FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of September, 2005

CANON INC.

(Translation of registrant’s name into English)

30-2, Shimomaruko 3-Chome, Ohta-ku, Tokyo 146-8501, Japan

     [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F þ Form 40-F o

     [Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o       No þ

     [If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-

 

 

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		CANON INC.
		(Registrant)

The following materials are included.

1.

Semiannual Report filed with the Japanese government pursuant to the Securities and Exchange Law of Japan

[English summary with full translation of consolidated financial information]

Semiannual Report filed with the Japanese government
pursuant to the Securities and Exchange Law of Japan

For the six months ended
June 30, 2005

CANON INC.
Tokyo, Japan

CONTENTS

		Page.
I Corporate Information
(1) Consolidated Financial Summary			3
(2) Number of Employees			3
II The Business
(1) Operating Results			4
(2) Production and Sales			7
(3) Managerial Issues to be Addressed			7
(4) Research and Development Expenditure			8
III Property, Plant and Equipment
(1) Major Capital Investment			8
(2) Prospect of Capital Investment in fiscal 2005			8
IV Shares
(1) Shares			8
(2) Major Shareholders			9
(3) Stock Price Transition			9
V Financial Statements			10

Disclaimer Regarding Forward-Looking Statements

This semiannual report includes forward–looking statements (within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934) concerning Canon Inc. and its subsidiaries. To the extent that statements in this semiannual report do not relate to historical or current facts, they constitute forward-looking statements. These forward-looking statements are based on the current assumptions and beliefs of Canon in light of the information currently available to them, and involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause Canon’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. Canon undertakes no obligation to publicly update any forward-looking statements after the date of this semiannual report. Investors are advised to consult any further disclosures by Canon in its subsequent filings with the U.S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and its other filings.

The risks, uncertainties and other factors referred to above include, but are not limited to, exchange rate fluctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of exchange rate fluctuations; uncertainty as to economic condition, in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; uncertainty as to the recovery of computer and related markets; uncertainty of recovery in demand for Canon’s semiconductor production equipment; Canon’s ability to continue to develop products and to market products that incorporate new technology on a timely basis, are competitively priced and achieve market acceptance; the possibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign exchange rates; and inventory risk due to shifts in market demand.

Note:		Certain information that has been previously filed with the SEC in other reports, including English summaries of non-consolidated (parent company alone) financial information, is not included in this English translation.

I . Corporate Information

(1) Consolidated Financial Summary

		Millions of Yen (except per share amounts)
		Six months ended June 30												Year ended December 31
		2003				2004				2005				2003				2004
Net sales			1,535,588				1,648,420				1,755,840				3,198,072				3,467,853
Income before income taxes and minority interests			215,506				259,974				283,733				448,170				552,116
Net income			127,767				160,776				175,268				275,730				343,344
Stockholders’ equity			1,745,017				2,006,734				2,363,970				1,865,545				2,209,896
Total assets			3,120,088				3,353,465				3,657,425				3,182,148				3,587,021
Net assets per share (Yen)			1,986.32				2,263.90				2,664.44				2,120.58				2,491.83
Net income per share: basic (Yen)			145.55				181.84				197.61				313.81				387.80
Net income per share: diluted (Yen)			143.99				181.17				197.38				310.75				386.78
Stockholders’ equity / total assets (%)			55.9				59.8				64.6				58.6				61.6
Cash flows from operating activities			228,300				297,827				257,961				465,649				561.529
Cash flows from investing activities			(111,328	)			(109,920	)			(181,056	)			(199,948	)			(252,967	)
Cash flows from financing activities			(46,688	)			(64,326	)			(38,409	)			(102,039	)			(102,268	)
Cash and cash equivalents at end of period			591,130				811,221				935,921				690,298				887,774
Number of employees			100,308				104,947				109,434				102,567				108,257

(2) Number of Employees

     Canon’s number of employees by product group are summarized as follows:

		As of June 30, 2005
Business Machines			75,719
Cameras			17,115
Optical and other products			11,236
Corporate			5,364
Total			109,434

II . The Business

(1) Operating Results

Looking back at the global economy in the first half of 2005, despite worldwide concern over the economic impact of high crude oil prices and escalating costs of raw materials, economic growth was fairly steady during the term. In the United States, employment conditions continued to show improvement while consumer spending remained healthy, which helped fuel the ongoing trend of gradual expansion. In Europe, the effects of such factors as sluggish domestic demand have resulted in an economic slowdown. As for Asia, while the rate of expansion declined somewhat, China continued to realize high growth, and other Asian economies also enjoyed generally favorable performances. In Japan, such factors as improved consumer spending and an increase in capital spending fueled by favorable corporate profits indicated a trend of modest growth.

As for the markets in which the Canon Group operates, within the camera segment demand for digital single-lens-reflex (SLR) cameras continued to grow significantly in Japan and overseas markets during the term. Although sales of digital compact cameras leveled off in Japan, they remained strong in overseas markets to realize healthy growth overall. As for network digital multifunction devices (MFDs), demand shifted toward increasing multifunctionality, speed and color capability in the business market, while price competition intensified within the market for lower-speed models. Although sales of computer peripherals, including printers, grew for both multifunction and color models, the segment suffered amid severe price competition and a shift in demand toward high-performance low-priced machines. Demand for steppers, used in the production of semiconductors, tapered off because investment by manufacturers has entered a correction phase, resulting in sluggish sales. Increased demand for liquid crystal display (LCD) televisions, however, fueled growth in the market for projection aligners, which are used in the production of LCDs. The average value of the yen for the first half was ¥106.18 to the U.S. dollar and ¥136.14 to the euro, representing a year-on-year increase of almost 2% against the U.S. dollar, and a decrease of a little over 2% against the euro.

Amid these conditions, Canon’s consolidated net sales for the first half increased by 6.5% from the year-ago period to ¥1,755.8 billion, boosted by a favorable rise in sales of digital cameras and color network MFDs, along with a substantial increase in sales of projection aligners used in the production of LCDs. Net income for the first half recorded a first-half high of ¥175.3 billion, a year-on-year increase of 9.0%. Canon’s gross profit ratio for the half was 48.4%, a decline of 1.7 points from the 50.1% ratio recorded in the first half of 2004. Although production-reform efforts continued during the term, the decline in the gross profit ratio was mainly caused by a combination of such factors as increases in the prices of crude oil and raw materials, and severe price competition mainly among consumer products. Selling, general and administrative expenses for the first half rose 1.3% year-on-year, which was less than the growth rate of net sales during the same period; Although R&D expenditures grew by ¥4.0 billion to ¥136.4 billion during the first half, other selling, general and administrative expenses remained at the same level as the year-ago period. Operating profit ratio for the first half was 15.4%, the same rate as the year-ago period. Consequently, operating profit in the first half totaled ¥270.2 billion, a year-on-year increase of 6.6%. Other income (deductions) improved by ¥6.9 billion, mainly due to a ¥3.6 billion improvement in interest income (expense), along with a substantial decrease in currency exchange losses on foreign-currency-denominated trade receivables. As a result, income before income taxes and minority interests in the first half totaled ¥283.7 billion, a year-on-year increase of 9.1%. The effective tax rate during the half was 35.7%, the same rate as the year-ago period. Consequently, net income for the first half of 2005 totaled ¥175.3 billion.

Basic net income per share for the first half was ¥197.61, a year-on-year increase of ¥15.77.

Canon’s semiannual results by business segment are summarized as follows:

In the business machine segment, demand for network digital MFDs, which are grouped in the office imaging products sub-segment, indicates a shift from monochrome machines to color models, as well as a trend toward higher-end features. Additionally, amid color network digital MFDs, the iR C3220/2620 and iR C3100 series continued to sell well and recorded healthy sales increases in both Japan and Europe. The company bolstered the strength and competitiveness of its MFD products with the Japanese-market launch in May of the iR C3170/2570 series, successor to the iR C3100 series. The company strengthened its lineup of monochrome network digital MFDs with the launch of the high-end office-use iR6570/5570 models, which contributed to the realization of expanded sales, while the low-end and mid-range office-use iR4570/3570/2870/2270 models also enjoyed healthy sales. Overall, sales of office imaging products in the first half realized a year-on-year increase of 2.4%. In the field of computer peripherals, laser beam printers enjoyed a year-on-year increase in unit sales of nearly 30%, with both monochrome systems, particularly personal-use models, and color models achieving growth. Sales in value terms also realized double-digit growth despite the effects of the shift in market demand toward lower priced models and the appreciation of the yen against the U.S. dollar. Inkjet printers recorded a considerable increase in unit sales of approximately 15%, with the PIXMA iP3000 and iP4000 models maintaining brisk sales, high-speed multifunction systems, such as the PIXMA MP760, fueling sales growth, and the launch of popular models for markets outside of Japan, such as the PIXMA MP110/130, contributing to a stronger product lineup. Although unit sales of inkjet printers increased significantly, due to the impact of intensified price competition, sales in terms of value rose only slightly. As a result, sales of computer peripherals for the first half realized a year-on-year increase of 8.9%. Sales of business information products decreased by 10.2% due to the intentional curtailing of personal computer sales in the Japanese market. Collectively, sales of business machines during the first half totaled ¥1,197.0 billion, a year-on-year increase of 4.8%. Operating profit for the first half totaled ¥259.5 billion, a year-on-year increase of 4.3%, as cost reductions realized through the integration of manufacturing and development operations cancelled out the effects of rising materials prices and the drop in retail prices.

Within the camera segment, digital SLR cameras continued to enjoy robust growth, bolstered by particularly strong sales of the EOS DIGITAL REBEL XT launched in March, along with continued strong demand for the EOS 20D, which has also led to expanded sales of interchangeable SLR lenses. The introduction of several new compact-model digital cameras—the PowerShot SD500, PowerShot SD400, PowerShot A520, and PowerShot A510—also fueled sales growth. In the field of digital video camcorders, newly introduced models such as the Optura 60, Elura 90, and ZR100 recorded strong performances. As a result, overall camera sales for the first half increased by 9.2% from the year-ago period to ¥379.1 billion. Although the operating profit ratio decreased by 1.4 points due to the effects of a decline in selling prices, operating profit for the camera segment increased year-on-year by 0.7% to ¥61.9 billion.

In the optical and other products segment, sales of steppers, used for the production of semiconductors, decreased because investment by manufacturers has entered a correction phase. Sales of aligners for the production of LCDs enjoyed robust growth as LCD display manufacturers actively carried out new investments. As a result, first-half sales for the segment totaled ¥179.7 billion, a year-on-year increase of 13.1%. Operating profit for the segment grew year-on-year by 38.8% to ¥21.0 billion, boosted by an increase in sales volume.

Semiannual results by domestic and overseas company location are summarized as follows:

Japan

Sales in Japan increased 8.2% from the previous same period to ¥481.4 billion, mainly due to expanded sales in digital SLR cameras and color network digital MFDs. This was despite a decline in sales of personal computers. Geographical operating profit rose 7.0% from the previous same period to ¥310.8 billion.

Americas

Sales increased 4.7% from the previous same period to ¥516.9 billion, mainly due to a expanded sales in digital cameras. This was despite a decline in sales of monochrome network digital MFDs. Geographical operating profit decreased by 25.2% from the previous same period to ¥17.9 billion.

Europe

Sales increased 7.0% from the previous same period to ¥550.4 billion, mainly due to expanded sales in color network digital MFDs and digital cameras. Geographical operating profit also increased 41.3% from the previous same period to ¥14.0 billion.

Asia and others

Sales increased 6.1% from the previous same period to ¥207.1 billion, mainly due to an increase in digital camera and aligners for the production of LCDs sales. On the other hand, geographical operating profit decreased by 1.9% from the previous same period to ¥13.9 billion, mainly due to increasing prices for raw material.

Cash Flows

Cash and cash equivalents increased by ¥48.1 billion from the end of the previous year, to ¥935.9 billion at the end of the first half of 2005.

Cash flows from operating activities

In the first half of 2005, although Canon maintained cash flow from operating activities of ¥258.0 billion, reflecting the substantial growth in sales and increased cash proceeds from sales, combined with an increase in net income, the figure represents a year-on-year decrease of ¥39.9 billion due to the increased corporate tax payment accompanying the increase in profit last year.

Cash flows from investing activities

Capital expenditure totaled ¥174.1 billion, which was used mainly to expand production capabilities in both Japan and overseas regions, as well as to bolster the company’s R&D-related infrastructure. Cash flow from investing activities totaled ¥181.1 billion, an increase of ¥71.1 billion from the previous same period.

Cash flows from financing activities

Cash flow from financing activities recorded an outlay of ¥38.4 billion, a decrease of ¥25.9 billion from the previous same period, mainly resulting from an increase in dividend payouts of ¥35.5 billion, an increase of ¥4.7 billion over the previous year.

As a result, free cash flow, or cash flow from operating activities minus cash flow from investing activities, remained positive at ¥76.9 billion.

(2) Production and Sales

      Production

     The company’s production by product group are summarized as follows:

		Millions of yen
		Six months ended June 30, 2005
		Production				Change (%)
Business Machines			1,017,846				117.3
Cameras			398,354				101.0
Optical and other products			147,626				115.4
Total			1,563,826				112.5

Sales

The company’s sales by product group are summarized as follows:

		Millions of yen
		Six months ended June 30, 2005
		Sales				Change (%)
Business Machines			1,197,031				104.8
Cameras			379,152				109.2
Optical and other products			179,657				113.1
Total			1,755,840				106.5

Millions of yen

Six months ended June 30, 2004

Six months ended June 30, 2005

Sales

Proportion (%)

Sales

Proportion (%)

Hewlett-Packard Company

363,424

20.7

322,145

19.5

(3) Managerial Issues to be Addressed

There were no significant changes or new developments in Canon’s managerial and financial issues to be addressed during the first half of 2005.

(4) Research and Development Expenditure

Canon has positioned fiscal 2005 as the last year of PhaseII (2001-2005) of the “Excellent Global Corporation Plan”. Canon has been making efforts to build R&D capabilities which enables Canon to acquire a top share in every main business area and to continually create new business opportunities through 2005. Canon’s research and development expenditures for the six months ended June 30, 2005 totaled ¥136,386 million.

Research and development expenditures by product group are summarized as follows:

		Millions of yen
		Six months ended June 30
		2004				2005
Business Machines			58,044				57,724
Cameras			16,752				18,959
Optical and other products			14,388				13,417
Corporate			43,178				46,286
Total			132,362				136,386

III . Property, Plant and Equipment

(1) Major Capital Investment

There were no significant changes to the status of existing major capital investment during the first half of 2005.

(2) Prospect of Capital Investment in fiscal 2005

There were no significant changes for the plans for new construction and retirement of capital investment, originally made at the end of the previous year, during the first half of 2005. Also, there were no significant additional plans for new construction or retirement of capital investment, during the first half of 2005.

IV . Shares

(1) Shares

Total number of authorized shares is 2,000,000,000 shares. The common stock of the Company is listed on the Tokyo, Osaka, Nagoya, Fukuoka, Sapporo, Frankfurt am Main and New York stock exchanges. Total issued shares, common stock and number of shareholders are as follows:

		As of December 31,				As of June 30,
		2004				2005
Total issued shares (share)			887,977,251				888,362,687
Common stock (Millions of yen)			173,864				174,153

Note: The increase of the total issued shares during this term reflects the conversion of convertible shares.

(2) Major Shareholders

		As of June 30, 2005
		Number of shares held				Number of shares held /
		(thousands of shares)				Number of shares issued
The Dai-Ichi Mutual Life Insurance Co.			59,090				6.65	%
Japan Trustee Services Bank, Ltd. (Trust Account)			48,848				5.50	%
Moxley and Co.			45,335				5.10	%
The Master Trust Bank of Japan, Ltd. (Trust Account)			44,562				5.02	%
State Street Bank and Trust Company 505103			32,932				3.71	%
Nomura Securities Co., Ltd.			24,710				2.78	%
Mizuho Corporate Bank, Ltd.			18,946				2.13	%
The Chase Manhattan Bank, N.A., London			17,851				2.01	%
State Street Bank and Trust Company			17,691				1.99	%
Dresdner Kleinwort Wasserstein (Japan) Ltd, Tokyo Branch			16,780				1.89	%

(3) Stock Price Transition

The following table sets forth the monthly reported high and low sales prices of the Company’s common stock on the Tokyo Stock Exchange for the first half of fiscal 2005:

																						(Yen)
		January				February				March				April				May				June
High			5,580				5,610				5,790				5,900				5,990				6,000
Low			5,190				5,320				5,490				5,380				5,460				5,800

V . Financial Statements

     Index of Consolidated Financial Statements of Canon Inc. and Subsidiaries:

		Page.
Consolidated Balance Sheets As of June 30, 2004 and 2005, and December 31, 2004			11
Consolidated Statements of Income for the six months ended June 30, 2004 and 2005, and the year ended December 31, 2004			13
Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2004 and 2005, and the year ended December 31, 2004			14
Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2005, and the year ended December 31, 2004			15
Notes to Consolidated Financial Statements			16

CANON INC. AND SUBSIDIARIES
Consolidated Balance Sheets

as of June 30, 2004 and 2005, and December 31, 2004

		Millions of yen
		June 30								December 31
		2004				2005				2004
Assets
Current assets:
Cash and cash equivalents			811,221				935,921				887,774
Marketable securities (note 2)			1,369				1,236				1,554
Trade receivables, net (note 3)			526,980				542,192				602,790
Inventories (note 4)			486,623				485,887				489,128
Prepaid expenses and other current assets (notes 6, 7)			245,530				249,867				250,906
Total current assets			2,071,723				2,215,103				2,232,152
Noncurrent receivables (note 12)			14,999				14,162				14,567
Investments (notes 2, 7)			73,707				99,808				97,461
Property, plant and equipment, net (notes 5, 7)			891,248				1,042,448				961,714
Other assets (note 6)			301,788				285,904				281,127
Total assets			3,353,465				3,657,425				3,587,021

		Millions of yen
		June 30								December 31
		2004				2005				2004
Liabilities and stockholders’ equity
Current liabilities:
Short-term loans and current portion of long-term debt (note 7)			17,152				11,645				9,879
Trade payables (note 8)			470,817				437,210				465,396
Income taxes			80,639				78,324				105,565
Accrued expenses			180,164				197,405				205,296
Other current liabilities			121,532				181,525				197,029
Total current liabilities			870,304				906,109				983,165
Long-term debt, excluding current installments (note 7)			35,733				25,056				28,651
Accrued pension and severance cost			237,152				124,816				132,522
Other noncurrent liabilities			37,110				45,425				45,993
Total liabilities			1,180,299				1,101,406				1,190,331
Minority interests			166,432				192,049				186,794
Commitments and contingent liabilities (note 12)
Stockholders’ equity:
Common stock			173,514				174,153				173,864
(Authorized shares)			(2,000,000,000	)			(2,000,000,000	)			(2,000,000,000	)
(Issued shares)			(887,509,650	)			(888,362,687	)			(887,977,251	)
Additional paid-in capital			401,558				402,013				401,773
Legal reserve			40,798				42,186				41,200
Retained earnings			1,539,627				1,838,441				1,699,634
Accumulated other comprehensive income (loss) (note 9)			(143,585	)			(87,487	)			(101,312	)
Treasury stock at cost			(5,178	)			(5,336	)			(5,263	)
(Number of shares)			(1,105,393	)			(1,133,795	)			(1,120,867	)
Total stockholders’ equity			2,006,734				2,363,970				2,209,896
Total liabilities and stockholders’ equity			3,353,465				3,657,425				3,587,021

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Income

for the six months ended June 30, 2004 and 2005, and fiscal year ended December 31, 2004

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2004				2005				2004
Net sales			1,648,420				1,755,840				3,467,853
Cost of sales			822,653				905,800				1,754,510
Gross profit			825,767				850,040				1,713,343
Selling, general and administrative expenses (note 1)			572,391				579,851				1,169,550
Operating profit			253,376				270,189				543,793
Other income (deductions):
Interest and dividend income			3,027				5,970				7,118
Interest expense			(1,438	)			(771	)			(2,756	)
Other, net (note 1)			5,009				8,345				3,961
			6,598				13,544				8,323
Income before income taxes and minority interests			259,974				283,733				552,116
Income taxes			92,745				101,268				194,014
Income before minority interests			167,229				182,465				358,102
Minority interests			6,453				7,197				14,758
Net income			160,776				175,268				343,344

		Yen
Net income per share (note 10):
Basic			181.84				197.61				387.80
Diluted			181.17				197.38				386.78

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder’s Equity

for the six months ended June 30, 2004 and 2005, and fiscal year ended December 31, 2004

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2004				2005				2004
Common stock:
Balance at beginning of year			168,892				173,864				168,892
Conversion of convertible debt			4,622				289				4,972
Balance at end of period			173,514				174,153				173,864
Additional paid-in capital:
Balance at beginning of year			396,939				401,773				396,939
Conversion of convertible debt and other			4,624				289				4,966
Stock exchanged under exchange offering			114				—				114
Capital transactions by consolidated subsidiaries			(119	)			(49	)			(246	)
Balance at end of period			401,558				402,013				401,773
Legal reserve:
Balance at beginning of year			39,998				41,200				39,998
Transfers from retained earnings			800				986				1,202
Balance at end of period			40,798				42,186				41,200
Retained earnings:
Balance at beginning of year			1,410,442				1,699,634				1,410,442
Net income for the period			160,776				175,268				343,344
Cash dividends			(30,791	)			(35,475	)			(52,950	)
Transfers to legal reserve			(800	)			(986	)			(1,202	)
Balance at end of period			1,539,627				1,838,441				1,699,634
Accumulated other comprehensive income (loss) :
Balance at beginning of year			(143,275	)			(101,312	)			(143,275	)
Other comprehensive income (loss) for the period, net of tax			(310	)			13,825				41,963
Balance at end of period			(143,585	)			(87,487	)			(101,312	)
Treasury stock:
Balance at beginning of year			(7,451	)			(5,263	)			(7,451	)
Repurchase, net			(418	)			(73	)			(503	)
Stock exchanged under exchange offering			2,691				—				2,691
Balance at end of period			(5,178	)			(5,336	)			(5,263	)
Total stockholders’ equity			2,006,734				2,363,970				2,209,896
Disclosure of comprehensive income:
Net income for the period			160,776				175,268				343,344
Other comprehensive income (loss) for the period, net of tax (note 9):
Foreign currency translation adjustments			(2,048	)			13,049				4,050
Net unrealized gains and losses on securities			339				(634	)			686
Net gains and losses on derivative instruments			481				760				(396	)
Minimum pension liability adjustments			918				650				37,623
Other comprehensive income (loss)			(310	)			13,825				41,963
Total comprehensive income for the period			160,466				189,093				385,307

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

for the six months ended June 30, 2004 and 2005, and fiscal year ended December 31, 2004

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2004				2005				2004
Cash flows from operating activities:
Net income			160,776				175,268				343,344
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			87,380				98,556				192,692
Loss on disposal of property, plant and equipment			7,488				3,213				24,597
Deferred income taxes			10,937				8,608				9,060
Decrease (increase) in trade receivables			11,529				59,839				'(53,595	)
Decrease (increase) in inventories			(43,430	)			7,161				(40,050	)
Increase (decrease) in trade payables			75,589				(30,174	)			65,873
Increase (decrease) in income taxes			(2,735	)			(27,171	)			21,689
Increase (decrease) in accrued expenses			(9,584	)			(10,274	)			8,196
Decrease in accrued pension and severance cost			(1,053	)			(5,945	)			(16,924	)
Other, net			930				(21,120	)			6,647
Net cash provided by operating activities			297,827				257,961				561,529
Cash flows from investing activities:
Purchases of property, plant and equipment			(125,590	)			(174,084	)			(256,714	)
Proceeds from sale of property, plant and equipment			2,906				6,637				7,431
Purchases of available-for-sale securities			(28	)			(381	)			(388	)
Purchases of held-to-maturity securities			—				—				(21,544	)
Proceeds from sale of available-for-sale securities			9,733				2,371				9,735
Proceeds from sale of subsidiary common stock			—				—				9,731
Purchases of other investments			(673	)			(4,105	)			(8,628	)
Other, net			3,732				(11,494	)			7,410
Net cash used in investing activities			(109,920	)			(181,056	)			(252,967	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			275				735				2,115
Repayments of long-term debt			(28,599	)			(3,384	)			(43,175	)
Decrease (increase) in short-term loans			(2,654	)			1,544				(3,046	)
Dividends paid			(30,791	)			(35,475	)			(52,950	)
Purchases of treasury stock, net			(410	)			(73	)			(494	)
Other, net			(2,147	)			(1,756	)			(4,718	)
Net cash used in financing activities			(64,326	)			(38,409	)			(102,268	)
Effect of exchange rate changes on cash and cash equivalents			(2,658	)			9,651				(8,818	)
Net increase in cash and cash equivalents			120,923				48,147				197,476
Cash and cash equivalents at beginning of year			690,298				887,774				690,298
Cash and cash equivalents at end of period			811,221				935,921				887,774
Supplemental disclosure for cash flow information
Cash paid during the period for:
Interest			1,644				814				2,981
Income taxes			91,954				120,264				164,450

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(1) Basis of Presentation and Significant Accounting Policies

(a)

Basis of Presentation

The Company issued convertible debentures in the United States in May 1969 and established a program in which its American Depositary Receipts (ADRs) were traded in the U.S. over-the-counter market. Since then, under the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934, the Company has prepared the consolidated financial statements in accordance with accounting principles generally accepted in the United States and filed them with the U.S. Securities and Exchange Commission on Form 20-F. The Company’s ADRs were listed on NYSE in September 2000 after being quoted on NASDAQ from February 1972 to September 2000.

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. In the accompanying consolidated financial statements, the segment information is disclosed in conformity with financial accounting standards of Japan, but not disclosed under accounting principles generally accepted in the United States of America.

The number of the consolidated subsidiaries and the affiliated companies that were accounted for on the equity basis as of June 30, 2004 and 2005, and December 31, 2004 are summarized as follows:

		June 30								Dec. 31
		2004				2005				2004
Consolidated subsidiaries			200				187				184
Affiliated companies that were accounted for on the equity basis			19				16				17
Total			219				203				201

(b)

Description of Business

Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such fields as office imaging products, computer peripherals, business information products, cameras, and optical related products. Office imaging products consist mainly of copying machines and digital multifunction devices. Computer peripherals consist mainly of laser beam and inkjet printers. Business information products consist mainly of computer information systems, micrographics and calculators. Cameras consist mainly of single lens reflex (“SLR”) cameras, compact cameras, digital cameras and video camcorders. Optical related products include steppers and aligners used in semiconductor chip production, projection aligners used in the production of liquid crystal displays (“LCDs”), broadcasting lenses and medical equipment.

Canon’s consolidated net sales for the six months ended June 30, 2005 were distributed as follows: office imaging products 32%, computer peripherals 33%, business information products 3%, cameras 22%, and optical and other products 10%. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographical area. Approximately 73% of consolidated net sales for each of the six months ended June 30, 2005 were generated outside Japan, with 30% in the Americas, 31% in Europe, and 12% in other areas.

Canon’s manufacturing operations are conducted primarily at 18 plants in Japan and 14 overseas plants which are located in the United States, Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

		Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales constituted approximately 21% of consolidated net sales for the six ended months ended June 30, 2005.
(c)		Principles of Consolidation
		The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company is the primary beneficiary under FASB Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities.” All significant intercompany balances and transactions have been eliminated.
(d)		Use of Estimates
		The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant estimates and assumptions are reflected in valuation and disclosure of revenue recognition, allowance for doubtful receivables, valuation of inventories, environmental liabilities, deferred tax assets and employee retirement and severance benefit plans. Actual results could differ materially from those estimates.
(e)		Cash Equivalents
		All highly liquid investments acquired with an original maturity of three months or less are considered to be cash equivalents.
(f)		Translation of Foreign Currencies
		Assets and liabilities of the Company’s subsidiaries located outside Japan with functional currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of financial statements are excluded from earnings and are reported in other comprehensive income (loss).
		Gains and losses resulting from foreign currency transactions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions). Foreign currency exchange losses were ¥5,160 million, ¥898 million and ¥17,800 million for the six months ended June 30, 2004 and 2005, and year ended December 31, 2004, respectively.
(g)		Marketable Securities and Investments
		Canon classifies investments in debt and marketable equity securities as available-for-sale, or held-to-maturity securities. Canon does not hold any trading securities which are bought and held primarily for the purpose of sale in the near term.
		Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are reported as a separate component of other comprehensive income (loss) until realized.
		Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			Available-for-sale and held-to-maturity securities are regularly reviewed for other-than-temporary declines in carrying value based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and Canon’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. When such a decline exists, Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as appropriate.
			Realized gain and losses are determined on the average cost method and reflected in earnings.
			Other securities are stated at cost and reviewed periodically for impairment.
	(h)		Allowance for Doubtful Receivables
			Allowance for doubtful trade and finance receivables is maintained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions, significant one-time events, and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectible and charged against the allowance.
	(i)		Inventories
			Inventories are stated at the lower of cost or market value. Cost is determined principally by the average method for domestic inventories and the first-in, first-out method for overseas inventories.
	(j)		Investments in Affiliated Companies
			Investments in 20% to 50% owned affiliates in which Canon has the ability to exercise significant influence over their operating and financial policies are accounted for by the equity method.
	(k)		Impairment of Long-Lived Assets
			Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.
	(l)		Property, Plant and Equipment
			Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain assets which are depreciated by the straight-line method over the estimated useful lives of the assets. The depreciation period ranges from 3 years to 60 years for buildings and 2 years to 20 years for machinery and equipment.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			Assets leased to others under operating leases are stated at cost and depreciated by the straight-line method over the period ranging from 2 years to 5 years.
	(m)		Goodwill and Other Intangible Assets
			Goodwill and intangible assets with indefinite useful lives are not amortized, but instead tested for impairment at least annually. Intangible assets with finite useful lives, consisting primarily of software and license fees, are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. These costs consist of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing internal use software are capitalized at the application development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility.
	(n)		Environmental Liabilities
			Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.
	(o)		Income Taxes
			Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable.
	(p)		Issuance of Stock by Subsidiaries and Equity Investees
			The change in the Company’s proportionate share of a subsidiary’s or equity investee’s equity resulting from the issuance of stock by the subsidiary or equity investee is accounted for as an equity transaction.
	(q)		Net Income per Share
			Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during each year. Diluted net income per share includes the effect from potential issuance of common stock based on the assumption that all convertible debentures were converted into common stock.
	(r)		Revenue Recognition
			Canon generates revenue principally through the sale of consumer products, equipment, supplies, and related services under separate contractual arrangements. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer, the sales price is fixed or determinable, and collectibility is probable.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

			For arrangements with multiple elements, which may include any combination of equipment, installation and maintenance, Canon allocates revenue to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting as prescribed in the Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” Otherwise, revenue is deferred until the undelivered elements are fulfilled as a single unit of accounting.
			Revenue from sales of consumer products including office imaging products, computer peripherals, business information products and cameras is recognized upon shipment or delivery, depending upon when title and risk of loss transfer to the customer.
			Revenue from sales of optical equipment such as steppers and aligners sold with customer acceptance provisions related to their functionality is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and demonstrated by Canon. Service revenue is derived primarily from maintenance contracts on equipment sold to customers and is recognized over the term of the contract.
			Most office imaging products are sold with service maintenance contracts for which the customer typically pays a base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts are recognized as services are provided.
			Revenues from the sale of equipment under sales-type leases are recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type lease or direct-financing lease are accounted for as operating leases and related revenue is recognized over the lease term.
			Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions in sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced.
			A liability for estimated product warranty cost is recorded at the time revenue is recognized and is included in accrued expenses. Estimates for accrued product warranty cost are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure.
	(s)		Research and Development Costs
			Research and development costs are expensed as incurred. Research and development expenses were  ¥132,362  million, ¥136,386 million and ¥275,300 million for the six months ended June 30, 2004 and 2005, and year ended December 31, 2004, respectively.
	(t)		Advertising Costs
			Advertising costs are expensed as incurred. Advertising expenses were ¥52,848 million, ¥44,782 million and ¥111,770 million for the six months ended June 30, 2004 and 2005, and year ended December 31, 2004, respectively.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

	(u)		Shipping and Handling Costs
			Shipping and handling costs totaled ¥21,119 million, ¥24,319 million and ¥46,953 million for the six months ended June 30, 2004 and 2005, and year ended December 31, 2004, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.
	(v)		Derivative Financial Instruments
			All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other current liabilities on the consolidated balance sheets. On the date the derivative contract is entered into, Canon designates the derivative as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Canon formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Canon also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively.
			Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash flows of the hedged item. Gains and losses from hedging ineffectiveness are included in other income (deductions). Gains and losses excluded from the assessment of hedge effectiveness (time value component) are included in other income (deductions).
			Canon also uses certain derivative financial instruments which are not designated as hedges. Canon records these derivative financial instruments on the consolidated balance sheets at fair value. The changes in fair values are immediately recorded in earnings.
	(w)		Guarantees
			Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees.
	(y)		Reclassification
			Certain reclassifications have been made to the prior periods’ consolidated financial statements to conform with the presentation used for this period.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(2)		Marketable Securities and Investments
		The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities and held-to-maturity securities by major security type at June 30, 2004 and 2005, and December 31, 2004 were as follows:

		Millions of yen
						Gross				Gross
						Unrealized				Unrealized
						Holding				Holding
		Cost				Gains				Losses				Fair Value
June 30, 2004:
Current:
Available-for-sale:
Corporate debt securities			10				—				—				10
Bank debt securities			71				—				—				71
Fund trusts			92				46				—				138
Equity securities			1,077				82				9				1,150
			1,250				128				9				1,369
Noncurrent:
Available-for-sale:
Governmental bond securities			233				4				—				237
Corporate debt securities			48				2				—				50
Fund trusts			2,056				663				1				2,718
Equity securities			5,586				15,961				24				21,523
			7,923				16,630				25				24,528

		Millions of yen
						Gross				Gross
						Unrealized				Unrealized
						Holding				Holding
		Cost				Gains				Losses				Fair Value
June 30, 2005:
Current:
Available-for-sale:
Bank debt securities			71				—				—				71
Equity securities			1,033				133				1				1,165
			1,104				133				1				1,236
Noncurrent:
Available-for-sale:
Governmental bond securities			512				22				—				534
Corporate debt securities			72				6				—				78
Fund trusts			2,553				690				—				3,243
Equity securities			9,068				15,593				64				24,597
			12,205				16,311				64				28,452
Held-to-maturity:
Corporate debt securities			21,210				—				—				21,210
			33,415				16,311				64				49,662

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

		Millions of yen
						Gross				Gross
						Unrealized				Unrealized
						Holding				Holding
		Cost				Gains				Losses				Fair Value
December 31, 2004:
Current:
Available-for-sale:
Corporate debt securities			138				—				—				138
Bank debt securities			71				—				—				71
Fund trusts			92				40				—				132
Equity securities			1,117				100				4				1,213
			1,418				140				4				1,554
Noncurrent:
Available-for-sale:
Governmental bond securities			536				26				25				537
Corporate debt securities			56				19				—				75
Fund trusts			2,064				574				12				2,626
Equity securities			9,185				16,628				76				25,737
			11,841				17,247				113				28,975
Held-to-maturity:
Corporate debt securities			21,460				—				—				21,460
			33,301				17,247				113				50,435

Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥18,131 million, ¥16,696 million and ¥14,635 million at June 30, 2004 and 2005, and December 31, 2004, respectively.

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

		Millions of yen
		June 30								Dec. 31
		2004				2005				2004
Notes			30,115				25,838				30,261
Accounts			509,857				527,823				584,186
Less allowance for doubtful receivables			(12,992	)			(11,469	)			(11,657	)
			526,980				542,192				602,790

(4)		Inventories
		Inventories comprised the following:

		Millions of yen
		June 30								Dec. 31
		2004				2005				2004
Finished goods			334,371				349,581				352,656
Work in process			137,028				120,839				121,613
Raw materials			15,224				15,467				14,859
			486,623				485,887				489,128

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

		Millions of yen
		June 30								Dec. 31
		2004				2005				2004
Land			178,277				183,013				182,330
Buildings			778,070				882,034				824,969
Machinery and equipment			1,015,268				1,080,059				1,053,121
Construction in progress			57,861				82,911				74,599
			2,029,476				2,228,017				2,135,019
Less accumulated depreciation			(1,138,228	)			(1,185,569	)			(1,173,305	)
			891,248				1,042,448				961,714

(6)		Finance Receivables and Operating Leases
		Finance receivables represent financing leases which consist of sales-type leases and direct-financing leases resulting from the marketing of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 to 6 years.
		Future minimum lease payments to be received under non-cancelable operating leases are ¥4,622 million (within one year), ¥7,032 million (after one year) at June 30, 2005.

(7)		Pledged Assets and Secured Loans
		Certain property, plant and equipment with a net book carrying value at June 30, 2004 and 2005, and December 31, 2004 of ¥11,025 million, ¥8,467 million and ¥11,247 million, respectively, were mortgaged to secure loans from banks.
		In November 2004, Canon entered into an agreement whereby certain assets were deposited into an irrevocable trust to meet the debt service requirements of the: 1.88% Japanese yen notes; 2.95% Japanese yen notes; and 2.27% Japanese yen notes in the aggregate amount of ¥25,000 million. The assets contributed by Canon consisted of certificates of deposit and debt securities with carrying amounts of ¥5,010 million and ¥21,210 million, respectively, at June 30, 2005. Cash flows from such investments will be used solely to satisfy the principal and interest obligations for the debts. Accordingly, the certificates of deposit are included in the consolidated balance sheet under the caption of prepaid expenses and other current assets, and the debt securities are included in the consolidated balance sheet under the caption of investments.
		Both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank. Long-term agreements with lenders other than banks also generally provide that Canon must provide additional security upon request of the lender.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

		Millions of yen
		June 30								Dec. 31
		2004				2005				2004
Notes			72,014				22,067				51,081
Accounts			398,803				415,143				414,315
			470,817				437,210				465,396

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

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2004				2005				2004
Foreign currency translation adjustments:
Balance at beginning of year			(83,801	)			(79,751	)			(83,801	)
Adjustments for the period			(2,048	)			13,049				4,050
Balance at end of period			(85,849	)			(66,702	)			(79,751	)
Net unrealized gains and losses on securities:
Balance at beginning of year			6,784				7,470				6,784
Adjustments for the period			339				(634	)			686
Balance at end of period			7,123				6,836				7,470
Net gains and losses on derivative instruments:
Balance at beginning of year			(297	)			(693	)			(297	)
Adjustments for the period			481				760				(396	)
Balance at end of period			184				67				(693	)
Minimum pension liability adjustments:
Balance at beginning of year			(65,961	)			(28,338	)			(65,961	)
Adjustments for the period			918				650				37,623
Balance at end of period			(65,043	)			(27,688	)			(28,338	)
Total accumulated other comprehensive income (loss):
Balance at beginning of year			(143,275	)			(101,312	)			(143,275	)
Adjustments for the period			(310	)			13,825				41,963
Balance at end of period			(143,585	)			(87,487	)			(101,312	)