercial Code provides that an amount equal to at least 10% of cash dividends and
other distributions from retained earnings paid by the Company and its Japanese subsidiaries be
appropriated as a legal reserve. No further appropriations are required when the total amount of
the additional paid-in capital and the legal reserve equals 25% of their respective stated capital.
The Japanese Commercial Code also provides that to the extent that the sum of the additional
paid-in capital and the legal reserve exceeds 25% of the stated capital, the amount of the excess
(if any) is available for appropriations by the resolution of the shareholders. Certain foreign
subsidiaries are also required to appropriate their earnings to legal reserves under the laws of
the respective countries.Cash dividends and appropriations to the legal reserve charged to retained earnings for the years
ended December 31, 2004, 2003 and 2002 represent dividends paid out during those years and the
related appropriations to the legal reserve. Retained earnings at December 31, 2004 do not reflect
current year-end dividends aggregating Yen35,474 million which will be payable in March 2005 upon
stockholder approval.The amount available for dividends under the Japanese Commercial Code is based on the amount
recorded in the Companys nonconsolidated books of account in accordance with financial accounting
standards of Japan. Such amount was Yen1,141,596 million at December 31, 2004.Retained earnings at December 31, 2004 included Canons equity in undistributed earnings of
affiliated companies accounted for by the equity method in the amount of Yen7,420 million. 100




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  15.

Other Comprehensive Income (Loss)Change in accumulated other comprehensive income (loss) is as follows: Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Foreign currency translation
adjustments:Balance at beginning of year
    
    ¥
    (83,801
    )
    
    ¥
    (68,524
    )
    
    ¥
    (52,660
    )Adjustments for the year
    
    
    4,050
    
    
    
    (15,277
    )
    
    
    (15,864
    )Balance at end of year
    
    
    (79,751
    )
    
    
    (83,801
    )
    
    
    (68,524
    )Net unrealized gains and losses on
securities:Balance at beginning of year
    
    
    6,784
    
    
    
    (1,168
    )
    
    
    564Adjustments for the year
    
    
    686
    
    
    
    7,952
    
    
    
    (1,732
    )Balance at end of year
    
    
    7,470
    
    
    
    6,784
    
    
    
    (1,168
    )Net gains and losses on derivative
instruments:Balance at beginning of year
    
    
    (297
    )
    
    
    (334
    )
    
    
    (2,423
    )Adjustments for the year
    
    
    (396
    )
    
    
    37
    
    
    
    2,089Balance at end of year
    
    
    (693
    )
    
    
    (297
    )
    
    
    (334
    )Minimum pension liability adjustments:Balance at beginning of year
    
    
    (65,961
    )
    
    
    (96,441
    )
    
    
    (80,649
    )Adjustments for the year
    
    
    37,623
    
    
    
    30,480
    
    
    
    (15,792
    )Balance at end of year
    
    
    (28,338
    )
    
    
    (65,961
    )
    
    
    (96,441
    )Total accumulated other comprehensive
income (loss):Balance at beginning of year
    
    
    (143,275
    )
    
    
    (166,467
    )
    
    
    (135,168
    )Adjustments for the year
    
    
    41,963
    
    
    
    23,192
    
    
    
    (31,299
    )Balance at end of year
    
    ¥
    (101,312
    )
    
    ¥
    (143,275
    )
    
    ¥
    (166,467
    )
 101




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  15.

Other Comprehensive Income (Loss) (continued)Tax effects allocated to each component of other comprehensive income (loss) and reclassification
adjustments are as follows: Year ended December 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
    )
    
    ¥
    41,9632003:Foreign currency translation adjustments:Amount arising during the year
    
    ¥
    (19,115
    )
    
    ¥
    3,469
    
    
    ¥
    (15,646
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    369
    
    
    
    
    
    
    
    369Net change during the year
    
    
    (18,746
    )
    
    
    3,469
    
    
    
    (15,277
    )Net unrealized gains and losses on securities:Amount arising during the year
    
    
    12,129
    
    
    
    (4,477
    )
    
    
    7,652Reclassification adjustments for gains
and losses realized in net income
    
    
    515
    
    
    
    (215
    )
    
    
    300Net change during the year
    
    
    12,644
    
    
    
    (4,692
    )
    
    
    7,952Net gains and losses on derivative
instruments:Amount arising during the year
    
    
    (726
    )
    
    
    305
    
    
    
    (421
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    790
    
    
    
    (332
    )
    
    
    458Net change during the year
    
    
    64
    
    
    
    (27
    )
    
    
    37Minimum pension liability adjustments
    
    
    70,218
    
    
    
    (39,738
    )
    
    
    30,480Other comprehensive income (loss)
    
    ¥
    64,180
    
    
    ¥
    (40,988
    )
    
    ¥
    23,192
 102




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  15.

Other Comprehensive Income (Loss) (continued) Year ended December 31Before-tax
    
    
    Tax (expense)
    
    
    Net-of-taxamount
    
    
    or benefit
    
    
    amount(Millions of yen)2002:Foreign currency translation adjustments:Amount arising during the year
    
    ¥
    (13,521
    )
    
    ¥
    (2,908
    )
    
    ¥
    (16,429
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    44
    
    
    
    521
    
    
    
    565Net change during the year
    
    
    (13,477
    )
    
    
    (2,387
    )
    
    
    (15,864
    )Net unrealized gains and losses on securities:Amount arising during the year
    
    
    (2,331
    )
    
    
    872
    
    
    
    (1,459
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    (589
    )
    
    
    316
    
    
    
    (273
    )Net change during the year
    
    
    (2,920
    )
    
    
    1,188
    
    
    
    (1,732
    )Net gains and losses on derivative
instruments:Amount arising during the year
    
    
    (1,052
    )
    
    
    442
    
    
    
    (610
    )Reclassification adjustments for gains
and losses realized in net income
    
    
    4,654
    
    
    
    (1,955
    )
    
    
    2,699Net change during the year
    
    
    3,602
    
    
    
    (1,513
    )
    
    
    2,089Minimum pension liability adjustments
    
    
    (26,472
    )
    
    
    10,680
    
    
    
    (15,792
    )Other comprehensive income (loss)
    
    ¥
    (39,267
    )
    
    ¥
    7,968
    
    
    ¥
    (31,299
    )
 103




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  16.

Net Income per ShareA reconciliation of the numerators and denominators of basic and diluted net income per share
computations is as follows: Year ended December 312004
    
    
    2003
    
    
    2002(Millions of yen)Net income
    
    ¥
    343,344
    
    
    ¥
    275,730
    
    
    ¥
    190,737Effect of dilutive securities:1% Japanese yen convertible
debentures, due 2002
    
    
    
    
    
    
    
    
    
    
    261.20% Japanese yen
convertible debentures, due
2005
    
    
    24
    
    
    
    36
    
    
    
    481.30% Japanese yen
convertible debentures, due
2008
    
    
    72
    
    
    
    86
    
    
    
    91Diluted net income
    
    ¥
    343,440
    
    
    ¥
    275,852
    
    
    ¥
    190,902(Number
of shares)Average common shares outstanding
    
    
    885,365,124
    
    
    
    878,648,844
    
    
    
    876,716,443Effect of dilutive securities:1% Japanese yen convertible
debentures, due 2002
    
    
    
    
    
    
    
    
    
    
    1,952,3151.20% Japanese yen convertible
debentures, due 2005
    
    
    462,823
    
    
    
    2,664,354
    
    
    
    3,446,0711.30% Japanese yen convertible
debentures, due 2008
    
    
    2,125,278
    
    
    
    6,382,560
    
    
    
    6,624,428Diluted common shares outstanding
    
    
    887,953,225
    
    
    
    887,695,758
    
    
    
    888,739,257(Yen)Net income per share:Basic
    
    ¥
    387.80
    
    
    ¥
    313.81
    
    
    ¥
    217.56Diluted
    
    
    386.78
    
    
    
    310.75
    
    
    
    214.80
 104




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  17.

Derivatives and Hedging ActivitiesRisk management policyCanon operates internationally, exposing it to the risk of changes in foreign currency exchange
rates and interest rates. Derivative financial instruments are comprised principally of foreign
exchange contracts and interest rate swaps utilized by the Company and certain of its subsidiaries
to reduce these risks. Canon assesses foreign currency exchange rate risk and interest rate risk
by continually monitoring changes in these exposures and by evaluating hedging opportunities.
Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also
exposed to credit-related losses in the event of non-performance by counterparties to derivative
financial instruments, but it is not expected that any counterparties will fail to meet their
obligations, because most of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of major financial institutions.Foreign currency exchange rate risk managementCanons international operations expose Canon to the risk of changes in foreign currency exchange
rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures
principally from the exchange of U.S. dollar and euro into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of forecasted intercompany sales and
intercompany trade receivables which are denominated in foreign currencies. In accordance with
Canons policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts which principally mature within
three months.Interest rate risk managementCanons exposure to the risk of changes in interest rates relates primarily to its debt
obligations. The variable-rate debt obligations expose Canon to variability in their cash flows
due to change in interest rates. To manage the variability in cash flows caused by interest rate
changes, Canon enters into interest rate swaps when it is determined to be appropriate based on
market conditions. The interest rate swaps change variable-rate debt obligations to the fixed-rate
debt obligations by primarily entering into pay-fixed, receive-variable interest rate swaps.Fair value hedgeDerivative financial instruments designated as fair value hedges principally relate to interest
rate swaps associated with fixed rate debt obligations. Changes in fair values of the hedged debt
obligations and derivative financial instruments designated as fair value hedges of these debt
obligations are recognized in other income (deductions). There is no hedging ineffectiveness or
net gains or losses excluded from the assessment of hedge effectiveness for the years ended
December 31, 2004, 2003 and 2002 as the critical terms of the interest rate swaps match the terms
of the hedged debt obligations. 105




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  17.

Derivatives and Hedging Activities (continued)Cash flow hedgeChanges in the fair value of derivative financial instruments designated as cash flow hedges,
including foreign exchange contracts associated with forecasted intercompany sales and interest
rate swaps associated with variable rate debt obligation, are reported in accumulated other
comprehensive income (loss). These amounts are subsequently reclassified into earnings through
other income (deductions) in the same period as the hedged items affect earnings. Substantially
all amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to
be recognized in earnings over the next twelve months. Canon excludes the time value component
from the assessment of hedge effectiveness.The amount of the hedging ineffectiveness was not material for the years ended December 31, 2004,
2003 and 2002. The amount of net gains or losses excluded from the assessment of hedge
effectiveness (time value component) which was recorded in other income (deductions) was net losses
of Yen2,096 million, Yen490 million and Yen668 million for the years ended December 31, 2004, 2003
and 2002, respectively.Derivatives not designated as hedgesCanon has entered into certain foreign currency exchange contracts to manage its foreign currency
exposures. These foreign currency exchange contracts have not been designated as hedges.
Accordingly, the changes in fair value of the contracts are recorded in earnings immediately.Contract amounts of foreign exchange contracts and interest rate swaps at December 31, 2004 and
2003 are set forth below: December 312004
    
    
    2003(Millions of yen)To sell foreign currencies
    
    ¥
    584,208
    
    
    ¥
    447,543To buy foreign currencies
    
    
    34,201
    
    
    
    22,384Receive-fixed interest rate swaps
    
    
    
    
    
    
    1,337Pay-fixed interest rate swaps
    
    
    
    
    
    
    21,227
 106




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  18.

Commitments and Contingent LiabilitiesCommitmentsAt December 31, 2004, commitments outstanding for the purchase of property, plant and equipment
approximated Yen39,286 million, and commitments outstanding for the purchase of parts and raw
materials approximated Yen55,666 million.On September 14, 2004, the Company and Toshiba Corporation (Toshiba) entered into an agreement to
jointly establish SED Inc. for the development, production and marketing of next-generation
flat-screen SED (Surface-conduction Electron-emitter Display) panels. The Company and Toshiba
initially contributed approximately Yen500 million in cash, each. Under the agreement, the Company
is further committed to contribute 50% of the financing requirements for SED Inc. through the
establishment of a prototype production line.Canon occupies sales offices and other facilities under lease arrangements accounted for as
operating leases. Deposits made under such arrangements aggregated Yen14,307 million and Yen15,092
million at December 31, 2004 and 2003, respectively, and are reflected under noncurrent receivables
on the accompanying consolidated balance sheets. Rental expenses under the operating lease
arrangements amounted to Yen41,381 million, Yen42,131 million and Yen44,195 million for the years
ended December 31, 2004, 2003 and 2002, respectively.Future minimum lease payments required under noncancellable operating leases that have initial or
remaining lease terms in excess of one year at December 31, 2004 are as follows: (Millions of yen)Year ending December 31:2005
    
    ¥
    12,7142006
    
    
    9,2052007
    
    
    6,6532008
    
    
    5,5552009
    
    
    5,116Thereafter
    
    
    10,289Total future minimum lease payments
    
    ¥
    49,532
 107




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##### Table of Contents



Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  18.

Commitments and Contingent Liabilities (continued)GuaranteesCanon provides guarantees for bank loans of its employees, affiliates and other companies. The
guarantees for the employees are principally made for their housing loans. The guarantees of loans
of its affiliates and other companies are made to ensure that those companies operate with less
risk of finance.For each guarantee provided, Canon would have to perform under a guarantee, if the borrower
defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees
with housing loans, and of 1 year to 10 years, in the case of affiliates and other companies. The
maximum amount of undiscounted payments Canon would have had to make in the event of default is
Yen43,634 million at December 31, 2004. The carrying amounts of the liabilities recognized for
Canons obligations as a guarantor under those guarantees at December 31, 2004 were not
significant.Canon also issues contractual product warranties under which it generally guarantees the
performance of products delivered and services rendered for a certain period or term. Changes in
accrued product warranty cost for the year ended December 31, 2004 and 2003 are summarized as
follows: Year ended December 312004
    
    
    2003(Millions of yen)Balance at beginning of year
    
    ¥
    10,512
    
    
    ¥
    7,516Addition
    
    
    13,319
    
    
    
    10,919Utilization
    
    
    (9,400
    )
    
    
    (7,834
    )Other
    
    
    (167
    )
    
    
    (89
    )Balance at end of year
    
    ¥
    14,264
    
    
    ¥
    10,512
  Legal proceedingsIn 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 Yen3,600 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 which
could result in additional damages. There are additional defenses that are yet to be litigated in
a follow-up trial solely to the judge; thus, a final decision by the court, as to both infringement
and the total amount of damages, has not yet been reached. 108




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  18.

Commitments and Contingent Liabilities (continued)In November 2003, a law suit was filed by a former employee against the Company at Tokyo District
Court in Japan. The lawsuit alleges that the former employee is entitled to Yen45,872 million as
compensation for an invention related to certain technology used by the Company, and has sued for a
partial payment of Yen1,000 million and interest thereon. The case is still pending and its final
outcome is not yet determinable.Canon is also involved in various other claims and legal actions arising in the ordinary course of
business.In the opinion of management, the ultimate disposition of the above mentioned matters will not have
a material adverse effect on Canons consolidated financial position, results of operations, or
cash flows.19.


Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit RiskFair value of financial instrumentsThe estimated fair values of Canons financial instruments at December 31, 2004 and 2003 are set
forth below. The following summary excludes cash and cash equivalents, trade receivables, finance
receivables, noncurrent receivables, short-term loans, trade payables, accrued expenses for which
fair value approximate their carrying amounts. The summary also excludes marketable securities and
investments which are disclosed in Note 3. December 312004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Millions of yen)Long-term debt, including
current installments
    
    ¥
    (38,530
    )
    
    ¥
    (44,620
    )
    
    ¥
    (95,455
    )
    
    ¥
    (123,700
    )Derivatives:Foreign exchange contracts:Assets
    
    
    4,875
    
    
    
    4,875
    
    
    
    3,760
    
    
    
    3,760Liabilities
    
    
    (11,020
    )
    
    
    (11,020
    )
    
    
    (7,697
    )
    
    
    (7,697
    )Interest rate swaps:Liabilities
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    (55
    )
 109




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  19.

Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit
Risk (continued)The following methods and assumptions are used to estimate the fair value in the above table.Long-term debtThe fair values of Canons long-term debt instruments are based on the quoted price in the most
active market or the present value of future cash flows associated with each instrument discounted
using Canons current borrowing rate for similar debt instruments of comparable maturity.Derivative financial instrumentsThe fair values of derivative financial instruments, consisting principally of foreign exchange
contracts and interest rate swaps, all of which are used for purposes other than trading, are
estimated by obtaining quotes from brokers.LimitationsFair value estimates are made at a specific point in time, based on relevant market information and
information about the financial instruments. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimates.Concentrations of credit riskAt December 31, 2004 and 2003, one customer accounted for approximately 13%and 16% of consolidated
trade receivables, respectively. Although Canon does not expect that the customer will fail to
meet their obligations, Canon is potentially exposed to concentrations of credit risk if the
customer failed to perform according to the terms of the contracts. 110




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Canon Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued)  20.

Supplemental Cash Flow InformationFor the years ended December 31, 2004, 2003 and 2002, aggregate common stock and additional paid-in
capital arising from conversion of convertible debt amounted to Yen9,938 million, Yen3,297 million
and Yen3,908 million, respectively.In March 2004, the Company acquired all of the outstanding common shares of Igari Mold Co. Ltd., a
precision plastic mold manufacturer, in an exchange offering for 577,920 shares of the Companys
common stock. The aggregate value of the shares exchanged was approximately Yen2,805 million. In
connection with this transaction, the Company recognized goodwill, classified as other assets in
the accompanying consolidated financial statements, of Yen1,585 million.As a result of the acquisition of the outstanding minority ownership interest of Canon Components
Inc. and the issuance of common stock in connection with the acquisition during the year ended
December 31, 2002, goodwill classified as other assets increased by Yen795 million, and minority
interests decreased by Yen257 million. 111




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CANON INC. AND SUBSIDIARIES 
 Valuation and Qualifying Accounts Years ended December 31, 2004, 2003 and 2002 AddBalance at
    
    
    Add
    
    
    Deduct
    
    
    (deduct)
    
    
    Balancebeginning of
    
    
    charge to
    
    
    bad debts
    
    
    translation
    
    
    at end ofperiod
    
    
    income
    
    
    written off
    
    
    adjustments
    
    
    period(Millions of yen)Year ended December 31, 2004:Allowance for doubtful Receivables
    
    ¥
    14,423
    
    
    ¥
    449
    
    
    ¥
    3,515
    
    
    ¥
    300
    
    
    ¥
    11,657Year ended December 31, 2003:Allowance for doubtful Receivables
    
    ¥
    12,031
    
    
    ¥
    5,232
    
    
    ¥
    2,878
    
    
    ¥
    38
    
    
    ¥
    14,423Year ended December 31, 2002:Allowance for doubtful Receivables
    
    ¥
    11,091
    
    
    ¥
    6,027
    
    
    ¥
    3,997
    
    
    ¥
    (1,090
    )
    
    ¥
    12,031
 112




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##### Table of Contents



Item 18.
    Financial Statements Not applicable. 
  Item 19.
    Financial Statements and Exhibits  (a)

The following consolidated financial statements and schedule II included in
Item 17. Financial Statements. Consolidated financial statements of Canon Inc. and Subsidiaries:  Report of Ernst & Young ShinNihon, Independent Registered Public Accounting FirmReport of KPMG AZSA & Co., Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002Notes to Consolidated Financial Statements Schedule:  Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2004, 2003 and 2002(b)

List of exhibits Exhibit:  1.1

Articles of Incorporation of Canon Inc. (Translation)1.2

Regulations Of the Board of Directors of Canon Inc. (Translation), incorporated by
reference from the annual report on Form 20-F (Commission file number 0-15122) filed on June 10, 20042

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 Form 20-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 Form 20-F (Commission file number 0-15122) filed on June 10, 200412

302 Certifications13

906 Certification 113




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SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, the registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this Annual Report to
be signed on its behalf by the undersigned, thereunto duly authorized. CANON INC.
(Registrant)By:
    /s/ Toshizo Tanaka(Senior Managing Director,Group Executive of Finance and
Accounting Headquarters) Canon INC.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan Date June 13, 2005 114




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##### Table of Contents



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),
incorporated by reference from the annual report
on Form 20-F (Commission file number 0-15122) filed on June 10, 2004Exhibit 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 Form 20-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 Form 20-F (Commission file number 0-15122) filed on June
10, 2004Exhibit 12
    
    302 CertificationsExhibit 13
    
    906 Certification
 115