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 April, 2006

CANON INC.

 

(Translation of registrant’s name into English)

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

 

(Address of principal executive offices)

     [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.

*Print the name and title of the signing officer under his signature.

The following material is included.

1.   Consolidated Results For The First Quarter Ended March 31, 2006

CONSOLIDATED RESULTS FOR
THE FIRST QUARTER ENDED MARCH 31, 2006

April 27, 2006

CONSOLIDATED RESULTS

		(Millions of yen, thousands of U.S. dollars, except per share amounts)
		Actual																Projected
		Three months				Three months								Three months
		ended				ended								ended				Year ending
		March 31, 2006				March 31, 2005				Change(%)				March 31, 2006				December 31, 2006				Change(%)
		(Unaudited)				(Unaudited)								(Unaudited)
Net sales		¥	923,272			¥	843,367			+	9.5			$	7,891,214			¥	4,140,000			+	10.3
Operating profit			170,135				143,282			+	18.7				1,454,145				686,000			+	17.7
Income before income taxes and minority interests			169,591				149,451			+	13.5				1,449,496				690,000			+	12.7
Net income		¥	108,269			¥	93,057			+	16.3			$	925,376			¥	432,000			+	12.5
Net income per share:
- Basic		¥	121.98			¥	104.93			+	16.2			$	1.04			¥	486.70			+	12.4
- Diluted			121.92				104.79			+	16.3				1.04				—				—
		Actual
		As of				As of								As of
		March 31, 2006				December 31, 2005				Change(%)				March 31, 2006
		(Unaudited)												(Unaudited)
Total assets		¥	3,976,513			¥	4,043,553			-	1.7			$	33,987,291
Stockholders’ equity		¥	2,658,810			¥	2,604,682			+	2.1			$	22,724,872

Notes:	1.	Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.
	2.	U.S. dollar amounts are translated from yen at the rate of JPY117 = U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of March 31, 2006, solely for the convenience of the reader.

Canon Inc. Headquarter office		30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan Phone: +81-3-3758-2111

Operating Results and Financial Conditions

2006 First Quarter in Review

Looking back at the global economy in the first quarter of 2006, economic expansion was fairly steady despite worldwide concern over the economic impact of high crude oil prices and the escalating costs of raw materials. The U.S. economy continued to display growth despite anxiety over the effects of rising interest rates and climbing gasoline prices, with private sector spending and corporate capital expenditure continuing to grow. In Europe, growth in the production sector amid strong exports indicates a trend toward recovery. As for Asia, China and India continued to realize high growth and other Asian economies also enjoyed generally favorable performances. In Japan, the economy has finally emerged from its malaise and has fully entered a recovery phase, which has led to a rise in consumer spending.

As for the markets in which the Canon Group operates, within the camera segment demand for digital single-lens-reflex (SLR) cameras and compact digital cameras continued to realize healthy growth in overseas markets during the term. Within the office imaging product market, demand for network digital multifunction devices (MFDs) remained solid amid the shift toward color models and advanced functionality. For sales of computer peripherals, including printers, while demand for laser beam printers grew for color models, and a shift in demand was present from single-function printers to multifunctional models for inkjet printers, the segment suffered amid severe price competition. In the optical equipment segment, while demand for steppers, used in the production of semiconductors, has entered a recovery phase, the market for projection aligners, which are used to produce liquid crystal display (LCD) panels, declined due to restrained investment by LCD manufacturers. The average value of the yen for the quarter was ¥116.96 to the U.S. dollar and ¥140.71 to the euro, representing a year-on-year decrease of about 12% against the U.S. dollar, and a decrease of about 3% against the euro.

Amid these conditions, Canon’s consolidated net sales for the first quarter increased by 9.5% from the year-ago period to ¥923.3 billion (U.S.$7,891 million), boosted by a favorable rise in sales of digital cameras, color network MFDs and printers, along with the positive effect of currency exchange rates. The gross profit ratio for the quarter recorded a quarterly high level of 50.7%, a year-on-year increase of 2.1 points. The increase in the gross profit ratio was mainly the result of such factors as suppressing price decline through the launch of new products, and cost reduction efforts realized through ongoing production-reform and procurement-reform activities. These absorbed the effects of escalating crude oil and raw material costs, as well as severe price competition in the consumer product market. Owing to an increase in sales and an improvement in the gross profit ratio, first-quarter gross profit increased by 14.4% to ¥468.5 billion (U.S.$4,004 million). While first-quarter R&D expenditures grew by ¥8.0 billion (U.S.$68 million) from ¥59.2 billion for the year-ago period to ¥67.2 billion (U.S.$574 million), along with the negative effect of the translation of foreign currencies, other selling, general and administrative expenses increased slightly compared with the first quarter of the previous year. Consequently, operating profit in the first quarter totaled ¥170.1 billion (U.S.$1,454 million), a substantial year-on-year increase of 18.7%. Other income (deductions) declined by ¥6.7 billion (U.S.$57 million) mainly due to an increase in currency exchange losses on foreign-currency-denominated trade receivables, despite an increase in interest income accompanying the rise in the interest rate. As a result, income before income taxes and minority interests in the first quarter totaled ¥169.6 billion (U.S.$1,449 million), a year-on-year increase of 13.5%. The effective tax rate during the quarter was 1.0 point lower compared with the previous year. Consequently, first-quarter net income recorded an all-time high of ¥108.3 billion (U.S.$925 million).

Basic net income per share for the quarter was ¥121.98 (U.S.$1.04), a year-on-year increase of ¥17.05 (U.S.$0.15).

Results by Product Segment

In the business machine segment, demand for network digital MFDs, which are grouped in the office imaging products sub-segment, indicates a shift toward color models in the U.S. and European markets, as well as in the domestic Japanese market. Additionally, among color network digital MFDs, the iR C3170 series, equipped with a new high-speed image-processing chip, and the iR C3220 series continued to sell well, as did the new high-speed iR C6870 series models. Among monochrome network digital MFDs, mid-level models such as the iR4570 series contributed to expanded sales, along with the iR6570, featuring energy-saving performance, while low-end models, such as the iR2020 series with enhanced networking features, also contributed to sales growth. Overall, sales of office imaging products for the quarter realized a year-on-year increase of 4.1%. In the field of computer peripherals, laser beam printers enjoyed a year-on-year increase in unit sales, with color models growing more than 60% and sales of supplies also recording healthy growth. Sales in value terms also rose, increasing 11.3% despite the effect of the shift in market demand toward lower priced models. For inkjet printers, while high-speed multifunctional models, such as the PIXMA MP500, recorded a significant increase in unit sales, sales in terms of value increased only slightly due to such factors as a decline in unit sales of single-function printers and severe price competition. As a result, sales of computer peripherals for the quarter increased 8.4% year on year. Sales of business information products increased by 6.5%, mainly due to growing sales of an expanded lineup of document scanners. Collectively, sales of business machines for the quarter totaled ¥631.2 billion (U.S.$5,394 million), a year-on-year increase of 6.3%. Operating profit for the quarter totaled ¥152.2 billion (U.S.$1,301 million), a year-on-year increase of 8.1%, supported by such factors as restrained expense spending and an increase in the gross profit accompanying the sales growth.

Within the camera segment, digital SLR cameras continued to enjoy robust growth, bolstered by particularly strong sales of the EOS DIGITAL REBEL XT and the newly introduced EOS 30D, which has also led to expanded sales of interchangeable lenses. Sales of compact-model digital cameras also continued to expand steadily, with healthy demand for the PowerShot SD600, PowerShot SD550 and PowerShot SD450 models. Accordingly, unit sales of digital cameras for the quarter recorded growth of approximately 20% from the year-ago period. In the field of digital video camcorders, newly introduced Mini DV and DVD models, including the ZR700/600/500 and the DC40, delivered strong performances. As a result, overall camera sales for the first quarter increased by 20.1% from the year-ago period to ¥192.1 billion (U.S.$1,642 million). The gross profit ratio for the camera segment also rose substantially, boosted by such factors as favorable sales in high value-added products, including newly introduced products, and cost-reduction efforts realized through production-reform and procurement-reform activities. As a result, operating profit for the camera segment increased by 84.9% year on year to ¥44.0 billion (U.S.$376 million).

In the optical and other products segment, while steppers, used in the production of semiconductors, have entered a recovery phase, sales of aligners, used to produce LCD, decreased substantially due to restrained investment by LCD manufacturers. The subsidiary that the company acquired last year contributed with significant sales growth and, as a result, first-quarter sales for the segment totaled ¥100.0 billion (U.S.$855 million), a year-on-year increase of 11.3%. Operating profit for the segment grew year-on-year by 14.6% to ¥14.5 billion (U.S.$124 million), boosted by an increase in the gross profit accompanying the increase in sales.

Cash Flow

In the first quarter of 2006, Canon maintained cash flow from operating activities of ¥114.9 billion (U.S.$982 million), a year-on-year increase of ¥38.2 billion (U.S.$327 million), reflecting the substantial growth in sales and increased cash proceeds from sales, combined with an increase in net income and depreciation expenses. Capital expenditure totaled ¥109.8 billion (U.S.$939 million), which was used mainly to expand production capabilities in both domestic and overseas regions, as well as to bolster the company’s R&D-related infrastructure. Cash flow from investing activities totaled ¥124.1 billion (U.S.$1,060 million). As a result, free cash flow, or cash flow from operating activities minus cash flow from investing activities, totaled negative ¥9.2 billion (U.S.$78 million) mainly due to corporate tax payments. Although negative, first-quarter free cash flow improved by ¥11.7 billion (U.S.$100 million) from ¥20.9 billion for the year-ago period.

Cash flow from financing activities recorded an outlay of ¥56.4 billion (U.S.$482 million), mainly resulting from the dividend payout of ¥59.9 billion (U.S.$512 million), an increase of ¥24.4 billion (U.S.$209 million) over the previous year. Consequently, cash and cash equivalents, which totaled ¥937.4 billion (U.S.$8,012 million), although representing a ¥67.6 billion (U.S.$578 million) decrease from the end of the previous year, remained at a high level.

Outlook

As for the outlook for the global economy in the second quarter and thereafter, although there are concerns due to such factors as the increasing prices of crude oil and raw materials, as well as rising interest rates in the U.S. and Japan, the global economy is likely to continue its course toward modest recovery.

In the businesses in which Canon is involved, demand for digital SLR cameras is expected to continue enjoying robust growth primarily in overseas markets. As for network digital MFDs and laser beam printers, while additional demand is projected for full-color models, severe price competition and shifting demand toward lower-priced models are expected to continue. Within the semiconductor-production equipment market, demand for steppers indicates a trend toward moderate recovery, supported by increased investment by chip manufacturers. In the market for projection aligners used in the production of LCD panels, demand is expected to decline due to restrained investment by LCD manufacturers.

The company has revised upward its forecasts for the 2006 fiscal year and now anticipates consolidated net sales of ¥4,140.0 billion (U.S.$35,385 million), consolidated income before income taxes and minority interests of ¥690.0 billion (U.S.$5,897 million), and consolidated net income of ¥432.0 billion (U.S.$3,692 million). The company also projects non-consolidated net sales of ¥2,700.0 billion (U.S.$23,077 million), non-consolidated ordinary profit of ¥489.0 billion (U.S.$4,179 million), and non-consolidated net income of ¥313.0 billion (U.S.$2,675 million). Although uncertainty surrounds several factors that could affect currency exchange rates, significant changes in rates are not anticipated. These forecasts assume currency exchange rates of ¥117 to the U.S. dollar and ¥138 to the euro, representing an approximately 4% depreciation of the yen against the U.S. dollar, and the same level against the euro compared with previous year.

Consolidated Outlook

1st Half		Millions of yen
		Six months ending												Six months ended
		June 30, 2006								Change				June 30, 2005				Change (%)
		Previous Outlook (A)				Revised Outlook (B)				(B - A)				Results (C)				(B / C)
Net sales		¥	1,910,000			¥	1,960,000			¥	50,000			¥	1,755,840			+	11.6	%
Income before income taxes and minority interests			303,000				323,000				20,000				283,733			+	13.8	%
Net income			187,000				201,000				14,000				175,268			+	14.7	%
Fiscal year		Millions of yen
		Year ending												Year ended
		December 31, 2006								Change				December 31, 2005				Change (%)
		Previous Outlook (A)				Revised Outlook (B)				(B - A)				Results (C)				(B / C)
Net sales		¥	4,060,000			¥	4,140,000			¥	80,000			¥	3,754,191			+	10.3	%
Income before income taxes and minority interests			665,000				690,000				25,000				612,004			+	12.7	%
Net income			415,000				432,000				17,000				384,096			+	12.5	%
Non-consolidated Outlook
1st Half		Millions of yen
		Six months ending												Six months ended
		June 30, 2006								Change				June 30, 2005				Change (%)
		Previous Outlook (A)				Revised Outlook (B)				(B - A)				Results (C)				(B / C)
Net sales		¥	1,210,000			¥	1,245,000			¥	35,000			¥	1,158,478			+	7.5	%
Ordinary profit			220,000				232,000				12,000				210,125			+	10.4	%
Net income			143,000				146,000				3,000				137,938			+	5.8	%
Fiscal year		Millions of yen
		Year ending												Year ended
		December 31, 2006								Change				December 31, 2005				Change (%)
		Previous Outlook (A)				Revised Outlook (B)				(B - A)				Results (C)				(B / C)
Net sales		¥	2,660,000			¥	2,700,000			¥	40,000			¥	2,481,481			+	8.8	%
Ordinary profit			475,000				489,000				14,000				440,711			+	11.0	%
Net income			307,000				313,000				6,000				289,294			+	8.2	%

 

CANON INC. AND SUBSIDIARIES

CONSOLIDATED

1.  CONSOLIDATED STATEMENTS OF INCOME

														Thousands of
		Millions of yen												U.S. dollars
		Three months				Three months								Three months
		ended				ended								ended
		March 31, 2006				March 31, 2005				Change (%)				March 31, 2006
		(Unaudited)				(Unaudited)								(Unaudited)
Net sales		¥	923,272			¥	843,367			+	9.5			$	7,891,214
Cost of sales			454,754				433,703								3,886,787
Gross profit			468,518				409,664			+	14.4				4,004,427
Selling, general and administrative expenses			298,383				266,382								2,550,282
Operating profit			170,135				143,282			+	18.7				1,454,145
Other income (deductions):
Interest and dividend income			4,988				2,681								42,632
Interest expense			(381	)			(468	)							(3,256	)
Other, net			(5,151	)			3,956								(44,025	)
			(544	)			6,169								(4,649	)
Income before income taxes and minority interests			169,591				149,451			+	13.5				1,449,496
Income taxes			57,829				52,394								494,265
Income before minority interests			111,762				97,057								955,231
Minority interests			3,493				4,000								29,855
Net income		¥	108,269			¥	93,057			+	16.3			$	925,376

Notes:	1.	Research and development expenses included in selling, general and administrative expenses for the three months ended March 31, 2006 and 2005 were JPY67,150 million (U.S.$573,932 thousand) and JPY59,169 million, respectively.
	2.	Canon’s comprehensive income consists of net income, change in foreign currency translation adjustments, change in net unrealized gains (losses) on securities, change in net gains (losses) on derivative financial instruments and change in minimum pension liability adjustments. Comprehensive income for the three months ended March 31, 2006 and 2005 were JPY114,057 million (U.S.$974,846 thousand) and JPY102,525 million, respectively.

2.  DETAILS OF SALES

														Thousands of
		Millions of yen												U.S. dollars
		Three months				Three months								Three months
		ended				ended								ended
Sales by product		March 31, 2006				March 31, 2005				Change (%)				March 31, 2006
		(Unaudited)				(Unaudited)								(Unaudited)
Business machines:
Office imaging products		¥	286,488			¥	275,083			+	4.1			$	2,448,615
Computer peripherals			316,796				292,292			+	8.4				2,707,658
Business information products			27,869				26,179			+	6.5				238,197
			631,153				593,554			+	6.3				5,394,470
Cameras			192,061				159,911			+	20.1				1,641,547
Optical and other products			100,058				89,902			+	11.3				855,197
Total		¥	923,272			¥	843,367			+	9.5			$	7,891,214
														Thousands of
		Millions of yen												U.S. dollars
		Three months				Three months								Three months
		ended				ended								ended
Sales by region		March 31, 2006				March 31, 2005				Change (%)				March 31, 2006
		(Unaudited)				(Unaudited)								(Unaudited)
Japan		¥	213,694			¥	208,094			+	2.7			$	1,826,444
Overseas:
Americas			285,067				248,723			+	14.6				2,436,470
Europe			281,621				257,336			+	9.4				2,407,017
Other areas			142,890				129,214			+	10.6				1,221,283
			709,578				635,273			+	11.7				6,064,770
Total		¥	923,272			¥	843,367			+	9.5			$	7,891,214

 

Office imaging products :

Office network digital multifunction devices (MFDs) / Color network digital MFDs / Office copying machines / Personal-use copying machines / Full-color copying machines / etc.

Computer peripherals :

Laser beam printers / Single function inkjet printers / Inkjet multifunction peripherals / Image scanners / etc.

Business information products :

Computer information systems / Document scanners / Personal information products / etc.

Cameras :

SLR cameras / Compact cameras / Digital cameras / Digital video camcorders / etc.

Optical and other products :

Semiconductor production equipment / Mirror projection mask aligners for LCD panels / Broadcasting equipment / Medical equipment / Components / etc.

CANON INC. AND SUBSIDIARIES

CONSOLIDATED

3.  SEGMENT INFORMATION BY PRODUCT

														Thousands of
		Millions of yen												U.S. dollars
		Three months				Three months								Three months
		ended				ended								ended
		March 31, 2006				March 31, 2005				Change (%)				March 31, 2006
		(Unaudited)				(Unaudited)								(Unaudited)
Business Machines
Net sales:
Unaffiliated customers		¥	631,153			¥	593,554			+	6.3			$	5,394,470
Intersegment			—				—				—				—
Total			631,153				593,554			+	6.3				5,394,470
Operating cost and expenses			478,985				452,726			+	5.8				4,093,889
Operating profit			152,168				140,828			+	8.1				1,300,581
Cameras
Net sales:
Unaffiliated customers		¥	192,061			¥	159,911			+	20.1			$	1,641,547
Intersegment			—				—				—				—
Total			192,061				159,911			+	20.1				1,641,547
Operating cost and expenses			148,022				136,096			+	8.8				1,265,145
Operating profit			44,039				23,815			+	84.9				376,402
Optical and other products
Net sales:
Unaffiliated customers		¥	100,058			¥	89,902			+	11.3			$	855,197
Intersegment			41,397				35,181			+	17.7				353,820
Total			141,455				125,083			+	13.1				1,209,017
Operating cost and expenses			126,929				112,404			+	12.9				1,084,863
Operating profit			14,526				12,679			+	14.6				124,154
Corporate and Eliminations
Net sales:
Unaffiliated customers		¥	—			¥	—				—			$	—
Intersegment			(41,397	)			(35,181	)			—				(353,820	)
Total			(41,397	)			(35,181	)			—				(353,820	)
Operating cost and expenses			(799	)			(1,141	)			—				(6,828	)
Operating profit			(40,598	)			(34,040	)			—				(346,992	)
Consolidated
Net sales:
Unaffiliated customers		¥	923,272			¥	843,367			+	9.5			$	7,891,214
Intersegment			—				—				—				—
Total			923,272				843,367			+	9.5				7,891,214
Operating cost and expenses			753,137				700,085			+	7.6				6,437,069
Operating profit			170,135				143,282			+	18.7				1,454,145

Note:

General corporate expenses of JPY40,510 million (U.S.$346,239 thousand) and JPY34,039 million in the three months ended March 31, 2006 and 2005, respectively, are included in “Corporate and Eliminations.”

CANON INC. AND SUBSIDIARIES

CONSOLIDATED

4.  CONSOLIDATED BALANCE SHEETS

														Thousands of
		Millions of yen												U.S. dollars
		As of				As of								As of
		March 31,				December 31,								March 31,
		2006				2005				Change				2006
		(Unaudited)												(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		¥	937,367			¥	1,004,953			¥	(67,586	)		$	8,011,684
Marketable securities			71				172				(101	)			607
Trade receivables, net			607,684				689,427				(81,743	)			5,193,880
Inventories			545,074				510,195				34,879				4,658,752
Prepaid expenses and other current assets			271,852				253,822				18,030				2,323,521
Total current assets			2,362,048				2,458,569				(96,521	)			20,188,444
Noncurrent receivables			14,486				14,122				364				123,812
Investments			114,638				104,486				10,152				979,812
Property, plant and equipment, net			1,167,435				1,148,821				18,614				9,978,077
Other assets			317,906				317,555				351				2,717,146
Total assets		¥	3,976,513			¥	4,043,553			¥	(67,040	)		$	33,987,291
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans and current portion of long-term debt		¥	4,483			¥	5,059			¥	(576	)		$	38,316
Trade payables			469,593				505,126				(35,533	)			4,013,615
Income taxes			62,697				110,844				(48,147	)			535,872
Accrued expenses			245,927				248,205				(2,278	)			2,101,940
Other current liabilities			173,989				209,394				(35,405	)			1,487,086
Total current liabilities			956,689				1,078,628				(121,939	)			8,176,829
Long-term debt, excluding current installments			26,525				27,082				(557	)			226,709
Accrued pension and severance cost			73,197				80,430				(7,233	)			625,615
Other noncurrent liabilities			52,014				52,395				(381	)			444,565
Total liabilities			1,108,425				1,238,535				(130,110	)			9,473,718
Minority interests			209,278				200,336				8,942				1,788,701
Stockholders’ equity:
Common stock			174,446				174,438				8				1,490,991
Additional paid-in capital			403,258				403,246				12				3,446,650
Retained earnings			2,108,977				2,060,620				48,357				18,025,444
Accumulated other comprehensive income (loss)			(22,424	)			(28,212	)			5,788				(191,658	)
Treasury stock			(5,447	)			(5,410	)			(37	)			(46,555	)
Total stockholders’ equity			2,658,810				2,604,682				54,128				22,724,872
Total liabilities and stockholders’ equity		¥	3,976,513			¥	4,043,553			¥	(67,040	)		$	33,987,291
														Thousands of
		Millions of yen												U.S. dollars
		As of				As of								As of
		March 31,				December 31,								March 31,
		2006				2005								2006
		(Unaudited)												(Unaudited)
Allowance for doubtful receivables		¥	12,813			¥	11,728							$	109,513
Accumulated depreciation			1,299,439				1,272,163								11,106,316
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments			(21,976	)			(25,772	)							(187,829	)
Net unrealized gains (losses) on securities			7,210				6,073								61,624
Net gains (losses) on derivative financial instruments			(319	)			(1,174	)							(2,726	)
Minimum pension liability adjustments			(7,339	)			(7,339	)							(62,727	)

CANON INC. AND SUBSIDIARIES

CONSOLIDATED

5.  CONSOLIDATED STATEMENTS OF CASH FLOWS

										Thousands of
		Millions of yen								U.S. dollars
		Three months				Three months				Three months
		ended				ended				ended
		March 31, 2006				March 31, 2005				March 31, 2006
		(Unaudited)				(Unaudited)				(Unaudited)
Cash flows from operating activities:
Net income		¥	108,269			¥	93,057			$	925,376
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			53,331				46,631				455,821
Loss on disposal of property, plant and equipment			5,311				1,580				45,393
Deferred income taxes			1,047				2,163				8,949
Decrease in trade receivables			85,512				61,465				730,872
Increase in inventories			(31,396	)			(22,620	)			(268,342	)
Decrease in trade payables			(22,503	)			(4,460	)			(192,333	)
Decrease in income taxes			(47,569	)			(53,712	)			(406,573	)
Increase (decrease) in accrued expenses			(2,833	)			931				(24,214	)
Decrease in accrued pension and severance cost			(7,523	)			(4,245	)			(64,299	)
Other, net			(26,747	)			(44,101	)			(228,607	)
Net cash provided by operating activities			114,899				76,689				982,043
Cash flows from investing activities:
Purchases of fixed assets			(109,829	)			(96,360	)			(938,709	)
Proceeds from sale of fixed assets			4,557				5,040				38,949
Purchases of available-for-sale securities			(5,255	)			(2,464	)			(44,915	)
Proceeds from sale of available-for-sale securities			1,004				417				8,581
Purchases of other investments			(6,556	)			(4,194	)			(56,034	)
Other, net			(7,980	)			(17	)			(68,205	)
Net cash used in investing activities			(124,059	)			(97,578	)			(1,060,333	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			555				147				4,744
Repayments of long-term debt			(2,120	)			(2,075	)			(18,120	)
Increase (decrease) in short-term loans			(68	)			1,445				(581	)
Dividends paid			(59,912	)			(35,475	)			(512,068	)
Other, net			5,111				(1,508	)			43,683
Net cash used in financing activities			(56,434	)			(37,466	)			(482,342	)
Effect of exchange rate changes on cash and cash equivalents			(1,992	)			7,728				(17,026	)
Net decrease in cash and cash equivalents			(67,586	)			(50,627	)			(577,658	)
Cash and cash equivalents at beginning of period			1,004,953				887,774				8,589,342
Cash and cash equivalents at end of period		¥	937,367			¥	837,147			$	8,011,684

CANON INC. AND SUBSIDIARIES

CONSOLIDATED

6.  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

(1) NUMBER OF GROUP COMPANIES

		March 31, 2006				December 31, 2005				Change
Subsidiaries			217				200				17
Affiliates			13				13				—
Total			230				213				17

CHANGES IN GROUP OF ENTITIES

Subsidiaries
Addition:		19 companies
Removal:		2 companies

(2) SIGNIFICANT ACCOUNTING POLICIES

The accompanying consolidated financial statements reflect the adjustments which management believes are necessary to conform them with U.S. generally accepted accounting principles, except for the segment information, as required by Statement of Financial Accounting Standards No.131, “Disclosures about Segments of an Enterprise and Related Information.”

7.  OTHER

We have engaged Ernst & Young ShinNihon to complete a review of the consolidated statements of income, the consolidated balance sheets and the consolidated statements of cash flows as of and for the three months ended March 31, 2006 based upon Statement of Auditing Standards No.100, “Interim Financial Information,” established by the American Institute of Certified Public Accountants.

CONSOLIDATED FINANCIAL RESULTS FOR
THE FIRST QUARTER ENDED MARCH 31, 2006

SUPPLEMENTARY REPORT

TABLE OF CONTENTS

						PAGE
	1.			SALES BY REGION AND PRODUCT			S 1
	2.			SEGMENT INFORMATION BY PRODUCT			S 2
	3.			OTHER INCOME / DEDUCTIONS			S 2
	4.			SALES COMPOSITION BY PRODUCT			S 3
	5.			SALES GROWTH IN LOCAL CURRENCY (Year over year)			S 3
	6.			P&L SUMMARY (2nd Quarter 2006/Projection)			S 4
	7.			PROFITABILITY			S 4
	8.			IMPACT OF FOREIGN EXCHANGE RATES			S 4
	9.			STATEMENTS OF CASH FLOWS			S 4
	10.			R&D EXPENDITURE			S 5
	11.			CAPITAL EXPENDITURE & DEPRECIATION AND AMORTIZATION			S 5
	12.			INVENTORIES			S 5
	13.			DEBT RATIO			S 5
	14.			OVERSEAS PRODUCTION RATIO			S 5
	15.			NUMBER OF EMPLOYEES			S 5

Canon Inc.

1. SALES BY REGION AND PRODUCT		(Millions of yen)

		2006												2005												Change year over year
		1st quarter				2nd quarter (P)				Year (P)				1st quarter				2nd quarter				Year				1st quarter				2nd quarter				Year
Japan
Business machines			147,297				161,703				636,200				153,968				150,541				612,832				-4.3	%			+7.4	%			+3.8	%
Office imaging products			90,216				94,684				377,600				95,563				89,981				357,689				-5.6	%			+5.2	%			+5.6	%
Computer peripherals			37,954				45,546				188,300				39,377				43,532				183,727				-3.6	%			+4.6	%			+2.5	%
Business information products			19,127				21,473				70,300				19,028				17,028				71,416				+0.5	%			+26.1	%			-1.6	%
Cameras			27,798				35,102				136,800				26,583				31,416				127,886				+4.6	%			+11.7	%			+7.0	%
Optical and other products			38,599				49,001				181,500				27,543				26,067				115,487				+40.1	%			+88.0	%			+57.2	%
Total			213,694				245,806				954,500				208,094				208,024				856,205				+2.7	%			+18.2	%			+11.5	%
Overseas
Business machines			483,856				511,944				2,098,100				439,586				452,936				1,889,569				+10.1	%			+13.0	%			+11.0	%
Office imaging products			196,272				219,028				861,700				179,520				202,735				795,551				+9.3	%			+8.0	%			+8.3	%
Computer peripherals			278,842				284,258				1,200,200				252,915				241,913				1,061,179				+10.3	%			+17.5	%			+13.1	%
Business information products			8,742				8,658				36,200				7,151				8,288				32,839				+22.2	%			+4.5	%			+10.2	%
Cameras			164,263				216,637				843,400				133,328				187,825				751,300				+23.2	%			+15.3	%			+12.3	%
Optical and other products			61,459				62,341				244,000				62,359				63,688				257,117				-1.4	%			-2.1	%			-5.1	%
Total			709,578				790,922				3,185,500				635,273				704,449				2,897,986				+11.7	%			+12.3	%			+9.9	%
Americas
Business machines			207,570				214,130				888,200				187,548				187,418				795,268				+10.7	%			+14.3	%			+11.7	%
Office imaging products			87,979				98,121				386,600				76,866				88,903				353,384				+14.5	%			+10.4	%			+9.4	%
Computer peripherals			115,138				112,162				484,000				107,126				94,660				425,877				+7.5	%			+18.5	%			+13.6	%
Business information products			4,453				3,847				17,600				3,556				3,855				16,007				+25.2	%			-0.2	%			+10.0	%
Cameras			64,672				86,828				352,300				52,037				72,528				308,667				+24.3	%			+19.7	%			+14.1	%
Optical and other products			12,825				15,275				62,900				9,138				9,457				42,015				+40.3	%			+61.5	%			+49.7	%
Total			285,067				316,233				1,303,400				248,723				269,403				1,145,950				+14.6	%			+17.4	%			+13.7	%
Europe
Business machines			208,852				225,948				920,900				193,422				204,604				838,081				+8.0	%			+10.4	%			+9.9	%
Office imaging products			86,223				95,877				377,700				82,557				93,515				357,188				+4.4	%			+2.5	%			+5.7	%
Computer peripherals			119,009				126,191				528,000				107,902				107,498				466,965				+10.3	%			+17.4	%			+13.1	%
Business information products			3,620				3,880				15,200				2,963				3,591				13,928				+22.2	%			+8.0	%			+9.1	%
Cameras			64,647				89,753				327,900				57,331				84,502				316,769				+12.8	%			+6.2	%			+3.5	%
Optical and other products			8,122				7,478				34,000				6,583				5,224				26,408				+23.4	%			+43.1	%			+28.7	%
Total			281,621				323,179				1,282,800				257,336				294,330				1,181,258				+9.4	%			+9.8	%			+8.6	%
Other areas
Business machines			67,434				71,866				289,000				58,616				60,914				256,220				+15.0	%			+18.0	%			+12.8	%
Office imaging products			22,070				25,030				97,400				20,097				20,317				84,979				+9.8	%			+23.2	%			+14.6	%
Computer peripherals			44,695				45,905				188,200				37,887				39,755				168,337				+18.0	%			+15.5	%			+11.8	%
Business information products			669				931				3,400				632				842				2,904				+5.9	%			+10.6	%			+17.1	%
Cameras			34,944				40,056				163,200				23,960				30,795				125,864				+45.8	%			+30.1	%			+29.7	%
Optical and other products			40,512				39,588				147,100				46,638				49,007				188,694				-13.1	%			-19.2	%			-22.0	%
Total			142,890				151,510				599,300				129,214				140,716				570,778				+10.6	%			+7.7	%			+5.0	%
Total
Business machines			631,153				673,647				2,734,300				593,554				603,477				2,502,401				+6.3	%			+11.6	%			+9.3	%
Office imaging products			286,488				313,712				1,239,300				275,083				292,716				1,153,240				+4.1	%			+7.2	%			+7.5	%
Computer peripherals			316,796				329,804				1,388,500				292,292				285,445				1,244,906				+8.4	%			+15.5	%			+11.5	%
Business information products			27,869				30,131				106,500				26,179				25,316				104,255				+6.5	%			+19.0	%			+2.2	%
Cameras			192,061				251,739				980,200				159,911				219,241				879,186				+20.1	%			+14.8	%			+11.5	%
Optical and other products			100,058				111,342				425,500				89,902				89,755				372,604				+11.3	%			+24.1	%			+14.2	%
Total			923,272				1,036,728				4,140,000				843,367				912,473				3,754,191				+9.5	%			+13.6	%			+10.3	%