Canon Annual Report 2007

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CANON ANNUAL REPORT 2007

Fiscal Year Ended December 31, 2007

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CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

PUB. BEP017 0408SZ18.1 Printed in Japan

This publication is printed on paper certified by the Forest
Stewardship Council with ink that uses neither VOCs (Volaile
Organic Compounds) nor mineral oil and realizes superior
decomposability and deinkability.

CORPORATE PROFILE

Canon develops, manufactures and sells a wide lineup of copying machines,
printers, cameras, optical products and other products to meet a diverse range
of customer needs. The Canon brand is well recognized and trusted world-
wide by individuals, families, in offices and industrial circles.

Canon first began implementing its Excellent Global Corporation Plan in
1996, and has since delivered a series of strong performances. In fiscal 2007,
the 2nd year of Phase III of the Plan, Canon achieved record earnings and
marked its eighth consecutive year of growth in both sales and net income.

With the spread of globalization and broadband networks, Canon stands
poised to lead a new era, promoting cross-media imaging through advanced
synergies among digital imaging equipment. In addition to strengthening busi-
ness results for enhanced corporate value, the Company engages in a number
of environmental and social contribution activities and focuses on fulfilling its
duties to investors and society by stressing good corporate governance.

CORPORATE PHILOSOPHY: Kyosei

The corporate philosophy of Canon is kyosei. A concise definition of this
word would be “Living and working together for the common good,” but
our definition is broader: “All people, regardless of race, religion or culture,
harmoniously living and working together into the future.” Unfortunately,
the presence of imbalances in our world in such areas as trade, income
levels and the environment hinders the achievement of kyosei.

Addressing these imbalances is an ongoing mission, and Canon is doing
its part by actively pursuing kyosei. True global companies must foster good
relations, not only with their customers and the communities in which they
operate, but also with nations and the environment. They must also bear
the responsibility for the impact of their activities on society. For this reason,
Canon’s goal is to contribute to global prosperity and people’s well-being,
which will lead to continuing growth and bring the world closer to
achieving kyosei.

CORPORATE GOAL

In fiscal 2008, the Company aims to strengthen existing businesses,
expand business operations through diversification and identify next-
generation business domains to assure sustained growth beyond 2010,
while maintaining a high profit margin structure. Canon will make every
effort to join the ranks of the global top 100 companies by 2010 in terms
of key performance indicators. The Company’s goals for 2010 include net
sales of ¥6 trillion and a net income to sales ratio of 10% or more.

CONTENTS

FINANCIAL HIGHLIGHTS ............................ 1

TO OUR STOCKHOLDERS ........................... 2

MESSAGE FROM THE PRESIDENT .............. 6

EXCELLENT GLOBAL CORPORATION

PLAN—PHASE III ......................................... 8

CORPORATE GOVERNANCE ....................... 16

CORPORATE FUNCTIONS ........................... 20

RESEARCH & DEVELOPMENT

PRODUCTION

SALES & MARKETING

CORPORATE SOCIAL RESPONSIBILITY

PRODUCT GROUPS ..................................... 32

AT A GLANCE

OFFICE IMAGING PRODUCTS

COMPUTER PERIPHERALS

CAMERAS

OPTICAL AND OTHER PRODUCTS

MAJOR CONSOLIDATED SUBSIDIARIES .... 42

FINANCIAL SECTION ................................... 43

TRANSFER AND REGISTRAR’S OFFICE ....... 98

STOCKHOLDER INFORMATION ................. 98

Cover Photo:
Canon launched its new digital SLR camera,
EOS 40D, which attracted high praise from the
market. Utilizing a Live View function, users can
check images on a real time basis while taking
photographs.

FINANCIAL HIGHLIGHTS

Millions of yen
(except per share amounts)

Thousands of U.S. dollars
(except per share amounts)

2007

2006

Change (%)

2007

Net sales

Operating profit

Income before income taxes and minority interests

Net income

Net income per share:

-Basic

-Diluted

Total assets

¥4,481,346

¥4,156,759

756,673

768,388

488,332

707,033

719,143

455,325

377.59

341.95

377.53

341.84

¥4,512,625

¥4,521,915

Stockholders’ equity

¥2,922,336

¥2,986,606

+7.8

+7.0

+6.8

+7.2

+10.4

-0.2

-2.2

$39,310,053

6,637,482

6,740,246

4,283,614

3.31

$39,584,430

$25,634,526

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 JPY114=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 28, 2007, solely for the convenience of the reader.

Net Sales
(Millions of yen)

Net Income
(Millions of yen)

Net Income per Share
(Yen)

ROE / ROA
(%)

5,000,000

500,000

6
4
3
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1
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4
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9
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6
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1
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7
3

3
5
8
7
6
4
3

2
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0
8
9
1
3

Basic
Diluted

ROE
ROA

400

9
5
.
7
7
3

3
5
.
7
7
3

5
9
.
1
4
3

4
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16.8

16.0 16.3

16.5

15.9

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6
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10.6

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10.1 10.1

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03 04 05 06

03 04 05 06 07

TO OUR STOCKHOLDERS

Setting Our Sights

even Higher

Overview of Fiscal 2007
Canon celebrated its 70th anniversary in 2007 with record-
high consolidated net sales and net income. This represents
our eighth consecutive year of sales and profit growth.

In fiscal 2007, Canon’s operating environment was gen-

erally favorable. The global economy continued on a
growth path despite steep rises in raw material and fuel
costs and a slowdown in the U.S. economy stemming from
financial uncertainty surrounding the sub-prime loan crisis.
Under these conditions, the corporate sector stood firm
and employment conditions remained stable. In Europe,
which saw European Union expansion, healthy exports and
steady internal demand kept the economy on track.
Turning to Asia, China continued to boast remarkable
growth rates and ASEAN countries grew steadily. Japan’s
moderate but stable growth continued, supported by
robust exports, dynamic capital investment and strong
employment conditions.

Fiscal 2007 Performance Results
Canon recorded sales and profit growth during fiscal 2007.
Compared to the previous year, consolidated net sales rose
7.8% to ¥4,481.3 billion and net income climbed 7.2% to
¥488.3 billion. By product category, sales increased 9.1% to

¥2,935.5 billion for business machines and 10.6% to
¥1,152.7 billion for cameras, but fell 7.2% to ¥393.1 billion
for optical and other products. By operating region, sales
were particularly strong in Europe, where Canon marked its
50th anniversary in 2007, rising 14.1% to ¥1,499.3 billion.
Sales also increased in the Americas, climbing 4.1% to
¥1,336.1 billion. In Japan, sales were up 1.6% to ¥947.6
billion, and elsewhere in Asia and Oceania, sales jumped
11.5% to ¥698.3 billion.

Turning to operating expenses, the Company’s selling,
general and administrative expenses rose 7.4% year on year
to ¥1,122.0 billion. We increased R&D expenses by 19.4% to
¥368.3 billion, which is equivalent to 8.2% of net sales—a
high percentage that demonstrates the Company’s commit-
ment to maintaining its competitive edge through advanced
research and development. The gross profit ratio improved
0.5 percentage points to 50.1%, and free cash flow amount-
ed to ¥406.8 billion, compared to ¥234.4 billion at the previ-
ous year-end.

From a stockholders’ return perspective, Canon set its
full-year dividend per share at ¥110, an increase of ¥10
compared with the previous year, moving closer to the
Company’s targeted stockholder return ratio of around 30%.

Progressing toward Phase III Targets
Canon has set the goal of joining the world’s top 100 com-
panies in terms of key performance indicators by 2010, the
end of Phase III of the Excellent Global Corporation Plan. In
addition to this goal, we envision ourselves carrying on for
another century of sustained development and prosperity. To
this end, we will keep our sights firmly fixed on pursuing
higher profits, offering attractive and timely products, and
effectively reducing costs. In particular, Canon is pursuing
key innovation activities, namely: strengthening supply chain
management (SCM), increasing in-house production,
enhancing automated production and improving the effi-
ciency of procurement processes in order to reduce costs.
Based on the Company’s progress in 2007, we are confident
that Canon is now poised to take great strides forward in the
final three years of Phase III.

The Company undertook aggressive investment in infra-
structure during 2007, with the view to ensuring the future
growth of the Canon Group. As one example, capital expen-
diture was directed toward boosting the automated produc-
tion of toner, toner cartridges and ink cartridges. The
Company successfully introduced a newly designed automat-
ed production line for its toner cartridges in 2007 and has
significantly increased the volume and quality of production.
Toward the establishment of fully automated production sys-
tems, the Company will continue to work toward the Group-
wide development of production technologies from a long-
term perspective.

New Management Challenges
After considering the accumulated capabilities of the Group
and future world market conditions, we decided to set our
sights even higher. We raised our 2010 target for consolidat-
ed net sales from ¥5.5 trillion to ¥6 trillion while targeting a
net income to sales ratio of 10% or more.

Our strategies for joining the global top 100 companies
include boosting sales in high-growth emerging markets. At
the same time, we will work toward creating new business-
es, which in certain cases will entail timely mergers and
acquisitions. In the year under review, Canon acquired
majority ownership of Tokki Corporation, and expects Tokki’s

advanced technology related to production equipment for
organic light-emitting diode (OLED) displays to contribute
considerably toward the development of Canon products.
Canon also reached an agreement with Hitachi, Ltd. to
acquire shares in Hitachi Displays, Ltd., with the aims of
advancing display technologies, ensuring stable procurement
of LCD panels used in Canon products, accelerating its OLED
display development and facilitating product development.
Phase III is an expansion period for Canon, and we will pursue
M&A as a means to strengthen related fields in existing busi-
ness operations, sales networks and the solutions business.
Looking beyond Phase III, we recognize that the cultiva-
tion of next-generation business domains is vital for Canon’s
future growth. Accordingly, the Company is accumulating
technologies and conducting highly advanced research inter-
nally or in collaboration with leading universities and insti-
tutes. We have also identified medical imaging and robotics
as new business domains. In medical imaging, the Company
is advancing collaborative research with Kyoto University in
Japan with the aim of developing innovative diagnostic
imaging devices.

On a final note, to become a company worthy of admira-
tion and respect worldwide, Canon is strengthening its Group-
wide compliance systems and internal controls. In accordance
with our corporate philosophy of kyosei, we believe that an

excellent global corporation ultimately places compliance
above corporate profit. Therefore, with the aim of ensuring
Group-wide compliance, the Company is reinforcing its audit-
ing processes for compliance-related issues and promoting
greater awareness among all employees.

Looking back on our 70-year history, we recognize that the
Company’s continuous prosperity is founded upon the values
that make up its corporate DNA: respect for human dignity,
an emphasis on technology and an enterprising spirit. We
are envisioning the next 30 years until Canon’s 100th
anniversary with confidence in the depth and strength of
these values, which we will refine and pass on to the next
generation of employees.

Seventy years into a remarkable forward-looking journey,

Canon has never been stronger. We ask for your continued
support and understanding of the Company’s endeavors
and objectives.

Fujio Mitarai
Chairman and CEO
Canon Inc.

MESSAGE FROM THE PRESIDENT

Our priority goals for fiscal 2008 attest
to Canon’s ambition and commitment to
become a ¥6 trillion company

Priority Goals for Fiscal 2008
2008 marks the third year of Phase III. Driven by the overar-
ching aim of joining the global top 100 companies by the
final year of Phase III, we are therefore entering an important
period. Recognizing that all measures have been put in place
for improving profit generation and that the Group is com-
mitted to all-out efforts, we are confident that Canon will
achieve sales and profit growth for a ninth consecutive year.
The first of our priority goals in 2008 is to implement
sound strategies designed to secure the overwhelming No. 1
position in the Company’s core businesses. Ultimately, this
means delivering superior products that are rooted in innova-
tive technologies. Canon is well prepared to further solidify
its No. 1 share of the rapidly expanding digital single lens
reflex (SLR) camera market, as well as the compact digital
camera, copying machine and laser beam printer (LBP) mar-
kets in 2008. As for other markets, while we have many
products positioned among the top three, we will work to
further boost our ranking. In addition, we are building on
the innovative concept of cross-media imaging, a sophisticat-
ed combination of input and output devices. Cross-media
imaging will further increase synergies among Canon’s

products and raise their added value. Furthermore, by lever-
aging Canon’s strengths in advanced technologies for
optics, sensing, image processing, simulation, and software,
we are aiming to become the world’s premier digital imag-
ing company.

We have also set the priority goal of ensuring the highest

level of product quality. With the expansion of the global
market, and in line with substantial growth in production
volumes of Canon’s products, product quality risk factors are
increasing. We recognize that a single recall of a defective
product or part could result in massive costs and, more
importantly, a loss of the trust built up over the years among
customers and society. Therefore, we are implementing strin-
gent measures for ensuring the highest standards of product
quality. In addition to product quality, Canon is basically
revising and improving safety and risk controls.

We will reinforce environmental management as a priori-

ty goal. To this end, we will introduce broad measures that
effectively bind the Company’s responsibility to society and
the environment with the aim of raising product competitive-
ness. As environmental problems intensify across the globe,
Canon will make every effort to raise awareness and pro-

mote environmentally friendly product development and
operations throughout the Group.

Another priority goal is strengthening our research and
development structure through strategic reforms. Measures
include enhancing project leadership and raising the efficien-
cy of management and resources distribution. Furthermore,
given the centrality of proprietary technologies to the
Company’s core businesses, we will expand the scope of
R&D and focus efforts on exploratory research geared
toward future market development.

Along with these priority goals, we aim to decrease our
cost to sales ratio, develop new businesses, implement an
information system for Companywide development and pro-
duction, and reinforce compliance systems. We will do our
utmost to realize these objectives on the way to becoming a
¥6 trillion company.

Tsuneji Uchida
President and COO
Canon Inc.

EXCELLENT GLOBAL
CORPORATION PLAN—
PHASE III

Photo:
The imagePRESS C7000VP, a digital color press, has
been well received by the POD market. Adopted by
MicroPage, a New York-based printing company, this
system has contributed to greater printing efficiency
and quality.

The image in the print sample was designed by
Europa Quality & Style Inc. N.Y.

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

Canon is setting the stage for an even faster rate of growth
to join the global top 100 companies

In 1996, Canon launched its medium- and long-term Excellent
Global Corporation Plan, which laid out the following vision:
“In accordance with the philosophy of kyosei, Canon will con-
tinue contributing to society through technological innova-
tion, aiming to be a corporation worthy of admiration and
respect worldwide.” Guided by the criteria of “total optimiza-
tion” and “focus on profit,” Canon pressed forward with
reforms in every aspect of its business. The Company was
rewarded with steadily improving performance results in each
of the Excellent Global Corporation Plan’s five-year terms,
Phase I and Phase II. 2007 was the second year of Phase III of
the Plan.

Overview of Phase I
Phase I transformed the Company mind-
set, emphasizing a total optimization
strategy and focus on profit underpinned
by the selection and concentration of
business areas. Canon particularly
endeavored to strengthen its financial
health, achieving impressive results
including improvements in its equity ratio
and increased retained earnings.

Canon recorded consolidated net

sales of ¥2,696.4 billion and net
income of ¥134.1 billion at the end of
Phase I in fiscal 2000, the beginning of
the Company’s eighth consecutive year
of sales and profit growth.

Overview of Phase II
Canon opened the 21st century with
Phase II, and set out to become No. 1
worldwide in all of its major areas of
business. Working from the solid
financial foundation realized in Phase
I, the Company bolstered the competi-
tiveness of its products—with core
products capturing top global market
share—and continued to enjoy contin-
uous growth in revenues.

At the close of Phase II in fiscal
2005, Canon’s consolidated net sales
amounted to ¥3,754.2 billion and net
income reached ¥384.1 billion.
Compared to results in fiscal 1995, the
year before the Excellent Global
Corporation Plan was implemented,
net sales surged 80.0% while net
income expanded sevenfold.

Goal of Phase III
Under Phase III of the Excellent Global
Corporation Plan, Canon aims to join
the global top 100 companies in
terms of all key performance indica-
tors. Having recorded continuous
growth since fiscal 2000, the
Company re-examined its 2010 target
for net sales and raised it from ¥5.5
trillion to ¥6 trillion.

To reach this new target, Canon
regards the efficient implementation
of the following five key strategies as
essential.

5KEY STRATEGIES

1. Achieving the overwhelming No.1 position
worldwide in all current core businesses

2. Expanding business operations through

diversification

3. Identifying new business domains and
accumulating required technologies

4. Establishing new production systems to
sustain international competitiveness

5. Nurturing truly autonomous individuals

and promoting effective corporate reforms

External Ratings

• Financial Times Global 500 (June 30/July 1, 2007 issue)

Market value ranking: 100

(7th in the Technology Hardware and Equipment category)

• FORTUNE Global 500 (July 23, 2007 issue)

Revenues ranking: 182

(6th in the Computers, Office Equipment category)

Profits ranking: 124

(3rd in the Computers, Office Equipment category)

• BusinessWeek “Best Global Brands” of 2007 (August 6, 2007 issue)

Ranking: 36

(4th among all Japanese companies)

FORTUNE Global 500 is a registered trademark of FORTUNE Magazine,
a division of Time Inc. in the United States of America.

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

1. Achieving the overwhelming No.1 position worldwide

in all current core businesses

expand Canon’s in-house production
capacity as well as reduce costs.

In semiconductor exposure equip-
ment, Canon released the FPA-7000AS7
immersion lithography scanning stepper.
The Company will reinforce its lineup of
ArF scanning steppers, including dry and
immersion types, in an aim to expand
market share.

Furthermore, the Company will
promote cross-media imaging as a
fundamental concept for the continuous
expansion of its businesses. In specific
terms, the Company will realize high-level
synergies through the consolidation of
input and output, image processing and
color management and other imaging
technologies.

Canon’s FPA-7000AS7 immersion lithography
scanning stepper was launched in 2007

PricewaterhouseCoopers, a major international accounting and auditing company in Zurich, Switzerland,
has decided to use Canon’s MFD security systems for document management

Canon has achieved global No. 1 market
positions for various core products and
will strive to further its market leadership.
In the office imaging business, riding

the momentum of the market shift to
color imaging models, Canon is strength-
ening its color network products in the
world. Canon will continue to leverage its
Multifunctional Embedded Application
Platform (MEAP) to expand its solutions
business in global markets.

In cameras, the Company capitalized
on the remarkable growth of the digital

SLR camera market. With a lineup of
products for a broad range of users from
beginners to professionals, Canon will
strive to maintain its commanding lead in
the digital camera market. The Company
is taking major steps to bolster in-house
production of Complementary Metal
Oxide Semiconductor (CMOS) sensors, a
key component in digital cameras and
digital video camcorders. Specifically,
Canon will establish a new facility for
CMOS development through production
in Kawasaki, Japan. This move will further

2. Expanding business operations through diversification

Canon is aggressively working to bring
OLED displays to market

Large-format inkjet printers are working at SPECTOR, a photographic company in Belgium.
This printer is effective across a variety of materials including canvas

©Hitomi-za Otome Bunraku

Canon is forging ahead with measures to
realize commercial opportunities in SEDs

Canon is pursuing diversification to ensure
further growth. For example, the
Company entered the print-on-demand
(POD) market and the market for large-
format printers as new business areas.

The display business is indispensable

to the promotion of the cross-media
imaging concept. In this context, Canon
has improved its infrastructure for the
mass production of surface-conduction

electron-emitter displays (SEDs). As a
means of accelerating the growth of its
display technologies, Canon has also
joined an alliance with Hitachi, Ltd. and
Matsushita Electric Industrial Co., Ltd.
through an acquisition that enables the
Company to stably procure LCD panels
for use in its products and accelerate
development of organic light-emitting
diode (OLED) displays.

Canon also acquired Tokki Corporation,

whose advanced technology related to
OLED displays will significantly contribute

to the Company’s future mass production
of OLED displays.

Canon continues to promote the
Group’s business expansion. Canon
Marketing Japan has been actively expand-
ing its solutions business and has acquired
Argo 21 Corporation, a systems integrator.
In the United States, Canon plans to com-
mercialize molecular diagnostic equipment.

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

3. Identifying new business domains and accumulating

required technologies

In collaboration with Kyoto University in Japan, Canon is engaging in medical imaging technology research as a next-generation business domain

Canon is targeting medical imaging and
industrial robotics as new business
domains after 2010. The Company
selects new business domains based on
their prospects for significant market
growth, potential progress of innova-
tive technology, consistency with
Canon’s core capabilities and effect on
sound growth.

Canon engages in leading-edge
collaborative research in areas with poten-
tial, including next-generation business

domains. In the field of medical imaging,
the Company is working with Stanford
University in the United States, Kyoto
University in Japan and other institutes.
From the long-term perspective,
research is essential for further growth,
and we will therefore continue to devote
attention to global research involving
international investigative studies in a
number of technical fields. Canon also
dispatches researchers to major interna-
tional universities and research institutes

that engage in the development of cut-
ting-edge technologies.

Research at the Robotics Institute of Carnegie
Melon University in the United States

4. Establishing new production systems to sustain

international competitiveness

To compete with the world’s top
companies, Canon is raising production
efficiency to even higher levels through
in-house production, automation and
procurement reforms.

In 2007, Canon concentrated its
production engineering bases in Kawasaki,
Japan. This will further accelerate research
and development and reinforce
production-engineering capabilities related
to automated production.

Canon installed new concept automated

production lines for toner cartridges at Oita
Canon Materials Inc. in 2007. Canon
Machinery Inc. is well advanced in the
manufacture of automated production lines
for cartridges. Looking ahead, Canon will
continue its endeavors to establish next-
generation, fully automated production lines.

Production engineering development for automated production at Kawasaki, Japan

5. Nurturing truly autonomous individuals and promoting

effective corporate reforms

Canon recognizes the necessity of nurtur-
ing employees who can lead on the
global stage. To this end, the Company
established the Canon Global
Management Institute (CGMI) in Tokyo in
2006. As a strategy for Phase III of the
Excellent Global Corporation Plan, the
Institute functions as a development
center for future leaders and executives

of the Group worldwide.

As it continually strives to maintain
the integrity of a first-rate global compa-
ny, Canon holds employee compliance in
the highest regard. Canon is strengthen-
ing compliance by further improving its
inspection processes and promoting
awareness among employees and execu-
tive officers alike.

A presentation meeting on the results of global
leader training at the CGMI in Meguro, Tokyo

CORPORATE GOVERNANCE

Positioning itself for the future, Canon is bolstering corporate governance
commensurate with business growth

Governance Structure (as of December 31, 2007)

Canon Inc.

General Meeting of Stockholders

Board of Directors

Chairman and CEO
President and COO
Executive Vice President

Subsidiaries &
Subsidiaries &
Affiliates
Affiliates

Executive Committee

Corporate Audit Center

Headquarters Administrative Divisions

Product Group Operations

Marketing Subsidiaries & Affiliates

Manufacturing Subsidiaries & Affiliates

R&D Subsidiaries & Affiliates

Board of Corporate Auditors

Management Strategy Committee

New Business Development Committee

Corporate Ethics and Compliance Committee

Internal Control Committee

Disclosure Committee

Global Legal Affairs Coordination Committee

Boards of Directors & Corporate Auditors (as of December 31, 2007)

Chairman & CEO

Fujio Mitarai

President & COO

Tsuneji Uchida

Executive Vice President

Toshizo Tanaka
Group Executive, Policy & Economy Research
Headquarters

Senior Managing Directors

Nobuyoshi Tanaka
Group Executive, Corporate Intellectual Property &
Legal Headquarters

Junji Ichikawa
Chief Executive, Optical Products Operations

Hajime Tsuruoka
President, Canon Europa N.V.;
President & CEO, Canon Europe Ltd.

Managing Directors

Akiyoshi Moroe
Group Executive, Human Resources Management &
Organization Headquarters;
Group Executive, External Relations Headquarters

Kunio Watanabe
Group Executive, Corporate Planning Development
Headquarters;
Deputy Group Executive, Policy & Economy Research
Headquarters

Yoroku Adachi
President & CEO, Canon U.S.A., Inc.

Yasuo Mitsuhashi
Chief Executive, Peripheral Products Operations

Tomonori Iwashita
Group Executive, Global Environment Promotion
Headquarters
Group Executive, Quality Management Headquarters

Masahiro Osawa
Group Executive, Finance & Accounting Headquarters

Shigeyuki Matsumoto
Group Executive, Device Technology
Development Headquarters

Directors

Katsuichi Shimizu
Chief Executive, Inkjet Products Operations

Ryoichi Bamba
Executive Vice President, Canon U.S.A., Inc.

Toshio Homma
Chief Executive, L Printer Products Operations

Keijiro Yamazaki
Group Executive, General Affairs Headquarters

Shunichi Uzawa
Group Executive, Core Technology Development
Headquarters

Masaki Nakaoka
Chief Executive, Office Imaging Products Operations

Toshiyuki Komatsu
Group Executive, Leading-Edge Technology Research
Headquarters

Haruhisa Honda
Group Executive, Production Engineering Headquarters

Tetsuro Tahara
Group Executive, Global Manufacturing & Logistics
Headquarters

Seijiro Sekine
Group Executive, Information & Communication
Systems Headquarters

Shunji Onda
Group Executive, Global Procurement Headquarters

Kazunori Fukuma
President & CEO, SED Inc.

Hideki Ozawa
President & CEO, Canon (China) Co., Ltd.

Masaya Maeda
Chief Executive, Image Communication Products
Operations

Corporate Auditors

Teruomi Takahashi
Kunihiro Nagata
Tadashi Ohe
Yoshinobu Shimizu
Minoru Shishikura

Basic Policy and Corporate Governance Structure
Canon recognizes that strengthening management supervision
functions and maintaining management transparency are vital to
improving its corporate governance structure and raising corporate
value. Canon’s basic governance structure comprises the General
Meeting of Stockholders, the Board of Directors and the Board of
Corporate Auditors. Furthermore, the Executive Committee and
management committees are dedicated to key issues. All of these
bodies work together to ensure appropriate management of the
Group through an independent internal auditing structure centered
on the Corporate Audit Center, and an information disclosure
system for management activities.

Board of Directors
Important business matters are discussed and ratified during meet-
ings of the Board of Directors and Executive Committee, which are
attended, in principle, by all directors. As of December 31, 2007, the
Board consisted of 27 directors. In order to realize a more stream-
lined and efficient management decision-making process, Canon
has not adopted an outside director system. The main reason why
directors are chosen from among Canon personnel is that they have
followed these same codes of behavior and have been subject to
close scrutiny within the Group over many years.

Auditing System
The Company has five corporate auditors, including three external
auditors who have no personal, capital or business affiliations with
Canon. Auditors’ duties include attending meetings of the Board of
Directors, Executive Committee and various management commit-
tees, listening to business reports from directors, carefully examining
documents related to important decisions, and conducting strict
audits of the Group’s business and assets. Corporate auditors also
work closely with accounting auditors and the Corporate Audit
Center, which monitors compliance, risk management and internal
control systems, and provides assessments and recommendations.

Canon compliance cards

Internal Control Committee
The Internal Control Committee, established in 2004, ensures the
reliability of financial reporting. It also conducts reviews of the
Group’s internal controls in order to gauge the true efficiency of
business operations, supports compliance with all related laws and
internal regulations, and implements sound internal controls. In
response to the Sarbanes-Oxley Act, including Section 404 that
came into force during 2006, Canon continues to reinforce internal
control systems and implement all appropriate measures.

In order to strengthen internal controls, Canon conducts com-

prehensive evaluations of internal controls across areas including
accounting, management oversight, legal compliance, IT systems,
and promotion of corporate ethics.

Internal controls over financial reporting as of December 31, 2007,
have been assessed as effective by the management and the independ-
ent registered public accounting firm. (Please refer to p.95 and p.97)

Other Corporate Governance Committees
Canon’s management committees are integral to its overall gover-
nance system. Key among these are the Corporate Ethics and
Compliance Committee, which discusses and approves compliance
and corporate ethics policies; the Global Legal Affairs Coordination
Committee, which analyzes trends in legal developments and
works to raise the level of employee awareness regarding impor-
tant legal issues facing the Group; and the Disclosure Committee,
which is dedicated to ensuring the dissemination of accurate and
thorough information.

Compliance
Since its founding, employee education has been based on the
guiding principles of the San-Ji, or “Three Selfs” spirit, namely “self-
motivation,” or taking the initiative and being proactive in all things;
“self-management,” or conducting oneself responsibly and being
accountable for all one’s actions; and “self-awareness,” or under-
standing one’s situation and role in it. Based upon these principles,

CORPORATE GOVERNANCE

the Canon Group Code of Conduct was established as a standard
for executives and employees.

Canon holds a Compliance Week twice per year to give employ-

ees a chance to discuss issues related to compliance and corporate
ethics and to recognize the importance of their individual actions in
the workplace.

Disclosure
Canon makes every effort to disclose information on its manage-
ment and business strategies as well as its performance results to all
stakeholders in an accurate, fair and timely manner. To this end,
Canon holds regular briefings and posts the latest information on its
Website together with a broad range of disclosure materials. Canon
has established its own Disclosure Guidelines, in addition to a
Disclosure Committee that serves to ensure strict compliance with
disclosure regulations prescribed by stock exchanges.

With 43.5% of Canon’s shares owned by non-Japanese investors

as of December 31, 2007, the Group goes to great lengths to
promote close relations with non-Japanese institutional investors,
maintaining IR bases in Europe and the United States and working to
ensure that investors inside and outside of Japan have access to the
same information. Canon will continue to promote transparency and
understanding of its activities by practicing thoroughgoing disclosure.

Introduction of an Executive Officer System
At a Board of Directors meeting held on January 30, 2008,
Canon resolved to introduce an Executive Officer System
effective April 1, 2008. Executive Officers are appointed
and discharged by the Board of Directors and have a term
of office of one year. The number of Executive Officers has
initially been set at eight.

Taking into consideration growth in the scope of its
business activities, Canon recognizes the need to bolster its
management execution structure. By promoting capable
human resources with accumulated executive knowledge
across specific business areas, the Company is endeavoring
to realize more flexible and efficient management opera-
tions. To this end, Canon will gradually increase the num-
ber of Executive Officers and further solidify its
management systems.

Significant Differences in Corporate Governance Practices
between Canon and U.S. Companies Listed on the NYSE

Section 303A of the New York Stock Exchange (the “NYSE”) Listed
Company Manual (the “Manual”) provides that companies listed on
the NYSE must comply with certain corporate governance stan-
dards. However, foreign private issuers whose shares have been
listed on the NYSE, such as Canon Inc. (the “Company”), are
permitted, with certain exceptions, to follow the laws and practice
of their home country in place of the corporate governance prac-
tices stipulated under the Manual. In such circumstances, the
foreign private issuer is required to disclose the significant differ-
ences between the corporate governance practices under Section
303A of the Manual and those required in Japan. A summary of
these differences as they apply to the Company is provided below.

1. Directors
Currently, the Company’s board of directors does not have any
director who could be regarded as an “independent director” under
the NYSE Corporate Governance Rules for U.S. listed companies.
Unlike the NYSE Corporate Governance Rules, the Corporation Law
of Japan (the “Corporation Law”) does not require Japanese com-
panies with a board of corporate auditors such as the Company, to
appoint independent directors as members of the board of direc-
tors. The NYSE Corporate Governance Rules require non-manage-
ment directors of U.S. listed companies to meet at regularly
scheduled executive sessions without the presence of management.
Unlike the NYSE Corporate Governance Rules, however, the
Corporation Law does not require companies to implement an
internal corporate organ or committee comprised solely of inde-
pendent directors. Thus, the Company’s board of directors currently
does not include any non-management directors.

2. Committees
Under the Corporation Law, the Company may choose to:
(i) have an audit committee, nomination committee and compensa-
tion committee and abolish the post of corporate auditors; or
(ii) have a board of corporate auditors.

The Company has elected, to have a board of corporate auditors,
whose duties include monitoring and reviewing the management
and reporting the results of these activities to the shareholders or
board of directors of the Company. While the NYSE Corporate
Governance Rules provide that U.S. listed companies must have an
audit committee, nominating committee and compensation com-
mittee, each composed entirely of independent directors, the
Corporation Law does not require companies to have specified
committees, including those that are responsible for director nomi-
nation, corporate governance and executive compensation.

The Company’s board of directors nominates the candidates for

directorship and submits a proposal at the general meeting of
shareholders for shareholder approval. Pursuant to the Corporation
Law, the shareholders then vote to elect directors at the meeting.
The Corporation Law requires that the total amount or calculation
method of compensation for directors and corporate auditors be
determined by a resolution of the general meeting of shareholders
respectively, unless the amount or calculation method is provided
under the Articles of Incorporation. As the Articles of Incorporation
of the Company do not stipulate the requirements as expressed
under the Corporation Law, the amount of compensation for the
directors and corporate auditors of the Company is determined by a
resolution of the general meeting of shareholders. The allotment of
compensation for each director from the total amount of compen-
sation is determined by the Company’s board of directors, and the
allotment of compensation to each corporate auditor is determined
by consultation among the Company’s corporate auditors.

3. Audit Committee
The Company plans to avail itself of paragraph (c)(3) of Rule 10A-3
of the Security Exchange Act, which provides that a foreign private
issuer which has established a board of corporate auditors shall be
exempt from the audit committee requirements, subject to certain
requirements which continue to be applicable under Rule 10A-3.
Pursuant to the requirements of the Corporation Law, the
shareholders elect the corporate auditors by resolution of a general
meeting of shareholders. The Company currently has five corporate
auditors, although the minimum number of corporate auditors
required pursuant to the Corporation Law is three.

Unlike the NYSE Corporate Governance Rules, Japanese laws

and regulations, including the Corporation Law, do not require
corporate auditors to be experts in accounting or to have any
other area of expertise. Under the Corporation Law, a board of
corporate auditors may determine the auditing policies and
methods for investigating the business and assets of a Company,
and may resolve other matters concerning the execution of the
corporate auditor’s duties. The board of corporate auditors pre-
pares auditors’ reports and may veto a proposal for the nomina-
tion of corporate auditors and accounting auditors put forward by
the board of directors.

Under the Corporation Law, more than half of a company’s
corporate auditors must be “outside” corporate auditors. These
are individuals who are prohibited to have ever been a director,
executive officer, manager, or employee of the Company or its
subsidiaries. The Company’s current corporate auditor system
meets these requirements. Among the five members on the
Company’s board of auditors, three are outside corporate
auditors. The qualifications for an “outside” corporate auditor
under the Corporation Law are different from the audit committee
independence requirement under the NYSE Corporate
Governance Rules.

4. Shareholder Approval of Equity Compensation Plans
The NYSE Corporate Governance Rules require that shareholders be
given the opportunity to vote on all equity compensation plans and
any material revisions of such plans, with certain limited exceptions.
Under the Corporation Law, a Company is required to obtain
shareholder approval regarding the details of an equity-compensation
plan. Stock acquisition rights to be issued to directors and corporate
auditors are recognized as part of remuneration of directors and
corporate auditors, and the issuance of stock acquisition rights must
be approved by shareholders as part of their approval regarding
remuneration of directors and corporate auditors.

CORPORATE FUNCTIONS

RESEARCH & DEVELOPMENT ................. 22

PRODUCTION .......................................... 24

SALES & MARKETING ............................. 26

CORPORATE SOCIAL RESPONSIBILITY ... 28

Photo:
The Tsuzuri Project, a collaborative initiative
between Canon and the Kyoto International Culture
Foundation, aims to preserve and pass on important
Japanese cultural properties using the latest digital
technologies. Canon’s large-format inkjet printers
contributed to the faithful reproduction of original
works.

RESEARCH & DEVELOPMENT

While focusing on the development of proprietary products, Canon will
strengthen R&D activities in an effort to identify next-generation domains.

significant to its future. The Strategic Product Research
Headquarters, pursuing both technological and market-
based endeavors, develops the essential technologies
required to create innovative products beyond the scope
of Product Operations. The Frontier Research
Headquarters, in collaboration with global institutes,
conducts research into emerging technologies as the
basis for cultivating future businesses.

Bolstering Product Strength
In order to deliver a consistent stream of unique products,
Canon is strengthening its activities in the development of
such key components and devices as CMOS sensors and
DigitalImagingIC (DIGIC) imaging processors for digital
cameras, and iR controllers for multifunction devices
(MFDs). Further enhancing and accelerating development,
the Company successfully incorporated such key compo-
nents and devices into new products throughout 2007.
To raise product prowess even further, Canon is
developing and promoting “cross-media imaging,” a
concept that, through interactive connectivity, enables
advanced synergies between such input and output
devices as cameras, printers and displays. Cross-media
imaging allows users to realistically communicate and
reproduce at will a variety of images and information.
In focusing on this link between its input and output
devices, Canon will continue to promote the develop-
ment of Companywide digital platform technologies
that include user-interface, communication and image
processing across its entire product lineup.

Concurrent processes bring together development and production
divisions for multifunction devices at the Company’s Toride Plant

Canon is conducting collab-
orative research with lead-
ing institutions such as
Stanford University in the
United States

R&D Expenditure
(Millions of yen)

400,000

1
6
2
8
6
3

7
0
3
8
0
3

6
7
4
6
8
2

0
0
3
5
7
2

0
4
1
9
5
2

R&D Expenditure and Patents
Canon is committed to the pursuit of cutting-edge R&D
as a vital means to deliver unique, proprietary products.
In fiscal 2007, the Company increased R&D expenditure
by ¥60.0 billion from the previous fiscal year to ¥368.3
billion, accounting for 8.2% of net sales. From this
total, ¥122.6 billion, or 33.3%, was allocated to the
Business Machines segment, ¥44.3 billion, or 12.0%,
went to the Cameras segment, ¥42.3 billion, or 11.5%
went to the Optical and Other Products segment, and
¥159.1 billion, or 43.2%, was used for basic R&D not
belonging to any one business segment.

In 2007, the Company was granted 1,989*
patents in the United States, placing third among all
corporations. This marked the 16th consecutive year
Canon has ranked among the top three.

*Source: U.S. Patent and Trademark Office; Calculated based upon

announcements of weekly totals.

Strengthening the Company’s R&D Infrastructure
Canon continues to improve its R&D capabilities by
strengthening its infrastructure. As a part of these
endeavors, the Company established the Technology
Strategy Committee, the Strategic Product Research
Headquarters and the Frontier Research Headquarters on
January 1, 2008. The Technology Strategy Committee
formulates Companywide R&D strategy proposals

Raising Development Efficiency
By linking its development and production divisions,
Canon promotes concurrent processes to ensure
cooperation from the initial product concept stage. The
early-stage consideration of production processes and
identification of problem areas has led to shorter lead
times as well as cost reductions.

Canon also aims to establish an integrated IT system

based on 3D-CAD systems to better utilize design
information and enhance the links among design, trial,
verification and production stages. Representing a key
measure in the Company’s efforts to innovate the
development process, 3D-CAD systems were introduced
Companywide, dramatically speeding up product
development and reducing trial times. Looking ahead,
Canon plans to standardize 3D-CAD and other informa-
tion systems throughout all business operations by 2010.

Researching Next-Generation Technologies
The Company is pursuing the development of next-
generation technologies in fields that exhibit significant
potential. These include such new domains as biotech-
nology, nanotechnology and life sciences.

Canon actively conducts leading-edge research

The development of digital
SLR cameras using the
3D-CAD system at the
Company’s Shimomaruko
Headquarters, Tokyo

activities on a global scale to access and acquire the
latest technologies necessary for cultivating new
markets. The Company also dispatches researchers
and conducts collaborative research with the world’s
leading universities and institutes.

As next-generation business domains beyond
2010, Canon is focusing its sights on medical imaging
and robotics. In medical imaging, Canon is developing
advanced diagmatic imaging technologies that enable
the detection of metabolic changes and the structure
of human subjects. This development aims to facilitate
the early detection of disease to improve the quality of
life. As an example, the Company is undertaking a joint
research project with Kyoto University in Japan.

Canon announced the development of a 50 million-pixel
CMOS sensor prototype in 2007

PRODUCTION

Proceeding with in-house and automated production, Canon is expanding
capacity to meet growing global demand.

in production reforms. Contributing to improved
flexibility, Canon is employing cell production at all of
its production bases worldwide.

Based on this highly successful cell production
system, Canon is moving toward fully integrating
comprehensive “pull” production, which involves the
timely manufacture of the exact number of products
that are sold or “pulled” by the market. This new pull
production dramatically increases the speed with
which changes can be made in response to fluctua-
tions in order volume. Looking ahead, in order to
further shorten lead times and reduce costs, Canon
will continue to implement this new pull production
while enhancing production reforms in other fields.

At Canon Vietnam Co., Ltd.,
inkjet printer production
reforms are advancing

Establishment of New Production Methods
Canon first introduced the cell production system in
1998 and in the ensuing decade has substantially
increased production efficiency. Utilizing small teams
of workers, or “cells,” who assemble one product
from start to finish has marked a major step forward

Differentiating Products and Cost Cutting
through In-House Production
An important strategy for differentiating the Company’s
products and reducing costs is the in-house production
of key devices and components. Canon is also working
toward expanding its in-house production of manufac-

Oita Canon is integrating machine and staff assembly operations

turing equipment including molds. Canon Mold Co.,
Ltd. in charge of mold production for the entire Group
expanded capacity with a new facility to enhance in-
house production of molds in 2007. Canon is promoting
comprehensive in-house production from CMOS sensors
through printed circuit boards and plastic parts.

Expanding Production Capacity
Canon continues to increase its production capacity to
meet growing demand for its products worldwide.
Concerning inkjet printers, the Company placed a
considerable amount of weight on the expansion of its
production facilities based on a long-term perspective.
In Vietnam, Canon completed construction of its
second inkjet printer plant in 2007 and will commence
full-scale operations in 2008. Canon also completed
construction of a facility for inkjet cartridge production at
Oita Canon Materials Inc. in Japan in 2007. Housing an
automated production assembly line, Canon is taking
steps to expand production capacity for inkjet cartridges.
Also at Oita Canon Materials, given the growing
global demand for toner cartridges, Canon is planning
to build a new plant in Hita, Oita in 2008. At Canon

New automated toner
cartridge production lines
were installed at Oita
Canon Materials

Precision Inc. in Aomori, Japan, the Company began
construction in 2007 of a plant to manufacture toner
cartridges for printers and copying machines.
Scheduled to commence operations in 2008, the plant
will incorporate automated assembly lines to signifi-
cantly raise productivity levels.

The Company has significantly raised the produc-
tion capacity of interchangeable single lens reflex (SLR)
lenses at Oita Canon Inc. in Japan. This is in response
to the rapidly expanding market for digital SLR cam-
eras. With the addition of lens production, Canon has
significantly reduced lead times.

Canon Mold is reinforcing its production facilities for
mold-making operations

SALES & MARKETING

Canon is significantly boosting sales in emerging markets and expanding
its businesses through diversification.

Looking ahead, the Company will strengthen its
solutions business and provide optimal proposals on
an individual client firm basis. In South America,
Canon will place particular emphasis on reinforcing its
sales and marketing infrastructure. The Company
aims to secure the No. 1 position in both the con-
sumer and business machines markets. At the same
time, Canon will cultivate new markets with the
establishment of new businesses, such as life science.
Canon U.S. Life Sciences, Inc. is engaged in R&D for
molecular diagnostic systems. In addition, Canon
U.S.A. will expand its business in other fields taking
into consideration M&A.

Europe
In Europe, sales climbed 14.1% from the previous fiscal
year to ¥1,499.3 billion, comprising 33.5% of consoli-
dated net sales.

In 2007, unit sales in every product category were

up. Canon also secured the No. 1 market share for
digital SLR cameras, compact digital cameras, and
both color and monochrome copying machines. An
increase in sales of high-value added products,
particularly digital SLR cameras and POD machines,
contributed significantly to the Company’s earnings.

In the emerging markets of this region, particular-

ly Russia, Canon achieved double-digit percentage
sales growth by raising the Company’s presence and
brand image, increasing investment in marketing, and

Canon Concerto, a private product exhibition, was held in Dubai
in 2007, the first time the event has visited the Middle East

Canon is engaged in
the development of molec-
ular diagnostic equipment.
The goal is to bring this
technology to market in
the United States

Customer Contact Points around the World
Regional marketing headquarters oversee activities in
each region of the globe: Canon U.S.A., Inc. in North
and South America; Canon Europe Ltd. and Canon
Europa N.V. in Europe, Russia, Africa and the Middle
East; Canon (China) Co., Ltd. in Asia excluding Japan
and Korea; Canon Australia Pty. Ltd. in Oceania; and
Canon Marketing Japan Inc. in Japan.

The Americas
In fiscal 2007, sales in the Americas increased 4.1%
year on year to ¥1,336.1 billion, representing 29.8%
of Canon’s consolidated net sales.

In this region, Canon enjoyed double-digit sales
growth in the areas of large-format printers, print-on-
demand (POD), medical equipment and broadcasting
equipment. In business machines, sales of the
imageRUNNER lineup of color copying machines grew
steadily. On the earnings front, high profitability
continued in the camera business as Canon held its
No. 1 spot for both digital single lens reflex (SLR)
cameras and compact digital cameras.

By broad geographic region, firm year-on-year
results in North America and strong growth in Latin
America drove the Company’s performance forward.

more effectively directing sales and marketing chan-
nels. The Company also took steps to strengthen its
own sales and marketing structure for the Middle
East by establishing sales companies with a strong
focus on the UAE and Turkey.

Asia and Oceania
Canon reported revenue and profit growth in Japan in
fiscal 2007, with sales increasing 1.6% year on year to
¥947.6 billion, representing 21.1% of the Company’s
consolidated sales.

Along with its M&A activities aimed at grooming IT

solutions as a core business, Canon Marketing Japan
worked toward establishing next-generation businesses
and expanding profits in its business solutions, con-
sumer products, and industrial equipment businesses.
Sales in Oceania and Asian countries were up
11.5%, reaching ¥698.3 billion, which accounts for
15.6% of consolidated sales.

In the growth markets of India and Vietnam, year-

on-year sales dramatically increased. Canon also
reported steady sales growth in other Asian countries.
Celebrating its 10th anniversary in China, 2007 will be

Canon Europa celebrated
its 50th anniversary of
business at a party held
in Monaco

remembered as the year in which Canon Asia EXPO
2007 was held in Beijing and the Company first
achieved US$1 billion in sales.

Extending its reach across emerging markets
including Thailand and Indonesia, the Company will
also bolster its sales and marketing activities in tune
with the needs and unique characteristics of each
country and region.

In Oceania, Canon Australia achieved a remarkable
jump in unit sales of large-format printers. The compa-
ny will boost its solutions business in the finance, legal
and government sectors.

Showcasing the appeal of Canon’s imaging products and
technologies at the Canon Asia EXPO 2007 in Beijing, China

CORPORATE SOCIAL RESPONSIBILITY

Guided by its corporate philosophy of kyosei, Canon actively participates in
environmental conservation and social contribution activities around the world.

Camera products, shipped from Oita to Shanghai,
are sent to Beijing via train. Canon is promoting a modal shift in China

Canon’s Basic Approach to CSR
Canon’s corporate philosophy is kyosei, defined as
“Living and working together for the common good.”
The Company puts kyosei into practice through its
participation in environmental conservation and social
contribution activities around the world. As Canon
extends its range of business globally, the number of its
stakeholders increases and the sphere of its social
influence expands. Based on this recognition, we are
actively pursuing activities that earn the trust and
respect of stakeholders and society.

Environmental Activities
Life Cycle Assessment Approach
Canon conducts its environmental activities from the
basic standpoint of life cycle assessment (LCA) to ensure
that its products are environmentally friendly at every
stage, from procurement and production to use and
recycling. At the development stage, the Company’s
3D-CAD systems have reduced waste from the creation
of virtual prototypes. In recycling, Canon remanufac-
tures monochrome copying machines and color MFDs
with a considerable amount of reused components.

Environmentally Friendly Products
Canon designs and produces its products with the
environment in mind, including at the usage stage of
the product life cycle. For example, the Company’s
PIXMA MP 610 inkjet multifunction printer (MFP)
incorporates a control unit that provides power sepa-
rately to copy, print and scan functions only when in
use, resulting in approximately 86% savings on power
consumption compared to earlier models.

In addition, the PowerShot G9 contributes to
resource and transportation energy savings. This is
attributed to the redesign of its packaging, which has
reduced volume and mass by approximately 35% and
23%, respectively, compared with previous products.

Implementing a Modal Shift
In its distribution activities, Canon has been actively
implementing a modal shift—the switch from truck
transport to rail or ship transport worldwide. In fiscal
2007, the Company reviewed its logistics routes
within China.

The iR C3380 MFD incorpo-
rates Canon’s energy-
saving, on-demand fixing
technology and improved
controller, which achieves
an approximately 80%
reduction in power con-
sumption, compared with
previous models

A completely closed wastewater processing system at
Oita Canon Materials achieved zero wastewater discharge

Canon Vietnam is imple-
menting the Canon
Friendship School Chain
project. A total of 16 ele-
mentary schools in north-
ern Vietnam will be built or
renovated under the proj-
ect by the end of 2010

For digital cameras, Canon has switched to marine

transportation from Fukuoka to Shanghai and rail
transportation from Shanghai to Beijing and Guangzhou
instead of direct shipment by air to Shanghai, Beijing
and Guangzhou from Osaka. This change is estimated
to considerably reduce CO2 emissions.

Furthermore, office machines manufactured in

China that were previously shipped by sea to
Tokyo, stored in a central facility and transported
by truck to sales outlets across Japan, are now
directly delivered by sea or rail to sales offices from
Fukuoka port. In cutting back distribution channels,
this modal shift is contributing to lower CO2 emissions
and costs and shorter delivery times.

Contributing to Society
Guided by its corporate philosophy of kyosei, Canon
engages in social contributions around the world. The
following are a few of the Company’s numerous
ongoing activities.

Optical Research Funding
In April 2007, Canon collaborated with Utsunomiya
University in Japan to set up the Utsunomiya
University Center for Optical Research & Education
(CORE). Optics is a key technology underpinning

many industries including the camera lens industry.
Given the current pace of technological change, the
needs of optical engineers have increased, but oppor-
tunities for professional training in Japan are in short
supply. With Canon’s contribution of educational
support, utilizing Canon employees acting as instruc-
tors, CORE will provide systematic education and
conduct research in advanced optics technologies over
the next five years. Drawing from open subscriptions
from within the university, CORE will also promote
research projects to develop creative technologies that
will contribute to society.

Red Cross Youth Projects in Europe
Canon Europe commenced activities under a partnership

A workshop on International Humanitarian Law organized by
the French Red Cross at Pierre & Marie Curie University in Paris

agreement with the Red Cross in Europe in 2006 and
has sponsored youth projects organized by thirteen
Red Cross National Societies across Europe.

Supporting Education in Vietnam
In July 2007, Canon commenced the Canon Friendship
School Chain Project to support the new construction,
rebuilding and enlargement of schools in 12 northern
provinces in Vietnam. Recognizing that today’s youth
are responsible for the next generation, Canon is
dedicated to creating learning opportunities for chil-
dren and advancing quality.

WWF-Canada Schools for a Living Planet
As a long-term supporter of the World Wildlife Fund -
Canada, Canon is the title sponsor of Schools for a
Living Planet, a web-based educational program
designed to provide educators with curriculum materi-
als for engaging their students in the vital conservation
issues of our time. Canon shares with WWF-Canada
the hope that young people will acquire the necessary
knowledge to make a difference in the planet’s future.

Training and Nurturing Employees
For Canon to progress through the next 100 or even
200 years, it is essential to train and nurture employees
at all levels, including upper management. Since the
Company’s founding, employee education has been
based on the guiding principles of the San-Ji, or “Three
Selfs” spirit, comprised of “self-motivation,” or taking
the initiative and being proactive in all things; “self-
management,” or conducting oneself responsibly and
being accountable for all one’s actions; and “self-
awareness,” or understanding one’s situation and role
in it. We believe that employees’ commitment to these
principles increases the strength and autonomy of each
and every employee and ultimately contributes to the
Company’s development as well as society, which
Canon continues to serve.

Canon Global Management Institute
In training provided at the Canon Global Management

Canon employees in
Europe attending a
training session on time
management—Canon is
enhancing its local educa-
tional training programs

Institute (CGMI) in Tokyo, trainees learn those theories
considered essential to managerial personnel. At the
same time, Canon promotes voluntary interactive
development among trainees and offers select training
programs tailored to individual positions in an effort to
nurture a greater sense of responsibility and establish a
set of high-quality managerial capabilities.

Establishment of Regional Technical Skills
Training Center
The Company plans to establish a technical skills
training center at the site of Oita Canon in April 2009,
with the aim to raise the level of technical skills of
Group employees, while cultivating and supporting
employment in the local community. The facility will be
fitted with top-of-the-line manufacturing equipment
including plastic-molding machines and automation
control equipment. Canon also plans to conduct the
appropriate training.

Consistent with the Japanese government’s
intentions to commence full-fledged implementation
of the Job Card program from April 2008, Canon’s
training facilities located in Oita; Toride, Ibaraki; and
Mizonokuchi, Kanagawa will be used for public
purposes. In this context, the Company is conduct-
ing research into the development of appropriate
training programs.

PRODUCT GROUPS
AT A GLANCE

Business Machines
OFFICE
IMAGING
PRODUCTS ............................... 34

Business Machines
COMPUTER
PERIPHERALS ......................... 36

Business Machines
BUSINESS
INFORMATION
PRODUCTS

CAMERAS ................................. 38

OPTICAL AND
OTHER PRODUCTS ................ 40

Main Products

(cid:129) Office network digital
multifunction devices (MFDs)
(cid:129) Color network digital MFDs
(cid:129) Office copying machines
(cid:129) Personal-use copying machines
(cid:129) Full-color copying machines, etc.

(cid:129) Laser beam printers (LBPs)
(cid:129) Single-function inkjet printers
(cid:129) Inkjet multifunction peripherals
(cid:129) Image scanners, etc.

(cid:129) Computer information systems
(cid:129) Document scanners
(cid:129) Personal information
products, etc.

(cid:129) Digital single lens reflex (SLR) cameras
(cid:129) Compact digital cameras
(cid:129) Interchangeable lenses
(cid:129) Digital video camcorders, etc.

(cid:129) Semiconductor-production
equipment
(cid:129) Mirror projection mask aligners
for LCD panels
(cid:129) Broadcasting equipment
(cid:129) Medical equipment
(cid:129) Components, etc.

Review of FY2007

Sales were ¥1,290.8 billion, up 8.8% year on year, with sales of
color MFDs strong in every region. In Europe, the Americas, and
Asia and Oceania, Canon’s color equipment sales grew more than
20% on a unit basis. Energy-efficient models in the Company’s
monochrome series also contributed to results. Canon entered the
commercial printing industry in earnest through the launch of the
imagePRESS C7000VP digital color printing press, which promptly
attracted high market praise.

Sales increased 9.9% to ¥1,537.5 billion. In LBPs, demand for color
and monochrome low-end machines grew. Canon increased its
results on a unit and revenue basis by approximately 20% and
10.5%, respectively. At the same time, the Company enjoyed
steady growth in sales of consumable supplies. Sales of inkjet
printers climbed 9.2% year on year. Despite the continued decline
in unit SFP sales, results were supported by the substantial surge in
unit MFP sales. In the period under review, sales of consumable
supplies also increased steadily.

Sales increased 0.5% to ¥107.2 billion. Sales of document scanners
increased in line with the growing trend toward digitalized
documents and market expansion. Calculators maintained high rates
of growth throughout Asia, excluding Japan. In 2007, Canon
commenced sales of electronic dictionaries in Korea. Coupled with
the release of high-value-added electronic dictionary models in
Japan, sales in this product category increased steadily.

Sales increased 10.6% to ¥1,152.7 billion and included a 17%
increase in unit sales of digital cameras. Buoyed by the introduction
of beginner and mid-level models, sales of digital SLR cameras
climbed steadily. In the period under review, Canon successfully
increased its market share in compact digital cameras. The
Company also experienced sound growth in digital video cameras
and other products.

Sales were ¥393.1 billion, down 7.2%. Sales of exposure equipment
for LCDs decreased due to weak capital investment by LCD panel
manufacturers, while semiconductor exposure equipment were
essentially on par with the previous year. Canon launched the dry
ArF scanning stepper FPA-7000AS5, and the immersion lithography
scanning stepper FPA-7000AS7, building a foundation for future sales
growth. Incorporating a review of manufacturing and assembly
methods, the MPAsp-H700 LCD exposure equipment generated
significant praise from the market.

Share of
Consolidated Sales
(FY2007)

Sales Results
(Millions of yen)

28.8%

34.3%

2.4%

25.7%

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8.8%

Product Groups

OFFICE IMAGING PRODUCTS

Masaki Nakaoka
Chief Executive,
Office Imaging Products
Operations

Reinforcing its color product lineup,
Canon aims to secure growth in the production market.

Office network color multifunction device

Office imaging, production, SOHO and
document solutions represent the four
pillars of Canon’s Office Imaging
Products business. In fiscal 2007, the
Company recorded significant sales
growth in both value and volume, with
the office imaging, production and
SOHO businesses in particular showing
record-breaking unit sales.

Responding to the shift toward color

network digital multifunction devices
(MFDs), Canon expanded shipments of
color machines in every region. Moreover,
total shipments of network digital MFDs,
increased considerably to Europe and the
Asian region (excluding Japan).

In office imaging, Canon upgraded its

product lineup of color machines and
increased shipments of mid- to high-
speed models. Turning to the SOHO
business, the Company enjoyed double-
digit growth in unit sales and saw its
market share increase. These results are

especially important as they translate to
an increase in sales of consumable sup-
plies. In document solutions, sales also
grew in the double-digit range, and
Canon positioned this business as a major
pillar for future expansion. The Company
also released its high-definition, high-
performance imagePRESS C7000VP to
the POD market, winning a new cus-
tomer base.

Along with these excellent results,

Canon took a significant step in the
expansion of its software business during
2007, reaching the milestone of issuing
three million application licenses.

By region, although downward
pressure on prices continued in all mar-
kets, Canon recorded remarkable unit
sales growth in the emerging economies
of Asia, the Middle East, Latin America
and Eastern Europe. Shipments of color
machines were up in Japan as well despite
sluggish market conditions.

Looking ahead, Canon is aiming to
accelerate the shift to color machines.
While making deeper inroads into emerg-
ing markets, which continue to expand,
the Company is also strengthening its
proposal-style solutions business using its
Multifunctional Embedded Application
Platform (MEAP) technology that enables
customization of MFDs. Capitalizing on
the dynamism of the POD market, the
Company will work to reinforce produc-
tion systems to boost sales and profits,
and further expand its light-production
printing segment. Positioning ourselves
for market expansion, we will strengthen
product lineups in every category while
pursuing product development aimed at
realizing cross-media imaging.

Fiscal 2007 Review

Sales in the Office Imaging Products business
totaled ¥1,290.8 billion in 2007, up 8.8%
year on year.

Reflecting the shift to color products, sales

of color MFDs were strong in every region as
Canon released new models, including the
low-end Color imageRUNNER C2880 (iR
C2880 in some areas) and the high-end Color
imageRUNNER C5185 (iR C5185 in some
areas). In Europe, the Americas, and Asia
excluding Japan and Oceania, the Company’s
sales grew more than 20% on a unit basis.
Sales of monochrome network digital

MFDs also increased, through such new
products as the imageRUNNER 3025 (iR 3025
in some areas), which boasts low power
consumption. Although the domestic market
was sluggish, double-digit growth was
recorded in Asia and Oceania.

In 2007, Canon signaled its full-fledged
entry into the commercial printing industry by
launching the imagePRESS C7000VP digital
color printing device. Despite its release
almost halfway into the fiscal year, the
C7000VP significantly contributed to sales

and won praise in the market for mid-speed
production-use products. The C7000VP
received the prestigious Best 10 New Products
Award* from the Nikkan Kogyo Shimbun**.
Also the imagePRESS C1 model continued to
enjoy popularity, with shipments more than
doubling compared with the previous year.

Sales of SOHO market MFDs were strong
in fiscal 2007, increasing more than 10% on
a unit basis. Canon boosted shipments of
low-end monochrome machines for A4
printing that are distinguished for their high
efficiency and cost performance.

Canon Marketing Japan acquired Argo

21 Corporation to expand the document
solutions business. Even after subtracting the
positive effects of this acquisition, the
Company enjoyed double-digit percentage
sales growth in this business. In combining
technological hardware prowess with
Canon’s inherent solutions strengths, the
Company is taking every advantage to create
new opportunities.

* An award to new, excellent products with cutting-edge technology
** A major industrial news publication in Japan

Color imageRUNNER C5185
(iR C5185)

imageRUNNER 3025
(iR3025)

imagePRESS C7000VP

Innovative Product — imagePRESS C7000VP

Canon started sales of the imagePRESS C7000VP for short-run printing
jobs in the printing and copying industries in the POD market in 2007.
Canon’s color POD products are built on electrophotographic tech-
nologies cultivated for its color multifunction devices. The imagePRESS
C7000VP realizes high image-quality that looks and feels like offset
printing production.

Canon developed new fixing equipment and a new toner that
deliver optimal output irrespective of the paper texture. The C7000VP
is equipped with several kinds of automatic registration functions,
including Canon’s Intelligent Registration Technology (IRT) for attain-
ing front-to-back registration accuracy in double-sided printing. The
C7000VP also enables high-speed 70 pages per minute printing to
any kind of paper to match professional printing environments.

Second
fixing unit

Dual-path route

For coated paper,
embossed
paper and plain paper
over 150 g/m2

Bypass route

For plain paper of
150 g/m2 or less

First fixing unit

Canon’s imagePRESS handles thick and coated paper through a
two-path system employing two fixing units. Paper that does not
require dual fixing, such as thin or recycled paper, is processed only
in the first fixing unit, bypassing the second fixing unit.

Product Groups

COMPUTER PERIPHERALS

Katsuichi Shimizu
Chief Executive,
Inkjet Products Operations

Working toward continuous growth, Canon will consistently offer a product lineup
that caters to the needs of all users while boosting sales in emerging markets.

Inkjet All-in-One

In 2007, the market for inkjet printers
continued to shift from single-function
printers (SFPs) to multifunction printers
(MFPs). As a result, MFP sales increased
primarily on a unit basis, while the SFP
market contracted in excess of expectations.
Against this backdrop, unit sales of Canon’s
inkjet printers increased slightly from the
previous fiscal year. Buoyed by successful
efforts to expand its product lineup, howev-
er, the Company reported record-breaking
results on a value basis, with consumable
supplies in particular showing healthy year-
on-year growth.

Driving these results was the Company’s

commitment to photo quality for its inkjet
printers, represented for example by Canon’s
proprietary FINE (Full-photolithography Inkjet
Nozzle Engineering) technology for high-
resolution, high-speed printing. Because of
the Company’s technological expertise, its
mid- to high-speed products were highly
evaluated in the marketplace for their user-
friendliness, ease-of-use and sophisticated

designs. Furthermore, the Company aggres-
sively promoted MFPs for business use
prompting expectations of increased print
volumes. Looking to extend our its base,
Canon also launched a new MFP series with
additional features such as facsimile capabili-
ties. The boost in sales of medium- and
high-grade products, led to significant sales
growth of consumable supplies.

Looking at results for inkjet printers by
region, sales on a unit basis in 2007 remained
in line with the previous fiscal year in Japan,
North America and Europe, while unit sales
set new records in Latin America, Southeast
Asia and Russia. With preferences differing
from region to region, Canon expanded its
printer lineup, introducing core models that
match the characteristics of local markets
and respond to individual market needs.
Sales of medium- and high-grade MFPs
stayed on course in Japan and Australia, with
robust results in the Americas, Europe and
Asia for SFPs and low-end MFPs.

Turning to the Company’s production

systems, Canon worked to procure parts
locally, step up in-house production and
reduce costs in Vietnam and Thailand. To
meet the high demand for inkjet printer
cartridges, Canon bolstered its production
capabilities and pushed ahead with auto-
mated production. In 2008, a new cartridge
production plant will commence operations
at Oita Canon Materials.

Also in 2008, Canon will enhance its
FINE printhead technology and will also offer
user solutions that make photo printing
simpler and more enjoyable. This is expected
to increase opportunities for printing at
home. At the same time, the Company will
propose high-speed, high-quality inkjet
printer solutions that also take into consider-
ation concerns for the environment to SOHO
and office users. While there is little likeli-
hood of strong market growth in 2008,
Canon will aggressively promote sales in
emerging economies led by the BRICs.
Collectively, these initiatives are forecast to
further increase sales of consumable supplies.

Fiscal 2007 Review

Sales in the Computer Peripherals business
amounted to ¥1,537.5 billion, a year-on-
year increase of 9.9%.

In laser beam printers (LBPs), the market
for monochrome models remained inactive
in North America and Europe, but propelled
by the emerging economies of China, India,
the Middle East, Russia and Eastern Europe,
it continued its steady expansion overall.
The market for color models continued to
expand in the double-digit growth range.
While the main markets for color models
are Japan, North America and Europe, the
Asian market including China and India has
increasingly come into play. With the
release in recent years of competitively
priced models, the shift to color products
throughout Asia has advanced rapidly.

In 2007, demand primarily for color,

monochrome and low-end devices
increased. Under these conditions, Canon
boosted its sales on a unit basis by approxi-
mately 20%. The Company’s LBP3000,
which requires no warm-up time and is
ideal for offices, received positive evalua-
tions in the market for its compact and
stylish design. In the period under review,

Canon recorded a 10.5% increase in overall
LBP sales together with steady results in
consumable supplies.

The market for inkjet printers continued

to expand steadily in emerging economies
including the BRICs. Including Japan, North
America and Europe, however, the overall
market remained flat compared with the
previous year.

Confronted by persistent and fierce
price competition, the SFP market contin-
ued to shrink. This was, however, offset by
robust MFP unit sales growth, particularly
for the PIXUS MP600 and MP610 models.
Accounting for these and other factors,
overall sales of inkjet printers rose 9.2%
year on year. This included solid contribu-
tions from inkjet consumable supplies.

Although the market for scanners is
contracting, owing to the growth of MFPs,
Canon’s sales stayed on track compared to
the previous year. As a result, the
Company’s scanner business maintained its
No. 1 market share and continued to
operate as a sound business.

LBP3000

PIXMA iP4500

PIXMA MP610

CanoScan LiDE90

Innovative Product — PIXMA Pro9500 Professional Photo Printer

Demand for inkjet printers that cater to the needs of profes-
sionals and dedicated amateurs, who use digital SLR cameras,
has increased in recent years, reflecting the trend toward
high-resolution printing. To address these needs, Canon
commenced sales of the Pro9500 professional photo printer
for professionals and high-end amateurs in 2007. Canon
designed the printer to use the same pigment ink employed in
its large-format inkjet printers—LUCIA. Responding to profes-
sional needs, this ink possesses exceptional image durability
and contributes to high-definition image quality. Furthermore,
the PIXMA Pro9500 can reproduce true-to-life color photo-
graphs and accommodate monochrome pictures using a 10-
color pigment ink system made up of stable colors including

cyan, magenta, yellow, photo cyan, photo magenta, red,
green, photo black, matte black and gray inks.

The PIXMA Pro9500 is equipped with Canon's FINE inkjet

printing technology. This technology realizes precise and
uniform ejection of ultra-fine ink droplets for a high resolu-
tion of 4,800 (cid:2)
2,400 dpi—a level of
photo quality vivid
enough even for the
sharpest eyes of
professional and
aspiring professional
photographers alike.

Product Groups

CAMERAS

Masaya Maeda
Chief Executive,
Image Communication
Products Operations

Canon is expanding its camera business through
a broad product lineup in tune with market trends.

Compact digital camera

Celebrating 70 years since its foundation in
the camera business with a string of competi-
tive product launches, Canon held on firmly
to its overwhelming No. 1 position in the
global markets for single lens reflex (SLR) and
compact digital cameras.

In fiscal 2007, the overall market for
digital cameras continued to grow, driven by
rapid expansion in China, Russia and other
emerging markets, as well as in the United
States, Japan and other areas. The world
market for digital SLR cameras continued on
an upward trajectory, while the market for
compact digital cameras also expanded,
supported by the replacement of older- with
newer-model digital cameras and growing
demand for a second camera.

To maintain its leading position in the
marketplace, Canon has enhanced its lineups
of value-added products for both SLR and
compact digital cameras with its DIGIC III
imaging processor that achieves extraordinary
image quality, as well as the Company’s

advanced optics technology.

Aside from digital cameras, fiscal 2007
was a year of sound growth in every camera
category in this segment. In digital video
camcorders, where we are making priority
efforts to shift to HDs, the Company success-
fully expanded sales of HD products by
delivering industry-leading, high-quality
images and compatibility with mini-DV tape,
DVDs, and HDD media. Furthermore, as part
of the Company’s production reforms,
automated systems for manufacturing
lenses—one of Canon’s core competencies—
implemented at the Oita Plant have improved
production quality and reduced costs.
In fiscal 2008, Canon will improve
individual models and further strengthen its
varied lineup of digital cameras by responding
to changing and growing demand from
individuals in contrast to the family level.

Canon will provide a broad lineup, from
entry models to equipment for the dedicated
enthusiast and professional, that supports

developing skills and capabilities. To this end,
we will release models for users at every skill
level and meet diverse user requirements.
From a production perspective, Canon

will continue to implement reforms as it
works toward lowering the cost to sales ratio.

Moreover, aiming to ensure the
Company’s sound growth, Canon has
adopted cross-media imaging as the means
to attain an advanced synergy between its
imaging products. The Company will apply
this concept in its pursuit of the ultimate in
image quality from still images to movies for
input and output devices. An example of the
application of this concept is the Cultural
Heritage Inheritance Project (Tsuzuri Project).
In combining the use of EOS cameras with
large-format inkjet printers, Canon has
contributed to further advances in EOS digital
technology. As Canon strives to be the
leading imaging company, we will work
tirelessly to positively contribute to the
evolving digital-photography culture.

Fiscal 2007 Review

Net sales in the Camera segment
increased 10.6% year on year to
¥1,152.7 billion boosted by a 17%
jump in unit sales of digital cameras.
Sales of digital SLR cameras
climbed steadily, led by the compact
and lightweight EOS Digital Rebel XTi
(EOS 400D). Equipped with a 10.1
million-pixel CMOS sensor, the EOS
Digital Rebel XTi (EOS 400D) was
highly evaluated for its price perform-
ance. Both the EOS 30D for advanced
amateurs and the newer EOS 40D also
received favorable market assessment
for their ease of use and ability to
address the most detailed of needs.
Along with strong sales of new camera
models, sales of interchangeable
lenses increased.

In compact digital cameras, the

Company introduced 16 models,
strengthening its lineup. Offering all
the basic functions and outstanding
design, the PowerShot SD1000 DIGI-
TAL ELPH (DIGITAL IXUS 70) received

high market praise worldwide. The
PowerShot G9, which successfully
addressed the needs of dedicated
amateurs, also enjoyed extraordinary
popularity.

Sales and market share for HD
camcorders increased in fiscal 2007,
supported by the release of the HDV-
model HV20 Camcorder. Combining
the Company’s new in-house-produced
full-HD CMOS sensor, an HD video lens
and the DIGIC DV II imaging processor,
this camcorder produces a high image
quality. In bolstering its product lineup
through the introduction of an HDD
model, Canon further increased its
market share in the HD field.

In fiscal 2007, Canon increased its

market share for LCD projectors,
releasing models that achieve extreme-
ly high resolution and faithful color
reproduction, such as the SX7 and
other SXGA+ model lines equipped
with liquid crystal on silicon (LCOS)
panels.

PowerShot SD1000 DIGITAL ELPH
(DIGITAL IXUS 70)

EOS Digital Rebel XTi
(EOS 400D)

HV20

REALis SX7 (XEED SX7)

Innovative Product — EOS Rebel XSi (EOS 450D) Digital SLR Camera

Stepping up from Canon’s lineup of compact digital
cameras, the Company’s digital SLR cameras for
beginners experienced a sharp jump in demand.
Following the release in fiscal 2007 of the EOS
Digital Rebel XTi (EOS 400D) as an SLR-type begin-
ner’s model, the EOS Rebel XSi (EOS 450D) further
expands Canon’s lineup in this category. In March
2008, we released the EOS Rebel XSi (EOS 450D)
fitted with a 12.2 million-pixel CMOS sensor as well
as the unmatched DIGIC III imaging processor, which
handles up to 3.5 shots per second and enables
continuous shots of up to 53 frames. This model also

boasts a Live View function that allows the photographer
to simultaneously view, display, and shoot.

Canon will work to further augment its lineup of

digital SLR cameras
and to address the
needs of a wide
spectrum of users
from beginners to
dedicated amateurs
and professionals.

EOS Rebel XSi (EOS 450D)

Product Groups

OPTICAL AND OTHER PRODUCTS

Junji Ichikawa
Chief Executive,
Optical Products Operations

Using its own optical technologies and shortening installation times,
Canon is expanding its market share.

Immersion lithography scanning stepper

In 2007, Canon geared up for future
demand growth and made steady techno-
logical and quality refinements and
improvements. It was a meaningful year in
that Canon laid the foundation for gaining
the future top market share.

In the optical products market,
demand for semiconductor exposure
equipment was largely in line with that of
the previous year; however, sales of mirror
projection mask aligners for LCDs were
weak due to continued low LCD panel
manufacturer capital investment.

The ratio of ArF in semiconductor
exposure equipment is increasing and is
expected to reach 65% of total sales in
2010. Canon began full-scale business
expansion with the shipment of the FPA-
7000AS5, a dry ArF scanning stepper, and
the launch of the FPA-7000AS7 for the
immersion lithography scanning stepper
market. Amidst increased capital invest-
ment by memory-device manufacturers,

Canon’s full product lineup is now well
positioned to meet various demands in the
market. The FPA-7000AS7 features the
highest NA (1.35), capable of sub-45nm
resolution. Leveraging technological capa-
bilities that enable the in-house develop-
ment and production of key components,
including super high-performance sensors
that detect lens positioning errors in sub-
nano units, semiconductor exposure
equipment showcases the technological
strengths of Canon.

In exposure equipment for LCDs,
despite ongoing inventory adjustments
due to over supply in the LCD panel
market, signs of a rebound in capital
investment began emerging thanks to a
long overdue growth in demand for
panels in PC monitors. Under these cir-
cumstances, Canon began shipping the
MPAsp-H700 in 2007. This LCD exposure
equipment for eighth-generation panels
has yielded numerous innovations includ-

ing new production methods for various
key components and reduced installation
times to one-third thanks to rigorous pre-
assembly simulations.

In 2008, our primary objective for

semiconductor exposure equipment is to
perfect immersion and ArF equipment,
making them highly competitive products.
In exposure equipment for LCDs, growth in
52-inch large screen LCD TVs and the
change in size of PC monitors to accommo-
date films and moving images have trig-
gered a major rebound in capital
investments by LCD panel manufacturers.
Canon is taking steps to respond to major
demand growth, further improve assembly
precision and maintain short delivery times
for high-quality products, and thereby
expand market share.

Fiscal 2007 Review

Net sales of Optical and Other Products
totaled ¥393.1 billion, down 7.2% year on
year. On an individual product basis, results
in exposure equipment for LCDs were weak
due to a downturn in LCD panel manufac-
turer capital investment. While sales of
semiconductor exposure equipment were
essentially on par with the previous year,
results remained soft.

In the semiconductor production

equipment market, demand for DRAM and
NAND flash memories increased. This was
particularly true of Asia, an area where
memory-device manufacturers are
concentrated. Canon launched the new
FPA-5510iZ, an enhanced model more
productive than the existing FPA-5500iZ, in
order to retain market share amidst heavy
competition. Moreover, Canon shipped the
dry ArF scanning stepper FPA-7000AS5,
and the immersion lithography scanning
stepper FPA-7000AS7, thus laying the
groundwork for future sales growth.

The market for exposure equipment for
LCDs contracted substantially amidst efforts
to increase LCD TV size and achieve further
productivity improvements in monitor panel

production. The MPAsp-H700 LCD expo-
sure equipment for eighth-generation
panels have received rave customer reviews
not only for their high-quality, high-optical
performance and high productivity, but for
a significantly shorter installation time.

In digital radiography systems, Canon

has shipped a total of 6,000 units since
1998. Sales of the portable CXDI-50G have
been favorable, especially outside Japan.
In the large-format printer market,
Canon successively launched nine new
models to bolster its product lineup. The
Company also increased unit printer sales as
well as ink sales volumes due to the grow-
ing number of printers in the market.

In broadcast and communications, sales
of the DIGISUPER 100AF field zoom broad-
casting lens fared well on the back of
growth in the penetration of hi-vision large-
format TVs. This lens contains a unique AF
mechanism that enables exact focus of
objects moving at high speed as well as an
optical image stabilizer developed from
know-how acquired from EOS interchange-
able lenses.

Innovative Product — FPA-7000AS7 Immersion Lithography Scanning Stepper

MPAsp-H700

CXDI-50G

DIGISUPER 100AF

imagePROGRAF iPF9100

Canon launched the FPA-7000AS7 ArF immersion lithography
scanning stepper that incorporates a number of advanced
technologies, enabling the mass production of state-of-the-art
semiconductors below 45nmHP (half pitch). Featuring the
world’s highest NA (numerical aperture) of 1.35, the scanning
stepper employs a guideless two-wafer stage system, which has
the advantage of immersion lithography throughout and meets
the demand for high speed and high precision. Moreover, Canon
developed a proprietary immersion method liquid film system.
This system enables a continuous and uninterrupted flow of
water to pass under the lens. As a result, Canon has perfected a

product that supports the full mass production of state-of-the-art
devices below 45nmHP with a maximum resolution of 37nmHP.

37mm

65mm

The NA1.35 lens offers outstanding resolution and quality

MAJOR CONSOLIDATED SUBSIDIARIES

MANUFACTURING
Canon Electronics Inc.
Canon Finetech Inc.
Nisca Corporation
Canon Semiconductor Equipment Inc.
Canon Ecology Industry Inc.
Canon Chemicals Inc.
Canon Components, Inc.
Canon Precision Inc.
Oita Canon Inc.
Nagahama Canon Inc.
Oita Canon Materials Inc.
Ueno Canon Materials Inc.
Fukushima Canon Inc.
Canon Optron, Inc.
Canon Mold Co., Ltd.
Canon Machinery Inc.
Canon ANELVA Corporation
SED Inc.
Tokki Corporation
Canon Virginia, Inc.
Custom Integrated Technology, Inc.
Industrial Resource Technologies, Inc.
Canon Giessen GmbH
Canon Bretagne S.A.S.
Canon Inc., Taiwan
Canon Dalian Business Machines, Inc.
Canon Zhuhai, Inc.
Canon Zhongshan Business Machines Co., Ltd.
Tianjin Canon Co., Ltd.
Canon (Suzhou) Inc.
Canon Opto (Malaysia) Sdn. Bhd.
Canon Hi-Tech (Thailand) Ltd.
Canon Ayutthaya (Thailand) Ltd.
Canon Engineering (Thailand) Ltd.
Canon Vietnam Co., Ltd.
Canon Electronic Business Machines (H.K.) Co., Ltd.
Canon Engineering Hong Kong Co., Ltd.

RESEARCH & DEVELOPMENT
Canon Development Americas, Inc.
Canon Technology Europe Ltd.
Canon Research Centre France S.A.S.
Canon Information Systems Research Australia Pty. Ltd.
Canon Information Technology (Beijing) Co., Ltd.
Canon (Suzhou) System Software Inc.

(As of December 31, 2007)

MARKETING & OTHER
Canon Marketing Japan Inc.
Canon System and Support Inc.
Canon System Solutions Inc.
Canon Software Inc.
Argo 21 Corporation
Canon U.S.A., Inc.
Canon Canada, Inc.
Canon Mexicana, S. de R.L. de C.V.
Canon Latin America, Inc.
Canon do Brasil Industria e Comercio Limitada
Canon Chile, S.A.
Canon Panama, S.A.
Canon Argentina, S.A.
Canon Business Solutions-Central, Inc.
Canon Business Solutions-West, Inc.
Canon Business Solutions-East, Inc.
Canon Financial Services, Inc.
Canon Information Technology Services, Inc.
Canon Europa N.V.
Canon Europe Ltd.
Canon (UK) Ltd.
Canon Deutschland GmbH
Canon France S.A.S.
Canon Italia S.p.A.
Canon España S.A.
Canon Nederland N.V.
Canon Danmark A/S
Canon Belgium N.V./S.A.
Canon (Schweiz) AG
Canon Gesellschaft m.b.H.
Canon Svenska AB
Canon Oy
Canon North-East Oy
Canon Norge A.S.
Canon CEE GmbH
Canon Middle East FZ-LIC
Canon South Africa Pty. Ltd.
Canon Australia Pty. Ltd.
Canon New Zealand Ltd.
Canon Finance Australia Ltd.
Canon Finance New Zealand Ltd.
Canon (China) Co., Ltd.
Canon Singapore Pte. Ltd.
Canon Hongkong Co., Ltd.
Canon Marketing (Malaysia) Sdn. Bhd.
Canon Marketing (Philippines), Inc.
Canon Marketing (Thailand) Co., Ltd.
Canon Marketing (Taiwan) Co., Ltd.
Canon India Pte. Ltd.
Canon Korea Consumer Imaging Inc.
Canon Semiconductor Engineering Korea Inc.
Canon Semiconductor Equipment Taiwan Inc.

FINANCIAL SECTION

TABLE OF CONTENTS

FINANCIAL OVERVIEW ........................................................................................ 44

TEN-YEAR FINANCIAL SUMMARY ..................................................................... 62

CONSOLIDATED BALANCE SHEETS .................................................................... 64

CONSOLIDATED STATEMENTS OF INCOME ...................................................... 65

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY .......................... 66

CONSOLIDATED STATEMENTS OF CASH FLOWS .............................................. 67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...................................... 68

1 Basis of Presentation and Significant Accounting Policies

2 Basis of Financial Statement Translation ........................................... 72

Foreign Operations

4 Marketable Securities and Investments ............................................. 73

Trade Receivables ................................................................................ 75

Inventories

Property, Plant and Equipment

Finance Receivables and Operating Leases ........................................ 76

9 Acquisitions .......................................................................................... 77

10 Goodwill and Other Intangible Assets

Short-Term Loans and Long-Term Debt ............................................ 78

Trade Payables ..................................................................................... 79

Employee Retirement and Severance Benefits

Income Taxes ........................................................................................ 84

15 Common Stock ..................................................................................... 87

Legal Reserve and Retained Earnings ................................................ 88

17 Other Comprehensive Income (Loss)

18 Net Income per Share .......................................................................... 90

19 Derivatives and Hedging Activities .................................................... 91

20 Commitments and Contingent Liabilities .......................................... 92

21 Disclosures about the Fair Value of Financial Instruments and

Concentrations of Credit Risk ............................................................. 94

Supplemental Cash Flow Information

Subsequent Event

MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING ............................................................................ 95

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ............. 96

FINANCIAL OVERVIEW

GENERAL
The following discussion and analysis provides information
that management believes to be relevant to understanding
Canon’s consolidated financial condition and results of operations.
References in this discussion to the “Company” are to Canon
Inc. and, unless otherwise indicated, references to the financial
condition or operating results of “Canon” refer to Canon Inc.
and its consolidated subsidiaries.

OVERVIEW
Canon is one of the world’s leading manufacturers of copying
machines, laser beam printers, inkjet printers, cameras, steppers
and aligners. Canon earns revenues primarily from the manu-
facture and sale of these products domestically and interna-
tionally. Canon’s basic management policy is to contribute to
the prosperity and well-being of the world while endeavoring
to become a truly excellent global corporate group targeting
continued growth and development.

Canon divides its businesses into three product groups:
business machines, cameras, and optical and other products.
The business machines product group has three sub-groups:
office imaging products, computer peripherals and business
information products.

Economic environment
Looking back at the global economy in 2007, the U.S. economy
proved sluggish in the second half of the year as the fallout
from the subprime loan crisis resulted in a decline not only in
housing investment, but also in consumer spending. In Europe,
the region moved toward moderate recovery as domestic
demand expanded in major European countries, boosted by
such factors as increased consumer spending owing to continued
improvements in the employment environment. Within Asia,
the Chinese economy maintained a high growth rate while
other economies in the region also enjoyed generally favorable
conditions, primarily due to export growth. In Japan, the
economy maintained a trend toward recovery, buoyed by an
improvement in consumer spending along with increased
capital spending fueled by strong corporate earnings.

Market environment
As for the markets in which Canon operates, within the
camera segment, demand for digital single-lens reflex (“SLR”)
cameras and digital compact cameras continued to realize
healthy growth during the year. Within the office imaging
products market, demand for network digital multifunction
devices (“MFDs”) remained solid as the office market shifted
toward color models in all regions. As for computer peripherals,
including printers, demand for laser beam printers continued to
grow for both color and monochrome low-end models. Within
the inkjet printer market, as the shift in demand from single-
function to multifunction machines gained momentum, price
competition for multifunction models increased in severity. In
the optical equipment segment, while demand for projection
aligners, which are used to produce liquid crystal display
(“LCD”) panels, remained at a low level due to restrained
investment by LCD manufacturers, demand for steppers, used
in the production of semiconductors, remained at approximately

the same level as the previous year. The average value of the
yen for the year was ¥117.50 to the U.S. dollar and ¥161.41 to
the euro, representing a slight year-on-year decrease against
the U.S. dollar, and about a 10% decline against the euro.

Summary of operations
Amid these conditions, Canon’s consolidated net sales in 2007
increased by 7.8% from the year-ago period to ¥4,481.3 billion
(U.S.$39,310 million), resulting from a solid rise in sales of digi-
tal cameras, color network MFDs, and laser beam printers,
along with the positive effect of favorable currency exchange
rates. Income before income taxes and minority interests in
2007 totaled ¥768.4 billion (U.S.$6,740 million), a year-on-year
increase of 6.8%, while net income for the year totaled ¥488.3
billion (U.S.$4,284 million), both marking all-time highs.

Key performance indicators
Following are the key performance indicators (“KPIs”) that
Canon uses in managing its business. The changes from year to
year in these KPIs are set forth in the table shown on page 45.

Revenues
As Canon seeks to become a truly excellent global company,
one indicator upon which Canon’s management places strong
emphasis is revenue. Following are some of the KPIs relating to
revenue that management considers to be important.

Net sales is one such KPI. Canon derives net sales primarily
from the sale of products and, to a much lesser extent, provi-
sion of services relating to its products. Sales vary based on such
factors as product demand, the number and size of transactions
within the reporting period, product reputation for new products,
and changes in sales prices. Other factors involved are market
share and market environment. In addition, management con-
siders an evaluation of net sales by product group important to
assessing Canon’s performance in sales in various product
groups in light of market trends.

Gross profit ratio (ratio of gross profit to net sales) is
another KPI for Canon. Through its reforms in product develop-
ment, Canon has been striving to shorten product development
lead times in order to launch new, competitively priced products
at a faster pace. In addition, Canon has achieved cost reductions
through efficiency enhancements in its production. Canon
believes that these achievements have contributed to improving
Canon’s gross profit ratio, and Canon intends to continue to
pursue further shortening of product development lead times
and reductions in production costs.

Operating profit ratio (ratio of operating profit to net sales)

and research and development (“R&D”) expense to net sales
ratio are considered by Canon to be KPIs. Canon is focusing on
two areas for improvement. On the one hand, Canon strives to
control and reduce its selling, general and administrative
expenses. On the other hand, Canon’s R&D policy is designed
to maintain a high level of spending in core technology in order
to sustain Canon’s leading position in its current fields of
business, and to explore possibilities in other markets. Canon
believes such investments will be the basis for future success in
its business and operations.

Cash flow management
Canon also places significant emphasis on cash flow
management. The following are the KPIs relating to cash flow
management that management believes to be important.
Inventory turnover within days is a KPI because it is a
measure of supply-chain management efficiency. Inventories
have inherent risks of becoming obsolete, deteriorating or
otherwise decreasing in value significantly, which may adversely
affect Canon’s operating results. To mitigate these risks,
management believes that it is important to continue reducing
inventories and shortening production lead times in order to
achieve early recovery of related product expenses by
strengthening supply-chain management.

Canon’s management seeks to meet its liquidity and
capital requirements primarily with cash flow from operations.
Management also seeks debt-free operations. For a manufac-
turing company such as Canon, the process for realizing profit
on any endeavor can be lengthy, involving as it does R&D,
manufacturing, and sales activities. Management, therefore,

KEY PERFORMANCE INDICATORS

believes that it is important to have sufficient financial strength
so that it does not have to rely on external funding. Canon has
continued to reduce its reliance on external funding for capital
investments in favor of generating the necessary funds from its
own operations.

Stockholders’ equity to total assets ratio (ratio of total
stockholders’ equity to total assets) is another KPI for Canon.
Canon believes that stockholders’ equity to total asset ratio
measures its long-term viability. Canon believes that a high or
increasing stockholders’ equity ratio usually indicates that
Canon has a good, or improving ability to fund debt obligations
and other unexpected expenses, which means in the long-term
that Canon is better able to maintain a high level of stable
investments for its future operations and development. As
Canon puts a strong emphasis on its research and development
activities, management believes that it is important to maintain
a stable financial base and, accordingly, a high level of
stockholders’ equity to total assets ratio.

2007

2006

2005

2004

2003

Net sales (Millions of yen)
Gross profit to net sales ratio
R&D expense to net sales ratio
Operating profit to net sales ratio
Inventory turnover within days
Debt to total assets ratio
Stockholders' equity to total assets ratio

¥4,481,346
50.1%
8.2%
16.9%
44 days
0.6%
64.8%

¥4,156,759
49.6%
7.4%
17.0%
45 days
0.7%
66.0%

¥3,754,191
48.5%
7.6%
15.5%
47 days
0.8%
64.4%

¥3,467,853
49.4%
7.9%
15.7%
49 days
1.1%
61.6%

¥3,198,072
50.3%
8.1%
14.2%
49 days
3.1%
58.6%

Note: Inventory turnover within days; Inventory divided by net sales for the previous six months, multiplied by 182.5.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in accor-
dance with U.S. generally accepted accounting principles and
based on the selection and application of significant accounting
policies which require management to make significant estimates
and assumptions. Canon believes that the following are the
more critical judgment areas in the application of its accounting
policies that currently affect its financial condition and results
of operations.

Revenue recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred and title and risk of loss have been trans-
ferred to the customer or services have been rendered, the sales
price is fixed or determinable, and collectibility is probable.
Revenue from sales of consumer products including
office imaging products, computer peripherals, business infor-
mation 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 that are 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 demon-
strated by Canon. Service revenue is derived primarily from
separately priced product maintenance contracts on equipment
sold to customers and is measured at the stated amount of the
contract and recognized as services are provided.

Canon also offers separately priced product maintenance
contracts for most office imaging products, for which the
customer typically pays a stated base service fee plus a variable
amount based on usage. Revenue from these service mainte-
nance contracts is measured at the stated amount of the
contract and recognized as services are provided and variable
amounts are earned.

leases are bundled with product maintenance contracts, revenue
is first allocated considering the relative fair value of the lease
and non-lease deliverables based upon the estimated relative
fair values of each element. Lease deliverables generally include
equipment, financing and executory costs, while non-lease
deliverables generally consist of product maintenance contracts
and supplies.

For all other arrangements with multiple elements, Canon
allocates revenue to each element based on its relative fair value
if such element meets the criteria for treatment as a separate
unit of accounting as prescribed in the Emerging Issues Task
Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with
Multiple Deliverables.” Otherwise, revenue is deferred until the
undelivered elements are fulfilled and accounted for as a single
unit of accounting.

Canon records estimated reductions to sales at the time of
sale for sales incentive programs including product discounts,
customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other
known factors at the time of sale. In addition, Canon provides
price protection to certain resellers of its products, and records
reductions to sales for the estimated impact of price protection
obligations when announced.

Estimated product warranty costs are recorded at the time
revenue is recognized and are included in selling, general and
administrative expenses. Estimates for accrued product warranty
costs are based on historical experience, and are affected by
ongoing product failure rates, specific product class failures
outside of the baseline experience, material usage and service
delivery costs incurred in correcting a product failure.

Allowance for doubtful receivables
Allowance for doubtful receivables is determined using a com-
bination of factors to ensure that Canon’s trade and financing
receivables are not overstated due to uncollectibility. Canon
maintains an allowance for doubtful receivables for all customers
based on a variety of factors, including the length of time
receivables are past due, trends in overall weighted average risk
rating of the total portfolio, macroeconomic conditions, signifi-
cant one-time events and historical experience. Also, Canon
records specific reserves for individual accounts when Canon
becomes aware of a customer’s inability to meet its financial
obligations to Canon, such as in the case of bankruptcy filings
or deterioration in the customer’s operating results or financial
position. If circumstances related to customers change, estimates
of the recoverability of receivables would be further adjusted.

Valuation of inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the average method for
domestic inventories and the first-in, first-out method for
overseas inventories. Market value is the estimated selling price
in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make a sale.
Canon routinely reviews its inventories for their salability and
for indications of obsolescence to determine if inventories
should be written-down to market value. Judgments and esti-
mates must be made and used in connection with establishing

such allowances in any accounting period. In estimating the
market value of its inventories, Canon considers the age of the
inventories and the likelihood of spoilage or changes in market
demand for its inventories.

Property, plant and equipment and
accounting change
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.

Effective April 1, 2007, the Company and its domestic sub-

sidiaries elected to change the declining-balance method of
depreciating machinery and equipment from the fixed-percent-
age-on-declining base application to the 250% declining-bal-
ance application. Estimated residual values were also reduced
in conjunction with this change. The Company and its domes-
tic subsidiaries believe that the 250% declining-balance appli-
cation is preferable because it provides a better matching of
the allocation of cost of machinery and equipment with associ-
ated revenues in light of increasingly short product life cycles.

Environmental liabilities
Canon is subject to liability for the investigation and clean-up
of environmental contamination at each of the properties that
Canon owns or operates, as well as at certain properties Canon
formerly owned or operated. Canon employs extensive internal
environmental protection programs that focus on preventive
measures. Canon conducts environmental assessments for a
number of its locations and operating facilities. If Canon was to
be held responsible for damages in any future litigation or pro-
ceedings, such costs may not be covered by insurance and may
be material. The liabilities for environmental remediation and
other environmental costs are accrued when it is considered
probable and costs can be reasonably estimated.

Income taxes
As more fully disclosed in the Notes to Consolidated Financial
Statements, Canon adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation
of FASB Statement No. 109,” on January 1, 2007. Canon
considers many factors when evaluating and estimating income
tax uncertainties. These factors include an evaluation of the
technical merits of the tax positions as well as the amounts and
probabilities of the outcomes that could be realized upon
settlement. The actual resolutions of those uncertainties will
inevitably differ from those estimates, and such differences
may be material to the financial statements.

Valuation of deferred tax assets
Canon currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of
Canon’s deferred tax assets is principally dependent upon its
achievement of projected future taxable income. Canon’s judg-
ments regarding future profitability may change due to future
market conditions, its ability to continue to successfully execute
its operating restructuring activities and other factors. Any
changes in these factors may require possible recognition of

significant valuation allowances to reduce the net carrying value
of these deferred tax asset balances. When Canon determines
that certain deferred tax assets may not be recoverable, the
amounts which may not be realized are charged to income tax
expense and will adversely affect net income.

Employee retirement and severance benefit plans
Canon has significant employee retirement and severance
benefit obligations that are recognized based on actuarial
valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions,
including changes in interest rates, in selecting these assump-
tions. Other assumptions include assumed rate of increase in
compensation levels, mortality rate, and withdrawal rate.
Changes in these assumptions inherent in the valuation are
reasonably likely to occur from period to period. Actual results
that differ from the assumptions are accumulated and amortized
over future periods and, therefore, generally affect future
pension expenses. While management believes that the
assumptions used are appropriate, the differences may affect
employee retirement and severance benefit costs in the future.
In preparing its financial statements for fiscal 2007,
Canon estimated a weighted-average discount rate of 2.5%
for Japanese plans and 4.5% for foreign plans and a weighted-
average expected long-term rate of return on plan assets of
3.9% for Japanese plans and 6.0% for foreign plans. In estimat-
ing the discount rate, Canon uses available information about
rates of return on high-quality fixed-income governmental and
corporate bonds currently available and expected to be available
during the period to the maturity of the pension benefits.
Canon establishes the expected long-term rate of return on plan
assets based on management’s expectations of the long-term
return of the various plan asset categories in which it invests.
Management develops expectations with respect to each plan
asset category based on actual historical returns and its current
expectations for future returns.

Decreases in discount rates lead to increases in actuarial
pension benefit obligations which, in turn, could lead to an
increase in service cost and amortization cost through amorti-
zation of actuarial gain or loss, a decrease in interest cost, and
vice versa. A decrease of 50 basis points in the discount rate
increases the projected benefit obligation by approximately

CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY OF OPERATIONS

9%. The net effect of changes in the discount rate, as well as
the net effect of other changes in actuarial assumptions and
experience, are deferred until subsequent periods, as permitted
by the Statement of Financial Accounting Standards (“SFAS”)
No. 87, “Employers’ Accounting for Pensions.”

Decreases in expected return on plan assets may increase
net periodic benefit cost by decreasing expected return amounts,
while differences between expected value and actual fair value
of those assets could affect pension expense in the following
years, and vice versa. For fiscal 2008, if a change of 50 basis
points in the expected long-term rate of return on plan assets is
to occur, that may cause a change of approximately ¥3,022
million in net periodic benefit cost. Canon multiplies manage-
ment’s expected long-term rate of return on plan assets by the
value of its plan assets, to arrive at the expected return on plan
assets that is included in pension income (expense). Canon
defers recognition of the difference between this expected
return on plan assets and the actual return on plan assets. The
net deferral affects the value of plan assets in future fiscal years
and, ultimately, future pension income (expense).

On December 31, 2006, Canon adopted the recognition
and disclosure provisions of SFAS 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”
(“SFAS 158”). SFAS 158 required Canon to recognize the
funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension
plans in the December 31, 2006 consolidated balance sheet,
with a corresponding adjustment to accumulated other
comprehensive income (loss), net of tax.

Effective January 1, 2007, Canon and certain of its domestic
subsidiaries have amended their funded defined benefit pension
plans, and the projected benefit obligation has decreased by
¥101,620 million (U.S.$891 million), primarily due to the modi-
fication of the pattern of future benefit payments. This
decrease is amortized as a reduction of net periodic benefit
cost over the employee’s average remaining service period. The
amount is approximately ¥5,834 million (U.S.$51 million) per
year. In conjunction therewith, Canon and certain of its
domestic subsidiaries have implemented an unfunded retire-
ment and severance plan and a defined contribution pension
plan for certain future pension benefits attributable to
employee’s future services.

Millions of yen
2007

change

2006

change

2005

Thousands of
U.S. dollars
2007

Net sales
Operating profit
Income before income taxes and minority interests
Net income

¥4,481,346
756,673
768,388
488,332

+7.8% ¥4,156,759 +10.7% ¥3,754,191 $39,310,053
6,637,482
+7.0
6,740,246
+6.8
4,283,614
+7.2

707,033 +21.3
719,143 +17.5
455,325 +18.5

583,043
612,004
384,096

Sales
Canon’s consolidated net sales in fiscal 2007 totaled
¥4,481,346 million (U.S.$39,310 million). This represents a
7.8% increase from the previous fiscal year, reflecting solid
rises in sales of digital cameras and color network digital MFDs,
and laser beam printers, along with the positive effects of the
depreciation of the yen.

Overseas operations are significant to Canon’s operating
results and generated approximately 77% of total net sales in
fiscal 2007. Such sales are denominated in the applicable local
currency and are subject to fluctuations in the value of the yen
in relation to such other currencies. Despite efforts to reduce
the impact of currency fluctuations on operating results,
including localizing some manufacturing and procuring parts
and materials from overseas suppliers, Canon believes such
fluctuations have had and will continue to have a significant
effect on results of operations.

The average value of the yen in fiscal 2007 was ¥117.50

to the U.S. dollar, and ¥161.41 to the euro, representing a
slight decrease against the U.S. dollar, and about 10% decline
against the euro, compared with the previous year. The effects
of foreign exchange rate fluctuations favorably impacted net
sales by approximately ¥125,500 million. This favorable impact
was comprised of approximately ¥9,600 million for U.S. dollar
denominated sales, ¥104,700 million for euro denominated
sales and ¥11,200 million for other foreign currency
denominated sales.

Cost of sales
Cost of sales principally reflects the cost of raw materials, parts
and labor used by Canon in the manufacture of its products.
A portion of the raw materials used by Canon is imported or
includes imported materials. Such raw materials are subject to
fluctuations in world market prices and exchange rates that
may affect Canon’s cost of sales. Other components of cost of
sales include depreciation expenses from plants, maintenance
expenses, light and fuel expenses and rent expenses. The ratio
of cost of sales to net sales for fiscal 2007, 2006 and 2005
was 49.9%, 50.4% and 51.5%, respectively.

Gross profit
Canon’s gross profit in fiscal 2007 increased by 9.1% to
¥2,246,981 million (U.S.$19,710 million) from fiscal 2006. The
gross profit ratio improved 0.5 points year on year to reach
50.1%. The improved gross profit ratio was mainly the result of
such factors as the launch of new products and the in-house
manufacturing of key components and key devices, in addition
to cost-reduction efforts realized through ongoing production-
reform and procurement-reform activities, which absorbed the
negative effects of escalating raw materials cost and severe
price competition in the consumer product market.

Operating expenses
The major components of operating expenses are payroll, R&D,
advertising expenses and other marketing expenses. Although
the growth in selling, general and administrative expenses—
which increased 7.4% year on year—remained less than revenue
growth, R&D expenditures grew by 19.4% from the year-ago
period to ¥368,261 million (U.S.$3,230 million) due to active
R&D investment, resulting in an increase in the operating
expense to net sales ratio of 0.6 points year on year to 33.2%.

Operating profit
Operating profit in fiscal 2007 increased by 7.0% to ¥756,673
million (U.S.$6,637 million) from fiscal 2006. Operating profit
in fiscal 2007 was 16.9% of net sales.

The Company and its domestic subsidiaries implemented
a change in the accounting method used to calculate deprecia-
tion of fixed assets at the start of the second quarter of the
year, which resulted in an increase of depreciation expense by
¥63,773 million (U.S.$559 million) compared with the previously
used method.

Other income (deductions)
Other income (deductions) for fiscal 2007 stayed at almost
the same level as the previous year. Although interest and
dividend income increased by ¥5,666 million (U.S.$50 million),
the foreign currency exchange loss offset it by ¥6,139 million
(U.S.$54 million).

Income before income taxes and
minority interests
Income before income taxes and minority interests in fiscal
2007 was ¥768,388 million (U.S.$6,740 million), a 6.8%
increase from fiscal 2006, and constituted 17.1% of net sales.

Income taxes
Provision for income taxes in fiscal 2007 increased by ¥16,025
million (U.S.$141 million) from fiscal 2006, primarily as a result
of the increase in income before income taxes and minority
interests. The effective tax rate during fiscal 2007 declined by
0.1% compared with fiscal 2006.

Net income
As a result of the factors offering above, net income in fiscal
2007 increased by 7.2% to ¥488,332 million (U.S.$4,284
million), which represents a 10.9% return on net sales.

Product information
Canon divides its businesses into three product groups: business
machines, cameras and optical and other products.
• The business machines product group includes office
imaging products, computer peripherals and business
information products.
Office imaging products include mainly office network digital
MFDs, color network digital MFDs, office copying machines,
personal-use copying machines, and full-color copying
machines.
Computer peripherals include mainly laser beam printers,
inkjet multifunction peripherals, single function inkjet printers,

and image scanners.
Business information products include mainly computer
information systems, document scanners, and personal
information products.

• The cameras product group includes mainly digital single

lens reflex (“SLR”) cameras, digital compact cameras,
interchangeable lenses, and digital video camcorders.

• The optical and other products product group includes
mainly semiconductor production equipment, mirror projec-
tion mask aligners for LCD panels, broadcasting equipment,
medical equipment, large format printers, and related
components.

Sales by product
Canon’s sales by product group are summarized as follows:

SALES BY PRODUCT

Millions of yen
2007

change

2006

change

2005

Thousands of
U.S. dollars
2007

Business machines:

Office imaging products
Computer peripherals
Business information products

Cameras
Optical and other products

Total

+2.8% ¥1,153,240 $11,322,702
+8.8% ¥1,185,925
¥1,290,788
13,486,939
+9.9
1,537,511
940,727
+0.5
107,243
+9.1
2,935,542
25,750,368
10,111,079
1,152,663 +10.6
–7.2
3,448,606
+7.8% ¥4,156,759 +10.7% ¥3,754,191 $39,310,053

1,398,408 +12.3
+2.4
106,754
+7.5
2,691,087
1,041,865 +18.5
423,807 +13.7

1,244,906
104,255
2,502,401
879,186
372,604

393,141
¥4,481,346

Return on Sales
(%)

Sales by Product
(Millions of yen)

Business Machines
Office imaging products
Computer peripherals
Business information products
Cameras
Optical and other products

Sales by Region
(Millions of yen)

Japan
Americas
Europe
Other areas

10.2

9.9

8.6

11.0

10.9

4,500,000

4,156,759

4,500,000

4,481,346

4,156,759

3,754,191

3,467,853

3,198,072

3,754,191

3,467,853

3,198,072

Sales of business machines, constituting 65.5% of con-
solidated net sales, increased 9.1%, to ¥2,935,542 million
(U.S.$25,750 million) in fiscal 2007.

Sales of office imaging products increased 8.8% in fiscal

2007, to ¥1,290,788 million (U.S.$11,323 million). In the
business machine segment, as demand for network digital
MFDs shifted toward color models in both the domestic
Japanese and overseas markets, the competitively priced iR
C2880 series and the high-end iR C5185 series continued to
enjoy strong sales. Among monochrome network digital MFDs,
the iR5055 series and the new energy-saving iR3025 series
contributed to expanded sales. Additionally, Canon marked its
entry into the commercial print market with the launch of the
new imagePRESS C7000VP. Color office imaging products
accounted for 35% and 31% and monochrome office imaging
products accounted for 45% and 49% of office imaging prod-
ucts sales in fiscal 2007 and 2006, respectively. Sales of facsim-
iles and information system business accounted for 20% of
sales of office imaging products in both fiscal 2007 and 2006.
Sales of computer peripherals increased 9.9% in fiscal
2007 to ¥1,537,511 million (U.S.$13,487 million). Laser beam
printers enjoyed a year-on-year increase of over 20% in unit
sales, with strong demand for both color and monochrome
low-end models, and consumables also growing favorably,
resulting in an increase of 10.5% in sales in value terms. As for
inkjet printers, despite a continuing decline in unit sales for
single-function models and severe price competition in the
market, sales in value terms increased by 9.2% in 2007,
boosted by such factors as increased unit sales of multifunction
models, including the PIXMA MP600/610, and healthy sales
growth for consumables.

Sales of business information products increased 0.5%, to

¥107,243 million (U.S.$941 million) in fiscal 2007.

Sales of cameras continued to achieve growth of 10.6% in
fiscal 2007, totaling ¥1,152,663 million (U.S.$10,111 million).
The growth was fueled by demand for digital SLR cameras,
with particularly strong sales for the compact, lightweight-body
EOS DIGITAL REBEL XTi and the advanced-amateur-model EOS
30D/40D which, in turn, led to expanded sales of interchange-
able lenses for SLR cameras. As for compact digital cameras,
Canon strengthened its lineup with the launch of 16 new
models—5 stylish ELPH-series models and 11 PowerShot-series
models—catering to a diverse range of shooting styles. As a

result, unit sales of digital cameras for 2007 increased by
approximately 17% from the year-ago period. In the field of
digital video camcorders, the launch of consumer-market HDV
models equipped with Canon HD CMOS sensors contributed
to expanded sales, filling out Canon’s digital camcorder lineup
along with MiniDV, DVD and hard disk models. Sales of cam-
eras constituted 25.7% of consolidated net sales in fiscal 2007.

Sales of optical and other products decreased 7.2% in
fiscal 2007, to ¥393,141 million (U.S.$3,449 million). In the
optical and other products segment, sales of aligners, used to
produce LCD panels, decreased amid reduced market demand
due to restrained investment by LCD manufacturers, and sales
of steppers, used in the production of semiconductors, also
declined slightly. Sales of optical and other products constituted
8.8% of consolidated net sales in fiscal 2007.

Sales by region
A geographical analysis indicates that net sales in fiscal 2007
increased in every region.

In Japan, sales of office imaging products increased by
6.8% in fiscal 2007 due to the growth of color network digital
MFDs and cameras also achieved sales growth of 7.4% due
to strong demand for digital SLR cameras. Sales of optical and
other products decreased by 6.8% due to a reduced demand
for steppers. As a result, net sales in this region increased by
1.6% in fiscal 2007 from fiscal 2006.

In the Americas, net sales increased by 3.1% on a local
currency basis in fiscal 2007, mainly due to increased sales of
digital cameras and color network digital MFDs. Sales of digital
cameras experienced continued strong demand and benefited
from the effect of newly-launched products such as the EOS
40D, advanced-amateur-model, and the EOS DIGITAL REBEL
XTi. On a yen basis, net sales in the Americas increased by
4.1% in fiscal 2007.

In Europe, net sales increased by 5.3% on a local currency
basis in fiscal 2007, mainly due to increased sales of laser beam
printers, color network digital MFDs and digital cameras. On a
yen basis, after accounting for the depreciation of the yen
against the euro, net sales in Europe grew 14.1% in fiscal 2007.
Sales in other areas increased by 11.5% on a yen basis in
fiscal 2007, reflecting overall sales growth, particularly in digital
cameras and laser beam printers.

A summary of net sales by region is provided below:

SALES BY REGION

Japan
Americas
Europe
Other areas
Total

Millions of yen
2007

change

2006

change

2005

Thousands of
U.S. dollars
2007

+1.6% ¥ 932,290
¥ 947,587
1,336,168
+4.1
1,499,286 +14.1
698,305 +11.5

+8.9% ¥ 856,205 $ 8,312,167
11,720,772
13,151,632
6,125,482
+7.8% ¥4,156,759 +10.7% ¥3,754,191 $39,310,053

1,283,646 +12.0
1,314,305 +11.3
+9.8

1,145,950
1,181,258
570,778

¥4,481,346

626,518

Note: This summary of net sales by region of destination is determined by the location of the customer.

SEGMENT INFORMATION BY PRODUCT

Millions of yen
2007 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure

2006 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure

2005 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure

Thousands of U.S.dollars
2007 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure

Business
Machines

Cameras

Optical and
Other Products

Corporate and
Eliminations

Consolidated

¥2,935,542
—
2,935,542
2,285,281
¥ 650,261
¥1,762,167
159,309
166,143

¥2,691,087
—
2,691,087
2,091,858
¥ 599,229
¥1,617,198
127,873
154,259

¥2,502,401
—
2,502,401
1,960,373
¥ 542,028
¥1,427,277
123,037
201,887

¥1,152,663
—
1,152,663
845,237
¥ 307,426
¥ 561,504
37,180
32,870

¥1,041,865
—
1,041,865
773,127
¥ 268,738
¥ 542,866
28,756
31,517

¥ 879,186
—
879,186
705,480
¥ 173,706
¥ 480,957
27,662
57,678

¥393,141
238,659
631,800
610,720
¥ 21,080
¥544,734
69,843
78,449

¥423,807
190,687
614,494
573,019
¥ 41,475
¥501,008
37,018
36,272

¥372,604
158,114
530,718
491,898
¥ 38,820
¥517,527
28,011
15,955

(238,659)
(238,659)
(16,565)

— ¥4,481,346
—
4,481,346
3,724,673
¥ (222,094) ¥ 756,673
¥4,512,625
¥1,644,220
341,694
75,362
428,549
151,087

(190,687)
(190,687)
11,722
¥ (202,409)
¥1,860,843
68,647
157,609

— ¥4,156,759
—
4,156,759
3,449,726
¥ 707,033
¥4,521,915
262,294
379,657

(158,114)
(158,114)
13,397
¥ (171,511)
¥1,617,792
47,231
108,264

— ¥3,754,191
—
3,754,191
3,171,148
¥ 583,043
¥4,043,553
225,941
383,784

Business
Machines

Cameras

Optical and
Other Products

Corporate and
Eliminations

Consolidated

10,111,079
7,414,360

—
25,750,368
20,046,324

$25,750,368 $10,111,079 $3,448,606 $

— $39,310,053
—
— 2,093,499
39,310,053
5,542,105
32,672,571
5,357,193
$ 5,704,044 $ 2,696,719 $ 184,912 $ (1,948,193) $ 6,637,482
$15,457,605 $ 4,925,474 $4,778,368 $14,422,983 $39,584,430
2,997,316
3,759,202

(2,093,499)
(2,093,499)
(145,306)

661,071
1,325,325

1,397,447
1,457,395

612,658
688,149

326,140
288,333

Notes:
1. General corporate expenses of ¥221,979 million (U.S.$1,947 million), ¥202,328 million and ¥171,522 million in the years ended December 31, 2007, 2006

and 2005, respectively, are included in “Corporate and Eliminations.”

2. Corporate assets of ¥1,644,220 million (U.S.$14,423 million), ¥1,860,933 million and ¥1,239,255 million as of December 31, 2007, 2006 and 2005,

respectively, which mainly consist of cash and cash equivalents, time deposits, marketable securities, investments and corporate properties, are included in
“Corporate and Eliminations.”

3. The segments are defined under Japanese GAAP. In grouping of segment information by product, Japanese GAAP requires that consideration be given to

similarities of product types and characteristics, manufacturing methods, sales markets, and other factors that are similar.

4. As noted in Note 1-(l) of the Notes to Consolidated Financial Statements, Effective April 1, 2007, the Company and its domestic subsidiaries elected to change

the declining-balance method of depreciating machinery and equipment.

The change in depreciation methods caused an increase in depreciation expense by ¥29,148 million (U.S.$256 million) in the Business Machines segment,
¥6,451 million (U.S.$56 million) in the Cameras segment, ¥15,540 million (U.S.$136 million) in the Optical and other products segment and ¥12,634 million
(U.S.$111 million) in Corporate and Eliminations.

SEGMENT INFORMATION BY GEOGRAPHIC AREA

Millions of yen

2007 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets

2006 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets

2005 Net sales:

Unaffiliated customers
Intersegment

Total

Operating cost and expenses
Operating profit
Assets

Thousands of U.S.dollars

2007 Net sales:

Japan

Americas

Europe

Others

Corporate and
Eliminations

Consolidated

¥1,048,310 ¥1,329,479 ¥1,499,821 ¥ 603,736
824,844
2,494,251
1,428,580
3,542,561
1,378,306
2,722,672
¥ 819,889 ¥
50,274
¥2,715,294 ¥ 506,295 ¥ 732,579 ¥ 367,234

3,496
1,503,317
1,441,972

4,608
1,334,087
1,281,805

61,345 ¥

52,282 ¥

¥1,037,657 ¥1,277,867 ¥1,313,919 ¥ 527,316
792,018
2,311,482
1,319,334
3,349,139
1,275,817
2,558,685
¥ 790,454 ¥
43,517
¥2,644,116 ¥ 432,001 ¥ 682,381 ¥ 339,314

3,586
1,317,505
1,272,463

4,764
1,282,631
1,236,138

46,493 ¥

45,042 ¥

¥ 979,748 ¥1,139,784 ¥1,178,672 ¥ 455,987
646,530
2,046,173
1,102,517
3,025,921
1,071,155
2,362,019
31,362
¥ 663,902 ¥
¥2,419,012 ¥ 406,101 ¥ 569,750 ¥ 312,472

2,206
1,180,878
1,147,658

7,424
1,147,208
1,110,415

36,793 ¥

33,220 ¥

(3,327,199)
(3,327,199)
(3,100,082)

— ¥4,481,346
—
4,481,346
3,724,673
¥ (227,117) ¥ 756,673
¥4,512,625
¥

191,223

(3,111,850)
(3,111,850)
(2,893,377)

— ¥4,156,759
—
4,156,759
3,449,726
¥ (218,473) ¥ 707,033
¥4,521,915
¥

424,103

(2,702,333)
(2,702,333)
(2,520,099)

— ¥3,754,191
—
3,754,191
3,171,148
¥ (182,234) ¥ 583,043
¥4,043,553
¥

336,218

Japan

Americas

Europe

Others

Corporate and
Eliminations

Consolidated

Total

Unaffiliated customers
Intersegment

21,879,394
31,075,096
Operating cost and expenses 23,883,087
Operating profit
Assets

$ 9,195,702 $11,662,096 $13,156,325 $ 5,295,930 $

— $39,310,053
(29,185,956)
—
(29,185,956) 39,310,053
(27,193,701) 32,672,571
$ 7,192,009 $
441,000 $ (1,992,255) $ 6,637,482
$23,818,368 $ 4,441,184 $ 6,426,132 $ 3,221,351 $ 1,677,395 $39,584,430

30,666
13,186,991
12,648,877

40,422
11,702,518
11,243,904

7,235,474
12,531,404
12,090,404

458,614 $

538,114 $

Notes:
1. General corporate expenses of ¥221,979 million (U.S.$1,947 million), ¥202,328 million and ¥171,522 million in the years ended December 31, 2007, 2006

and 2005, respectively, are included in “Corporate and Eliminations.”

2. Corporate assets of ¥1,644,220 million (U.S.$14,423 million), ¥1,860,933 million and ¥1,239,255 million as of December 31, 2007, 2006 and 2005,

respectively, which mainly consist of cash and cash equivalents, time deposits, marketable securities, investments and corporate properties, are included in
“Corporate and Eliminations.”

3. Segment information by geographic area is determined by the location of the Company or its relevant subsidiary making the sale. The segments are defined

under Japanese GAAP. In grouping of segment information by geographic area, Japanese GAAP requires that consideration be given to geographic proximity,
as well as similarities of economic activities, interrelationships of business activities and other similar factors.

Operating profit by product
Operating profit for business machines in fiscal 2007
increased by ¥51,032 million (U.S.$448 million) to ¥650,261
million (U.S.$5,704 million). This increase resulted primarily
from sales growth and cost reduction efforts.

Operating profit for cameras in fiscal 2007 increased by
¥38,688 million (U.S.$339 million) to ¥307,426 million
(U.S.$2,697 million). The suppression of price declines through
the launch of new products and continued cost reduction
efforts realized through ongoing production reform and
procurement boosted the operating profit of this segment.

Operating profit for optical and other products in fiscal
2007 decreased by ¥20,395 million (U.S.$179 million) to
¥21,080 million (U.S.$185 million) mainly due to a decline in
the sales volume of aligners and steppers.

FOREIGN OPERATIONS AND FOREIGN CURRENCY
TRANSACTIONS
Canon’s marketing activities are performed by subsidiaries in
various regions in local currencies, while the cost of sales is
generally in yen. Given Canon’s current operating structure,
appreciation of the yen has a negative impact on net sales and
the gross profit ratio. To reduce the financial risks from changes
in foreign exchange rates, Canon utilizes derivative financial
instruments, which are comprised principally of forward
currency exchange contracts.

The return on foreign operation sales is usually lower than
that from domestic operations because foreign operations con-
sist mainly of marketing activities. Return on foreign operation
sales is calculated by dividing net income of foreign subsidiaries,
after factoring in consolidation adjustments between foreign
subsidiaries, by net sales of foreign subsidiaries. Marketing
activities are generally less profitable than production activities,
which are mainly conducted by the Company and its domestic
subsidiaries. The returns on foreign operation sales in fiscal 2007,
2006 and 2005 were 4.0%, 3.7% and 3.0%, respectively.
This compares with returns of 10.9%, 11.0% and 10.2% on
consolidated operations for the respective years.

LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2007 decreased by
¥211,163 million (U.S.$1,852 million) to ¥944,463 million
(U.S.$8,285 million), compared with ¥1,155,626 million in
fiscal 2006 and ¥1,004,953 million in fiscal 2005. Canon’s cash
and cash equivalents are typically denominated both in Japanese
yen and in U.S. dollar, with the remainder denominated in
foreign currencies except for the U.S. dollar.

Net cash provided by operating activities in fiscal 2007
increased by ¥144,028 million (U.S.$1,263 million) from the
previous year to ¥839,269 million (U.S.$7,362 million), reflecting
the growth in sales and increased cash proceeds from sales,
combined with an increase in net income. Cash flow from
operating activities consisted of the following key components:
the major component of Canon’s cash inflow is cash received
from customers, while the major components of Canon’s
cash outflow are payments for parts and materials, selling,
general and administrative expenses, and income taxes.

For fiscal 2007, cash inflow from cash received from cus-
tomers increased, due to the increase in net sales. This increase
in cash inflow was within the range of the increase in net sales,
as there were no significant changes in Canon’s collection
rates. Cash outflow for payments for parts and materials also
increased, as a result of an increase in net sales. However, this
increase was less than the increase in net sales, due to the
effects of cost reductions. Cost reductions reflect a decline in
unit prices of parts and raw materials, as well as a streamlining
of the process of using these parts and materials through
promoting efficiency in operations. Cash outflow for payroll
increased, due to an increase in the number of employees. The
employees in the Asian region increased, due to the expansion
of production in the region. Cash outflow for payments for
selling, general and administrative expenses increased, but the
increase was within the range of the increase in net sales, due
to cost-cutting efforts. Cash outflow for payments of income
taxes increased, due to the increase in taxable income.

Net cash used in investing activities in fiscal 2007 was
¥432,485 million (U.S.$3,794 million), compared with ¥460,805
million in fiscal 2006 and ¥401,141 million in fiscal 2005,
consisting primarily of capital expenditures. Purchases of fixed
assets in fiscal 2007 totaled ¥474,285 million (U.S.$4,160
million), which was used mainly to expand production capa-
bilities in Japan and overseas and to strengthen the Company’s
production-technology related infrastructure. As a result, free
cash flow, or cash flow from operating activities minus cash
flow from investing activities, totaled ¥406,784 million
(U.S.$3,568 million) for fiscal 2007 as compared to ¥234,436
million for fiscal 2006.

Net cash used in financing activities totaled ¥604,383
million (U.S.$5,302 million) in fiscal 2007, mainly resulting from
the ¥450,000 million (U.S.$3,947 million) purchase of treasury
stock with the aim of improving capital efficiency and ensuring
a flexible capital strategy and the dividend payout. The Company
paid dividends in fiscal 2007 of ¥110.00 (U.S.$0.96) per share,
which was an increase of ¥26.67 (U.S.$0.23) per share over
the prior year (after adjusting for the effect of 3 for 2 stock
split in 2006).

Canon seeks to meet its liquidity and capital requirements
principally with cash flow from operations. Consistent with this
objective, Canon continued to reduce its reliance on external
funding for capital investments in favor of relying upon internally
generated cash flows. This approach is supplemented with
group-wide treasury and cash management activities undertaken
at the parent company level. Canon believes that its working
capital is sufficient for its present requirements.

To the extent Canon relies on external funding for its
liquidity and capital requirements, it generally has access to
various funding sources, including issuance of additional share
capital, long-term debt or short-term loans. While Canon has
been able to obtain funding from its traditional financing
sources and from the capital markets, and believes it will
continue to be able to do so in the future, there can be no
assurance that adverse economic or other conditions will not
affect Canon’s liquidity or long-term funding in the future.
Short-term loans (including current portion of long-term

debt) amounted to ¥18,317 million (U.S.$161 million) at
December 31, 2007 compared to ¥15,362 million at December
31, 2006. Long-term debt (excluding current portion) amounted
to ¥8,680 million (U.S.$76 million) at December 31, 2007
compared to ¥15,789 million at December 31, 2006.

Canon’s long-term debt (excluding current portion) generally

consists of lease obligations.

In order to facilitate access to global capital markets, Canon

obtains credit ratings from two rating agencies; Moody’s
Investors Services, Inc. (“Moody’s”) and Standard and Poor’s
Rating Services (“S&P”). In addition, Canon maintains a rating
from Rating and Investment Information, Inc. (“R&I”), a rating
agency in Japan, for access to the Japanese capital market.

As of February 18, 2008, Canon’s debt ratings are:
Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short-
term); and R&I: AA+ (long-term). Canon does not have any
rating downgrade triggers that would accelerate the maturity
of a material amount of its debt. A downgrade in Canon’s
credit ratings or outlook could, however, increase the cost of
its borrowings.

Capital expenditures (purchases of property, plant and
equipment) in fiscal 2007 amounted to ¥428,549 million
(U.S.$3,759 million) compared with ¥379,657 million in fiscal
2006 and ¥383,784 million in fiscal 2005. In fiscal 2007,
capital expenditures were mainly used to expand production
capabilities in both domestic and overseas regions, and to
bolster the Company’s production-technology related infras-
tructure. In addition, Canon has been continually investing in
tools and dies for business machines, in which the amount
invested is generally the same each year. For fiscal 2008,
Canon projects its capital expenditures will be approximately
¥440,000 million (U.S.$3,860 million). The capital expenditures
include investments in new production plants and new facilities
of Canon.

Employer contributions to Canon’s worldwide defined
benefit pension plans were ¥21,720 million (U.S.$191 million)
in fiscal 2007, ¥44,981 million in fiscal 2006, ¥40,059 million
in fiscal 2005. In addition, employer contributions to Canon’s
worldwide defined contribution pension plans were ¥10,262
million (U.S.$90 million) in fiscal 2007, ¥6,233 million in fiscal
2006, and ¥4,878 million in fiscal 2005.

Capital Expenditures
(Millions of yen)

450,000

428,549

383,784 379,657

318,730

210,038

OFF-BALANCE SHEET ARRANGEMENTS
As part of its ongoing business, Canon does not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow
or limited purposes.

Canon provides guarantees for bank loans of its employees,

affiliates and other companies. Canon would have to perform
under a guarantee if the borrower defaults on a payment
within the contract periods of 1 year to 30 years in the case of
employees with housing loans, and of 1 year to 10 years in the
case of affiliates and other companies. The maximum amount
of undiscounted payments Canon would have had to make in
the event of default by all borrowers was ¥27,946 million
(U.S.$245 million) at December 31, 2007. The carrying amounts
of the liabilities recognized for Canon’s obligations as a guarantor
under those guarantees were insignificant.

Working capital in fiscal 2007 decreased by ¥266,960 million
(U.S.$2,342 million), to ¥1,352,082 million (U.S.$11,860 million),
compared with ¥1,619,042 million in fiscal 2006 and ¥1,379,941
million in fiscal 2005. This decrease was primarily a result of a
decrease in cash and cash equivalents. Canon believes its
working capital will be sufficient for its requirements for the
foreseeable future. Canon’s capital requirements are primarily
dependent on management’s business plans regarding the
levels and timing of capital expenditures and investments. The
working capital ratio (ratio of current assets to current liabilities)
for fiscal 2007 was 2.08 compared to 2.39 for fiscal 2006 and
2.28 for fiscal 2005.

Return on assets (Net income divided by the average of total
assets) was 10.8% in fiscal 2007, compared to 10.6% in fiscal
2006 and 10.1% in fiscal 2005.

Return on stockholders’ equity (Net income divided by the
average of total stockholders’ equity) was 16.5% in fiscal 2007
compared with 16.3% in fiscal 2006 and 16.0% in fiscal 2005.

Debt to total assets ratio was 0.6%, 0.7% and 0.8% as of
December 31, 2007, 2006 and 2005, respectively. Canon had
short-term loans and long-term debt of ¥26,997 million
(U.S.$237 million) as of December 31, 2007, ¥31,151 million
as of December 31, 2006 and ¥32,141 million as of
December 31, 2005.

Working Capital Ratio

Return on Stockholders’ Equity
(%)

2.5

2.33

2.27

2.28

2.39

2.08

16.8

15.9

16.0

16.3

16.5

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes Canon’s contractual obligations at December 31, 2007.

Total

Less than 1 year

1–3 years

3–5 years

More than 5 years

Payments Due By Period

Millions of yen

Contractual obligations:

Long-term debt:

Capital lease obligations
Other long-term debt
Operating lease obligations
Purchase commitments for:

¥ 10,988
13,121
57,401

4,651
10,778
16,365

¥ 5,055
1,443
20,019

¥ 1,268
691
9,736

14
209
11,281

—
—

Property, plant and equipment
Parts and raw materials

117,119
91,882

—
—

Total

¥290,511

¥240,795

¥26,517

¥11,695

¥11,504

Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to
these obligations cannot be projected with reasonable certainty. See Note 14, Income Taxes in the Notes to Consolidated Financial Statements for further details.

Thousands of U.S.dollars

Contractual obligations:

Long-term debt:

Capital lease obligations
Other long-term debt
Operating lease obligations
Purchase commitments for:

Total

Less than 1 year

1–3 years

3–5 years

More than 5 years

Payments due by period

96,386
115,096
503,518

40,798
94,544
143,553

$ 44,342
12,658
175,605

$ 11,123
6,061
85,403

123
1,833
98,957

Property, plant and equipment
Parts and raw materials

1,027,360
805,982

—
—

Total

$2,548,342

$2,112,237

$232,605

$102,587

$100,913

Canon provides warranties of generally less than one year
against defects in materials and workmanship on most of its
consumer products. Estimated product warranty related costs
are established at the time revenue is recognized and is
included in selling, general and administrative expenses.
Estimates for accrued product warranty cost are primarily
based on historical experience, and are affected by ongoing
product failure rates, specific product class failures outside of
the baseline experience, material usage and service delivery
costs incurred in correcting a product failure. As of December
31, 2007, accrued product warranty costs amounted to
¥20,138 million (U.S.$177 million).

At December 31, 2007, commitments outstanding for
the purchase of property, plant and equipment were approxi-
mately ¥117,119 million (U.S.$1,027 million), and commit-
ments outstanding for the purchase of parts and raw materials
were approximately ¥91,882 million (U.S.$806 million), both
for use in the ordinary course of its business. Canon anticipates
that funds needed to fulfill these commitments will be gener-
ated internally through operations.

During fiscal 2008, Canon expects to contribute ¥13,699
million (U.S.$120 million) to its Japanese defined benefit pension
plans and ¥4,409 million (U.S.$39 million) to its foreign defined
benefit pension plans.

Canon’s management believes that current financial

resources, cash generated from operations and Canon’s poten-
tial capacity for additional debt and/or equity financing will be
sufficient to fund current and future capital requirements.

RESEARCH AND DEVELOPMENT, PATENTS
AND LICENSES
The fiscal year 2007 is the second year of Phase III (2006-2010)
of the Excellent Global Corporation Plan, which has an objective
to realize “Sound Growth” toward “Joining the World’s Top
100 Companies.”

Canon has established the following as key strategies:
• Realize an overwhelming No.1 position worldwide in all

current core businesses,

• Expand operations through diversification and
• Identify new business domains and accumulate necessary

technological capabilities.

Canon is striving to achieve these strategies as follows:
• Realize an overwhelming No.1 position worldwide in all
current core businesses: Product R&D divisions will work
together with the corporate R&D headquarters to bolster
product competitiveness through development of
extremely superior next-generation products.

• Expand operations through diversification: Canon is study-
ing existing technologies to expand business domains.
Furthermore, Canon will continue to develop various types
of displays, such as Surface-conduction Electron-emitter
Display (“SED”) and Organic Light-Emitting Diode displays
(“OLED”), in order to realize “cross-media imaging”—a
sophisticated combination of imaging input and output
equipment for data, still images and video that allows
users to intuitively process images and information in any
context in daily life or industry.

• Identify new business domains and accumulate necessary
technological capabilities: Canon established a “Strategic
Committee for New Domains.” As a result of discussions
in that committee, Canon targeted the “medical sector”
and “intelligent robot industry” as new business domains,
and “safety technology” as a common base technology,
and recommended strengthening research and develop-
ment of related technologies. In addition, Canon is devel-
oping and strengthening relationships with universities
and other research institutes, such as Stanford University,
Kyoto University, Tokyo Institute of Technology and the
National Institute of Advanced Industrial Science and
Technology, to carry on fundamental research and
develop cutting-edge technologies.

Canon has utilized 3D-CAD systems for some time in
boosting R&D efficiency to curtail product development times
and costs. Moreover, Canon enhanced and evolved its simula-
tion, measurement, and analysis technologies by introducing

R&D Expenditure
(Millions of yen)

400,000

368,261

308,307

286,476

275,300

259,140

leading-edge facilities including one of Japan’s highest-
performance cluster computers. As such, Canon has succeeded
in further reducing the need for prototypes, dramatically lowering
costs and shortening product development lead times.

Canon has R&D centers worldwide, and each of our R&D
centers, with its expertise, is collaborating with other centers to
achieve synergies, and cultivating closer ties in fields ranging
from basic research to product development.

Canon’s consolidated R&D expenditures were ¥368,261
million (U.S.$3,230 million) in fiscal 2007, ¥308,307 million in
fiscal 2006 and ¥286,476 million in fiscal 2005. The ratios of
R&D expenditure to the consolidated total net sales for fiscal
2007, 2006 and 2005 were 8.2%, 7.4% and 7.6%, respectively.
Canon believes that new products protected by seminal
patents will not easily allow competitors to catch up with it,
and will give it an advantage in establishing standards in the
market and industry. According to the United States patent
annual list, which IFI CLAIMS® Patent Services released, Canon
obtained the third greatest number of private sector patents in
2007. This achievement marks Canon’s sixteenth consecutive
year as one of the top three patent-receiving private-sector
organizations.

RECENT DEVELOPMENTS
Canon Marketing Japan Inc. acquired shares of Argo 21
Corporation (listed on the Tokyo stock exchange), which
possesses an advanced IT solution business, through a tender
offer and it became a consolidated subsidiary as of June 21,
2007. Subsequently, Canon Marketing Japan Inc. acquired all
of the remaining issued and outstanding shares of Argo 21
Corporation as of November 1, 2007 through a share exchange.
With Argo 21 as a wholly-owned subsidiary, Canon Marketing
Japan Inc. aims to strengthen its IT solutions business. In
conjunction with this transaction, Argo 21 Corporation has been
delisted from the Tokyo stock exchange on October 26, 2007.
Canon acquired shares of Tokki Corporation (listed on the

JASDAQ stock exchange), which possesses advanced display
technology, through a tender offer and a third party allotment,
and made it into a consolidated subsidiary as of December 28,
2007. With Tokki Corporation as a subsidiary, Canon aims to
accelerate the development of its display business.

On February 27, 2008, Canon entered into a stock purchase

agreement with Hitachi, Ltd. (“Hitachi”) to acquire shares of
Hitachi Displays, Ltd. (“Hitachi Displays”), a wholly-owned
subsidiary of Hitachi, with the aim of accelerating ongoing
development of organic light-emitting diode (“OLED”) displays,
ensuring stable procurement of LCD panels and facilitating
product development. Under the terms of this agreement, the
Company will acquire a 24.9% stake in Hitachi Displays by
March 31, 2008, pending regulatory approval.

As the next step, Canon plans to acquire additional Hitachi
Displays’ shares and make Hitachi Displays a Canon subsidiary.

MARKET RISK EXPOSURE
Canon is exposed to market risks, including changes in foreign
currency exchange rates, interest rates and prices of marketable
securities and investments. In order to hedge the risks of
changes in foreign currency exchange rates, Canon uses
derivative financial instruments.

Equity price risk
Canon holds marketable securities included in current assets as
short-term investments, which consist generally of highly-liquid
and low-risk instruments. Investments included in noncurrent

assets are held as long-term investments. Canon does not hold
marketable securities and investments for trading purposes.

Maturities and fair values of such marketable securities and

investments were as follows at December 31, 2007.

Available-for-sale securities

Due within one year
Due after one year through five years
Due after five years
Equity securities

Held-to-maturity securities

Due within one year

Millions of yen

Cost

Fair Value

Thousands of U.S. dollars
Cost

Fair Value

51
3,430
3,822
12,666
¥19,969

51
3,638
4,726
22,316
¥30,731

447
30,088
33,526
111,105
$175,166

447
31,912
41,456
195,755
$269,570

Millions of yen

Cost

Fair Value

Thousands of U.S. dollars
Cost

Fair Value

¥10,115

$ 88,728

Foreign currency exchange rate and interest
rate risk
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates. Derivative financial
instruments are comprised principally of foreign currency
exchange contracts utilized by the Company and certain of its
subsidiaries to reduce the risk. Canon assesses foreign currency
exchange rate risk by continually monitoring changes in the
exposures and by evaluating hedging opportunities. Canon
does not hold or issue derivative financial instruments for
trading purposes. Canon is also exposed to credit-related
losses in the event of non-performance by counterparties to
derivative financial instruments, but it is not expected that any
counterparties will fail to meet their obligations, because most
of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of
major financial institutions.

Canon’s international operations expose Canon to the risk of
changes in foreign currency exchange rates. Canon uses foreign
exchange contracts to manage certain foreign currency exchange
exposures principally from the exchange of U.S. dollars and euros
into Japanese yen. These contracts are primarily used to hedge
the foreign currency exposure of forecasted intercompany sales
and intercompany trade receivables which are denominated in
foreign currencies. In accordance with Canon’s policy, a specific
portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts
which principally mature within three months.

The following table provides information about Canon’s
major derivative financial instruments related to foreign currency
exchange transactions existing at December 31, 2007. All of
the foreign exchange contracts described in the following table
have a contractual maturity date in 2008.

Millions of yen

Forwards to sell foreign currencies:

Contract amounts
Estimated fair value

Forwards to buy foreign currencies:

Contract amounts
Estimated fair value

Thousands of U.S. dollars

Forwards to sell foreign currencies:

Contract amounts
Estimated fair value

Forwards to buy foreign currencies:

Contract amounts
Estimated fair value

U.S.$

euro

Others

Total

¥361,582
(6,253)

¥294,355
(5,132)

¥41,303
(62)

¥697,240
(11,447)

¥ 29,826
(53)

2,451
9

¥14,620
(38)

¥ 46,897
(82)

U.S.$

euro

Others

Total

$3,171,772
(54,851)

$2,582,061
(45,018)

$362,307
(543)

$6,116,140
(100,412)

$ 261,632
(465)

21,500
79

$128,245
(334)

$ 411,377
(720)

Canon’s long-term debt consists generally of fixed rate.
Accordingly, Canon considers interest rate risk is insignificant.
For debt obligations, the table below presents principal cash

flows by expected maturity dates and related weighted average
interest rates, as of December 31, 2007.

LONG-TERM DEBT (including due within one year)
Millions of yen

Japanese yen notes
Japanese yen convertible
debentures
Other long-term debt

Total

Thousands of U.S. dollars

Japanese yen notes
Japanese yen convertible
debentures
Other long-term debt

Total

Weighted average
interest rates

Total

2008

2009

Expected maturity date
2011

2010

2012

Thereafter

Estimated
Fair Value

2.27% ¥10,000

¥10,000

¥ — ¥ — ¥ — ¥ — ¥ — ¥10,065

1.30%
128
1.80% 13,981
¥24,109

128
5,301
¥15,429

—
4,052
¥4,052

—
2,446
¥2,446

—
1,504
¥1,504

—
455
¥455

—
223
¥223

668
13,981
¥24,714

Weighted average
interest rates

Total

2008

2009

Expected maturity date
2011

2010

2012

Thereafter

Estimated
Fair Value

2.27% $ 87,719 $ 87,719 $

— $

— $ — $ — $ 88,289

1.30%
1,123
1.80% 122,640

5,860
122,640
$211,482 $135,342 $35,544 $21,456 $13,193 $3,991 $1,956 $216,789

1,123
46,500

—
35,544

—
21,456

—
13,193

—
1,956

—
3,991

Changes in the fair value of derivative financial instruments

designated as cash flow hedges, including foreign exchange
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassified into earnings
through other income (deductions) in the same period as the
hedged items affect earnings. Substantially all amounts recorded
in accumulated other comprehensive income (loss) at year-end
are expected to be recognized in earnings over the next 12
months. Canon excludes the time value component from the
assessment of hedge effectiveness. Changes in the fair value
of a foreign exchange contract for the period between the
date that the forecasted intercompany sales occur and its
maturity date are recognized in earnings and not considered
hedge ineffectiveness.

The amount of the hedging ineffectiveness was not mate-
rial for the years ended December 31, 2007, 2006 and 2005.
The amount of net gains or losses excluded from the assess-
ment of hedge effectiveness (time value component) which
was recorded in other income (deductions) was net losses of
¥6,883 million (U.S.$60 million), ¥5,917 million and ¥3,725
million for the years ended December 31, 2007, 2006 and
2005, respectively.

Canon has entered into certain foreign currency exchange

contracts to manage its foreign currency exposures. These
foreign currency exchange contracts have not been designated
as hedges. Accordingly, the changes in fair values of the
contracts are recorded in earnings immediately.

LOOKING FORWARD
Though there is a slight sense of uncertainty regarding the
future and global economies are now confronted with factors
heightening the risk of economic downturn such as financial
market confusion due to the subprime loan issue and the
impacts of rising crude oil prices, Canon expects modest eco-
nomic growth to continue on the whole led by the high eco-
nomic growth of the BRIC countries. On the other hand,
however, it is expected that competition will intensify and
business conditions for Canon will become increasingly severe.
In addressing those business and economic conditions,
Canon, views the current fiscal year, the third year of Phase III
(2006 to 2010) of our “Excellent Global Corporation Plan,” as
a key period for firmly positioning itself for achieving its 2010
objectives, and will actively work to further strengthen and
enhance its management base.

Toward that goal, Canon will focus on strengthening prod-
uct development capabilities, the source of competitiveness in
all of its operations, introduce superior products to those of its
competitors, and achieve the real global No.1 market positions
in all of its core businesses.

Additionally, Canon will work to lower its cost rate even
further by automating production and moving forward with
efforts to produce more key parts in-house through measures
like advancing the stable adoption of automated assembly
equipment, and by undertaking production and procurement

innovation activities. Additionally, regarding product quality,
which is always the top concern of a manufacturer, Canon will
strategically undertake product quality innovation activities to
augment its ability to deliver safety, security, and satisfaction to
our customers.

To enhance its future-oriented R&D, Canon will strengthen

companywide strategic functions related to R&D under an
organizational structure starting form during the current fiscal
year, and focus on areas like technology development for
future product and research on future technologies.

Canon will also accelerate the development of various kinds

of displays to promptly establish the display business because
the development of new core businesses is essential for realiz-
ing sound growth of its business.

Additionally, because compliance is a key requirement for

Canon to continue to prosper as a truly excellent global
company, Canon will take measures that go beyond those
Canon has taken in the past to ensure that all executives and
employees thoroughly understand and implement Canon’s
compliance practices.

Business machines segment
Office imaging products
In the office imaging products segment, it has become more
important to provide added value in the form of networking,
integration, color printing, and multifunction models. Also, in
addition to the stable market for mid-segment office products,
Canon expects that the market for higher-end models and
low-end multifunction models will expand. The market for
color digital devices continued to grow rapidly, and sales of
monochrome digital MFDs were stable, reflecting the market
trend shifting from single-function to multifunction. Recently,
there has been a new, printer-based multifunction printer
(“MFP”) market created by printer vendors as they seek to
enter the copier and MFD market.

To maintain and enhance a competitive edge and to meet
more sophisticated customer demands, Canon is strengthening
its marketing capabilities by reinforcing its hardware and soft-
ware product lineups and by improving functionality. In 2007,
Canon strengthened the product lineups of its color digital
devices as well as its monochrome machines and maintained
its market share by executing business strategies in line with
current market trends.

Computer peripheral products
In the Inkjet printer market, Canon expects a continuation of
declines in market prices, slowdown in market growth, and a
shift from single-function printers (“SFP”) to MFPs. To manage
these trends, Canon launched new lineups of SFPs and MFPs
from flagship to entry models in order to expand its printer sales.
Canon’s laser beam printer business holds a strong position

in the market. In the monochrome laser beam printer market,
Canon expects that the transition to a low price segment will
expand sales in the micro-business/home office market and in

the emerging markets. In the color laser beam printer market,
Canon expects continued strong growth in demand. In general,
competition will become more intense as competitors implement
aggressive price strategies in order to establish themselves as
market leaders. Canon seeks to remain competitive by develop-
ing technologies that can be deployed in a timely fashion to
produce innovative products in all segments. Canon is also
working to lower costs by automating production of consum-
ables and to secure procurement of essential parts through
internal sourcing.

Although Canon expects that the size of the scanner market
will continue to contract, the “Cano Scan 8800F” which is based
on CCD technology and the “Canon Scan LiDE 90” incorporat-
ing Contact Image Sensor technology were both introduced in
fiscal 2007 in order to increase Canon’s share of this market.

Business information products
As for document scanners, adoptions of internal information
management systems by corporations, and other factors are
driving a worldwide movement to digitize documents and the
market for low-priced, compact scanners continued to expand.
Under these circumstances, as for the “DR Scanner Series,”
Canon introduced the compact, affordable “image FORMULA
DR-2510C” in Japan and the “ScanFront 220P,” which is
capable of distributing scanned images over a network, in Japan
and overseas, and worked to expand sales of these products.
As a result, sales have steadily increased in fiscal 2007.

With regard to servers and personal computers, demand
from corporate clients in the Japanese market held steady in
fiscal 2007, but a decline in sales was caused by Canon’s
change in marketing strategy from selling single products to a
solutions business involving combinations of various products.
This trend is expected to continue in fiscal 2008.

Cameras segment
The entire digital camera market continues to expand. While
the growth rate has slowed in Japan and the United States,
emerging markets, especially China and Eastern Europe, have
experienced strong growth. In addition, the emergence of
digital imaging systems has contributed to this growth as well,
such as PC-free direct printing systems, by expanding the
digital imaging functionality through network connectivity,
along with the improvement of the user-friendly image
processing interfaces and software.

The digital camera industry is seeing growth on various
fronts. As with most other digital consumer electronics, the
digital camera market is now confronted with a fierce price
war and intensified technological competition in terms of
picture quality and functions. Profit margins have been
shrinking for the overall industry, but Canon has been able
to maintain higher margins through reforms of its production
and procurement systems.

Canon expects the market for compact digital cameras to
expand in the intermediate term. However, profit margins for

the overall industry are moving lower as prices fall and compe-
tition increases. Therefore, Canon seeks to continue cutting
production costs while expanding sales volumes.

There are signs of rapid growth in the market for compact

photo printers, which present a new business opportunity.
By creating a strong product line, over the mid-term Canon
believes that it will be able to take a significant role in this
market and turn the compact photo printer business into a
new earnings source for Canon.

Canon believes that it played a major role in the continued
expansion of the digital SLR market in fiscal 2007. This market
is expected to continue growing for the time being. Canon
expects the interchangeable lens market to grow as a result of
the rapid market penetration of digital SLR cameras. Canon
aims to expand its sales and market share by introducing the
most suitable products for the digital SLR camera users, including
products with Image Stabilizer capability.

For video camcorders, the market has recently switched
entirely over to digital. Against this background, two trends
have been conspicuous in the market. First is the diversity of
recording media for video cameras, including DVD, HDD, SD
cards and other new forms of media. Second is the trend
towards higher picture quality using high-resolution recording
methods such as HDV and AVCHD. Canon believes that these
two trends will lead to higher picture quality of video camcorders
with longer battery life, and will likely contribute to further
growth for the overall digital video market.

Canon will seek continued sales growth with a stronger
product line while investing in research and development in
order to better respond to new market trends.

Canon expects that the market for business-use liquid
crystal projectors will continue to grow by about 10% per year
on a unit basis, while market prices will continue to decline,
resulting in almost no sales growth. Especially in the low-end
segment, sales are expected to decline, despite an increase in
units sold. On the other side, unit prices of high resolution and
high luminosity models are relatively stable and unit sales and
sales in value terms are both expected to grow.

In these market conditions, Canon believes that its high-
resolution and high luminosity projectors have been very well
received by professionals such as system integrators. Canon
plans to continue to develop distinctive, value-added products
by further improving picture quality, resolution, luminosity and
system expandability with Canon’s proprietary AISYS technology
and LCOS.

Optical and other products segment
In the semiconductor-production equipment industry,
equipment manufacturers must provide high quality products
corresponding to rapid technology progress. Canon will continue
to focus on developing new products which adopt leading-edge
technologies, such as immersion exposure technology and ultra
precision processing and measurement technology.

In the LCD production mask aligner market, Canon will
seek to strengthen its technical capabilities to meet the recent
trend toward larger glass-substrates due to the increasing
demand for larger LCD televisions.

In addition, Canon will continue to make distinctive products

enabling high resolution and high productivity.

In the TV lens market, demand for HDTV, which has grown

in the United States and Japan, is now growing in Europe as
well. In particular, there has been increased demand for lenses
used for broadcasting sporting events and for producing
dramas and documentaries. Canon also expects to see new
worldwide replacement demand thanks to greater progress in
digitalization. At the same time, there have been signs of
expanded HDTV applications by the media. While Canon already
has a major market share worldwide for this class of lenses, it
intends to continue to strengthen its position in this market.
The large format printer market unit sales and sales in
value terms have experienced stable growth of 10% every year.
Canon’s sales growth in this market is much higher than average
growth in the market and our market share has expanded every
year. Unit price in the market has been stable in recent years.
Canon has been able to incur lower costs of production and
improve inventory turnover by expanding its market share and
achieving economics of scale that improve its profitability.

Forward looking statements
The foregoing discussion and other disclosure in this report
contains forward-looking statements that reflect management’s
current views with respect to certain future events and financial
performance. Actual results may differ materially from those
projected or implied in the forward-looking statements. Further,
certain forward-looking statements are based upon assump-
tions of future events that may not prove to be accurate. The
following important factors could cause actual results to differ
materially from those projected or implied in any forward-
looking statements: foreign currency exchange rate fluctuations;
the uncertainty of Canon’s ability to implement its plans to
localize production and other measures to reduce the impact
of foreign currency exchange rate fluctuations; uncertainty as
to economic conditions in Canon’s major markets; uncertainty
of continued demand for Canon’s high-value-added products;
uncertainty as to the recovery of computer and related markets;
uncertainty of recovery in demand for Canon’s semiconductor
production equipment; Canon’s ability to continue to develop
products and to market products that incorporate new tech-
nology 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 currency exchange rates; and
inventory risk due to shifts in market demand.

TEN-YEAR FINANCIAL SUMMARY

Net sales:

Domestic
Overseas
Total

Percentage of previous year

Net income

Percentage of sales

Advertising
Research and development
Depreciation of property, plant and equipment
Capital expenditures

Millions of yen (except per share amounts)

2007

2006

2005

2004

¥ 947,587
3,533,759
4,481,346
107.8%

¥ 932,290
3,224,469
4,156,759
110.7%

¥ 856,205
2,897,986
3,754,191
108.3%

¥ 849,734
2,618,119
3,467,853
108.4%

488,332
10.9%

132,429
368,261
309,815
428,549

455,325
11.0%

116,809
308,307
235,804
379,657

384,096
10.2%

106,250
286,476
205,727
383,784

343,344
9.9%

111,770
275,300
174,397
318,730

Long-term debt, excluding current installments
Stockholders' equity
Total assets

8,680
2,922,336
4,512,625

15,789
2,986,606
4,521,915

27,082
2,604,682
4,043,553

28,651
2,209,896
3,587,021

Per share date:

Income before cumulative effect of change
in accounting principle:
Basic
Diluted
Net income:

Basic
Diluted

Cash dividends declared
Stock price:
High
Low

377.59
377.53

341.95
341.84

288.63
288.36

258.53
257.85

377.59
377.53
110.00

7,450
5,190

341.95
341.84
83.33

6,780
4,567

288.63
288.36
66.67

4,780
3,460

258.53
257.85
43.33

3,880
3,273

Average number of common shares in thousands
Number of employees

1,293,296
131,352

1,331,542
118,499

1,330,761
115,583

1,328,048
108,257

Common Stock Price Range (Tokyo Stock Exchange)
(Yen)

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

2003

2002

2001

2000

1999

1998

¥ 801,400
2,396,672
3,198,072
108.8%

¥ 732,551
2,207,577
2,940,128
101.1%

¥ 827,288
2,080,285
2,907,573
107.8%

¥ 779,366
1,917,054
2,696,420
106.5%

¥ 718,513
1,812,383
2,530,896
92.5%

¥ 725,063
2,011,021
2,736,084
102.5%

275,730
8.6%

100,278
259,140
168,636
210,038

190,737
6.5%

71,725
233,669
158,469
198,702

167,561
5.8%

66,837
218,616
147,286
207,674

134,088
5.0%

67,840
194,552
144,043
170,986

70,234
2.8%

67,544
177,922
155,682
200,386

109,569
4.0%

76,911
176,967
159,888
221,401

Thousands of U.S. dollars
(except per share amounts)

2007

$ 8,312,167
30,997,886
39,310,053
107.8%

4,283,614
10.9%

1,161,658
3,230,360
2,717,676
3,759,202

59,260
1,865,545
3,182,148

81,349
1,591,950
2,942,706

95,526
1,458,476
2,844,756

¥ 142,925
1,298,914
2,832,125

¥ 165,277
1,202,003
2,587,532

¥ 180,320
1,155,520
2,728,329

76,140
25,634,526
39,584,430

209.21
207.17

145.04
143.20

124.71
123.03

102.44
101.01

209.21
207.17
33.33

4,140
2,607

145.04
143.20
20.00

3,500
2,413

127.53
125.80
16.67

3,553
2,100

102.44
101.01
14.00

3,747
2,267

53.77
53.00

53.77
53.00
11.33

2,800
1,447

84.07
82.62

84.07
82.62
11.33

2,267
1,287

3.31
3.31

3.31
3.31
0.96

65.35
45.53

1,317,974
102,567

1,315,074
97,802

1,313,940
93,620

1,308,909
86,673

1,306,049
81,009

1,303,374
79,799

Note: U.S. dollar amounts are translated from yen at the rate of U.S.$1 = ¥114, the approximate exchange rate on the Tokyo Foreign Exchange Market as of

December 28, 2007.

CONSOLIDATED BALANCE SHEETS
CANON INC. AND SUBSIDIARIES

ASSETS
Current assets:

Cash and cash equivalents
Time deposits
Marketable securities (Notes 4 and 11)
Trade receivables, net (Note 5)
Inventories (Note 6)
Prepaid expenses and other current assets (Notes 8 and 14)

Total current assets

Noncurrent receivables (Note 20)
Investments (Note 4)
Property, plant and equipment, net (Notes 7, 8 and 11)
Other assets (Notes 8, 9, 10, 13 and 14)

Total assets

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Short-term loans and current portion of long-term debt (Note 11)
Trade payables (Note 12)
Accrued income taxes (Note 14)
Accrued expenses (Note 20)
Other current liabilities (Notes 7 and 14)

Total current liabilities

Long-term debt, excluding current installments (Note 11)
Accrued pension and severance cost (Note 13)
Other noncurrent liabilities (Note 14)

Total liabilities
Minority interests
Commitments and contingent liabilities (Note 20)
Stockholders’ equity:
Common stock

Authorized 3,000,000,000 shares;
issued 1,333,636,210 shares in 2007 and
1,333,445,830 shares in 2006 (Note 15)

Additional paid-in capital (Note 15)
Legal reserve (Note 16)
Retained earnings (Note 16)
Accumulated other comprehensive income (loss) (Note 17)
Treasury stock, at cost 72,588,428 shares in 2007 and
1,794,390 shares in 2006
Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial statements.

December 31, 2007 and 2006

Millions of yen

Thousands of
U.S. dollars (Note 2)

2007

2006

2007

¥ 944,463
10,333
10,166
794,240
563,474
286,111
2,608,787
15,239
90,086
1,364,702
433,811
¥4,512,625

¥1,155,626
41,953
10,445
761,947
539,057
273,321
2,782,349
14,335
110,418
1,266,425
348,388
¥4,521,915

18,317
514,226
150,726
357,525
215,911
1,256,705
8,680
44,710
57,324
1,367,419
222,870

15,362
493,058
133,745
303,353
217,789
1,163,307
15,789
83,876
55,536
1,318,508
216,801

$ 8,284,763
90,640
89,175
6,967,018
4,942,754
2,509,746
22,884,096
133,675
790,228
11,971,070
3,805,361
$ 39,584,430

160,675
4,510,754
1,322,158
3,136,184
1,893,957
11,023,728
76,140
392,193
502,843
11,994,904
1,955,000

174,698
402,991
46,017
2,720,146
34,670

174,603
403,510
43,600
2,368,047
2,718

1,532,439
3,535,009
403,658
23,860,930
304,123

(456,186)
2,922,336
¥4,512,625

(5,872)
2,986,606
¥4,521,915

(4,001,633)
25,634,526
$ 39,584,430

CONSOLIDATED STATEMENTS OF INCOME
CANON INC. AND SUBSIDIARIES

Net sales
Cost of sales (Notes 7, 10, 13 and 20)

Gross profit

Operating expenses (Notes 1, 7, 10, 13 and 20):
Selling, general and administrative expenses
Research and development expenses

Operating profit

Other income (deductions):

Interest and dividend income
Interest expense
Other, net (Notes 1, 4 and 19)

Income before income taxes and minority interests

Income taxes (Note 14)

Income before minority interests

Minority interests

Net income

Net income per share (Note 18):

Basic
Diluted

Cash dividends per share

See accompanying notes to consolidated financial statements.

Years ended December 31, 2007, 2006 and 2005

Millions of yen

Thousands of
U.S. dollars (Note 2)

2007

2006

2005

2007

¥4,481,346
2,234,365
2,246,981

¥4,156,759
2,096,279
2,060,480

¥3,754,191
1,935,148
1,819,043

1,122,047
368,261
1,490,308
756,673

1,045,140
308,307
1,353,447
707,033

949,524
286,476
1,236,000
583,043

32,819
(1,471)
(19,633)
11,715
768,388

264,258
504,130

27,153
(2,190)
(12,853)
12,110
719,143

248,233
470,910

14,252
(1,741)
16,450
28,961
612,004

212,785
399,219

15,798
¥ 488,332

15,585
¥ 455,325

15,123
¥ 384,096

Yen

$39,310,053
19,599,693
19,710,360

9,842,518
3,230,360
13,072,878
6,637,482

287,886
(12,904)
(172,218)
102,764
6,740,246

2,318,053
4,422,193

138,579
$ 4,283,614

U.S. dollars (Note 2)

377.59
377.53
110.00

341.95
341.84
83.33

288.63
288.36
66.67

3.31
3.31
0.96

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CANON INC. AND SUBSIDIARIES

Millions of yen

Legal
reserve

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Treasury
stock

¥41,200

¥1,699,634 ¥(101,312)

(5,263)

Common
stock

¥173,864
574

Additional
paid-in
capital

¥401,773
574
899

1,131

(64,310)
(1,131)

384,096

53,979
(1,397)
(481)
20,999

174,438
165

403,246
264

42,331

2,018,289

(28,212)

(147)
(5,410)

1,269

(104,298)
(1,269)

455,325

48,630
1,992
(489)
(3,575)

(15,628)

174,603

403,510

43,600

2,368,047

2,718

(462)
(5,872)

(522)

2,417

(2,204)

(131,612)
(2,417)

488,332

(62)
(1,778)
814
32,978

¥174,698

3
¥402,991

¥46,017

¥2,720,146 ¥ 34,670

Thousands of U.S. dollars (Note 2)

(450,314)
¥(456,186)

Total
stockholders’
equity

¥2,209,896
1,148
899
(64,310)
—

384,096

53,979
(1,397)
(481)
20,999
457,196
(147)
2,604,682
429
(104,298)
—

455,325

48,630
1,992
(489)
(3,575)
501,883
(15,628)
(462)
2,986,606

(2,204)
(427)
(131,612)
—

488,332

(62)
(1,778)
814
32,978
520,284
(450,311)
¥2,922,336

$1,531,606 $3,539,561 $382,456 $20,772,342 $ 23,842 $

(51,510) $26,198,297

833

(4,579)

21,202

(19,333)

(1,154,491)
(21,202)

4,283,614

(19,333)
(3,746)
(1,154,491)
—

4,283,614

(544)
(15,596)
7,140
289,281
4,563,895
(3,950,096)
$1,532,439 $3,535,009 $403,658 $23,860,930 $ 304,123 $(4,001,633) $25,634,526

(544)
(15,596)
7,140
289,281

(3,950,123)

Balance at December 31, 2004
Conversion of convertible debt and other
Capital transaction by consolidated subsidiaries and affiliated companies
Cash dividends
Transfer to legal reserve
Comprehensive income:

Net income
Other comprehensive income (loss), net of tax (Note 17):

Foreign currency translation adjustments
Net unrealized gains and losses on securities
Net gains and losses on derivative instruments
Minimum pension liability adjustments

Total comprehensive income
Repurchase of treasury stock, net
Balance at December 31, 2005
Conversion of convertible debt and other
Cash dividends
Transfer to legal reserve
Comprehensive income:

Net income
Other comprehensive income (loss), net of tax (Note 17):

Foreign currency translation adjustments
Net unrealized gains and losses on securities
Net gains and losses on derivative instruments
Minimum pension liability adjustments

Total comprehensive income

Adjustment to initially apply SFAS 158, net of tax (Note 13)
Repurchase of treasury stock, net
Balance at December 31, 2006
Cumulative effect of a change in accounting principle-adoption
of EITF06-2, net of tax (Note 1)
Conversion of convertible debt and other
Cash dividends
Transfer to legal reserve
Comprehensive income:

Net income
Other comprehensive income (loss), net of tax (Note 17):

Foreign currency translation adjustments
Net unrealized gains and losses on securities
Net gains and losses on derivative instruments
Pension liability adjustments

Total comprehensive income
Repurchase of treasury stock, net
Balance at December 31, 2007

Balance at December 31, 2006
Cumulative effect of a change in accounting principle-adoption
of EITF06-2, net of tax (Note 1)
Conversion of convertible debt and other
Cash dividends
Transfer to legal reserve
Comprehensive income:

Net income
Other comprehensive income (loss), net of tax (Note 17):

Foreign currency translation adjustments
Net unrealized gains and losses on securities
Net gains and losses on derivative instruments
Pension liability adjustments

Total comprehensive income
Repurchase of treasury stock, net
Balance at December 31, 2007

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
CANON INC. AND SUBSIDIARIES

Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Loss on disposal of property, plant and equipment
Deferred income taxes
Increase in trade receivables
(Increase) decrease in inventories
Increase (decrease) in trade payables
Increase in accrued income taxes
Increase in accrued expenses
Decrease in accrued pension and severance cost
Other, net

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of fixed assets
Proceeds from sale of fixed assets
Purchases of available-for-sale securities
Proceeds from sale and maturity of available-for-sale securities
Proceeds from maturity of held-to-maturity securities
(Increase) decrease in time deposits
Acquisitions of subsidiaries, net of cash acquired
Purchases of other investments
Other, net

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from issuance of long-term debt
Repayments of long-term debt
Decrease in short-term loans
Dividends paid
Repurchases of treasury stock, net
Other, net

Net cash used in financing activities
Effect of exchange rate changes on cash and
cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year

Supplemental disclosure for cash flow information (Note 22):

Cash paid during the year for:

Interest
Income taxes

See accompanying notes to consolidated financial statements.

Years ended December 31, 2007, 2006 and 2005

Millions of yen

Thousands of
U.S. dollars (Note 2)

2007

2006

2005

2007

¥ 488,332 ¥ 455,325 ¥ 384,096

$ 4,283,614

341,694
9,985
(35,021)
(10,722)
(26,643)
21,136
14,988
43,035
(15,387)
7,872
839,269

(474,285)
9,635
(2,281)
8,614
10,000
31,681
(15,675)
(2,432)
2,258
(432,485)

2,635
(13,046)
(358)
(131,612)
(450,311)
(11,691)
(604,383)

262,294
16,182
(6,945)
(40,969)
(5,542)
(2,313)
22,657
36,165
(20,309)
(21,304)
695,241

(424,862)
12,507
(7,768)
4,047
—
(35,863)
(2,485)
(8,911)
2,530
(460,805)

1,053
(5,861)
(828)
(104,298)
(462)
2,909
(107,487)

225,941
13,784
(766)
(48,391)
27,558
16,018
1,998
31,241
(16,221)
(29,580)
605,678

(395,055)
14,827
(5,680)
12,337
—
(6,090)
(17,657)
(19,531)
15,708
(401,141)

1,716
(15,187)
(12,011)
(64,310)
(147)
(4,000)
(93,939)

2,997,316
87,588
(307,202)
(94,053)
(233,711)
185,404
131,474
377,500
(134,974)
69,053
7,362,009

(4,160,395)
84,518
(20,009)
75,561
87,719
277,904
(137,500)
(21,333)
19,807
(3,793,728)

23,114
(114,439)
(3,140)
(1,154,491)
(3,950,096)
(102,553)
(5,301,605)

(13,564)
(211,163)
1,155,626

6,581
23,724
117,179
150,673
887,774
1,004,953
¥ 944,463 ¥1,155,626 ¥1,004,953

(118,983)
(1,852,307)
10,137,070
$ 8,284,763

1,476 ¥

2,146 ¥

273,888

244,236

1,919
211,540

12,947
2,402,526

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANON INC. AND SUBSIDIARIES

1. Basis of Presentation and Significant Accounting Policies
(a) Description of Business
Canon Inc. (the “Company”) and subsidiaries (collectively
“Canon”) is one of the world’s leading manufacturers in such
fields as office imaging products, computer peripherals, business
information products, cameras, and optical related products.
Office imaging products consist mainly of network multifunction
devices and copying machines. Computer peripherals consist
mainly of laser beam and inkjet printers. Business information
products consist mainly of computer information systems,
document scanners and calculators. Cameras consist mainly of
digital single lens reflex (“SLR”) cameras, digital compact
cameras, interchangeable lenses and digital video camcorders.
Optical and other products include semiconductor production
equipment, mirror projection mask aligners for liquid crystal
displays (“LCDs”) panels, broadcasting equipment, medical
equipment and large format printers. Canon’s consolidated net
sales for the years ended December 31, 2007, 2006 and 2005
were distributed as follows: office imaging products 29%,
28% and 31%, computer peripherals 34%, 34% and 33%,
business information products 2%, 3% and 3%, cameras
26%, 25% and 23%, and optical and other products 9%,
10% and 10%, respectively.

interest entities where the Company or its consolidated sub-
sidiaries are the primary beneficiaries under Financial Accounting
Standards Board (“FASB”) Interpretation No. 46 (revised December
2003) (“FIN 46R”), “Consolidation of Variable Interest Entities.”
All significant intercompany balances and transactions have
been eliminated.

(d) Use of Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant estimates
and assumptions are reflected in valuation and disclosure of
revenue recognition, allowance for doubtful receivables,
valuation of inventories, environmental liabilities, valuation of
deferred tax assets, uncertain tax positions and employee
retirement and severance benefit plans. Actual results could
differ materially from those estimates.

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
77%, 75% and 74% of consolidated net sales for the years
ended December 31, 2007, 2006 and 2005 were generated
outside Japan, with 30%, 31% and 30% in the Americas,
33%, 31% and 32% in Europe, and 14%, 13% and 12% in
other areas, respectively.

Canon sells laser beam printers on an OEM basis to

Hewlett-Packard Company; such sales constituted approximately
22%, 22% and 21% of consolidated net sales for the years
ended December 31, 2007, 2006 and 2005, respectively.

Canon’s manufacturing operations are conducted primarily
at 24 plants in Japan and 17 overseas plants which are located
in countries or regions such as the United States, Germany,
France, Taiwan, China, Malaysia, Thailand and Vietnam.

(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their books
of account in conformity with financial accounting standards of
Japan. Foreign subsidiaries maintain their books of account in
conformity with financial accounting standards of the countries
of their domicile.

Certain adjustments and reclassifications have been incor-
porated in the accompanying consolidated financial statements
to conform with U.S. generally accepted accounting principles.
These adjustments were not recorded in the statutory books
of account.

(c) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries and those variable

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

(f) Time Deposits
Time deposits with original maturities of more than three
months are included in the consolidated balance sheets under
the caption of time deposits.

(g) 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,
net were ¥31,943 million ($280,202 thousand), ¥25,804 million
and ¥3,710 million for the years ended December 31, 2007,
2006 and 2005, respectively.

(h) Marketable Securities and Investments
Canon classifies investments in debt and marketable equity
securities as available-for-sale or held-to-maturity securities.
Canon does not hold any trading securities, which are bought
and held primarily for the purpose of sale in the near term.
Available-for-sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, are

reported as a separate component of other comprehensive
income (loss) until realized. Held-to-maturity securities are
recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.

Available-for-sale and held-to-maturity securities are
regularly reviewed for other-than-temporary declines in carrying
value based on criteria that include the length of time and the
extent to which the market value has been less than cost, the
financial condition and near-term prospects of the issuer and
Canon’s intent and ability to retain the investment for a period
of time sufficient to allow for any anticipated recovery in market
value. When such a decline exists, Canon recognizes an impair-
ment loss to the extent by which the cost basis of the investment
exceeds the fair value of the investment. Fair value is determined
based on quoted market prices, projected discounted cash
flows or other valuation techniques as appropriate.

Realized gains and losses are determined on the average

cost method and reflected in earnings.

Investments in affiliated companies over which Canon has
the ability to exercise significant influence, but does not hold
a controlling financial interest, are accounted for by the equity
method.

Non-marketable equity securities in companies over which
Canon does not have the ability to exercise significant influence
are stated at cost and reviewed periodically for impairment.

(i) 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.

(j) 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.

(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
undiscounted future cash flows, an impairment charge is rec-
ognized in the amount by which the carrying amount of the

asset exceeds the fair value of the asset. Assets to be disposed
of by sale are reported at the lower of the carrying amount or
fair value less costs to sell, and are no longer depreciated.

(l) Property, Plant and Equipment and Accounting Change
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.

Effective April 1, 2007, the Company and its domestic
subsidiaries elected to change the declining-balance method of
depreciating machinery and equipment from the fixed-percentage-
on-declining base application to the 250% declining-balance
application. Estimated residual values were also reduced in
conjunction with this change. The Company and its domestic
subsidiaries believe that the 250% declining-balance application
is preferable because it provides a better matching of the allo-
cation of cost of machinery and equipment with associated
revenues in light of increasingly short product life cycles.

In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 154, “Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3,” this change in depreciation methods repre-
sents a change in accounting estimate effected by a change in
accounting principle. Accordingly, the affects of the change
are accounted for prospectively beginning with the period of
change and prior period results have not been restated. The
change in depreciation methods caused an increase in deprecia-
tion expense by ¥63,773 million ($559,412 thousand) for the
year ended December 31, 2007. Net income, basic net income
per share and diluted net income per share decreased by ¥32,321
million ($283,518 thousand), ¥24.99 ($0.22) and ¥24.99
($0.22), respectively, for the year ended December 31, 2007.

The depreciation period ranges from 3 years to 60 years for
buildings and 1 year to 20 years for machinery and equipment.
Assets leased to others under operating leases are stated at

cost and depreciated to the estimated residual value of the
assets by the straight-line method over the period ranging from
2 years to 5 years.

(m) Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indefinite useful
lives are not amortized, but are instead tested for impairment
annually in the fourth quarter of each year, or more frequently
if indicators of potential impairment exist. Intangible assets
with finite useful lives, consisting primarily of software and
license fees, are amortized using the straight-line method over
the estimated useful lives, which range from 3 years to 5 years
for software and 5 years to 10 years for license fees. Certain
costs incurred in connection with developing or obtaining
internal use software are capitalized. These costs consist primarily
of payments made to third parties and the salaries of employees
working on such software development. Costs incurred in con-
nection 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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

(n) Environmental Liabilities
Liabilities for environmental remediation and other environ-
mental 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.

Canon recognizes the financial statement effects of tax
positions when they are more likely than not, based on the
technical merits, that the tax positions will be sustained upon
examination by the tax authorities. Benefits from tax positions
that meet the more-likely-than-not recognition threshold are
measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon settlement.
Interest and penalties accrued related to unrecognized tax
benefits are included in income taxes in the consolidated
statements of income.

(p) Issuance of Stock by Subsidiaries and Equity Investees
The change in the Company’s proportionate share of a sub-
sidiary’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 trans-
ferred to the customer or services have been rendered, the sales
price is fixed or determinable, and collectibility is probable.

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.

Canon also offers separately priced product maintenance

contracts for most office imaging products, for which the
customer typically pays a stated base service fee plus a variable
amount based on usage. Revenue from these service mainte-
nance contracts is measured at the stated amount of the
contract and recognized as services are provided and variable
amounts are earned.

Revenue from the sale of equipment under sales-type
leases is recognized at the inception of the lease. Income on
sales-type leases and direct-financing leases is recognized over
the life of each respective lease using the interest method. Leases
not qualifying as sales-type leases or direct-financing leases are
accounted for as operating leases and related revenue is recog-
nized ratably over the lease term. When equipment leases are
bundled with product maintenance contracts, revenue is first
allocated considering the relative fair value of the lease and
non-lease deliverables based upon the estimated relative fair
values of each element. Lease deliverables generally include
equipment, financing and executory costs, while non-lease
deliverables generally consist of product maintenance contracts
and supplies.

Taxes collected from customers and remitted to governmen-

recorded in earnings.

tal authorities are excluded from revenues in the consolidated
statements of income.

(s) Research and Development Costs
Research and development costs are expensed as incurred.

(t) Advertising Costs
Advertising costs are expensed as incurred. Advertising
expenses were ¥132,429 million ($1,161,658 thousand),
¥116,809 million and ¥106,250 million for the years ended
December 31, 2007, 2006 and 2005, respectively.

(u) Shipping and Handling Costs
Shipping and handling costs totaled ¥63,708 million ($558,842
thousand), ¥62,626 million and ¥50,052 million for the years
ended December 31, 2007, 2006 and 2005, 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 in the consolidated balance sheets. On the date the
derivative contract is entered into, Canon designates the
derivative as either a hedge of the fair value of a recognized
asset or liability or of an unrecognized firm commitment (“fair
value” hedge), or a hedge of a forecasted transaction or the
variability of cash flows to be received or paid related to a rec-
ognized 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 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 in the consolidated balance
sheets at fair value. The changes in fair values are immediately

Canon classifies cash flows from derivatives as cash flows

from operating activities in the consolidated statements of
cash flows.

(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.

(x) New Accounting Standards
In June 2006, the FASB ratified the EITF consensus on EITF Issue
No. 06-2, “Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43” (“EITF 06-2”).
EITF 06-2 provides guidance for an accrual of compensated
absences that require a minimum service period but have no
increase in the benefit even with additional years of service.
EITF 06-2 is effective for fiscal years beginning after December
15, 2006, and was adopted by Canon in the first quarter
beginning January 1, 2007 through a cumulative-effect adjust-
ment which increased accrued expenses by ¥4,402 million
($38,614 thousand) and decreased retained earnings by
¥2,204 million ($19,333 thousand).

In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109” (“FIN48”). FIN48 clarifies the
accounting for uncertainty in income taxes by prescribing the
recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides
guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN48
is effective for fiscal years beginning after December 15, 2006,
and was adopted by Canon in the first quarter beginning
January 1, 2007. See Note 14 for further discussion of the effect
of adopting FIN 48 on Canon’s consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair

Value Measurements” (“SFAS157”). SFAS157 defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS157
is effective for fiscal years beginning after November 15, 2007
and is required to be adopted by Canon in the first quarter
beginning January 1, 2008. In February 2008, the FASB issued
Staff Positions No. FAS157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under
Statement 13” and No. FAS157-2, “Effective Date of FASB
Statement No. 157,” which partially delay the effective date
of SFAS 157 for one year for certain nonfinancial assets and
liabilities and remove certain leasing transactions from its
scope. The adoption of SFAS157 will not have a material
impact on Canon’s consolidated results of operations and
financial condition.

In February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Financial Liabilities,
Including an amendment of FASB Statement No. 115” (“SFAS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

159”). SFAS 159 provides companies with an option to report
selected financial assets and liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected will be recognized in earnings. SFAS 159 is effec-
tive for fiscal years beginning after November 15, 2007 and is
required to be adopted by Canon in the first quarter beginning
January 1, 2008. The adoption of SFAS 159 will not have a
material impact on Canon’s consolidated results of operations
and financial condition.

In June 2007, the FASB ratified the EITF consensus on EITF

Issued No. 07-3, “Accounting for Nonrefundable Advance
Payments for Goods or Services Received for Use in Future
Research and Development Activities” (“EITF 07-3”). EITF 07-3
requires that nonrefundable advance payments for goods or
services that will be used or rendered for future research and
development activities be deferred and capitalized and recog-
nized as an expense as the goods are delivered or the related
services are performed. EITF 07-3 is effective, on a prospective
basis, for fiscal years beginning after December 15, 2007 and is
required to be adopted by Canon in the first quarter beginning
January 1, 2008. The adoption of EITF 07-3 will not have a
material impact on Canon’s consolidated results of operations
and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised
2007), “Business Combinations ” (“SFAS 141R”). SFAS 141R
establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifi-
able assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination.

SFAS 141R is effective for fiscal years beginning on or after
December 15, 2008 and is required to be adopted by Canon in
the first quarter beginning January 1, 2009. Canon is currently
evaluating the potential effect, if any, that the adoption of
SFAS 141R will have on Canon’s consolidated results of
operations and financial condition.

In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statement,
an amendment of ARB No. 51” (“SFAS 160”). SFAS 160
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s
ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated. SFAS
160 also establishes disclosure requirements that clearly identify
and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS 160 is effective
for fiscal years beginning on or after December 15, 2008 and is
required to be adopted by Canon in the first quarter beginning
January 1, 2009. Canon is currently evaluating the effect that
the adoption of SFAS 160 will have on its consolidated results
of operations and financial condition.

(y) Reclassification
Time deposits with original maturities of more than three
months, which were previously included in prepaid expenses
and other current assets, have been reclassified to time deposits
in the consolidated balance sheets to conform to the current
year presentation.

2. Basis of Financial Statement Translation
The consolidated financial statements presented herein are
expressed in Japanese yen and, solely for the convenience of the
reader, have been translated into United States dollars at the
rate of ¥114=U.S.$1, the approximate exchange rate prevailing

on the Tokyo Foreign Exchange Market on December 28, 2007.
This translation should not be construed as a representation
that the amounts shown could be converted into United States
dollars at such rate.

3. Foreign Operations
Amounts included in the consolidated financial statements
relating to subsidiaries operating in foreign countries are
summarized as follows:

December 31:
Total assets
Net assets

Years ended December 31:

Net sales
Net income

2007

Millions of yen
2006

2005

¥2,077,268
1,024,150

¥1,995,927
907,845

¥1,751,011
767,711

¥3,433,036
136,560

¥3,119,102
114,916

¥2,774,443
81,916

Thousands of
U.S. dollars
2007

$18,221,649
8,983,772

$30,114,351
1,197,895

4. 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 December
31, 2007 and 2006 were as follows:

December 31

Millions of yen
2007: Current:

Available-for-sale:

Bank debt securities

Held-to-maturity:

Corporate debt securities

Noncurrent:

Available-for-sale:

Government bonds
Corporate debt securities
Fund trusts
Equity securities

Millions of yen
2006: Current:

Available-for-sale:

Government bonds
Bank debt securities

Held-to-maturity:

Corporate debt securities

Noncurrent:

Available-for-sale:

Government bonds
Corporate debt securities
Fund trusts
Equity securities

Held-to-maturity:

Corporate debt securities

Gross
unrealized
holding
gains

Gross
unrealized
holding
losses

—

—
—

—
31
1,158
10,233
¥11,422

Gross
unrealized
holding
gains

—
—
—

—
—

—
35
1,536
17,479
19,050

—
¥19,050

¥ —

—
¥ —

¥ 25
49
3
583
¥660

Gross
unrealized
holding
losses

¥ —
1
1

—
¥ 1

¥ 15
1
1
275
292

—
¥292

Fair value

10,115
¥10,166

471
3,165
4,728
22,316
¥30,680

Fair value

224
70
294

10,151
¥10,445

320
4,124
5,607
29,852
39,903

10,311
¥50,214

Cost

10,115
¥10,166

496
3,183
3,573
12,666
¥19,918

Cost

224
71
295

10,151
¥10,446

335
4,090
4,072
12,648
21,145

10,311
¥31,456

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

Thousands of U.S. dollars
2007: Current:

Available-for-sale:

Bank debt securities

Held-to-maturity:

Corporate debt securities

Noncurrent:

Available-for-sale:

Government bonds
Corporate debt securities
Fund trusts
Equity securities

Maturities of debt securities and fund trusts classified as

available-for-sale and held-to-maturity were as follows at
December 31, 2007:

Available-for-sale securities

Due within one year
Due after one year through five years
Due after five years

Held-to-maturity securities

Due within one year

Gross
unrealized
holding
gains

Gross
unrealized
holding
losses

Fair value

—

—
—

$ —

447

—
$ —

88,728
$ 89,175

—
272
10,158
89,763
$100,193

$ 220
430
26
5,113
$5,789

4,131
27,763
41,474
195,755
$269,123

Cost

447

88,728
$ 89,175

4,351
27,921
31,342
111,105
$174,719

Millions of yen

Cost

51
3,430
3,822
¥7,303

Fair value
51
¥
3,638
4,726
¥8,415

Thousands of
U.S. dollars

Cost

447
30,088
33,526
$64,061

Fair value
447
$
31,912
41,456
$73,815

Millions of yen

Cost
¥10,115

Fair value
¥10,115

Thousands of
U.S. dollars

Cost
$88,728

Fair value
$88,728

The gross realized gains for the year ended December 31,
2007, 2006 and 2005 were ¥1,512 million ($13,263 thousand),
¥674 million and ¥11,049 million, respectively. The gross
realized losses for the years ended December 31, 2007, 2006
and 2005 were not significant.

At December 31, 2007, substantially all of the available-
for-sale and held-to-maturity securities with unrealized losses
had been in a continuous unrealized loss position for less than
12 months.

Aggregate cost of non-marketable equity securities

accounted for under the cost method totaled ¥14,017 million
($122,956 thousand) and ¥18,462 million at December 31,
2007 and 2006, respectively. Investments with an aggregate cost
of ¥12,929 million ($113,412 thousand) were not evaluated

for impairment because (a) Canon did not estimate the fair
value of those investments as it was not practicable to estimate
the fair value of the investments and (b) Canon did not identify
any events or changes in circumstances that might have had
significant adverse effects on the fair value of those investments.
Investments in affiliated companies accounted for by the

equity method amounted to ¥42,817 million ($375,588
thousand) and ¥40,143 million at December 31, 2007 and
2006, respectively. Canon’s share of the net earnings (losses)
in affiliated companies accounted for by the equity method,
included in other income (deductions), are earnings of ¥5,634
million ($49,421 thousand), ¥4,237 million and ¥1,646 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.

5. Trade Receivables
Trade receivables are summarized as follows:

December 31

Notes
Accounts

Less allowance for doubtful receivables

6. Inventories
Inventories are summarized as follows:

December 31

Finished goods
Work in process
Raw materials

7. Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and are summarized as follows:

December 31

Land
Buildings
Machinery and equipment
Construction in progress

Less accumulated depreciation

Millions of yen

2007
¥ 23,632
785,155
808,787
(14,547)
¥794,240

2006
¥ 24,241
751,555
775,796
(13,849)
¥761,947

Thousands of
U.S. dollars
2007
$ 207,298
6,887,325
7,094,623
(127,605)
$6,967,018

Millions of yen

2007
¥366,845
175,704
20,925
¥563,474

2006
¥359,471
160,231
19,355
¥539,057

Thousands of
U.S. dollars
2007
$3,217,939
1,541,263
183,552
$4,942,754

Millions of yen

2007
249,959
1,198,519
1,406,849
103,749
2,959,076
(1,594,374)
¥ 1,364,702

2006
231,026
1,077,585
1,261,176
79,582
2,649,369
(1,382,944)
¥ 1,266,425

Thousands of
U.S. dollars
2007
$ 2,192,623
10,513,324
12,340,781
910,079
25,956,807
(13,985,737)
$ 11,971,070

Depreciation expense for the years ended December 31,
2007, 2006 and 2005 was ¥309,815 million ($2,717,676 thou-
sand), ¥235,804 million and ¥205,727 million, respectively.

Amounts due for purchases of property, plant and equipment

were ¥120,823 million ($1,059,851 thousand) and ¥122,081
million at December 31, 2007 and 2006, respectively, and are
included in other current liabilities in the accompanying
consolidated balance sheets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

8. 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 year to 6

years. The components of the finance receivables, which are
included in prepaid expenses and other current assets, and
other assets in the accompanying consolidated balance sheets,
are as follows:

December 31

Total minimum lease payments receivable
Unguaranteed residual values
Executory costs
Unearned income

Less allowance for doubtful receivables

Less current portion

Millions of yen

2007
¥229,229
17,036
(2,960)
(27,756)
215,549
(8,590)
206,959
(72,776)
¥134,183

2006
¥216,697
14,377
(2,923)
(24,930)
203,221
(7,871)
195,350
(72,808)
¥122,542

Thousands of
U.S. dollars
2007
$2,010,781
149,439
(25,965)
(243,474)
1,890,781
(75,351)
1,815,430
(638,386)
$1,177,044

The cost of equipment leased to customers under operating

leases included in property, plant and equipment, net at
December 31, 2007 and 2006 was ¥63,190 million ($554,298
thousand) and ¥62,357 million, respectively. Accumulated
depreciation on equipment under operating leases at December

31, 2007 and 2006 was ¥48,818 million ($428,228 thousand)
and ¥46,092 million, respectively.

The following is a schedule by year of the future minimum

lease payments to be received under financing leases and
non-cancelable operating leases at December 31, 2007.

Year ending December 31:

Millions of yen

Thousands of U.S. dollars

2008
2009
2010
2011
2012
Thereafter

Financing leases
¥ 88,947
66,846
43,217
20,918
7,373
1,928
¥229,229

Operating leases
¥ 8,175
4,192
2,427
1,250
416
4
¥16,464

Financing leases
$ 780,237
586,368
379,096
183,491
64,675
16,914
$2,010,781

Operating leases
$ 71,711
36,772
21,289
10,965
3,649
35
$144,421

9. Acquisitions
In 2007, the Company and one of its subsidiaries acquired
two companies for a total cost of ¥26,387 million ($231,465
thousand). One company, which was acquired with cash, is
engaged in developing, manufacturing, selling and providing
services for equipment used in the manufacture of organic EL
display panels and thin-film solar cells. The other company, which
was acquired with cash and share exchange by the subsidiary of
the Company, is engaged in providing architecture, manage-
ment and maintenance services for information systems. In
connection with those transactions, Canon recognized goodwill
of ¥10,086 million ($88,474 thousand) and intangible assets of
¥2,915 million ($25,570 thousand), which were classified as
other assets in the accompanying consolidated balance sheets.
Intangible assets consist primarily of customer contracts and
related customer relationships, and are subject to a weighted
average amortization period of approximately 14 years.

In 2005, the Company acquired two companies for a total
cost of ¥20,205 million, which was paid in cash. Those companies
are engaged in the development, manufacturing and sales of

10. Goodwill and Other Intangible Assets
Intangible assets developed or acquired during the year ended
December 31, 2007 totaled ¥44,592 million ($391,158 thou-
sand), which are subject to amortization and primarily consist
of software of ¥36,513 million ($320,289 thousand), which
is mainly for internal use, and license fees of ¥1,486 million
($13,035 thousand), in addition to those recorded from

December 31

Millions of yen
Software
License fees
Other

Thousands of U.S. dollars
Software
License fees
Other

semiconductor manufacturing equipment, factory automation
equipment and vacuum equipment for production of electronic
parts, including semiconductors, flat panel displays, magnetic
heads and hard disc drives. In connection with those transactions,
Canon recognized goodwill of ¥4,885 million and intangible
assets of ¥16,382 million, which were classified as other assets in
the accompanying consolidated balance sheets. Intangible assets
consist primarily of developed technology, and are subject to a
weighted average amortization period of approximately 9 years.
Canon acquired businesses other than those described
above for the years ended December 31, 2007, 2006 and 2005
that were not material to its consolidated financial statements.
Canon has included the results of operations of these trans-
actions prospectively from the respective dates of transactions.
Canon has not presented pro forma results of operations of the
acquired businesses because the results are not material to its
consolidated results of operations on either an individual or an
aggregate basis.

acquired businesses. The weighted average amortization period
for software and license fees is approximately 4 years and 8
years, respectively.

The components of acquired intangible assets subject to
amortization included in other assets at December 31, 2007
and 2006 were as follows:

2007

2006

Gross carrying
amount
¥174,645
22,825
31,488
¥228,958

Accumulated
amortization
¥ 96,445
11,697
9,241
¥117,383

Gross carrying
amount
¥140,756
23,681
24,899
¥189,336

Accumulated
amortization
¥ 76,120
11,257
4,919
¥ 92,296

2007

Gross carrying
amount
$1,531,974
200,219
276,211
$2,008,404

Accumulated
amortization
$ 846,009
102,605
81,061
$1,029,675

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

Aggregate amortization expense for the years ended
December 31, 2007, 2006 and 2005 was ¥31,879 million
($279,640 thousand), ¥26,490 million and ¥20,214 million,
respectively. Estimated amortization expense for intangible
assets currently held for the next five years ending December
31 is ¥34,751 million ($304,833 thousand) in 2008, ¥25,151
million ($220,623 thousand) in 2009, ¥16,861 million

Years ended December 31

Balance at beginning of year
Goodwill acquired during the year
Recognition of acquired company’s tax benefits
Translation adjustments and other
Balance at end of year

($147,904 thousand) in 2010, ¥9,089 million ($79,728 thousand)
in 2011, and ¥5,071 million ($44,482 thousand) in 2012.

Intangible assets not subject to amortization other than
goodwill at December 31, 2007 and 2006 were not significant.
The changes in the carrying amount of goodwill for the
years ended December 31, 2007 and 2006 were as follows:

Millions of yen

2007
¥40,801
13,573
—
2,409
¥56,783

2006
¥40,161
2,297
(1,038)
(619)
¥40,801

Thousands of
U.S. dollars
2007
$357,904
119,061
—
21,131
$498,096

During the year ended December 31, 2006, Canon
recognized ¥1,038 million of deferred tax benefits relating to
preexisting net operating tax losses of a company acquired in

2005. In connection therewith, Canon reduced the related
goodwill by the same amount.

11. Short-Term Loans and Long-Term Debt
Short-term loans consisting of bank borrowings at December
31, 2007 and 2006 were ¥2,888 million ($25,333 thousand)
and ¥99 million, respectively. The weighted average interest

rates on short-term loans outstanding at December 31, 2007
and 2006 were 3.16% and 4.91%, respectively.
Long-term debt consisted of the following:

December 31

Loans, principally from banks, maturing in installments through 2017;
bearing weighted average interest of 1.80% and 1.34%
at December 31, 2007 and 2006, respectively,
partially secured by mortgage of property, plant and equipment
2.95% Japanese yen notes, due 2007
2.27% Japanese yen notes, due 2008
1.30% Japanese yen convertible debentures, due 2008
Capital lease obligations

Less current portion

Millions of yen

2007

2006

Thousands of
U.S. dollars
2007

¥ 2,993
—
10,000
128
10,988
24,109
(15,429)
¥ 8,680

149
10,000
10,000
318
10,585
31,052
(15,263)
¥ 15,789

$ 26,254
—
87,719
1,123
96,386
211,482
(135,342)
$ 76,140

The aggregate annual maturities of long-term debt out-

standing at December 31, 2007 were as follows:

Year ending December 31:

2008
2009
2010
2011
2012
Thereafter

Millions of yen
¥15,429
4,052
2,446
1,504
455
223
¥24,109

Thousands of
U.S. dollars
$135,342
35,544
21,456
13,193
3,991
1,956
$211,482

Certain property, plant and equipment with a net book
carrying value of ¥2,872 million ($25,193 thousand) at December
31, 2007 were mortgaged to secure loans from banks.

Canon entered into an agreement whereby certain assets
were deposited into an irrevocable trust to meet the debt service

requirements of the 2.27% Japanese yen notes of ¥10,000
million ($87,719 thousand). The assets contributed by Canon
were debt securities with carrying amounts of ¥10,115 million
($88,728 thousand) at December 31, 2007. Cash flows from
such investments will be used solely to satisfy the principal and
interest obligations for the debts. Accordingly, the debt securities
are included in the consolidated balance sheets under the
captions of marketable securities.

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.

The 1.30% Japanese yen convertible debentures due 2008
are convertible into approximately 128,000 shares of common
stock at a conversion price of ¥998.00 ($8.75) per share at
December 31, 2007.

12. Trade Payables
Trade payables are summarized as follows:

December 31

Notes
Accounts

Millions of yen

2007
¥ 17,088
497,138
¥514,226

2006
¥ 15,902
477,156
¥493,058

Thousands of
U.S. dollars
2007
$ 149,894
4,360,860
$4,510,754

13. Employee Retirement and Severance Benefits
The Company and certain of its subsidiaries have contributory
and noncontributory defined benefit pension plans covering
substantially all of their employees. Benefits payable under
the plans are based on employee earnings and years of service.
Certain foreign subsidiaries also have defined contribution
pension plans covering substantially all of their employees.

The amounts of cost recognized for the defined contribution
pension plans of the Company and certain of its subsidiaries for
the years ended December 31, 2007, 2006 and 2005 were
¥10,262 million ($90,018 thousand), ¥6,233 million and
¥4,878 million respectively.

Canon uses a measurement date of December 31 for the

Effective January 1, 2007, the Company and certain of its

majority of its plans.

domestic subsidiaries have amended their funded defined
benefit pension plans, and the projected benefit obligation has
decreased by ¥101,620 million ($891,404 thousand) primarily
due to the modification of the pattern of future benefit pay-
ments. In conjunction therewith, the Company and certain of
its domestic subsidiaries also have implemented an unfunded
retirement and severance plan and a defined contribution
pension plan for certain future pension benefits attributable
to employees’ future services.

On December 31, 2006, Canon adopted the recognition and
disclosure provisions of SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132 (R)”
(“SFAS158”). SFAS 158 required Canon to recognize the
funded status (i.e., the difference between the fair value of
plan assets and the projected benefit obligations) of its pension
plans in the December 31, 2006 consolidated balance sheet,
with a corresponding adjustment to accumulated other

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

comprehensive income (loss), net of tax. The adjustment to
accumulated other comprehensive income (loss) at adoption
represented the unrecognized actuarial loss, unrecognized prior
service credit, and unrecognized net transition obligation, all of
which were previously netted against the plans’ funded status
in the consolidated balance sheet pursuant to the provisions of
SFAS 87. These amounts are subsequently recognized as net
periodic benefit cost pursuant to Canon’s historical accounting
policy for amortizing such amounts. Further, actuarial gains and
losses that arise in subsequent periods and are not recognized
as net periodic benefit cost in the same periods are recognized
as a component of other comprehensive income (loss). Those

amounts are subsequently recognized as a component of net
periodic benefit cost on the same basis as the amounts recog-
nized in accumulated other comprehensive income (loss) at
adoption of SFAS 158. The adoption of SFAS 158 had no effect
on the consolidated statement of income for the year ended
December 31, 2006, or for any prior period presented, and it
will not affect Canon’s operating results in future periods.

Obligations and funded status
Reconciliations of beginning and ending balances of the benefit
obligations and the fair value of the plan assets are as follows:

December 31

Japanese plans

Foreign plans

Millions of yen

2007

2006

Change in benefit obligations:

Benefit obligations at beginning of year ¥ 578,086 ¥539,212
23,916
Service cost
13,411
Interest cost
—
Plan participants’ contributions
(954)
Amendments
13,200
Actuarial gain (loss)
(11,413)
Benefits paid
714
Acquisition
—
Foreign currency exchange rate changes
578,086
Benefit obligations at end of year

20,161
11,888
—
(101,620)
(4,623)
(12,888)
2,474
—
493,478

Thousands of
U.S. dollars
2007

$5,070,930
176,851
104,281
—
(891,404)
(40,553)
(113,053)
21,702
—
4,328,754

Millions of yen

2007

2006

¥110,505 ¥ 81,281
3,483
3,898
1,412
—
10,386
(1,651)
—
11,696
110,505

4,016
4,947
1,613
—
(3,293)
(3,177)
—
(778)
113,833

Thousands of
U.S. dollars
2007

$ 969,342
35,228
43,395
14,149
—
(28,886)
(27,868)
—
(6,825)
998,535

Change in plan assets:

Fair value of plan assets at beginning
of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefits paid
Acquisition
Foreign currency exchange rate changes
Fair value of plan assets at end of year

Funded status at end of year

520,476
(15,796)
17,510
—
(12,498)
1,758
—
511,450

475,344
14,803
41,422
—
(11,413)
320
—
520,476
¥ 17,972 ¥ (57,610)

4,565,579
(138,562)
153,596
—
(109,632)
15,422
—
4,486,403
$ 157,649

87,173
2,283
4,210
1,613
(2,242)
—
(129)
92,908

70,174
4,055
3,559
1,412
(1,651)
—
9,624
87,173
¥ (20,925) ¥ (23,332)

764,676
20,026
36,930
14,149
(19,667)
—
(1,132)
814,982
$(183,553)

Amounts recognized in the consolidated balance sheets at

December 31, 2007 and 2006 are as follows:

December 31

Japanese plans

Foreign plans

Other assets
Accrued expenses
Accrued pension and severance cost

Millions of yen

2007
¥ 41,567
—
(23,595)
¥ 17,972

2006
¥ 3,018
—
(60,628)
¥(57,610)

Thousands of
U.S. dollars
2007
$ 364,623
—
(206,974)
$ 157,649

Amounts recognized in accumulated other comprehensive
income (loss) at December 31, 2007 and 2006 are as follows:

Millions of yen

2007

2006

347
(157)
(21,115)

6
(90)
(23,248)
¥(20,925) ¥(23,332)

Thousands of
U.S. dollars
2007

3,043
(1,377)
(185,219)
$(183,553)

December 31

Japanese plans

Foreign plans

Actuarial loss
Prior service credit
Net transition obligation

Millions of yen

2007

2006

(182,073)
2,888

¥ 146,937 ¥119,484
(93,932)
3,610
¥ (32,248) ¥ 29,162

Thousands of
U.S. dollars
2007
$ 1,288,921
(1,597,131)
25,333
$ (282,877)

Millions of yen

2007
¥16,905
(953)
—
¥15,952

2006
¥19,821
(1,003)
—
¥18,818

Thousands of
U.S. dollars
2007
$148,290
(8,360)
—
$139,930

The accumulated benefit obligation for all defined benefit

plans was as follows:

December 31

Japanese plans

Foreign plans

Accumulated benefit obligation

¥471,146 ¥542,610

Millions of yen

2007

2006

Thousands of
U.S. dollars
2007
$4,132,860

Millions of yen

2007
¥104,275

2006
¥ 98,589

Thousands of
U.S. dollars
2007
$914,693

The projected benefit obligations and the fair value of plan
assets for the pension plans with projected benefit obligations
in excess of plan assets, and the accumulated benefit obligations

and the fair value of plan assets for the pension plans with
accumulated benefit obligations in excess of plan assets are
as follows:

December 31

Japanese plans

Foreign plans

Millions of yen

2007

2006

Thousands of
U.S. dollars
2007

Millions of yen

2007

2006

Thousands of
U.S. dollars
2007

Plans with projected benefit obligations
in excess of plan assets:
Projected benefit obligations
Fair value of plan assets

Plans with accumulated benefit obligations
in excess of plan assets:
Accumulated benefit obligations
Fair value of plan assets

¥179,455 ¥546,221
485,593

155,860

$1,574,167
1,367,193

¥113,790 ¥110,501
87,163

92,518

$998,158
811,562

¥ 46,789 ¥510,223
481,452

29,599

$ 410,430
259,640

¥104,119 ¥ 98,589
87,163

92,401

$913,325
810,535

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

Components of net periodic benefit cost and other
amounts recognized in other comprehensive income (loss)
Net periodic benefit cost for Canon’s employee retirement and

severance defined benefit plans for the years ended December
31, 2007, 2006 and 2005 consisted of the following components:

Years ended December 31

Japanese plans

Foreign plans

Service cost
Interest cost
Expected return on plan assets
Amortization of
net transition obligation
Amortization of
prior service credit
Amortization of actuarial loss

2007

Millions of yen
2006
¥ 20,161 ¥ 23,916 ¥ 22,799
12,769
13,411
(15,964)
(21,705)

11,888
(21,148)

2005

Thousands of
U.S. dollars
2007
$ 176,851
104,281
(185,509)

2007

Millions of yen
2006
¥ 4,016 ¥ 3,483 ¥ 3,002
3,403
3,898
(3,687)
(4,494)

4,947
(5,427)

2005

Thousands of
U.S. dollars
2007
$ 35,228
43,395
(47,605)

722

345

6,333

—

(13,479)
4,868

(6,855)
8,222
¥ 3,012 ¥ 11,908 ¥ 21,316

(7,436)
3,377

(118,237)
42,702
$ 26,421

(86)
887

(1,152)
2,320
¥ 4,337 ¥ 3,176 ¥ 3,886

(113)
402

(754)
7,780
$ 38,044

Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss) for the year
ended December 31, 2007 were summarized as follows:

Current year actuarial (gain) loss
Amortization of actuarial loss
Prior service credit due to amendments
Amortization of prior service credit
Amortization of net transition obligation

Japanese plans

Foreign plans

Millions of yen
¥ 32,321
(4,868)
(101,620)
13,479
(722)
¥ (61,410)

Thousands of
U.S. dollars
$ 283,518
(42,702)
(891,404)
118,237
(6,333)
$(538,684)

Millions of yen
¥(149)
(887)
—
86
—
¥(950)

Thousands of
U.S. dollars
$(1,307)
(7,780)
—
754
—
$(8,333)

The estimated net transition obligation, prior service credit
and actuarial loss for the defined benefit pension plans that will
be amortized from accumulated other comprehensive income

(loss) into net periodic benefit cost over the next year are
summarized as follows:

Net transition obligation
Prior service credit
Actuarial loss

Assumptions
Weighted-average assumptions used to determine benefit
obligations are as follows:

December 31

Discount rate
Assumed rate of increase in future compensation levels

Japanese plans

Foreign plans

Millions of yen
722
¥
(13,361)
6,685

Thousands of
U.S. dollars
$

6,333
(117,202)
58,640

Millions of yen
¥ —
(86)
849

Thousands of
U.S. dollars
$ —
(754)
7,447

Japanese plans

Foreign plans

2007
2.5%
2.9%

2006
2.5%
2.9%

2007
5.1%
3.1%

2006
4.5%
2.9%

Weighted-average assumptions used to determine net

periodic benefit cost are as follows:

Years ended December 31

Japanese plans

Foreign plans

Discount rate
Assumed rate of increase
in future compensation levels
Expected long-term rate of return on plan assets

2007
2.5%

2.9%
3.9%

2006
2.5%

2.9%
4.5%

2005
2.5%

3.1%
4.5%

2007
4.5%

2.9%
6.0%

2006
4.8%

2.6%
6.4%

2005
4.8%

2.7%
6.6%

Canon determines the expected long-term rate of return
based on the expected long-term return of the various asset
categories in which it invests. Canon considers the current
expectations for future returns and the actual historical returns
of each plan asset category.

Plan assets
The weighted-average asset allocations of Canon’s benefit plans
at December 31, 2007 and 2006 and target asset allocation by
asset category are as follows:

December 31

Asset category:

Equity securities
Debt securities
Cash
Life insurance company general accounts
Other

Japanese plans

Foreign plans

2007

2006

Target
allocation

2007

2006

Target
allocation

33.6% 43.0% 35.4%
37.5
45.2
0.5
1.1
18.6
19.5
0.4
0.6
100.0% 100.0% 100.0%

45.2
0.2
18.7
0.5

52.4% 57.9% 52.3%
25.9
33.8
—
—
—
—
13.8
16.2
100.0% 100.0% 100.0%

33.4
—
—
14.3

Canon’s investment policies are designed to ensure adequate
plan assets are available to provide future payments of pension
benefits to eligible participants. Taking into account the expected
long-term rate of return on plan assets, Canon formulates a
“model” portfolio comprised of the optimal combination of
equity securities and debt securities. Plan assets are invested in
individual equity and debt securities using the guidelines of the
“model” portfolio in order to produce a total return that will
match the expected return on a mid-term to long-term basis.
Canon evaluates the gap between expected return and actual
return of invested plan assets on an annual basis to determine
if such differences necessitate a revision in the formulation of
the “model” portfolio. Canon revises the “model” portfolio
when and to the extent considered necessary to achieve the
expected long-term rate of return on plan assets.

The plan’s equity securities include common stock of the

Company and certain of its subsidiaries in the amounts of
¥1,257million ($11,026 thousand) and ¥1,797 million at
December 31, 2007 and 2006, respectively.

Contributions
Canon expects to contribute ¥13,699 million ($120,167
thousand) to its Japanese defined benefit pension plans and
¥4,409 million ($38,675 thousand) to its foreign defined
benefit pension plans for the year ending December 31, 2008.

Estimated future benefit payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:

Year ending December 31:

Japanese plans

Foreign plans

2008
2009
2010
2011
2012
2013—2017

Millions of yen
¥ 10,949
11,981
13,209
14,901
16,119
100,323

Thousands of
U.S. dollars
$ 96,044
105,096
115,868
130,711
141,395
880,026

Millions of yen
¥ 2,163
2,258
2,376
2,570
2,678
16,852

Thousands of
U.S. dollars
$ 18,974
19,807
20,842
22,544
23,491
147,825

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

14. Income Taxes
Domestic and foreign components of income before income
taxes and minority interests, and the current and deferred

Years ended December 31

2007:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2006:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2005:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2007:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

income tax expense (benefit) attributable to such income are
summarized as follows:

Japanese
¥575,017

¥238,921
(31,930)
¥206,991

Millions of yen

Foreign
¥193,371

¥ 60,358
(3,091)
¥ 57,267

Total
¥768,388

¥299,279
(35,021)
¥264,258

¥556,759

¥162,384

¥719,143

¥201,022
(73)
¥200,949

¥ 54,156
(6,872)
¥ 47,284

¥255,178
(6,945)
¥248,233

¥492,709

¥119,295

¥612,004

¥172,595
3,441
¥176,036

¥ 40,956
(4,207)
¥ 36,749

¥213,551
(766)
¥212,785

Japanese
$5,044,009

Thousands of U.S. dollars
Foreign
$1,696,237

Total
$6,740,246

$2,095,799
(280,088)
$1,815,711

$ 529,456
(27,114)
$ 502,342

$2,625,255
(307,202)
$2,318,053

The Company and its domestic subsidiaries are subject to a
number of income taxes, which, in the aggregate, represent a
statutory income tax rate of approximately 40% for the years
ended December 31, 2007, 2006 and 2005.

A reconciliation of the Japanese statutory income tax rate
and the effective income tax rate as a percentage of income
before income taxes and minority interests is as follows:

Years ended December 31
Japanese statutory income tax rate
Increase (reduction) in income taxes resulting from:

Expenses not deductible for tax purposes
Income of foreign subsidiaries taxed at lower than
Japanese statutory tax rate
Tax credit for research and development expenses
Other

Effective income tax rate

Net deferred income tax assets and liabilities are included

in the accompanying consolidated balance sheets under the
following captions:

December 31

Prepaid expenses and other current assets
Other assets
Other current liabilities
Other noncurrent liabilities

2007
40.0%

0.3

(2.8)
(4.5)
1.4
34.4%

2006
40.0%

0.3

(2.1)
(4.1)
0.4
34.5%

2005
40.0%

0.3

(1.9)
(3.9)
0.3
34.8%

Millions of yen

2007
¥ 79,846
68,178
(4,506)
(28,157)
¥115,361

2006
¥ 66,839
67,568
(4,133)
(39,299)
¥ 90,975

Thousands of
U.S. dollars
2007
$ 700,403
598,053
(39,526)
(246,991)
$1,011,939

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

The tax effects of temporary differences that give rise to
the deferred tax assets and deferred tax liabilities at December
31, 2007 and 2006 are presented below:

December 31

Deferred tax assets:

Inventories
Accrued business tax
Accrued pension and severance cost
Research and development—costs capitalized for tax purposes
Property, plant and equipment
Accrued expenses
Net operating losses carried forward
Other

Less valuation allowance
Total deferred tax assets

Deferred tax liabilities:

Undistributed earnings of foreign subsidiaries
Net unrealized gains on securities
Tax deductible reserve
Financing lease revenue
Prepaid pension and severance cost
Other

Total deferred tax liabilities
Net deferred tax assets

Millions of yen

2007

2006

¥ 17,359
11,555
16,336
42,434
53,487
27,903
4,080
34,448
207,602
(9,327)
198,275

(13,566)
(4,440)
(8,574)
(26,892)
(10,604)
(18,838)
(82,914)
¥115,361

¥ 20,077
10,654
37,385
31,068
26,577
21,277
1,767
28,061
176,866
(6,500)
170,366

(9,138)
(7,521)
(11,955)
(35,990)
(3,752)
(11,035)
(79,391)
¥ 90,975

Thousands of
U.S. dollars
2007

$ 152,272
101,360
143,298
372,228
469,184
244,763
35,790
302,175
1,821,070
(81,816)
1,739,254

(119,000)
(38,947)
(75,210)
(235,894)
(93,018)
(165,246)
(727,315)
$1,011,939

The net changes in the total valuation allowance were
increases of ¥2,827 million ($24,798 thousand) and ¥3,155
million for the years ended December 31, 2007 and 2006,
respectively, and a decrease of ¥150 million for the year ended
December 31, 2005.

Based upon the level of historical taxable income and
projections for future taxable income over the periods which
the net deductible temporary differences are expected to
reverse, management believes it is more likely than not that

Canon will realize the benefits of these deferred tax assets, net
of the existing valuation allowance, at December 31, 2007.
At December 31, 2007, Canon had net operating losses

which can be carried forward for income tax purposes of
¥11,795 million ($103,465 thousand) to reduce future taxable
income. Periods available to reduce future taxable income vary
in each tax jurisdiction and generally range from 1 year to 10
years as follows:

Millions of yen
—
1,717
6,009
4,069
¥11,795

Thousands of
U.S. dollars
—
$
15,061
52,711
35,693
$103,465

Within one year
After one year through five years
After five years through ten years
Indefinite period

Total

Income taxes have not been accrued on undistributed
earnings of domestic subsidiaries as the tax law provides a
means by which the dividends from a domestic subsidiary can
be received tax free.

Canon has not recognized deferred tax liabilities of ¥49,661

million ($435,623 thousand) for a portion of undistributed
earnings of foreign subsidiaries that arose during the year ended
December 31, 2007 and prior years because Canon currently
does not expect to have such amounts distributed or paid as
dividends to the Company in the foreseeable future. Deferred
tax liabilities will be recognized when Canon expects that it will
realize those undistributed earnings in a taxable manner, such

as through receipt of dividends or sale of the investments. At
December 31, 2007, such undistributed earnings of these
subsidiaries were ¥686,837 million ($6,024,886 thousand).

Canon adopted FIN48 effective January 1, 2007. As a result
of implementation of FIN48, Canon identified unrecognized tax
benefits of ¥16,087 million ($141,114 thousand) as of January
1, 2007, and did not require a cumulative-effect adjustment to
retained earnings.

A reconciliation of the beginning and ending amount of

unrecognized tax benefits is as follows:

Balance at January 1, 2007
Additions for tax positions of the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Lapse of the applicable statute of limitations
Settlements
Other
Balance at December 31, 2007

Millions of yen
¥16,087
994
1,902
(1,340)
(1,311)
(322)
(219)
¥15,791

Thousands of
U.S. dollars
$141,114
8,719
16,684
(11,754)
(11,500)
(2,825)
(1,920)
$138,518

Total amount of unrecognized tax benefits that would
reduce the effective tax rate, if recognized, is ¥8,278 million
($72,614 thousand).

Although Canon believes its estimates and assumptions of
unrecognized tax benefits are reasonable, uncertainty regarding
the final determination of tax audit settlements and any related
litigation could affect the effective tax rate in the future periods.
Based on each of the items of which Canon is aware at December
31, 2007, no significant changes to the unrecognized tax
benefits are expected within the next twelve months.

Canon recognizes interest and penalties accrued related to
unrecognized tax benefits in income taxes in the consolidated
statements of income. Both interest and penalties accrued as of
December 31, 2007 and interest and penalties included in income
taxes for the year ended December 31, 2007 are not material.

Canon files income tax returns in Japan and various foreign
tax jurisdictions. In Japan, Canon is no longer subject to regular
income tax examinations by the tax authority for years before
2006. While there has been no specific indication by the tax
authority that Canon will be subject to a transfer pricing exami-
nation in the near future, the tax authority could conduct a
transfer pricing examination for years after 2000. In other
major foreign tax jurisdictions, including the United States and
Netherlands, Canon is no longer subject to income tax exami-
nations by tax authorities for years before 2003 with few
exceptions. The tax authorities are currently conducting income
tax examinations of Canon’s income tax returns for certain
years after 2002 in Japan and in major foreign tax jurisdictions.

15. Common Stock
Based on the resolution of Board of Directors on May 11, 2006,
the Company made a three-for-two stock split on July 1, 2006,
for stockholders recorded in the stockholders’ register as of June
30, 2006. All share and per share information has been adjusted
to reflect the implementation of the stock split.

For the years ended December 31, 2007, 2006 and 2005,

the Company issued 190,380 shares, 331,661 shares and

1,148,292 shares of common stock, respectively, in connection
with the conversion of convertible debt. In accordance with the
Corporation Law of Japan, conversion into common stock of
convertible debt is accounted for by crediting one-half or more
of the conversion price to the common stock account and the
remainder to the additional paid-in capital account.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

16. Legal Reserve and Retained Earnings
The Corporation Law of Japan provides that an amount equal
to 10% of distributions from retained earnings paid by the
Company and its Japanese subsidiaries be appropriated as a
legal reserve. No further appropriations are required when the
total amount of the additional paid-in capital and the legal
reserve equals 25% of their respective stated capital. The
Corporation Law of Japan also provides that additional paid-in
capital and legal reserve are available for appropriations by the
resolution of the stockholders. Certain foreign subsidiaries are
also required to appropriate their earnings to legal reserves
under the laws of the respective countries.

Cash dividends and appropriations to the legal reserve
charged to retained earnings for the years ended December
31, 2007, 2006 and 2005 represent dividends paid out during

those years and the related appropriations to the legal reserve.
Retained earnings at December 31, 2007 do not reflect current
year-end dividends in the amount of ¥75,663 million ($663,711
thousand) which will be payable in March 2008 upon approval
by the stockholders.

The amount available for dividends under the Corporation
Law of Japan is based on the amount recorded in the Company’s
nonconsolidated books of account in accordance with financial
accounting standards of Japan. Such amount was ¥1,383,747
million ($12,138,132 thousand) at December 31, 2007.

Retained earnings at December 31, 2007 included Canon’s

equity in undistributed earnings of affiliated companies
accounted for by the equity method in the amount of ¥20,792
million ($182,386 thousand).

17. Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss)
are as follows:

Years ended December 31

Foreign currency translation adjustments:

Balance at beginning of year
Adjustments for the year
Balance at end of year

Net unrealized gains and losses on securities:

Balance at beginning of year
Adjustments for the year
Balance at end of year

Net gains and losses on derivative instruments:

Balance at beginning of year
Adjustments for the year
Balance at end of year

Minimum pension liability adjustments:

Balance at beginning of year
Adjustments for the year
Adjustment to initially apply SFAS 158
Balance at end of year
Pension liability adjustments:

Balance at beginning of year
Adjustments for the year
Adjustment to initially apply SFAS 158
Balance at end of year

Total accumulated other comprehensive income (loss):

Balance at beginning of year
Adjustments for the year
Adjustment to initially apply SFAS 158
Balance at end of year

2007

¥ 22,858
(62)
22,796

8,065
(1,778)
6,287

(1,663)
814
(849)

—
—
—
—

(26,542)
32,978
—
6,436

2,718
31,952
—
¥ 34,670

Millions of yen
2006

¥(25,772)
48,630
22,858

6,073
1,992
8,065

(1,174)
(489)
(1,663)

(7,339)
(3,575)
10,914
—

—
—
(26,542)
(26,542)

(28,212)
46,558
(15,628)
¥ 2,718

2005

¥ (79,751)
53,979
(25,772)

7,470
(1,397)
6,073

(693)
(481)
(1,174)

(28,338)
20,999
—
(7,339)

—
—
—
—

(101,312)
73,100
—
¥ (28,212)

Thousands of
U.S. dollars
2007

$ 200,509
(544)
199,965

70,745
(15,596)
55,149

(14,587)
7,140
(7,447)

—
—
—
—

(232,825)
289,281
—
56,456

23,842
280,281
—
$ 304,123

Tax effects allocated to each component of other com-
prehensive income (loss) and reclassification adjustments are
as follows:

Years ended December 31

2007:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Pension liability adjustments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Other comprehensive income (loss)

2006:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Minimum pension liability adjustments
Other comprehensive income (loss)

2005:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Minimum pension liability adjustments
Other comprehensive income (loss)

Before-tax
amount

Millions of yen
Tax (expense)
or benefit

Net-of-tax
amount

(370)

308

(62)

(7,237)
(293)
(7,530)

590
772
1,362

62,768
(5,766)
57,002
¥ 50,464

3,037
2,715
5,752

(236)
(312)
(548)

(26,502)
2,478
(24,024)
¥(18,512)

(4,200)
2,422
(1,778)

354
460
814

36,266
(3,288)
32,978
¥ 31,952

¥ 49,518

(888)

¥ 48,630

3,708
(388)
3,320

(7,126)
6,309
(817)
(4,391)
¥ 47,630

(1,502)
174
(1,328)

2,858
(2,530)
328
816
¥ (1,072)

2,206
(214)
1,992

(4,268)
3,779
(489)
(3,575)
¥ 46,558

¥ 55,345

¥ (1,366)

¥ 53,979

9,005
(10,793)
(1,788)

(9,137)
8,333
(804)
40,364
¥ 93,117

(3,892)
4,283
391

3,658
(3,335)
323
(19,365)
¥ (20,017)

5,113
(6,510)
(1,397)

(5,479)
4,998
(481)
20,999
¥ 73,100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

2007:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Before-tax
amount

Thousands of U.S. dollars
Tax (expense)
or benefit

Net-of-tax
amount

$ (3,246)

2,702

(544)

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Pension liability adjustments:

Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year

Other comprehensive income (loss)

(63,482)
(2,570)
(66,052)

5,175
6,772
11,947

550,597
(50,579)
500,018
$442,667

26,640
23,816
50,456

(2,070)
(2,737)
(4,807)

(232,474)
21,737
(210,737)
$(162,386)

(36,842)
21,246
(15,596)

3,105
4,035
7,140

318,123
(28,842)
289,281
$280,281

18. Net Income per Share
The basic and diluted net income per share as well as the
number of shares has been calculated to reflect the three-for-
two stock split that was completed on July 1, 2006.

A reconciliation of the numerators and denominators of basic

and diluted net income per share computations is as follows:

2007
¥488,332

Millions of yen
2006
¥455,325

2005
¥384,096

Thousands of
U.S. dollars
2007
$4,283,614

—

4
¥488,336

8
¥455,333

18
¥384,119

35
$4,283,649

Number of shares
1,293,295,680 1,331,542,074 1,330,760,715

—

185,755

221,751

1,118,931
1,293,517,431 1,332,016,870 1,332,065,401

474,796

Yen

¥341.95
341.84

¥288.63
288.36

U.S. dollars

$3.31
3.31

¥377.59
377.53

Years ended December 31

Net income
Effect of dilutive securities:

1.20% Japanese yen convertible debentures,
due 2005
1.30% Japanese yen convertible debentures,
due 2008
Diluted net income

Average common shares outstanding
Effect of dilutive securities:

1.20% Japanese yen convertible debentures,
due 2005
1.30% Japanese yen convertible debentures,
due 2008

Diluted common shares outstanding

Net income per share:

Basic
Diluted

19. Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates. Derivative financial
instruments are comprised principally of foreign exchange
contracts utilized by the Company and certain of its subsidiaries
to reduce the risk. Canon assesses foreign currency exchange
rate risk by continually monitoring changes in the exposures
and by evaluating hedging opportunities. Canon does not hold
or issue derivative financial instruments for trading purposes.
Canon is also exposed to credit-related losses in the event of
non-performance by counterparties to derivative financial
instruments, but it is not expected that any counterparties will
fail to meet their obligations, because most of the counterparties
are internationally recognized financial institutions and contracts
are diversified across a number of major financial institutions.

Foreign currency exchange rate risk management
Canon’s international operations expose Canon to the risk of
changes in foreign currency exchange rates. Canon uses
foreign exchange contracts to manage certain foreign currency
exchange exposures principally from the exchange of U.S.
dollars and euros into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of fore-
casted intercompany sales and intercompany trade receivables
which are denominated in foreign currencies. In accordance
with Canon’s policy, a specific portion of foreign currency
exposure resulting from forecasted intercompany sales are
hedged using foreign exchange contracts which principally
mature within three months.

December 31

To sell foreign currencies
To buy foreign currencies

Cash flow hedge
Changes in the fair value of derivative financial instruments
designated as cash flow hedges, including foreign exchange
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassified into earnings
through other income (deductions) in the same period as the
hedged items affect earnings. Substantially all amounts
recorded in accumulated other comprehensive income (loss) at
year-end are expected to be recognized in earnings over the
next 12 months. Canon excludes the time value component
from the assessment of hedge effectiveness. Changes in the
fair value of a foreign exchange contract for the period
between the date that the forecasted intercompany sales
occur and its maturity date are recognized in earnings and not
considered hedge ineffectiveness.

The amount of the hedging ineffectiveness was not material

for the years ended December 31, 2007, 2006 and 2005. The
amount of net gains or losses excluded from the assessment of
hedge effectiveness (time value component) which was recorded
in other income (deductions) was net losses of ¥6,883 million
($60,377 thousand), ¥5,917 million and ¥3,725 million for the
years ended December 31, 2007, 2006 and 2005, respectively.

Derivatives not designated as hedges
Canon has entered into certain foreign exchange contracts to
manage its foreign currency exposures. These foreign exchange
contracts have not been designated as hedges. Accordingly,
the changes in fair value of the contracts are recorded in
earnings immediately.

Contract amounts of foreign exchange contracts at

December 31, 2007 and 2006 are set forth below:

Millions of yen

2007
¥697,240
46,897

2006
¥717,136
51,189

Thousands of
U.S. dollars
2007
$6,116,140
411,377

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

20. Commitments and Contingent Liabilities
Commitments
At December 31, 2007, commitments outstanding for the
purchase of property, plant and equipment approximated
¥117,119 million ($1,027,360 thousand), and commitments
outstanding for the purchase of parts and raw materials
approximated ¥91,882 million ($805,982 thousand).

Canon occupies sales offices and other facilities under lease

arrangements accounted for as operating leases. Deposits
made under such arrangements aggregated ¥14,440 million
($126,667 thousand) and ¥13,648 million at December 31,

2007 and 2006, respectively, and are included in noncurrent
receivables in the accompanying consolidated balance sheets.
Rental expenses under the operating lease arrangements
amounted to ¥36,900 million ($323,684 thousand), ¥36,157
million and ¥38,297 million for the years ended December 31,
2007, 2006 and 2005, respectively.

Future minimum lease payments required under noncance-
lable operating leases that have initial or remaining lease terms
in excess of one year at December 31, 2007 are as follows:

Year ending December 31:

2008
2009
2010
2011
2012
Thereafter

Total future minimum lease payments

Millions of yen

¥16,365
12,382
7,637
5,681
4,055
11,281
¥57,401

Thousands of
U.S. dollars

$143,553
108,614
66,991
49,833
35,570
98,957
$503,518

Guarantees
Canon provides guarantees for bank loans of its employees,
affiliates and other companies. The guarantees for the employ-
ees are principally made for their housing loans. The guarantees
of loans of its affiliates and other companies are made to
ensure that those companies operate with less financial risk.

For each guarantee provided, Canon would have to perform

under a guarantee if the borrower defaults on a payment
within the contract periods of 1 year to 30 years, in the case of
employees with housing loans, and of 1 year to 10 years, in the
case of affiliates and other companies. The maximum amount

of undiscounted payments Canon would have had to make in
the event of default is ¥27,946 million ($245,140 thousand) at
December 31, 2007. The carrying amounts of the liabilities
recognized for Canon’s obligations as a guarantor under those
guarantees at December 31, 2007 were not significant.

Canon also issues contractual product warranties under
which it generally guarantees the performance of products
delivered and services rendered for a certain period or term.
Changes in accrued product warranty cost for the years ended
December 31, 2007 and 2006 are summarized as follows:

Years ended December 31

Balance at beginning of year
Addition
Utilization
Other
Balance at end of year

Millions of yen

2007
¥ 18,144
31,053
(26,199)
(2,860)
¥ 20,138

2006
¥ 16,746
18,686
(18,377)
1,089
¥ 18,144

Thousands of
U.S. dollars
2007
$ 159,158
272,395
(229,816)
(25,088)
$ 176,649

Legal proceedings
In October 2003, a lawsuit was filed by a former employee
against the Company at the Tokyo District Court in Japan. The
lawsuit alleges that the former employee is entitled to ¥45,872
million ($402,386 thousand) as compensation for an invention
related to certain technology used by the Company, and the
former employee has sued for a partial payment of ¥1,000
million ($8,772 thousand) and interest thereon. On January 30,
2007, the Tokyo District Court in Japan ordered the Company
to pay the former employee approximately ¥33.5 million ($294

thousand) and interest thereon. On the same day, the Company
appealed the decision. This lawsuit is currently under trial in the
Intellectual Property High Court.

In Germany, Verwertungsgesellschaft Wort (“VG Wort”),
a collecting agency representing certain copyright holders, has
filed a series of lawsuits seeking to impose copyright levies
upon digital products such as PCs and printers, that allegedly
enable the reproduction of copyrighted materials, against the
companies importing and distributing these digital products. In
May 2004, VG Wort filed a civil lawsuit against Hewlett-Packard

GmbH seeking levies on multi-function printers. This is an
industry test case under which Hewlett-Packard GmbH represents
other companies sharing common interests, and Canon has
undertaken to be bound by the final decision of this court case.
The court of first instance and the court of appeals held that
the multi-function printers were subject to a levy. In particular,
the court of appeals ordered Hewlett-Packard GmbH to pay
the amount equivalent to the levies imposed on photocopiers
(EUR 38.35 to EUR 613.56 per unit, depending on printing
speed and color printing capability). On January 30, 2008,
the Federal Supreme Court delivered its short judgment in favor
of VG Wort, maintaining the judgment of the court of appeals,
whereby the court decided that, for MFPs sold during the period
from 1997 through 2001, the same full tariff as applicable to
photocopier should be applied. It is expected that the Federal
Supreme Court will issue a written full judgment explaining
the rationale underlying its decision sometime in the next
several months. If Hewlett-Packard GmbH decides to file a claim
with the Federal Constitutional Court challenging the judgment
of the Federal Supreme Court, it will have 30 days to file a
claim from receipt of the Federal Supreme Court’s written full
judgment. With regard to single-function printers, VG Wort
filed a separate lawsuit in January 2006 against Canon, seeking
payment of copyright levies, and the court of first instance in
Düsseldorf ruled in favor of the claim by VG Wort in November
2006. Canon lodged an appeal against such decision in
December 2006. In a similar court case, which does not include
Canon, seeking copyright levies on single-function printers of
Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita
Deutschland GmbH, the court of appeals in Düsseldorf rejected
such alleged levies on January 23, 2007. Consistent with the
last decision, Canon won its appeal at the court of appeal. In
its judgment of November 13, 2007, the court of appeal
rejected VG Wort’s claim against Canon. VG Wort appealed
further against decisions of the court of appeal for both Epson
et al. and Canon cases before the Federal Supreme Court. In
December 2007, for a similar Hewlett-Packard GmbH case
relating to single-function printers, the Federal Supreme Court
delivered its judgment in favor of Hewlett-Packard GmbH and
dismissed VG Wort’s claim. Written full judgment by the Federal
Supreme Court was issued on January 24, 2008. Canon was
informed that VG Wort already filed a constitutional complaint
with the Federal Constitutional Court against said judgment of
the Federal Supreme Court. Canon, other companies and the
industry associations have expressed opposition to such exten-
sion of the levy scope. Based on industry opposition to the
extension of levies to digital products, Canon’s assessments of
the merits of various proceeding and Canon’s estimates of the
units impacted and levies, Canon has accrued amounts that it
believes are adequate to address the matters described above.
However, the final conclusion of these court cases including the
amount of levies to be imposed and the associated financial
impact on Canon remains uncertain.

In April 2005, a lawsuit was filed by Nano-Proprietary Inc.

(“NPI”) against the Company and Canon U.S.A., Inc. in the
United States District Court of Texas alleging that SED Inc., a
joint venture company established by the Company and
Toshiba Corporation, was not regarded as a “subsidiary” under
the Patent License Agreement between the Company and NPI
and that the extension of the license to SED Inc. constituted
a breach of the agreement. NPI also alleged that Canon
committed fraud in executing such agreement, and requested
rescission of the agreement and compensatory damages. In
November 2006, the Court denied Canon’s motion for a
summary judgment that SED Inc. was a subsidiary of the
Company. In January 2007, the Company purchased all the
shares of SED Inc. owned by Toshiba Corporation, making SED
Inc. a 100% owned subsidiary of the Company. However, on
February 22, 2007, the Court issued a summary judgment
stating that SED Inc. (before the above stock purchase) was not
a subsidiary of the Company, that the Company had materially
breached the patent license agreement and that NPI was
allowed to terminate that agreement. Thereafter, a trial was
held from April 30 to May 3, 2007, in Austin, Texas. NPI’s fraud
claims against Canon were withdrawn by NPI and the jury
returned a verdict that NPI had sustained no damages. All claims
against Canon U.S.A., Inc. were also withdrawn by NPI. On May
15, 2007, Canon filed a notice of appeal to the United States
Court of Appeals for the Fifth Circuit, appealing the District
Court’s prior ruling that Canon had breached the patent
license agreement with NPI that allowed NPI to terminate that
agreement. On June 4, 2007, NPI also filed a notice of appeal,
appealing the District Court’s determination that NPI had
sustained no damages. These appeals are still pending.
Canon is involved in various claims and legal actions,
including those noted above, arising in the ordinary course of
business. In accordance with SFAS No. 5, “Accounting for
Contingencies,” Canon has recorded provisions for liabilities
when it is probable that liabilities have been incurred and the
amount of loss can be reasonably estimated. Canon reviews
these provisions at least quarterly and adjusts these provisions
to reflect the impact of the negotiations, settlements, rulings,
advice of legal counsel and other information and events
pertaining to a particular case. Based on its experience, Canon
believes that any damage amounts claimed in the specific
matters discussed above are not a meaningful indicator of
Canon’s potential liability. In the opinion of management, the
ultimate disposition of the above mentioned matters will not
have a material adverse effect on Canon’s consolidated financial
position, results of operations, or cash flows. However, litigation
is inherently unpredictable. While Canon believes that it has
valid defenses with respect to legal matters pending against it,
it is possible that Canon’s consolidated financial position,
results of operations, or cash flows could be materially affected
in any particular period by the unfavorable resolution of one or
more of these matters.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CANON INC. AND SUBSIDIARIES

21. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
Fair value of financial instruments
The estimated fair values of Canon’s financial instruments at
December 31, 2007 and 2006 are set forth below. The following
summary excludes cash and cash equivalents, time deposits,
trade receivables, finance receivables, noncurrent receivables,

short-term loans, trade payables, accrued expenses for which
fair values approximate their carrying amounts. The summary
also excludes marketable securities and investments which are
disclosed in Note 4.

December 31

Millions of yen

2007

2006

Carrying
amount

Estimated
fair value

Carrying
amount

Estimated
fair value

Long-term debt, including current installments ¥(24,109) ¥(24,714) ¥(31,052) ¥(32,795)
Foreign exchange contracts:

Thousand of U.S. dollars
2007

Carrying
amount

Estimated
fair value

$(211,482) $(216,789)

Assets
Liabilities

806
(12,335)

307
(17,534)

7,070
(108,202)

The following methods and assumptions are used to

estimate the fair value in the above table.

Long-term debt
The fair values of Canon’s long-term debt instruments are
based on the quoted price in the most active market or the
present value of future cash flows associated with each
instrument discounted using Canon’s current borrowing rate
for similar debt instruments of comparable maturity.

Foreign exchange contracts
The fair values of foreign exchange contracts, all of which are
used for purposes other than trading, are estimated by obtaining
quotes from brokers.

Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the
financial instruments. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.

Concentrations of credit risk
At December 31, 2007 and 2006, one customer accounted for
approximately 16% and 14% of consolidated trade receivables,
respectively. Although Canon does not expect that the customer
will fail to meet its obligations, Canon is potentially exposed to
concentrations of credit risk if the customer failed to perform
according to the terms of the contracts.

22. Supplemental Cash Flow Information
For the years ended December 31, 2007, 2006 and 2005,
aggregate common stock and additional paid-in capital arising

from conversion of convertible debt amounted to ¥190 million
($1,667 thousand), ¥331 million and ¥1,147 million, respectively.

23. Subsequent Event
On February 27, 2008, the Company entered into a stock
purchase agreement with Hitachi, Ltd. (“Hitachi”) to acquire
shares of Hitachi Displays, Ltd. (“Hitachi Displays”), a wholly-
owned subsidiary of Hitachi, with an aim to construct a
comprehensive liquid crystal display (“LCD”) panel business

alliance, following the resolution of the acquisition by the
Board of Directors on the same day. Under the terms of this
agreement, the Company will acquire a 24.9% stake in Hitachi
Displays by March 31, 2008, for approximately ¥43,200 million
($378,947 thousand), pending regulatory approval.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Canon is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a
process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by
the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Canon’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2007. In making
this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework (the COSO criteria).

Based on its assessment, management concluded that, as of December 31, 2007, Canon’s internal control over financial reporting
was effective based on the COSO criteria.

Canon’s independent registered public accounting firm, Ernst & Young ShinNihon, has issued an audit report on the effectiveness
of our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Canon Inc.

We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2007 and
2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the
period ended December 31, 2007, all expressed in Japanese yen. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

The Company’s consolidated financial statements do not disclose segment information required by Statement of Financial
Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” In our opinion,
disclosure of segment information is required by U.S. generally accepted accounting principles.

In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of Canon Inc. and subsidiaries at
December 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 2007 the Company changed its method of accounting for
depreciation.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Canon Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 14, 2008 expressed an unqualified opinion thereon.

We have also recomputed the translation of the consolidated financial statements as of and for the year ended December 31,
2007 into United States dollars. In our opinion, the consolidated financial statements expressed in Japanese yen have been
translated into United States dollars on the basis described in Note 2.

March 14, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Canon Inc.

We have audited Canon Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
COSO criteria). Canon Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report
on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

In our opinion, Canon Inc. maintained, in all material respects, effective internal control over financial reporting as of December
31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December
31, 2007, all expressed in Japanese yen, and our report thereon dated March 14, 2008 stated that, except for the omission of
segment information required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Canon Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.

March 14, 2008

TRANSFER AND REGISTRAR’S OFFICE

STOCKHOLDER INFORMATION

Canon Inc.

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

Stock Exchange Listings:
Tokyo, Osaka, Nagoya, Fukuoka, Sapporo and New York
stock exchanges

Manager of the Register of Stockholders
Mizuho Trust & Banking Co., Ltd.

2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan

Depositary and Agent with Respect to American Depositary
Receipts for Common Shares
JPMorgan Chase Bank, N.A.

4 New York Plaza, New York, N.Y. 10004, U.S.A.

American Depositary Receipts are traded on the New York Stock
Exchange (CAJ).

Stockholders’ Annual General Meeting:
March 28, 2008, in Tokyo

Further Information:
For publications or information, please contact the
Public Relations Center, Canon Inc., Tokyo,
or access Canon’s Website at
www.canon.com

CORPORATE PROFILE

CORPORATE PHILOSOPHY: Kyosei

CORPORATE GOAL

CONTENTS

FINANCIAL HIGHLIGHTS ............................ 1

TO OUR STOCKHOLDERS ........................... 2

MESSAGE FROM THE PRESIDENT .............. 6

EXCELLENT GLOBAL CORPORATION

PLAN—PHASE III ......................................... 8

CORPORATE GOVERNANCE ....................... 16

CORPORATE FUNCTIONS ........................... 20

RESEARCH & DEVELOPMENT

PRODUCTION

SALES & MARKETING

CORPORATE SOCIAL RESPONSIBILITY

PRODUCT GROUPS ..................................... 32

AT A GLANCE

OFFICE IMAGING PRODUCTS

COMPUTER PERIPHERALS

CAMERAS

OPTICAL AND OTHER PRODUCTS

MAJOR CONSOLIDATED SUBSIDIARIES .... 42

FINANCIAL SECTION ................................... 43

TRANSFER AND REGISTRAR’S OFFICE ....... 98

STOCKHOLDER INFORMATION ................. 98

CANON ANNUAL REPORT 2007

Fiscal Year Ended December 31, 2007

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CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

PUB. BEP017 0408SZ18.1 Printed in Japan