CANON SALES CO.,INC ANNUAL REPORT 2005 · 2010. 7. 15. · The Canon Sales Group comprises the parent company Canon Sales and its 16 consolidated subsidiaries. ... sales of maintenance

PROFILE

Disclaimer Regarding Forward-Looking StatementsThis annual report contains forward-looking statements about the performance and management plans of Canon Sales Co., Inc., based onmanagement’s assumptions in light of current information. The following factors may therefore influence actual results. These factors includeconsumer trends in Japan as well as other major global markets, private capital expenditures, currency fluctuations, notably against the U.S. dollar,materials prices and political turmoil in certain countries and regions.

Photo CreditCover photograph of broadcasting equipment courtesy of J.League Photos Inc.

Canon Sales Co., Inc. (which will be renamed Canon Marketing Japan Inc. on April 1, 2006), is

the independent marketing arm of Canon Inc.—wholesaling and retailing a broad range of products

developed and manufactured by Canon. The Canon Sales Group comprises the parent company Canon

Sales and its 16 consolidated subsidiaries. Its operations are concentrated in the following business

segments: Business Solutions, Consumer Equipment and Industrial Equipment.

The Group seeks to boost revenue and income through more efficient operations. It therefore makes

concerted efforts to expand high-revenue businesses and reduce costs through superior inventory and

logistical systems. Equally important, the Group is firmly committed to strict compliance and effective,

customer-oriented management.

Canon U.S.A., Inc.

Canon Europe Ltd.

Canon (China) Co., Ltd.

Canon Australia Pty. Ltd.

Canon Inc.

Business SolutionsBCanon System & Support Inc.

OAL Inc.Canon B.M. Tokyo Inc.Canon B.M. Kanagawa Inc.C B M O k ICanon B.M. Osaka Inc.

nformation Technology (IT) BusinessICanon Software Inc.

Canon Software Technology & Research Inc.Canon Software America Inc.

Canon System Solutions Inc.Canon Control System (SHANGHAI) Inc.

Canon Network Communications Inc.Canon Supercomputing S.I. Inc.

S l ti S i ISolution Service Inc.

Facility ManagementFCanon Facility Management IncCanon Facility Management Inc.

Mail-Order and Mobile SalesMCanon Trading IncCanon Trading Inc.

Customer SupportCCanon Response Service Inc.Canon Response Service Inc.

Sales of Ophthalmic InstrumentsSCanon Staar Co., Inc.

Canon Sales Co., Inc.

To be renamed Canon Business Support Inc. on April 1, 2006(As of December 31, 2005)(As of December 31, 2005)

Nonconsolidated

*

*

** **

Canon Sales Co., Inc.Annual Report 2005 1

CONTENTS

A guide to the corporate governance structure of Canon Sales,

including a summary of its internal controls system, which is

based on the internal controls standards established by Canon

Inc.—the New York Stock Exchange (NYSE)-listed company at

the center of the global Canon Group.

A message to our shareholders by Haruo Murase, the president

and CEO of Canon Sales, combining a review of the Company’s

record-setting consolidated net sales, operating income and net

income with a description of future goals and financial targets.

The section explains our reasons for renaming the Company on April 1,

2006. We also provide an outline of the Long-Term Management Plan

(Fiscal 2006–Fiscal 2010) and the Medium-Term Management Plan

(Fiscal 2006–Fiscal 2008)—a plan for implementing the broader

strategies of the former.

TO OUR SHAREHOLDERS 2

NEW COMPANY NAME/LONG-TERM AND MEDIUM-TERM MANAGEMENT PLANS 4

REVIEW OF OPERATIONS 8

CORPORATE GOVERNANCE 21

FINANCIAL SECTION 23

BOARD OF DIRECTORS AND CORPORATE AUDITORS/CORPORATE INFORMATION 43

At a Glance 8

Business Solutions 10

Consumer Equipment 14

Industrial Equipment 18

Canon Sales Co., Inc.Annual Report 20052

To Our Shareholders

As president and CEO of Canon Sales Co., Inc., I would like to express my deepest gratitude to all of our

shareholders for their solid support to date. I am proud to present this annual report outlining the achievements

in fiscal 2005, ended December 31, 2005.

Record Net Sales, Operating Income and Net Income

In recent years, Canon Sales and its consolidated subsidiaries have striven to evolve as an organization that

creates added value. This has entailed substantial changes to the structure of our business and operations.

During fiscal 2005, in the Business Solutions segment, we reinforced our software businesses and

focused on improving our ability to provide top-class solutions. Segment income increased, reflecting stronger

sales of maintenance services and cartridges due to the continued shift from monochrome to color equipment

in the areas of business-use multifunctional products (MFPs) and laser-beam printers (LBPs). Every member

of the Group forged ahead with efforts to promote IT services businesses, including information security and

consulting services.

In the Consumer Equipment segment, we maintained top share of the digital camera market, and enjoyed

solid sales growth of interchangeable lenses. We also recorded significantly higher sales of ink-jet MFPs as

the market for MFPs continued to evolve. Despite increasingly severe competition, segment sales expanded

steadily, reflecting the strength of our varied lineup, which enabled us to promote new approaches to digital

photography.

In the Industrial Equipment segment, we retained top share of the wafer imaging equipment market in

terms of shipments. This achievement was attributable to a concerted drive to increase customer satisfaction,

which countered the effects of reduced capital spending.

Companywide efforts to reorganize inventory and logistical systems ensured a significant reduction in other

expenses. Owing to the above, consolidated net sales edged up 0.8%, to ¥821.9 billion, operating income

increased 1.5%, to ¥29.7 billion, and net income climbed 24.2%, to ¥15.4 billion—all setting new records

for the Company.

To reward shareholders for their contribution to these outstanding results, we decided to pay a bonus

dividend by increasing the year-end cash dividends per share to ¥15.00, ¥2.00 higher than our initial

TO OUR SHAREHOLDERS


forecast. Combined with an interim cash dividend of ¥13.00, this brought full-term cash dividends to

¥28.00, up ¥6.00 from the previous fiscal year-end.

Company Name Change and Long-Term Management Plan

In fiscal 2006, Canon Inc. launched the Excellent Global Corporation Plan, Phase 3, which will guide its

operations until the end of fiscal 2010. Canon Sales and its consolidated subsidiaries have therefore

formulated the Long-Term Management Plan, a five-year plan timed to run concurrently with Canon’s global

plan. The new plan will enable us to plot the course of our business from a long-term perspective and accelerate

the pace of management reform.

On April 1, 2006, the Company name will be changed to Canon Marketing Japan Inc. (abbreviated to Canon

MJ) to mark this significant turning point. The new name will better reflect the focus of our business as we

intensify and broaden our comprehensive range of frontline marketing activities. These include ensuring two-

way communication with customers through a variety of channels; offering customer-oriented solutions and

support; and contributing to the development of products tailored to market needs. While stepping up efforts

in such activities, we will continue to promote profitable growth, ensure strict compliance and improve the

quality of our management.

For fiscal 2006, we forecast consolidated net sales of ¥870.0 billion, up nearly 6%, operating income of

¥30.5 billion, a rise of approximately 3% and net income of ¥16.9 billion, a gain of roughly 10%.

On May 8, 2006, we will reduce our minimum trading unit of stock from 1,000 to 100 shares to enable

a broader range of investors to become shareholders.

In these and all our endeavors, we look forward to the continued loyal support and understanding of our

shareholders, investors and other stakeholders.

March 2006

Haruo Murase

President and CEO


On April 1, 2006, Canon Sales will change its name to Canon

Marketing Japan Inc. In recent years, Canon Sales has

sought to evolve as a company centered on IT solutions. At

the same time, we have made substantial management

changes and promoted added-value businesses. Feedback

from within Canon Sales as well as from outside the

Company has suggested the current name no longer reflects

the true nature of our business. In light of this, we approved

the name change, timed to coincide with the start of the

Long-Term Management Plan. We will do our best to promote

and expand business activities implied by the new name.

(Canon MJ)

NEW COMPANY NAME


LONG-TERM MANAGEMENT PLAN(Fiscal 2006–Fiscal 2010)

In fiscal 2006, Canon Inc. launched the Excellent Global Corporation Plan, Phase 3, which will guide its operations until the end of fiscal 2010.

As the Japanese marketing arm of the worldwide Canon Group, Canon Sales and its subsidiaries initiated the Long-Term Management Plan, a

five-year management plan timed to run concurrently with Canon’s global plan.

Ensuring better two-way communication with customers has become an increasingly important challenge for companies wishing to accurately

identify market trends. In line with our corporate vision, we will align our operations more closely with those of our customers to provide the most

suitable, tailor-made solutions.

In our Long-Term Management Plan, we are targeting net sales of ¥1,100 billion for fiscal 2010. More importantly, we aim to raise our ordinary

income margin above 5.0%. Our top priority is to improve profit margins and income through sales expansion. Another goal for fiscal 2010 is to

push net income per share above ¥200.00.

Mission and Vision

Mission:As a member of the worldwide Canon Group, Canon Marketing Japan seeks to ensure

consistently innovative marketing activities and encourage greater creativity in each

individual, at work and in the community, by providing products and services of

the highest value.

Vision:Adopt a global perspective and strengthen our position as a topflight customer-oriented corporate group

Financial Goals foor Fiscal 2010

• Net sales: N ¥1,100 billion

• .0%Ordinary income margin: Over 5.05.0 O

• Net income per share: Over N ¥200.002020

Fiscal 2010

Medium-Term

Management Plan

See page 6

Fiscal 2006–Fiscal 2008


MEDIUM-TERM MANAGEMENT PLAN(Fiscal 2006–Fiscal 2008)

Financial Goals

The Medium-Term Management Plan is a three-year management plan that will guide our efforts as we implement the broader strategies

of the Long-Term Management Plan. For fiscal 2008, we are targeting net sales of ¥970.0 billion, operating income of ¥41.0 billion and

operating margin of 4.2% in line with our Long-Term Management Plan goals.

During the period under review, we reorganized the Business Solutions segment into two categories for accounting purposes:

Document Business comprising business-use equipment and maintenance services and IT Solutions encompassing IT services and IT

products. The subcategory IT products includes servers, network equipment and other IT-related equipment. We expect revenue to improve

steadily in every segment. In particular, we are aiming for double-digit increases in IT Solutions—an area with the sharpest growth rate.

(Billions of yen) (Billions of yen)

Consolidated Net Sales, Operating Income and Net Income

2005 2006 2007 2008

1,000

750

500

250

0

60

45

30

15

0

Projected

Net Sales(Left scale)

Operating Income(Right scale)

Net Income(Right scale)

Consolidated Segment Sales

2005 2006 2007 2008

1,000

750

500

250

0

Projected

Business Solutions

Consumer Equipment

Industrial Equipment

Document BusinessIT Solutions

Document Business

IT Solutions

Expand highly profitablebusinesses

Develop IT Solutions into a core business

Reinforce our position as the No. 1 digital photography company

Expand operations and increase our competitive strengths in the Document Business category

Strengthen and expand operations in the Industrial

Equipment segment

Key Strategy No. 1: Promote Profitable GrowthWe aim to promote profitable growth by expanding highly profitable businesses. The strategy has four parts.

First, we seek to develop IT Solutions into a core business (please refer to Key Strategy No. 3). Second, we

are committed to expanding operations and increasing our competitive strengths in the Document Business

category. This will entail promoting the shift from monochrome to color MFPs and LBPs and cultivating markets

for print-on-demand (POD) equipment and high-speed business-use equipment with advanced features. At

the same time, we will strive to provide better, distinctive solutions by capitalizing on our strengths in document-

related software. We will also take various measures to boost profitability, including a drive to enhance systems

for remote maintenance of MFPs.

Reinforcing our position as the No. 1 digital photography company is the third part of Key Strategy No. 1. To

this end, we will reinforce our digital photography-related business, which encompasses sales of digital cameras,

interchangeable lenses, digital camcorders, ink-jet printers and cartridges. In addition, we will continue to promote

an approach to digital photography whereby users enjoy every aspect of the creative process—from taking a

photograph to printing the final image. We will also endeavor to cultivate the photography studio market, where

digital equipment is becoming more common, by capitalizing on our lineup encompassing digital-photography

products, projectors and larger-format printers.

The fourth part of the strategy is to strengthen and expand operations in the Industrial Equipment segment by

reinforcing our semiconductor production equipment business. This area covers wafer imaging equipment for

semiconductors, lithography equipment for semiconductor and liquid crystal display (LCD) manufacturers, and

imported semiconductor production equipment. At the same time, we will pursue the full-scale expansion of our

medical solutions business.

Key Strategy No. 2: Become the No. 1 Company in Our Mainstay Product CategoriesOur goal is to become the top company in terms of market share in our mainstay product categories. In

addition, we aim to be No. 1 when judged by the criteria of customer satisfaction and quality of maintenance/


support services and software solutions. As the box below indicates, we plan to reinforce our position in product

categories where we are already ahead of our competitors. In the near future, we aim to secure the lead in

areas where we have yet to become No. 1.

Key Strategy No. 3: Develop IT Solutions into a Core BusinessFuture efforts to expand IT Solutions sales will center on IT services, which are divided into the following

four areas.

Our competitive advantage in the area of IT services owes itself to the clearly defined roles of our Group

companies, which develop different areas of excellence by capitalizing on quality products and a well-trained

workforce. The Group also benefits from having a diverse customer base, including small and medium-sized

enterprises (SMEs) and large corporations. Our goal is to provide a broader range of solutions in this area. We

will therefore maximize the integrated capabilities of the Group and make concerted efforts to expand

operations, utilizing mergers, acquisitions and business alliances when necessary.

Key Strategy No. 4: Improve Management Quality and Reduce Operational CostsThe first part of this strategy focuses on promoting management reform. In April 2005, we launched FOCUS-1,

a Groupwide management reform initiative to ensure better, customer-oriented management. As part of the

initiative, we have implemented a management quality program centered on self-assessments using criteria

set by the Japan Quality Award Council.

Responding better to customer needs is the second part of our strategy. To facilitate even better responses,

we will reorganize our services-based businesses and develop next-generation customer relationship

management (CRM) systems.

The third part of the strategy is to maximize the use of shared services within the Group. Under the shared

services system, the support functions of each Group company are transferred to one specialized company

serving the whole Group. We will ensure efficient and high-quality operations by switching to this system.

Canon Facility Management Inc., the subsidiary providing shared services, will be renamed Canon Business

Support Inc. on April 1, 2006.

Promote management reform

Respond better tocustomer needs

Maximize the use of sharedservices within the Group

Software:Information-related, backbone system, infrastructure software andbusiness software

Project-based services:Consulting, system integration, network integration and engineering

IT outsourcing:Internet service provider (ISP), application service provider (ASP),Internet Data Center (iDC) and other outsourcing services

Professional support services:Various services, including a comprehensive range of installationand maintenance services and training

(Billions of yen)IT Solutions Sales Targets

2005 2006 2007 2008

240

180

120

60

0

Projected

IT Services IT Products

116%114%

112%

In addition to securing top market share, we aim to be No. 1 in terms of customer satisfaction and the qualityof our maintenance/support services and software solutions.

Reinforce our top market share in:plain-paper copiers (PPCs), LBPs, compact digital cameras, digital SLR cameras, wafer imaging equipment and televisioncamera lenses

In the short-term, seize the largest market share for:color MFPs, color LBPs, ink-jet printers, and lithography equipment for semiconductor and LCD manufacturers


Business Solutions

Consumer Equipment


57.9%

30.9%

11.2%

Percentage of Net Sales

REVIEW OF OPERATIONS

At a Glance


• Sales of Canon’s business-use equipment and supplies

• Maintenance/support services and software solutions

• Document solutions and backbone system solutions

Business Solutions

• Wholesale of Canon’s personal-use equipment and supplies

Consumer Equipment

Industrial Equipment• Sales of Canon’s semiconductor production equipment and

medical equipment

• Sales of ophthalmic instruments

• Import-centered sales of equipment produced by companies

other than Canon

Sales

Millions of yen

Sales

475,882

Millions of yen

254,277

Sales

Millions of yen

91,789


■ Business-use multifunctional products (MFPs)■ Laser-beam printers (LBPs)■ Document software

■ IT services■ Service and support

(Billions of yen)Sales

03 04 05 06 07 08

600

450

300

150

0

Projected

Main Products

Financial Highlights



Business-use Multifunctional Products

In fiscal 2005, the business-use multifunctional product (MFP) market was characterized by firm sales of color

MFPs but weaker sales of monochrome models, reflecting the continuing trend toward color equipment. The

total number of shipments for the industry remained unchanged. In the color MFP market, makers have

continued to launch new products. At the lower end of the market, the shift to color equipment accelerated

significantly. As a result, color models accounted for nearly 40% of MFPs sold in fiscal 2005. We estimate

that Canon products accounted for 20% of the total business-use MFP market in terms of shipments.

Laser-Beam Printers

Although shipments fell in the monochrome laser-beam printer (LBP) market, sales by value held steady,

reflecting strong demand for the installation of optional products proposed as part of LBP systems. The color

LBP market expanded, with high-speed models becoming increasingly common. Our calculations show that

we secured a 27% share of total shipments in the LBP market in fiscal 2005.

IT Solutions

Software

The introduction of the e-Document Law (Law Concerning Application of Information and Telecommunication

Technology in Storage of Written Documents by Private Businesses) and other laws has stimulated demand

in the software market, especially for document management software. Most companies are proposing

integrated solutions to enhance operational efficiency and security. In this market, it is becoming increasingly

important to respond effectively to the particular needs of each client.

Information Services:

The market for Enterprise Content Management (ECM) services, which enable customers to maintain high

levels of compliance, is expected to grow rapidly. This is also the case with the market for Corporate

Performance Management (CPM) services.

Backbone Systems:

The overall market for backbone systems is expected to remain firm, owing to strong demand from medium-

size companies purchasing mid-range enterprise resource planning (ERP) systems. This demand should

compensate for a decline in orders from large corporations that have already installed high-end ERP systems

and are now in the downward phase of their investment cycle.

Network Systems:

We expect slow but steady growth in demand from database users with system construction needs. Although

unit prices for server systems have fallen, demand has increased for products with high levels of reliability,

availability and serviceability (RAS). This is attributable to greater network usage, as IT systems rely more on

web-based applications.



Business-use Multifunctional Products

In fiscal 2005, we remained committed to our basic policy of ensuring stable income and sales

growth. Accordingly, we continued to promote the shift from monochrome to color equipment in every

market segment and persisted in our efforts to expand our share of the high-speed MFP market by

persuading customers to switch to high-end equipment. In the area of color MFPs, new launches in

our Color imageRUNNER series included the iR C3170 and iR C2570—standard models introduced

in May 2005. In November, we commenced sales of the iR C6870 and iR C5870 models featuring

our proprietary Java-based Multifunctional Embedded Application Platform (MEAP). Such lineup

enhancements strengthened our marketing capabilities and ensured year-on-year sales increases

that exceeded the industry average.

In the area of monochrome MFPs, efforts to expand sales through launches of such models as

the standard iR 2230F and the high-speed iR 5570 and iR 6570 enabled us to maintain sales at fiscal

2004 levels, despite the continuing shift to color equipment. We also introduced the high-speed

iR 7105i in an effort to bolster sales to large offices and other users with high-volume printing needs.

Laser-Beam Printers

June 2006 saw the launches of the Satera LBP5900 and LBP5600 color printers, which mainly

target business-use customers and feature A3-size capabilities. In October 2006, we commenced

sales of the Satera LBP5000, a compact A4 printer. Sales of color LBPs rose considerably and color

toner cartridge sales improved steadily.

Other Products

In other products, three new large-format printers sold well, owing to specifications that met the

requirements of professionals printing signs and posters. We also established a reputation for top

quality in the ultra-high resolution liquid crystal projector market, where sales of the SX50, a Super

Extended Graphics Array Plus (SXGA+) projector, remained brisk.

Maintenance Services

Sales of maintenance services for color MFPs grew steadily as did sales of Canon Service Pack, a

package of maintenance services for various types of hardware. To improve the efficiency of our

services, we encouraged customers to install NET EYE, a remote web-based maintenance system,

and organized our city-based sales forces into specialized teams.

IT Solutions

We enjoyed firm sales growth in information-security products and related consulting services, as a

result of the Law on the Protection of Personal Information, effective since April 2005. The MEAP-

related business expanded considerably, owing to the launch of more than 30 applications and our

efforts to tailor solutions to increasingly diverse customer needs. During the fiscal year, we proposed


Business Solutions

iR C6870

Satera LBP5000



Business Solutions

distinctive solutions, including integrated circuit (IC) card authorization systems and Anyplace Print

for MEAP, which allows output from various printers while maintaining information security. By

targeting large corporations that place a high premium on information security, we achieved

considerable success in this area. Our reporting solutions business, centering on electronic forms and

documentation systems, expanded steadily, supported by substantial sales increases for such

products as Report Viewer and imageWARE Form Manager.

Group Companies

Canon Software Inc.

In fiscal 2005, Canon Software received a greater number of orders for large-scale software

development projects, including quality control systems. Packaged software such as Web-CADDY/J,

used for creating workflow systems, and Web Performer, a web application development tool, made

solid improvements, compared with sales of the previous fiscal year.

Canon System Solutions Inc.

Canon System Solutions recorded solid sales from system integration and other IT services, including

migration—the reconstruction of backbone systems by transferring programs and data. The

subsidiary’s security solutions business, which centers on its proprietary GUARDIAN series, also

performed well.

Canon Network Communications Inc.

Canon Network Communications enjoyed favorable sales in its network systems business focusing

on local area network (LAN) installation, database construction and application development. The

subsidiary also generated substantially higher sales from its Internet Data Center (iDC), which

monitors and manages customers’ systems 24 hours a day all year round.

Canon System & Support Inc.

Canon System & Support registered strong sales of equipment and maintenance services and steady

sales in its solutions business, which caters to small and medium-sized enterprises (SMEs).

Reflecting the above, in the Business Solutions segment, consolidated sales edged up 0.5%, to

¥475,882 million, and nonconsolidated sales slipped 0.1%, to ¥385,387 million.


■ Compact digital cameras■ Digital single-lens reflex (SLR) cameras■ Video cameras■ Ink-jet printers

■ Personal-use MFPs■ Personal-use faxes■ Scanners■ Calculators and electronic dictionaries

Main Products



03 04 05 06 07 08

400

300

200

100

0

Projected



Compact Digital CamerasIn fiscal 2005, the compact digital camera market shrank in terms of shipments and sales value, reflecting greater ownership of such products

and longer replacement cycles. Customers replacing old models accounted for the majority of purchases. Women and middle-aged people

represented a greater proportion of first-time purchases. Recently, average unit prices of new models have fallen between 10% and 15% within

a month of launch. This downward trend is expected to continue. The best-selling products in this product category are slim and lightweight with

large displays and occupy approximately 80% of the market. Products featuring blur reduction technology to minimize the effects of camera shake

and sudden subject movements have proved popular. Our estimates indicate that Canon Sales secured a 19% share of this market in terms of

total shipments in fiscal 2005.

Digital Single-Lens Reflex CamerasThe digital single-lens reflex (SLR) camera market grew by 50%, compared with the previous fiscal year. During fiscal 2005, competition intensified

following the launches of new models by each digital SLR maker. Consumer electronics makers announced agreements with camera producers

to jointly develop new digital SLRs—a move that will also exert pressure on other companies. These partnerships bring together Sony Corporation

and Konica Minolta Holdings, Inc.; Matsushita Electric Industrial Co., Ltd., and Olympus Corporation; and Samsung Techwin Co., Ltd., of the

Samsung Group and PENTAX Corporation. According to our calculations, our share of total shipments in this market was 57% in fiscal 2005.

Digital CamcordersIn fiscal 2005, the digital camcorder market underwent considerable change, characterized by shorter product cycles and increasingly diverse forms

of recording media. As a consequence, best-selling models represented less of the market. Sales of high-resolution camcorders grew as products

with resolution less than one mega pixel lost market share. In the area of high-end camcorders, makers are stepping up efforts to introduce

camcorders with hard disk drives (HDDs).

Ink-Jet Printers and Personal-use MFPsDuring the period under review, the ink-jet printer market began to grow, after recovering from its sluggish condition in fiscal 2004. Manufacturers

made considerable efforts to promote personal-use MFPs among their lineups. As a result, ink-jet printers accounted for a smaller portion of this

product category as the shift to MFPs accelerated. Reflecting this trend, MFPs represented over 50% of this market. The supplies market expanded

steadily, supported by increased photo printer sales.

Other ProductsPersonal-use Copiers

Personal-use copier shipments increased in the first half of fiscal 2005—the first year-on-year improvement in five years—but declined in the

second half, resulting in a slight decrease for the whole term.

Personal-use Faxes

Sales of personal-use faxes were level with fiscal 2004 in terms of shipments but decreased by value, owing to falling prices. This reflected a full-

scale shift toward multifunctional color equipment, as makers launched MFPs combining telephone functions and ink-jet engines.

Scanners

In fiscal 2005, the scanner market remained sluggish with shipments falling approximately 30%. Makers have increasingly sought to promote

devices with functions for converting photographs and printed documents into portable document format (PDF) files.

Calculators and Electronic Dictionaries

Sales in this product category were on a par with the previous fiscal year in terms of shipments and value. Electronic dictionaries for exam preparation

and other models containing Chinese dictionaries have dominated the electronic dictionary market.




Consumer Equipment

Compact Digital Cameras

In fiscal 2005, we strove to expand sales by launching six new models in both the IXY DIGITAL and

PowerShot series. In the IXY DIGITAL series, we implemented full-fledged advertising campaigns

to raise awareness of our products’ enhanced features and reinforce the brand. We also opened the

IXY DIGITAL Special Page web site as a new channel for communicating with our customers and

introducing interesting topics. As part of our distribution strategy, we held workshops and events to

announce launches in retail stores. In addition, we cultivated new distribution channels, including

general merchandising stores and home centers. These efforts enabled us to maintain sales at last

year’s level and secure top share of the compact digital camera market for the third consecutive year.

Digital Single-Lens Reflex Cameras

Our goal in this market was to boost sales of entry-level digital SLR cameras—a key growth area.

We therefore launched the EOS Kiss Digital N and promoted the WE NEED KISS campaign, primarily

focusing on families. In the advanced amateur category, we strove hard to encourage customers to

switch from film to digital cameras, introducing the EOS 5D in September 2005. During the fiscal

year, we endeavored to expand sales routes via large consumer electronics chains. To stimulate

demand, we organized various activities throughout Japan. These included events where visitors took

photographs and produced prints using Canon cameras; EOS Dojo training courses for store

personnel; and EOS Zemi workshops for users. Such efforts earned us an overwhelmingly large share

of the market, despite an increasingly competitive environment. Furthermore, strong sales of SLR

cameras were accompanied by a considerable improvement in sales of interchangeable lenses.

Digital Camcorders

During the period under review, we aimed to increase our market share and sales by launching eight

digital camcorders and promoting Shashin DV cameras, which realize image quality sufficient for both

still shots and video. Our lineup of DVD camcorders was enhanced by the addition of two new models,

the DC20 and DC10. We also commenced sales of the XL H1, a lightweight and affordable high-

definition (HD) camcorder for users involved in broadcasting or television/video production.

Ink-Jet Printers and Personal-use MFPs

In October 2005, we reinforced our lineup by replacing many models in the PIXUS series. To increase

sales, we launched the iP4200—a product targeted at the largest portion of the market—and two

other ink-jet printers. We also introduced four personal-use MFPs, including the flagship MP950—

a high-resolution model with a new design—and the MP500, appealing to the average user. As a

result, we achieved a solid overall performance in this area, benefiting from a substantial improvement

in MFP sales. Moreover, sales of ink cartridges, photo paper and other supplies were strong,

reflecting a greater number of ink-jet printers and personal-use MFPs in use and the growing

preference for printing photographs at home. Sales of compact photo printers rose significantly,

EOS 5D

IXY DIGITAL 700

DC20

PIXUS MP950



Consumer Equipment

owing to a drive to expand sales, which included the launch of three new SELPHY models in

September 2005. Through these efforts, we have driven the market expansion for personal-use

equipment that is capable of high-quality photo prints using ink-jet or dye-sublimation printing

technology.

Other Products

Overall sales of personal-use copiers were firm. Our personal-use scanners secured top share of the

market for the sixth consecutive year. Sales of ink films for personal-use faxes were roughly double

those in the previous fiscal year. Sales of electronic dictionaries improved steadily, reflecting efforts

to boost revenue by targeting students preparing for examinations and Chinese language learners.

As a result, in the Consumer Equipment segment, consolidated sales rose 6.4%, to ¥254,277

million, and nonconsolidated sales increased 6.4%, to ¥253,239 million.

wordtank V90


■ Lithography equipment for semiconductor manufacturers ■ Lithography equipment for LCD manufacturers■ Other semiconductor production equipment■ Broadcasting equipment

■ Network cameras■ Video recorders■ Medical equipment

Main Products



03 04 05 06 07 08

120

90

60

30

0

Projected



Lithography Equipment for Semiconductor Manufacturers

During the period under review, predictions of a dramatic slowdown in demand proved false, owing to

persistently strong domestic capital investment in semiconductor equipment. Although shipments of wafer

imaging equipment slipped slightly, high-priced products accounted for a greater proportion of the market. As

a result, the total value of such sales remained unchanged, compared with the previous fiscal year.

The market has become polarized between companies that are investing aggressively and those that are

not. This situation is likely to become more pronounced.

Lithography Equipment for LCD Manufacturers

In fiscal 2005, the market for liquid crystal display (LCD) and plasma televisions and other digital consumer

electronics continued to grow steadily. However, there is a growing disparity between the investments of

manufacturers recording high profits and those that are not.

Medical Equipment

Following revisions to the Pharmaceutical Affairs Law in April 2005, vendors seeking licenses to sell certain

medical equipment must undergo an evaluation process. Previously, these vendors only needed to apply to

the appropriate authorities before obtaining licenses. New safety regulations for medical equipment that

requires high levels of care have ensured better maintenance standards.

Broadcasting Lenses and Closed Circuit Televisions

In the broadcasting lens market, broadcasters have continued to replace older equipment with high-definition

television (HDTV) cameras as preparation for terrestrial digital broadcasting shifts into full gear.

Another significant trend in this area is the increased production of surveillance camera lenses by

manufacturers that have traditionally focused on LCD projectors and digital camera lenses.



Lithography Equipment for Semiconductor Manufacturers

In this area of our business, we strove to increase customer satisfaction levels by developing a better

support system tailored to user needs. At the same time, we made concerted efforts in our sales

activities to secure repeat orders. To cultivate business from new customers, we bolstered sales of

two new products: the FPA-5500iZa, an i-line stepper, and the FPA-6000ES6a, a krypton fluoride

(KrF) step-and-scan system.

Reflecting the above factors, we maintained top share of the Japanese market in terms of units

sold, but sales of argon fluoride (ArF) step-and-scan systems weakened.

Lithography Equipment for LCD Manufacturers

During the period under review, we sought to tap demand from LCD panel manufacturers, whose

businesses have expanded rapidly. To this end, we intensified various business activities, including

negotiations with senior executives of such companies, and stepped up marketing efforts, proposing

equipment with specifications that meet the requirements of each customer.

Other Semiconductor-related Equipment

Overall sales in this category declined, reflecting weaker demand.

Medical Equipment

Digital Radiography Systems

In fiscal 2005, we endeavored to expand sales of the CXDI series of digital radiography systems by

establishing a firm presence in the medical clinic segment of the market.

Intraocular Lenses

During the period under review, we recorded firm sales of intraocular lenses and commenced

operations with new original equipment manufacturer (OEM) partners.

Broadcasting Lenses

Our efforts in this area focused on portable HD lenses and network controllable pan/tilt/zoom

(P/T/Z) systems. These products mainly targeted private broadcasting companies acquiring

HD equipment.

Reflecting the factors above, consolidated and nonconsolidated sales in the Industrial Equipment

segment fell 10.9%, to ¥91,789 million.



FPA-6000ES6a

HJ22ex7.6B

CXDI-50G


CORPORATE GOVERNANCE

Board of Directors

We seek to promote swift, streamlined decision making through our 17-member Board of Directors. There are no outside directors and each

director’s term is limited to one year. Under the guidance of the Board of Directors, we are developing a management system that will enable prompt

responses to changes in the operating environment. We decide important matters after vigorous discussion at meetings of the Board of Directors,

usually held monthly, and meetings of the Management Committee, attended by Canon Sales directors and the CEOs of main subsidiaries.

Board of Corporate Auditors

The Board of Corporate Auditors designates responsibilities among auditors and sets auditing policy. The four corporate auditors, including three

outside corporate auditors, conduct thorough audits in line with this policy. The corporate auditors participate in Board of Director meetings, receive

business reports from directors and other senior management, examine documents relating to resolutions and other important matters, and monitor

the operations and financial condition of the Group.

Internal Controls

On March 1, 2004, Canon Inc.—the New York Stock Exchange (NYSE)-listed company at the center of the global Canon Group—established

an Internal Controls Evaluation Project. This step was taken in response to the Sarbanes–Oxley Act, a U.S. law designed to improve corporate

governance. During fiscal 2004, as the Japan-based marketing arm of the Canon Group, we completed our own version of the Internal Controls

Evaluation Project, applying the same standards. On January 1, 2005, we established the Internal Controls Evaluation Committee, chaired by the

President and CEO, and appointed internal controls officers in each division of Canon Sales and the main Group companies. We plan to continue

implementing the internal controls system throughout the whole Group.

Annual General Meeting for Shareholders

Appointment/Dismissal Appointment/Dismissal Appointment/Dismissal

17 Directors

Board of Directors

President and CEO

Internal AuditorsOffice

Internal Audits

Group Companies

Staff Managers

4 Corporate AuditorsAudits Cooperation

Board of Corporate Auditors

Management Committee

Corporate Ethics and Compliance Committee

Disclosure Committee

Internal Controls Evaluation Committee

Information Security Committee

Aud

iting

Com

pany

Law

yers

/Li

cens

ed T

ax A

ccou

ntan

ts

Auditing ofAccounts

Advice

(As of March 29, 2006)



C O N T E N T S

Six-Year Consolidated Financial Summary .......................................... 24

Financial Review ................................................................................... 25

Consolidated Balance Sheets .............................................................. 26

Consolidated Statements of Income .................................................... 28

Consolidated Statements of Stockholders’ Equity .............................. 29

Consolidated Statements of Cash Flows ............................................. 30

Notes to Consolidated Financial Statements ....................................... 31

Report of Independent Auditors ........................................................... 42

FINANCIAL SECTION


SIX-YEAR CONSOLIDATED FINANCIAL SUMMARYCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31

Thousands ofMillions of yen U.S. dollars (Note 1)

2005 2004 2003 2002 2001 2000 2005

For the year:Net sales .............................. ¥821,948 ¥815,511 ¥757,033 ¥695,585 ¥786,828 ¥794,917 $6,965,661Cost of sales......................... 551,165 547,011 507,491 467,044 542,732 541,199 4,670,890Gross profit ........................... 270,783 268,500 249,542 228,541 244,096 253,718 2,294,771Selling, general and administrative expenses ..... 241,060 239,226 232,555 217,656 224,699 233,206 2,042,881Operating income ................. 29,723 29,274 16,987 10,885 19,397 20,512 251,890Income (loss) before income taxes and minority interests ................ 27,086 20,186 20,438 6,873 (63,280) 15,313 229,542Income taxes (credit) ............ 11,366 7,666 13,219 3,361 (28,407) 7,966 96,322Net income (loss) .................. 15,358 12,364 7,043 3,436 (32,831) 6,460 130,153

At year-end:Total assets .......................... 513,335 482,337 495,396 495,298 514,698 518,958 4,350,297Total stockholders’ equity ..... 247,244 234,158 225,317 220,797 220,418 256,959 2,095,288

Yen U.S. dollars (Note 1)

Per share of common stock:Net income (loss) (Note 2) .... ¥)(101.78 ¥)(081.78 ¥0,046.24 ¥)(222.96 ¥,(217.39) ¥0,042.77 $,(0.86.Cash dividends (Notes 3 and 4) 28.00 22.00 18.00 18.00 18.00 18.00 0.24.Stockholders’ equity ............. 1,650.52 1,562.23 1,496.74 1,464.43 1,459.60 1,701.44 13.99.

Notes: 1. The accompanying financial figures have been presented in U.S. dollars by translating all Japanese yen amounts at ¥118 to US$1,the prevailing exchange rate as of December 31, 2005.

2. Net income (loss) per share is based on the weighted average number of shares of common stock outstanding during therespective fiscal years.

3. Cash dividends per share are the amounts applicable to the respective fiscal years, including dividends to be paid after the end ofthe year.

4. Year-end cash dividends for the year ended December 31, 2005, include a ¥2.00 bonus dividend reflecting record-highconsolidated net sales, operating income and net income.


FINANCIAL REVIEW

Results of OperationsSalesConsolidated net sales edged up 0.8% in fiscal 2005,ended December 31, 2005, to ¥821.9 billion, owing tostronger sales of such products as color MFPs, digital SLRcameras and maintenance services, which countered adecline in sales of semiconductor production equipment.

Business Solutions sales increased 0.5%, to ¥475.9billion, reflecting steady sales of LBP toner cartridges andimproved sales of color MFP maintenance services.Consumer Equipment sales amounted to ¥254.2 billion,up 6.4%, reflecting the performance of compact digitalcameras, which achieved top market share for the thirdconsecutive year, and stronger sales of digital SLR cameras.Industrial Equipment sales declined 10.9%, to ¥91.8billion, as a consequence of shrinking demand, despiteimprovements to the customer support system and asubstantial volume of orders from new clients.

EarningsOperating income once again reached record levels,advancing 1.5%, to ¥29.7 billion. This achievement wasattributable to higher gross profit due to stronger net sales,which countered rising advertising and sales promotionexpenses and higher performance-based remuneration—aconsequence of better business results.

Net income also achieved an all-time high of ¥15.4billion, up 24.2%, reflecting a significant reduction in losson disposal and devaluation of inventories, and the elimi-nation of two other negative factors: expenses related toredemption of bonds and loss on impairment of fixedassets.

Net income per share was ¥101.78, compared with¥81.78 in fiscal 2004. Cash dividends per share applicableto the year were ¥28.00, up ¥6.00.

Financial PositionTotal assets of Canon Sales as of December 31, 2005,grew 6.4%, to ¥513.3 billion. Significant factors in this totalwere an increase in cash and cash equivalents, a gain innotes and accounts receivable and a rise in investments insecurities due to a buoyant stock market.

The sum of total current liabilities and total long-termliabilities rose 6.9%, to ¥262.4 billion, primarily reflectinghigher notes and accounts payable and greater accruedincome taxes.

Reflecting the above, total stockholders’ equityamounted to ¥247.2 billion, up 5.6%. Return on equity(ROE) was 6.4%, compared with 5.4% in fiscal 2004.Stockholders’ equity ratio was 48.2%, down from 48.5%the previous fiscal year. Stockholders’ equity per sharereached ¥1,650.52, compared with ¥1,562.23 a yearearlier.

Cash FlowsCash and cash equivalents at end of year were ¥115.5billion, ¥16.7 billion higher than at the beginning of theperiod, owing mainly to income before income taxes andminority interests of ¥27.1 billion.

Net cash provided by operating activities totaled ¥37.0billion, compared with ¥22.1 billion in fiscal 2004. Impor-tant items in this result included income before incometaxes and minority interests of ¥27.1 billion; depreciationand amortization of ¥11.1 billion; increase in notes andaccounts payable of ¥9.7 billion; and ¥10.7 billion inincome taxes paid.

Net cash used in investing activities amounted to ¥17.9billion, compared with ¥8.0 billion in the previous fiscalyear. Key contributing factors were payments for pur-chases of property and equipment of ¥10.3 billion andpayments for purchases of investments in securities of¥5.4 billion.

Net cash used in financing activities totaled ¥4.3 billion,compared with ¥39.0 billion a year earlier, primarilyreflecting ¥4.1 billion in dividends paid.

-300

0

300

600

900

-5

0

1

2

3

00 01 02 03 04 05

Return on Sales (ROS)

0

100

200

300

400

00 01 02 03 04 05 00 01 02 03 04 05

Working Capital

-100

0

100

200

300

Total Stockholders’ Equityand Return on Equity (ROE)

0.0

0.6

1.2

1.8

2.4

-15.0

0.0

2.5

5.0

7.5(%) (%)(Times)

Net SalesROS

Total Stockholders’ EquityROE

Total Current AssetsTotal Current LiabilitiesCurrent Ratio

(Billions of yen) (Billions of yen) (Billions of yen)


CONSOLIDATED BALANCE SHEETSCanon Sales Co., Inc. and Consolidated SubsidiariesDecember 31, 2005 and 2004


ASSETS 2005 2004 2005

Current assets:Cash and cash equivalents (Note 3) ....................... ¥115,504 ¥098,844 $1,978,847Notes and accounts receivable .............................. 170,822 166,360 1,447,644Inventories (Note 4) ................................................ 56,667 56,887 480,229Deferred tax assets (Note 7) .................................. 7,302 5,731 61,882Other current assets .............................................. 12,059 7,700 102,195Allowance for doubtful receivables ......................... (255) (298) (2,161)

Total current assets .......................................... 362,099 335,224 3,068,636

Property and equipment (Note 8):Land ...................................................................... 40,864 40,884 346,305Buildings and structures ........................................ 72,235 70,817 612,161Machinery .............................................................. 4 4 34Vehicles ................................................................. 16 27 135Furniture and fixtures ............................................. 19,276 19,156 163,356Rental assets ......................................................... 17,373 15,311 147,229Construction in progress ........................................ — 542 —

Total ................................................................. 149,768 146,741 1,269,220Accumulated depreciation ..................................... (47,391) (43,815) (401,618)

Net property and equipment ............................ 102,377 102,926 867,602

Intangible assets:Software ................................................................ 4,517 5,009 38,280Utilization rights...................................................... 365 360 3,093Other intangible assets .......................................... 16 30 135

Total intangible assets ...................................... 4,898 5,399 41,508

Investments and other assets:Investments in securities (Notes 3 and 9) ............... 12,248 4,348 103,797Long-term loans receivable .................................... 13 15 110Lease deposits ...................................................... 8,714 9,286 73,847Deferred tax assets (Note 7) .................................. 20,787 23,073 176,161Other investments .................................................. 3,306 3,402 28,017Allowance for doubtful receivables ......................... (1,107) (1,336) (9,381)

Total investments and other assets .................. 43,961 38,788 372,551

Total assets ...................................................... ¥513,335 ¥482,337 $4,350,297

See accompanying notes to consolidated financial statements.



LIABILITIES AND STOCKHOLDERS’ EQUITY 2005 2004 2005

Current liabilities:Notes and accounts payable ................................. ¥151,936 ¥142,186 $1,287,593Accrued income taxes ........................................... 7,592 5,343 64,339Accrued consumption tax payable ......................... 2,822 3,872 23,915Accrued expenses ................................................. 30,401 29,721 257,636Reserves ................................................................ 4,476 4,676 37,932Other current liabilities............................................ 15,074 10,014 127,746

Total current liabilities ....................................... 212,301 195,812 1,799,161

Long-term liabilities:Deferred tax liabilities (Note 7) ................................ 188 184 1,593Liability for employees’ retirement benefits (Note 5) .. 45,520 44,741 385,763Liability for directors’ and corporate auditors’ retirement benefits (Note 2) .................................. 629 546 5,331Consolidation differences ....................................... 1,391 1,928 11,788Other long-term liabilities ....................................... 2,389 2,242 20,246

Total long-term liabilities ................................... 50,117 49,641 424,721

Minority interests ................................................... 3,673 2,726 31,127

Contingent liabilities (Note 10)

Stockholders’ equity (Notes 6 and 11):Common stock:

Authorized—299,500,000 shares;Issued—150,523,896 shares in 2005 and 2004 ... 73,303 73,303 621,212

Capital surplus ....................................................... 82,525 82,522 699,364Retained earnings .................................................. 90,324 78,599 765,458Net unrealized gain on available-for-sale securities ............................................................. 2,207 678 18,703Foreign currency translation adjustments ............... 8 (24) 68Treasury stock ....................................................... (1,123) (920) (9,517)

Total stockholders’ equity ................................ 247,244 234,158 2,095,288

Total liabilities and stockholders’ equity ........... ¥513,335 ¥482,337 $4,350,297


CONSOLIDATED STATEMENTS OF INCOMECanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2005 and 2004


2005 2004 2005

Net sales ................................................................. ¥821,948 ¥815,511 $6,965,661Cost of sales .......................................................... 551,165 547,011 4,670,890

Gross profit ............................................................ 270,783 268,500 2,294,771Selling, general and administrative expenses .... 241,060 239,226 2,042,881

Operating income .................................................. 29,723 29,274 251,890Other income (expenses):

Interest and dividend income ................................. 91 96 771Interest expense .................................................... (21) (468) (178)Loss on disposal and devaluation of inventories .... (2,437) (6,262) (20,653)Loss on impairment of fixed assets ........................ — (866) —Expenses related to redemption of bonds ............. — (1,660) —Gain on sales of investments in securities .............. 1 23 8Loss on sales and disposal of property and equipment ........................................................... (471) (1,267) (3,991)Expenses related to restructuring of consolidated subsidiaries .......................................................... — (100) —Expenses related to relocation of headquarters in affiliated companies .......................................... (309) — (2,619)Special depreciation of fixed assets ....................... (974) — (8,254)Other—net ............................................................. 1,483 1,416 12,568

(2,637) (9,088) (22,348)

Income before income taxes and minority interests .................................................. 27,086 20,186 229,542

Income taxes (Note 7):Current .................................................................. 11,683 7,919 99,008Deferred ................................................................. (317) (253) (2,686)

11,366 7,666 96,322Income before minority interests ............................ 15,720 12,520 133,220

Minority interests ....................................................... 362 156 3,067

Net income ............................................................... ¥)(15,358 ¥012,364 $0(130,153

Yen U.S. dollars (Note 1)

Per share of common stock (Note 2):Net income ............................................................ ¥101.78. ¥81.78 $0.86.Cash dividends applicable to the year.................... 28.00) 22.00 0.24.



Millions of yen

Net unrealized ForeignNumber of gain on currencyshares of Common Capital Retained available-for-sale translation Treasury

common stock stock surplus earnings securities adjustments stock

Balance at December 31, 2003 ........... 150,523,896 ¥73,303 ¥82,484 ¥69,289 ¥(290 ¥0(18). ¥0(31)Net income ........................................... 12,364Cash dividends ..................................... (3,005)Bonuses to directors ............................. (75)Adjustment due to increase in consolidated subsidiary ...................... 26Gain on disposal of treasury stock ........ 38Net unrealized gain on available-for-sale securities ................. 388Foreign currency translation adjustments ... (6)Employee welfare fund ............................ (0)Increase in treasury stock—net ............. (889)

Balance at December 31, 2004 ........... 150,523,896 ¥73,303 ¥82,522 ¥78,599 ¥0,678 ¥0(24) ¥0,(920)Net income ........................................... 15,358Cash dividends ..................................... (3,595)Bonuses to directors ............................. (90)Adjustment due to increase in consolidated subsidiary ...................... 53Gain on disposal of treasury stock ........ 3Net unrealized gain on available-for-sale securities ................. 1,529Foreign currency translation adjustments ... 32Employee welfare fund ............................ (1)Increase in treasury stock—net ........... (203)

Balance at December 31, 2005 ........... 150,523,896 ¥73,303 ¥82,525 ¥90,324 ¥2,207 ¥0(08 ¥(1,123)

Thousands of U.S. dollars (Note 1)

ForeignNet unrealized currency

Common Capital Retained gain on available- translation Treasurystock surplus earnings for-sale securities adjustments stock

Balance at December 31, 2004 .................................. $621,212 $699,339 $666,093 $05,746 $(203) $(7,797)Net income ................................................................. 130,153Cash dividends ........................................................... (30,466)Bonuses to directors ................................................... (763)Adjustment due to increase in consolidated subsidiary ............................................ 449Gain on disposal of treasury stock .............................. 25Net unrealized gain on available-for-sale securities ...... 12,957Foreign currency translation adjustments .................... 271Employee welfare fund ................................................ (8)Increase in treasury stock—net ................................... (1,720)

Balance at December 31, 2005 .................................. $621,212 $699,364 $765,458 $18,703 $(068 $(9,517)


CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2005 and 2004


CONSOLIDATED STATEMENTS OF CASH FLOWSCanon Sales Co., Inc. and Consolidated SubsidiariesYears ended December 31, 2005 and 2004


2005 2004 2005

Cash flows from operating activitiesIncome before income taxes and minority interests ......................... ¥027,086 ¥020,186 $229,542Adjustments for:

Depreciation and amortization ..................................................... 11,084 8,699 93,932Loss on impairment of fixed assets .............................................. — 866 —Amortization of consolidation differences ..................................... (762) (674) (6,458)Decrease in allowance for doubtful receivables ............................ (271) (278) (2,296)Provision for employees’ retirement benefits ................................ 835 5,447 7,076Provision for directors’ and corporate auditors’ retirement benefits ...................................................................................... 83 73 703Interest and dividend income ....................................................... (91) (96) (771)Interest expense .......................................................................... 21 2,106 178Loss on sales and disposal of property and equipment ................ 538 1,260 4,559Gain on sales of investments in securities .................................... (1) (23) (8)Increase in notes and accounts receivable ................................... (4,673) (22,647) (39,602)Decrease in inventories ................................................................ 815 8,519 6,907Increase in notes and accounts payable ...................................... 9,739 2,204 82,534Other ........................................................................................... 3,177 5,440 26,924

Cash generated from operations ..................................................... 47,580 31,082 403,220Interest paid ................................................................................. (21) (2,259) (178)Interest and dividends received .................................................... 91 94 771Income taxes paid ....................................................................... (10,665) (6,864) (90,381)Net cash provided by operating activities ..................................... 36,985 22,053 313,432

Cash flows from investing activitiesProceeds from sales of marketable securities .................................. — 3 —Payments for purchases of property and equipment ....................... (10,255) (7,685) (86,907)Payments for purchases of intangible assets ................................... (1,330) (1,190) (11,271)Payments for purchases of investments in securities ....................... (5,437) (232) (46,076)Proceeds from sales of investments in securities ............................. 2 96 17Proceeds from sales of investments in subsidiary accompanying changes of scope of consolidation ........................ 390 — 3,305Increase in other investments .......................................................... (2,000) — (16,949)Decrease in time deposits ............................................................... — 5 —Other .............................................................................................. 743 1,040 6,296

Net cash used in investing activities ............................................. (17,887) (7,963) (151,585)Cash flows from financing activities

Payments for redemption of bonds ................................................. — (35,000) —Payments for purchases of treasury stock ....................................... (217) (1,109) (1,839)Dividends paid ................................................................................ (4,109) (3,064) (34,822)Other .............................................................................................. 15 128 127

Net cash used in financing activities ............................................. (4,311) (39,045) (36,534)Effect of exchange rate changes on cash and cash equivalents ......... 52 (2) 441Net increase (decrease) in cash and cash equivalents ........................ 14,839 (24,957) 125,754Cash and cash equivalents at beginning of year ................................. 98,844 123,815 837,661Cash and cash equivalents of newly consolidated subsidiary at beginning of year .......................................................................... 101 46 856Increase in cash and cash equivalents resulting from merger of consolidated subsidiary .................................................... 1,720 — 14,576Decrease in cash and cash equivalents resulting from exclusion of consolidated subsidiary .................................................................... — (60) —Cash and cash equivalents at end of year .......................................... ¥115,504 ¥098,844 $978,847



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements of Canon Sales Co., Inc. (the “Company”) and its consoli-dated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are differ-ent in certain respects as to application and disclosure requirements of International Financial Reporting Standards,and are compiled from the consolidated financial statements prepared by the Company as required by theSecurities and Exchange Law of Japan.

The U.S. dollar amounts are included solely for convenience of the reader and are stated, as a matter ofarithmetical computation only, at the exchange rate of ¥118=US$1, being the rate prevailing at December 31, 2005.These translations should not be construed as representations that the Japanese yen amounts actually represent,or have been or could be converted into, U.S. dollars at that or any other rate.

2. Summary of Significant Accounting Policies

(a) Principles of ConsolidationThe accompanying consolidated financial statements as of December 31, 2005, include the accounts of theCompany and all of its 16 (17 in 2004) subsidiaries. Investments in nonconsolidated subsidiaries and affiliatedcompanies are accounted for by the equity method.

All intercompany accounts and transactions are eliminated in consolidation.The excess of acquisition costs over net assets acquired is amortized generally over five years.

(b) Cash EquivalentsFor purposes of the consolidated statements of cash flows, the Company and its consolidated subsidiariesconsider deposits with banks less than three months due to be cash equivalents.

(c) Investments in SecuritiesThe held-to-maturity debt securities are stated at amortized cost. Available-for-sale marketable securities are statedat fair market value, with unrealized gain or loss, net of the applicable taxes, reported as a separate component ofstockholders’ equity. Available-for-sale marketable securities whose fair value is not readily determinable are statedat cost determined by the moving-average method.

(d) InventoriesInventories are valued at cost. Cost is determined mainly by the moving-average method.

(e) Property and EquipmentProperty and equipment are stated at cost. Depreciation is computed by the declining-balance method for propertyand equipment, except for buildings purchased after April 1, 1998 (exclusive of furniture and fixtures), all buildingsand structures of the Company’s Makuhari office and all property and equipment of certain subsidiaries, and rentalassets in the Business Solutions segment, which are depreciated by the straight-line method, at rates based on theestimated useful lives of the assets. The useful lives are as follows: buildings, mainly 50 years; furniture and fixtures,mainly five years; rental assets, mainly three years. Normal repairs and maintenance, including minor renewals andimprovements, are charged to income as incurred.

Until December 31, 2004, the Company applied the declining-balance method of depreciation for rental assets inthe Business Solutions segment. In line with the Corporate Tax Law, the useful life of such assets was set at fiveyears and their residual value at 5% of the original cost. Since the start of the period under review, the Companyadopted the straight-line method of depreciation, with the economic life of rental assets set at three years and theirresidual value at 1% of the original cost.

This change, which coincides with the introduction of a new fixed asset management system, corrects discrep-ancies between the average number of years that rental assets are operational and previous estimates of theiruseful lives. The adoption of a new depreciation method with residual value set at 1% will enable the Company toadjust for various revenues and expenses and more accurately reflect the income and losses of the BusinessSolutions segment during each fiscal period.


As a result, in the year ended December 31, 2005, amortization and depreciation, which is included in cost ofsales, increased by ¥425 million; special depreciation of fixed assets—included in other expenses—amounted to¥974 million; and loss on sales and disposal of property and equipment decreased by ¥796 million. A ¥543 milliondecrease in loss on sales and disposal of rental assets was included in the decrease in loss on sales and disposalof property and equipment.

Reflecting these factors, gross profit and operating income were both ¥425 million lower in the year endedDecember 31, 2005, than they would have been under the previous accounting method. In addition, income beforeincome taxes and minority interests was ¥856 million lower.

(f) Accounting for Impairment of Fixed AssetsOn August 9, 2002, the Business Accounting Council issued “Statement of Opinion: Accounting for Impairment ofFixed Assets” and on October 31, 2003, the Accounting Standards Board (ASB) of Japan issued ASB GuidanceNo. 6, “Guidance for Accounting Standard for Impairment of Fixed Assets.” Since early adoption of the newaccounting standards and guidelines is permitted for years ending on or after March 31, 2004, the Company hasapplied them to its consolidated financial statements for the year ended December 31, 2004. As a consequence,income before income taxes and minority interests was impacted by an impairment loss of ¥866 million for the yearended December 31, 2004. In line with these accounting standards and guidelines, the Company and its consoli-dated subsidiaries did not record a loss on impairment of fixed assets for the year ended December 31, 2005. Theaccumulated losses on impairment of fixed assets are deducted directly from each asset’s acquisition cost inaccordance with the new accounting standards and guidelines.

(g) Employee Retirement and Severance BenefitsThe Company and its consolidated subsidiaries have defined benefit retirement plans. These include corporatepension plans, tax-qualified retirement pension plans and lump-sum severance payments.

In the year ended December 31, 2005, one domestic consolidated subsidiary established a retirement benefittrust. A certain overseas consolidated subsidiary already has a defined contribution pension plan. One consolidatedsubsidiary adopted a prepaid pension system.

(h) LeasesNoncancelable lease transactions are accounted for as operating leases regardless of whether such leases areclassified as operating leases or capital leases, except that lease agreements which stipulate the transfer ofownership of the leased property to the lessee are accounted for as capital leases.

(i) Allowance for Doubtful ReceivablesAn allowance for doubtful receivables is provided in the amount required to cover possible losses on collection. It isdetermined by adding individually estimated uncollectible amounts for specific items to an amount based on theactual rate of uncollected receivables of the Company in prior years.

(j) Appropriation of Retained EarningsUnder the Japanese Commercial Code (the “Code”) and the Articles of Incorporation of the Company, the plan forappropriation of retained earnings (primarily for cash dividend payments) proposed by the Board of Directors mustbe approved at the stockholders’ meeting, which is held within three months after the end of each fiscal year. Theappropriation of retained earnings reflected in the accompanying consolidated financial statements represents theresults of such appropriation applicable to the immediately preceding fiscal year, which were approved at the stock-holders’ meeting and disposed of during that year. Dividends are paid to stockholders of record at the end of thefiscal year.

As is customary practice in Japan, payments of bonuses to directors, which constitute a part of the appropria-tions cited above, are made out of retained earnings instead of being charged to income for the fiscal year.

(k) Income TaxesDeferred tax assets and liabilities are recorded to reflect the impact of temporary differences between assets andliabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Thesedeferred taxes are measured by applying the normal statutory rate of income taxes to the temporary differences.


(l) Translation of Foreign Currency AccountsAll short-term and long-term monetary receivables and payables denominated in foreign currencies are translatedinto Japanese yen at the current exchange rates at the balance sheet date. The foreign exchange gains and lossesfrom translation are recognized in the consolidated statements of income.

(m) Foreign Currency Financial StatementsThe balance sheet accounts and revenue and expense accounts of the foreign subsidiaries are translated intoJapanese yen at the current exchange rates except for stockholders’ equity, which is translated at the historicalexchange rate.

(n) Per Share Amount of Common StockNet income per share is based on the weighted average number of shares of common stock outstanding duringthe respective fiscal years.

Effective January 1, 2003, the Company has adopted the new accounting standard for net income per shareissued by the ASB of Japan. Under the new standards, net income per share is calculated using net income avail-able to holders of common shares—which is computed more precisely than under previous standards—andweighted average number of shares outstanding for the period.

Cash dividends per share presented in the accompanying consolidated statements of income are dividendsapplicable to the respective fiscal years, including dividends to be paid after the end of the respective fiscal years.

(o) Provision for Directors’ and Corporate Auditors’ Retirement BenefitsThe Company and its consolidated subsidiaries pay lump-sum retirement benefits to directors, the amount of whichis determined based upon the Company’s and its consolidated subsidiaries’ internal regulations. In accordance withthe Company’s and its consolidated subsidiaries’ internal regulations a reserve is provided for such benefits at theamount that would be required if all directors and corporate auditors retired at the end of the fiscal year.

(p) Change of Recording Periods for Maintenance Services SalesUntil December 31, 2004, in the case of maintenance services provided under contracts lasting more than oneyear, the Company recorded sales and cost of sales on a yearly basis, utilizing year-end estimates. In the yearended December 31, 2005, the Company began to record such items on a monthly basis and took other steps toimprove the accuracy of estimates. This decision was taken in light of the growing need to reflect diversified mainte-nance services sales due to the expansion of operations in the Business Solutions segment. The change reducednet sales by ¥174 million and raised cost of sales by ¥556 million. As a consequence, gross profit, operatingincome and income before income taxes and minority interests were ¥730 million less than they would have beenotherwise.

3. Investments in Securities

Investments in securities held by the Company and its consolidated subsidiaries as of December 31, 2005 and2004, were classified and included in the following accounts:


2005 2004 2005

Securities classified as:Available-for-sale;

Investments in securities .............................................. ¥11,922 ¥3,968 $101,034Held-to-maturity;

Cash and cash equivalents .......................................... 12,498 — 105,915Investments in securities .............................................. 227 231 1,924

12,725 231 107,839

¥24,647 ¥4,199 $208,873


The carrying amounts and aggregate fair values of investments in securities at December 31, 2005 and 2004, wereas follows:

Millions of yen

2005

Book value Unrealized gains Unrealized losses Fair value

Securities classified as:Held-to-maturity;

Government bonds .................................. ¥227 ¥0 ¥—. ¥227

Millions of yen

2005

Cost Unrealized gains Unrealized losses Fair value


Equity securities ....................................... ¥2,891 ¥3,727 ¥(47) ¥6,571Other ....................................................... 3,001 1 (1) 3,001

Total ......................................................... ¥5,892 ¥3,728 ¥(48) ¥9,572

Millions of yen

2004



Government bonds .................................. ¥231 ¥0 ¥—. ¥231

Millions of yen

2004



Equity securities ....................................... ¥1,886 ¥1,277 ¥(147) ¥3,016Other ....................................................... 500 1 — 501

Total ......................................................... ¥2,386 ¥1,278 ¥(147) ¥3,517


2005



Government bonds .................................. $1,924 $0 $—. $1,924


2005



Equity securities ....................................... $24,500 $31,585 $(398) $55,687Other ....................................................... 25,432 8 (8) 25,432

Total ......................................................... $49,932 $31,593 $(406) $81,119


Available-for-sale and held-to-maturity securities whose fair value is not readily determinable as of December 31,2005 and 2004, were as follows:

Carrying amount


2005 2004 2005

Available-for-sale;Equity securities .............................................................. ¥2,350 ¥451 $19,915

Held-to-maturity;Debt securities ................................................................. 12,498 — 105,915

¥14,848 ¥451 $125,830

4. Inventories

Inventories at December 31, 2005 and 2004, were composed of the following:Thousands of

Millions of yen U.S. dollars (Note 1)

2005 2004 2005

Merchandise ........................................................................ ¥49,687 ¥50,143 $421,076Service parts ........................................................................ 3,681 3,912 31,195Work in progress .................................................................. 2,590 2,080 21,949Supplies ............................................................................... 681 579 5,771Other ................................................................................... 28 173 238

¥56,667 ¥56,887 $480,229

5. Employee Retirement and Severance Benefits

The Company and its domestic consolidated subsidiaries have defined benefit retirement plans. These includecorporate pension plans, tax-qualified retirement pension plans and lump-sum severance payments.

The liability for employee retirement benefits as of December 31, 2005 and 2004, consisted of the following:Thousands of


2005 2004 2005

Projected benefit obligation .................................................. ¥144,847 ¥136,756 $1,227,517Fair value of plan assets ....................................................... (110,512) (93,255) (936,542)Unrecognized transitional obligation ..................................... — (43) —Unrecognized actuarial loss .................................................. (8) (18,692) (68)Unrecognized prior service cost ........................................... 11,059 19,872 93,720Prepaid pension cost ........................................................... 134 103 1,136

Net liability ........................................................................ ¥045,520 ¥044,741 $0,385,763


The components of net periodic benefit costs for the years ended December 31, 2005 and 2004, were as follows:Thousands of


2005 2004 2005

Service cost ......................................................................... ¥(6,989 ¥(7,157 $(59,229Interest cost ......................................................................... 3,387 3,260 28,703Expected return on plan assets ............................................ (3,264) (3,010) (27,661)Amortization of transitional obligation ................................... 43 43 365Amortization of prior service cost ......................................... (1,757) (1,535) (14,890)Amortization of actuarial loss ................................................ 1,544 1,436 13,085Other ................................................................................... 7 2 59

Net periodic benefit costs ................................................ ¥(6,949 ¥(7,353 $(58,890

Assumptions used for the years ended December 31, 2005 and 2004, were principally as follows:

2005 2004

Discount rate ....................................................... 2.5% 2.5%Expected rate of return on plan assets ................ 1.0%~4.0% 1.5%~4.0%Amortization period of prior service cost .............. 10~17 years 10~18 yearsRecognition period of actuarial gain or loss ......... 10~17 years 10~18 yearsAmortization period of transitional obligation........ 5 years for certain 5 years for certain

consolidated subsidiaries consolidated subsidiaries

6. Stockholders’ Equity

Japanese companies are subject to the Code to which certain amendments became effective as of October 1,2001.

The Code was revised whereby common stock par value was eliminated, resulting in all shares being recordedwith no par value and at least 50% of the issue price of new shares being recorded as common stock and theremaining net proceeds as additional paid-in capital, which is included in capital surplus. The Code permitsJapanese companies, upon approval by their Board of Directors, to issue shares to existing stockholders withoutconsideration as a stock split. Such issuance of shares generally does not give rise to changes within thestockholders’ accounts.

The revised Code also provides that an amount equal to at least 10% of the aggregate amount of cash dividendsand certain other appropriations of retained earnings associated with cash outlays applicable to each fiscal periodshall be appropriated as a legal reserve (a component of retained earnings) until such reserve and additional paid-incapital equals 25% of common stock. The amount of total additional paid-in capital and legal reserve that exceeds25% of common stock may be available for dividends by resolution of the stockholders. In addition, the Codepermits the transfer of a portion of additional paid-in capital and legal reserve to common stock by resolution ofthe Board of Directors.

The revised Code eliminated restrictions on the repurchase and use of treasury stock, allowing Japanese compa-nies to repurchase treasury stock by a resolution of the stockholders at the general stockholders’ meeting anddispose of such treasury stock by resolution of the Board of Directors, commencing April 1, 2002. The repurchasedamount of treasury stock cannot exceed the amount available for future dividends plus the amount of commonstock, additional paid-in capital or legal reserve to be reduced in the case where such reduction was resolved atthe general stockholders’ meeting.

Dividends are approved by the stockholders at a meeting held subsequent to the fiscal year to which the divi-dends are applicable. Semiannual interim dividends may also be paid upon resolution of the Board of Directors,subject to certain limitations imposed by the Code.


7. Income Taxes

The normal statutory rate of income taxes was approximately 40.0% and 42.0% for the years ended December 31,2005 and 2004, respectively.

For the year ended December 31, 2005, pro forma standard taxation was introduced, which reduced theincome-based tax rate. As a result, the statutory tax rate for the year ended December 31, 2005, was approxi-mately 40.0%.

In accordance with the “Accounting Procedures for the Reporting of the Pro Forma Standard Taxation Compo-nents of Local Enterprise Taxes on the Income Statement” (12th Report on Practical Implementation, AccountingStandards Board of Japan, February 13, 2004), the Company paid value-added taxes and taxes on property, whichincreased cost of sales by ¥52 million and selling, general and administrative expenses by ¥891 million. As a result,gross profit was ¥52 million less than it would have been otherwise, and operating income and income beforeincome taxes and minority interests were both ¥943 million lower.

The effective tax rates for the years ended December 31, 2004, differed from the normal tax rate following theadoption of tax-effect accounting for the following reasons. In the year ended December 31, 2005, the differencebetween the normal tax rate (40.0%) and the effective tax rate following the adoption of tax-effect accounting(42.0%) was two percentage points. Since this difference fell within the range of 0%–5% of the normal tax rate, abreakdown of related items has been omitted.

2005 2004

Normal tax rate ............................................................................................................................... 42.0% 42.0%Entertainment and other expenses permanently not deductible for tax purposes ........................ 1.8Per-capita levy for inhabitants tax ................................................................................................ 1.6Tax effect of loss carryforwards ................................................................................................... (0.1)Gain on amortization of consolidation differences ........................................................................ (1.4)Valuation allowance ..................................................................................................................... (4.8)Effect of pro forma standard taxation .......................................................................................... 1.3Reduction due to IT-related tax incentives ................................................................................... (0.5)Other .......................................................................................................................................... (1.9)

Effective tax rates following the adoption of tax-effect accounting ................................................... 38.0%

The effects of significant temporary differences, which resulted in deferred tax assets and liabilities as ofDecember 31, 2005 and 2004, were as follows:


2005 2004 2005

Deferred tax assets:Loss on disposal and devaluation of inventories ............... ¥01,630 ¥01,034 $005,339Accrued business tax and business office tax .................. 876 601 7,424Accrued bonuses to employees ....................................... 1,302 1,274 11,034Software depreciation ...................................................... 1,746 1,877 14,797Loss on impairment of fixed assets .................................. 355 364 3,008Excess depreciation of fixed assets .................................. 451 50 3,822Allowance for doubtful receivables ................................... 243 353 2,059Liability for employee retirement benefits .......................... 18,663 20,262 158,161Other ............................................................................... 5,872 4,101 49,763

Gross deferred tax assets ............................................ 30,138 29,916 255,407Less: valuation allowance ............................................. (355) (366) (3,008)

Total deferred tax assets .................................................. ¥29,783 ¥29,550 $252,399


Deferred tax liabilities:Deferred capital gain ........................................................ ¥02,257 ¥00,265 $022,178Special depreciation reserve ............................................. 76 123 644Other ............................................................................... 1,549 542 13,127

Total deferred tax liabilities ................................................ 1,882 930 15,949

Net deferred tax assets ........................................................ ¥27,901 ¥28,620 $236,450

8. Leases

(a) Finance LeasesLease payments for finance leases excluding subleases, except for the lease agreements which stipulate thetransfer of ownership of the leased property to the Company and its subsidiaries, were ¥2,961 million ($25,093thousand) and ¥2,966 million for the years ended December 31, 2005 and 2004, respectively.

(For Lessee)Future minimum lease payments subsequent to December 31, 2005 and 2004, were summarized as follows:


2005 2004 2005

Future minimum lease payments:Within one year ................................................................ ¥1,396 ¥2,977 $11,830Thereafter ........................................................................ 1,477 2,037 12,517

¥2,873 ¥5,014 $24,347

Future minimum lease payments included the following subleases:Thousands of


2005 2004 2005

Future minimum lease payments:Within one year ................................................................ ¥133 ¥173 $1,127Thereafter ........................................................................ 156 188 1,322

¥289 ¥361 $2,449

Acquisition cost, accumulated depreciation and net book value of leased property as of December 31, 2005 and2004, excluding subleases were summarized as follows:


2005 2004 2005

Acquisition cost:Machinery and vehicles .................................................... ¥00,370 ¥00,323 $003,135Furniture and fixtures ........................................................ 6,475 9,585 54,873Software .......................................................................... 769 1,383 6,517

¥17,614 ¥11,291 $164,525


Accumulated depreciation:Machinery and vehicles .................................................... ¥00,161 ¥00,103 $001,364Furniture and fixtures ........................................................ 4,448 5,652 37,695Software .......................................................................... 421 883 3,568

¥05,030 ¥06,638 $142,627

Net book value:Machinery and vehicles .................................................... ¥00,209 ¥0,0220 $001,771Furniture and fixtures ........................................................ 2,027 3,933 17,178Software .......................................................................... 348 500 2,949

¥42,584 ¥04,653 $321,898

(For Lessor)Future minimum lease payments which consist of subleases subsequent to December 31, 2005 and 2004, weresummarized as follows:


2005 2004 2005

Future minimum lease payments:Within one year ................................................................ ¥133 ¥173 $1,127Thereafter ........................................................................ 156 188 1,322

¥289 ¥361 $2,449

(b) Operating Leases (Noncancelable)

(For Lessee)Future minimum lease payments subsequent to December 31, 2002 and 2001, were summarized as follows:


2005 2004 2005

Future minimum lease payments:Within one year ................................................................ ¥283 ¥209 $2,703Thereafter ........................................................................ 37 114 314

¥120 ¥323 $1,017

9. Assets Pledged as Collateral

Assets pledged as collateral for deferred payment of customs duties as of December 31, 2005 and 2004, were asfollows:


2005 2004 2005

Investments in securities ...................................................... ¥227 ¥231 $1,924


10. Contingent Liabilities

Contingent liabilities at December 31, 2005 and 2004, were as follows:Thousands of


2005 2004 2005

Guarantees for employees’ housing loans ............................ ¥00,243 ¥00,288 $032,059Contingent liabilities related to the reduction of corporate bonds by debt assumption ................................................. 20,000 25,000 169,492

¥20,243 ¥25,288 $171,551

11. Subsequent Event

On March 29, 2006, the following appropriations of retained earnings were approved at the stockholders’ meetingof the Company:


Cash dividends ............................................................................................ ¥2,246 $19,034Bonuses to directors .................................................................................... 90 763

¥2,336 $19,797

12. Segment Information

(a) Business Segment Information

Millions of yen

2005

Business Consumer Industrial Corporate andYear ended or as of December 31 Solutions Equipment Equipment Total eliminations Consolidated

Net sales:Unaffiliated customers ........... ¥475,882 ¥254,277 ¥91,789 ¥821,948 ¥000,0—. ¥821,948Intersegment ......................... — — — — — —

Total .................................. 475,882 254,277 91,789 821,948 — 821,948Operating expenses .................. 462,443 242,625 87,157 792,225 — 792,225Operating income...................... 13,439 11,652 4,632 29,723 — 29,723Assets ....................................... 203,162 88,157 89,593 380,912 132,423 513,335Depreciation and amortization ... 8,538 1,368 1,178 11,084 — 11,084Capital expenditures .................. 9,376 639 1,416 11,431 — 11,431


Millions of yen

2004


Net sales:Unaffiliated customers ........... ¥473,428 ¥239,085 ¥102,998 ¥815,511 ¥000,0—. ¥815,511Intersegment ......................... — — — — — —

Total .................................. 473,428 239,085 102,998 815,511 — 815,511Operating expenses .................. 463,848 227,266 95,123 786,237 — 786,237

Operating income...................... 9,580 11,819 7,875 29,274 — 29,274

Assets ....................................... 200,683 77,495 93,195 371,373 110,964 482,337Depreciation and amortization ... 6,965 751 983 8,699 — 8,699Loss on impairment of fixed assets ............................. 866 — — 866 — 866Capital expenditures .................. 7,256 512 1,282 9,050 — 9,050

Thousands of U.S. dollars

2005


Net sales:Unaffiliated customers ........... $4,032,898 $2,154,890 $777,873 $6,965,661 $0,000,0—. $6,965,661Intersegment ......................... — — — — — —

Total .................................. 4,032,898 2,154,890 777,873 6,965,661 — 6,965,661Operating expenses .................. 3,919,008 2,056,144 738,619 6,713,771 — 6,713,771Operating income...................... 113,890 98,746 39,254 251,890 — 251,890Assets ....................................... 1,721,712 747,093 759,263 3,228,068 1,122,229 4,350,297Depreciation and amortization ... 72,356 11,593 9,983 93,932 — 93,932Capital expenditures .................. 79,458 5,415 12,000 96,873 — 96,873

(b) Geographic Segment InformationAs international sales of the Company and its consolidated subsidiaries for the years ended December 31, 2005and 2004, constituted less than 10% of consolidated net sales, geographic segment information is not disclosed.


REPORT OF INDEPENDENT AUDITORS


Group VisionAdopt a global perspective and strengthen our position as a topflight customer-oriented corporate group

Capitalization¥73,303,082,757

Date of EstablishmentFebruary 1, 1968

HeadquartersCanon S Tower, 16-6, Konan 2-chome,Minato-ku, Tokyo 108-8011, Japan

Number of EmployeesConsolidated: 15,369Nonconsolidated: 6,682(As of December 31, 2005)

OperationsMarketing activities to build the Canon brandand promote related solutions within Japan

Main Locations of OperationsHeadquarters, Makuhari office and branches(Sapporo, Sendai, Nagoya, Osaka, Hiroshimaand Fukuoka)(As of April 1, 2006)

BOARD OF DIRECTORS AND CORPORATE AUDITORS

CORPORATE INFORMATION

Canon S Tower

Canon Marketing Japan Inc. Web Site

(Investor Relations)http://cweb.canon.jp/co-profile/ir-e

Stock ListingCanon Marketing Japan Inc. common stock is traded onthe First Section of the Tokyo Stock Exchange.

Annual General MeetingCanon Marketing Japan Inc. holds its annualgeneral meeting for shareholders in March ofeach year.

President and CEOHaruo Murase

Senior Managing DirectorKeiji Domon*

Senior Managing DirectorKoji Ashizawa*

Senior Managing DirectorHiroshi Shibuya*

Senior Managing DirectorMasami Kawasaki*

Managing DirectorKeiji Nagata

Managing DirectorFumitaka Yamada

Managing DirectorKenichiro Goto*

DirectorKazunori Asada

DirectorMotoo Fukui

DirectorYasuhiko Kudo

DirectorHajime Iwaki

DirectorOsamu Sasaki

DirectorTetsuo Yoshida

DirectorYo Shibasaki*

DirectorKunitoshi Horikawa*

DirectorMasahiro Sakata*

Corporate AuditorNobuo Ishido

Corporate AuditorKunihiro Nagata

Corporate AuditorMasayasu Saito*

Corporate AuditorMinoru Shishikura*

(As of April 1, 2006)

*Newly appointed

Canon Sales Co., Inc.

HeadquartersCanon S Tower, 16-6, Konan 2-chome, Minato-ku, Tokyo 108-8011, Japan

Canon Sales Web Site (Investor Relations)http://cweb.canon.jp/co-profile/ir-e

Canon Sales will be renamed Canon Marketing Japan Inc. on April 1, 2006.