Canon Annual Report 2008

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FY2008 Annual Report · Canon

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CANON ANNUAL REPORT 2008

Fiscal Year Ended December 31, 2008

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

PUB. BEP018 0409SZ16.5 Printed in Japan

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

CORPORATE PROFILE

Canon is engaged in the development, manufacture and sale of a growing
lineup of copying machines, printers, cameras, optical and other products
that meet a diverse range of customer needs. The Canon brand is well
recognized and trusted throughout the world by the individuals, families,
ofﬁ ces and industries that use Canon products. In 1996, Canon launched
its Excellent Global Corporation Plan and has since delivered a series of
strong performances. After this period of sustained growth, however, the
Company is confronting an unprecedented downturn in worldwide ﬁ nan-
cial and economic markets. Despite the onset of harsh operating condi-
tions, Canon remains at the forefront of an industry that continues to
experience the spread of globalization and broadband networks. Leverag-
ing its strengths in cross-media imaging through advanced synergies
among digital imaging equipment and technologies, Canon will reinforce
its robust position in preparation for the next economic upturn. As a part
of these endeavors, and in its efforts to fulﬁ ll its duties to investors and
society, Canon will continue to emphasize good corporate governance and
promote activities that contribute to the environment and society.

CORPORATE PHILOSOPHY: Kyosei

The corporate philosophy of Canon is kyosei. A concise deﬁ nition of
this word would be “Living and working together for the common
good,” but our deﬁ nition 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

Canon is shifting its emphasis more toward improved management
quality from sound growth, carrying out its medium- to long-term
management plan, the Excellent Global Corporation Plan. This decision
was made in light of the current worldwide ﬁ nancial crisis and unprec-
edented downturn in the global economy. With the aim of attaining the
status of being among the global top 100 companies in terms of key
performance indicators, Canon is accelerating management quality
improvement initiatives.

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

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:
Equipped with Dual Flash Memory, this lightweight and
compact video camcorder realizes reduced noise through
Canon’s CMOS sensor and 1,920 x 1,080 Full HD high image
quality. The dual memory allows users to enjoy capturing,
viewing and saving images with ease.

FINANCIAL HIGHLIGHTS

Net sales

Operating proﬁ t

Income before income taxes
and minority interests

Net income

Net income per share:

-Basic

-Diluted

Total assets

Millions of yen
(except per share amounts)

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

2008

2007

Change (%)

2008

¥ 4,094,161 ¥ 4,481,346

496,074

756,673

481,147

768,388

309,148

488,332

246.21 ¥

377.59

246.20

377.53

-8.6

-34.4

-37.4

-36.7

-34.8

$ 44,990,780

5,451,363

5,287,330

3,397,231

2.71

¥ 3,969,934 ¥ 4,512,625

-12.0

$ 43,625,648

Stockholders’ equity

¥ 2,659,792 ¥ 2,922,336

-9.0

$ 29,228,484

Notes:
1. Canon’s consolidated ﬁ nancial 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 JPY91=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2008, 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

Basic
Diluted

400.00

4,000,000

3,000,000

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ROA

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04 05 06 07

05 06

04 05 06 07 08

TO OUR STOCKHOLDERS

Bolstering Management Quality
in the Face of Adversity

In 2008, the world economy found itself facing an unprecedented

crisis triggered primarily by the global recession following the

collapse of Lehman Brothers in the United States.

In 2009, the economic environment will continue to be extreme-

ly harsh. Nevertheless, we view these drastic economic changes as

an ideal opportunity to further restructure in order to bolster our

overall management strength. In 2009, Canon will make a major

change in course from sound growth to improved management

quality while preparing to rapidly leap forward when the economic

environment recovers.

Improved management quality means that Canon will make

decisions swiftly as needed so that we can rapidly move to the

execution stage and increase the overall strength of the Company,

even when market conditions suddenly turn turbulent. In other

words, we will achieve real-time management. To that end, we will

further strengthen our cash-ﬂ ow management and supply chain

management (SCM) as we raise product competitiveness and

proﬁ tability. Canon is boldly pushing forward its Excellent Global

Corporation Plan with the aim of entering the ranks of the global

top 100 companies in terms of key performance indicators.

Overview of Fiscal 2008
In the ﬁ rst half of 2008, energy and raw material prices
skyrocketed, which had a major impact on corporate earn-
ings. Moreover, during the severe economic recession that
began in September, stock prices dropped precipitously due
to the expanding ﬁ nancial crisis. At the same time, heavy yen
buying in foreign exchange markets caused the already high
yen to sharply appreciate. During 2008, the average ex-
change rate of the yen was ¥103.23 against the dollar and
¥151.46 against the euro, appreciating approximately 14%
and 7% year on year, respectively.

Turning to each region, in the United States a grave
situation has been created by the recession triggered by the
subprime loan problem, with a sharp decline in new housing
starts along with growing unemployment in the auto and
ﬁ nancial industries—all leading economic indicators.

In Europe, the ﬁ nancial crisis has also affected the real
economy, leading to a decline in regional trade, which had
been an engine of growth.

In Japan as well, the ﬁ nancial crisis sent economic

conditions into a rapid tailspin. Exports, a growth driver,
plunged and production dropped substantially for most
manufacturers.

In Asia and emerging countries in other areas, economic

growth abruptly declined due to decreased exports.

Fiscal 2008 Performance Results
As a result of the above-mentioned factors, Canon’s consoli-
dated net sales declined 8.6% to ¥4,094.2 billion and net
income dropped 36.7% to ¥309.1 billion compared with the
previous ﬁ scal year. By product category, sales decreased
9.4% to ¥2,660.0 billion for business machines (includes
ofﬁ ce imaging products and computer peripherals) and
9.6% to ¥1,042.0 billion for cameras. However, sales of
optical and other products were largely in line with those of
the previous ﬁ scal year at ¥392.2 billion. By operating region,
in Europe sales fell 10.5% to ¥1,341.4 billion. Sales also
decreased in the Americas, declining 13.6% to ¥1,154.6
billion. In Japan sales slipped 8.4% to ¥868.3 billion, and
elsewhere in Asia and Oceania sales climbed 4.5% to
¥729.9 billion.

Turning to operating expenses, Canon’s selling, general

and administrative expenses declined 4.8% year on year to
¥1,067.9 billion. The Company’s R&D expenses increased
1.6% to ¥374.0 billion, or 9.1% of net sales. Even in a major
economic downturn, Canon’s aggressive R&D spending was
at a higher rate than in the previous ﬁ scal year. The gross
proﬁ t ratio declined 2.8 percentage points to 47.3%. Net
income per share, basic and diluted, came in at ¥246.21 and
¥246.20, respectively.

As for returning proﬁ ts to stockholders, Canon empha-
sizes the stable return of free cash ﬂ ow to stockholders, and
intends to pay a full-year dividend per share of ¥110, the
same amount as in the previous ﬁ scal year. Moreover, Canon
purchased a total of ¥100 billion in treasury stock during
ﬁ scal 2008.

Management Policies for Fiscal 2009
We have deﬁ ned 2009 as the year to prepare for making
our next leap forward. We will focus on surmounting the
adversity caused by the economic crisis and promote measures
and policies to improve the quality of management.

First, Canon will thoroughly strengthen its SCM. To
remain successful in the midst of major market changes, we
must continue to expeditiously launch conpetitive new
products. This cannot be achieved with only development
and product planning capabilities. We will build a higher
level of SCM through IT innovations that consolidate infor-
mation on everything from development through sales, as
well as through pull production, or the timely manufacture
of products to meet the exact level of demand.

Canon will promote a two-pronged production strategy

of further developing cost-reducing technologies and build-
ing a globally optimized production system based on local-
ized production.
With respect to the development of cost-reducing
technologies, the Company will work to expand the scope of
automation with the goal of establishing fully automated
production systems. In addition to the assembly of toner and
inkjet cartridges, We will continue to promote automation,
even in the product body assembly process. We are develop-
ing intelligent robots that can carry out highly precise and

sophisticated actions that will enable them to perform more
complex assembly work.

Canon promotes the in-house production of parts as a
strategy for innovation and increasing proﬁ tability. In-house
production leads to the accumulation of technological know-
how as well as higher quality and lower costs. In 2008, the
Company raised the ratio of in-house production of key
parts, such as electrophotographic and optical parts, as well
as metal molds.

Canon’s globally optimized production system is a new

production strategy that comprehensively considers such
factors as consumer markets, employment conditions and
transportation costs. Canon Virginia, Inc. in the United States
has initiated the construction of a new plant in which we will
build an integrated system that manufactures, sells, recovers
and recycles toner cartridges.

In order to launch businesses in a timely manner ahead
of the market, it is essential that Canon possess the techno-
logical capacity to develop technologies that will serve as
seeds for promising future businesses. As a measure to
strengthen the R&D system, in 2009 Canon established its
Corporate R&D Headquarters. Along with the appointment
of Dr. Toshiaki Ikoma as Executive Vice President and Chief
Technical Ofﬁ cer, Canon has taken steps to consolidate its
R&D Divisions and will fortify upstream technological re-
search and speed up the promotion of new domains. As a
result, we will achieve greater efﬁ ciency through the selec-
tion and concentration of research themes, and investments
in R&D will also contribute.

In addition, Canon is strengthening and increasing the
business autonomy of Group companies while fortifying its
global sales system.

Toward a Truly Excellent Global Company
Finally, in order to become a truly excellent global company
that sustains growth and continues to thrive for 100 or even
200 years, it is essential that we develop our management
resources. Canon will pass on its DNA—respect for human
dignity, an emphasis on technology, and an enterprising
spirit—to the next generation of managers and implement
practical human resource development training that will also

apply to its executive ofﬁ cer system. Canon will also redouble
its efforts to contribute to society. The presence of a truly
excellent global company must be welcome—even in ﬁ elds
outside of its direct business activities. Therefore, we will
fulﬁ ll our social responsibilities as a good corporate citizen.
One of those responsibilities is that of striking an opti-
mal balance between business operations and environmental
conservation. While Canon reexamines its business processes
and thoroughly eliminates waste that affects the environment,
the Company will enhance the environmental performance
of its products and continuously innovate in a wide range of
ﬁ elds, including materials and design. In addition, as a global
company, Canon established the Canon Institute for Global
Studies and the Canon Foundation in 2008 with the goal of
contributing to the global community. These institutions
analyze important issues pertaining to the world’s future,
disseminate information, and broadly support groups and
individuals involved in academic research, including in science
and technology areas, as well as cultural research, business
and education in the areas of technology.

The economic crisis has had a major impact throughout the
world and a great many uncertainties lie ahead. Neverthe-
less, guided by the strategies of Phase III of our Excellent
Global Corporation Plan, Canon will make a shift back to
achieving increased revenue and earnings, speciﬁ cally, net
sales of ¥3,700 billion or more and net income of ¥150
billion or more by ﬁ scal 2010, the ﬁ nal year of Phase III.
Thereafter in the three-year period to ﬁ scal 2012, the
Company will work diligently toward building a corporate
structure that is capable of achieving the level of sales and
proﬁ ts necessary to surpass its ﬁ scal 2008 performance
based on current foreign currency exchange rates.

I would like to thank everyone for their continued

understanding and support.

Chairman and CEO
Canon Inc.

MESSAGE FROM THE PRESIDENT

With speed and quality in mind, we will reorganize
the Company into a ﬁ rm structure that
completely eliminates inefﬁ ciencies

Priority Goals for Fiscal 2009
In 2009, we are charting a major change of course from
sound growth to improved management quality as we direct
our energies over the year toward preparing for the Compa-
ny’s next leap forward. Moreover, we have returned to the
original intent of our Excellent Global Corporation Plan to
achieve speed and quality with the realization that now is
the time to start everything anew. Speciﬁ cally, we will pur-
sue the following priority goals.

Our ﬁ rst priority goal is the timely launch of highly
competitive new products that excel in terms of functional-
ity, design, ease-of-use, reliability and cost performance. The
essence of competitiveness is innovation, beginning with the
enhancement of the Company’s key components. Further-
more, we consider “cross-media imaging” to be the guide-
line for innovation. Drawing on the Company’s shared digital
platforms of color management, wireless and user interface
technologies, cross-media imaging enables a high level of
collaboration among input and output devices and increases
product synergies and added value.

Our second priority goal is to lower the cost to sales ratio.

We believe that achieving sustainable growth into the future
requires the dedication of a considerable volume of resources to
R&D and, consequently, the Company must maintain steady
cash ﬂ ows. That is our main reason for working to establish
optimal SCM. For this purpose, at the end of January 2009,
Canon had already completed the introduction of a new,
highly effective production information system to 20 produc-
tion facilities, following its initial deployment at Oita Canon
Inc. in 2003. This system not only centralizes production
information for the entire Group, but also links technical

information from the development side and information
related to demand from sales and marketing.

In addition to this system, in the future we will move

forward with the establishment of an integrated system for
managing product quality information as well as a next-
generation logistics system that links information from the
marketplace directly to production while handling the ship-
ping, storage and transport of allocated products. We are
carrying out innovation initiatives, including our pull produc-
tion system, which allows us to efﬁ ciently respond to demand
ﬂ uctuations. By unifying all the information through IT re-
forms, Canon will further improve its management efﬁ ciency.
The main advantage realized by centralizing informa-
tion through these IT reforms is the ability to make progress
in all business processes at the same time. Fully implement-
ed, this unparalleled system will enable such results as
timing the completion of product design to coincide with
the completion of production equipment design, keeping
inventories of goods in transit only and entirely eliminating
the need for warehouses. The Company is determined to
ultimately realize such a system of centralized information.
Closely connected with these activities is our third

priority goal of carrying out sweeping reforms to further
raise quality. Problems with quality can cause considerable
damage to a brand image and lead to a loss of public trust.
Moreover, lack of quality during product design results in
wasted materials and energy. With this in mind, the Com-
pany has established new rules covering all product commer-
cialization processes. In the event that any problem should
arise, we will strictly adhere to the basic quality control
principle of diligently facing and working to resolve it. This

approach will enable us to improve product quality.

Our fourth priority goal is to cultivate the Company’s
core businesses of the future. Canon is making steady progress
in its development of displays, including organic light-emit-
ting diode (OLED) displays and surface-conduction electron-
emitter displays (SEDs). Furthermore, along with establishing
device and process technologies for displays, we are bolster-
ing our research and development efforts for the Company’s
medical equipment.

Our ﬁ nal priority goal is to strengthen the Group’s

environmental management. Solving environmental prob-
lems requires a fundamental reexamination of existing tech-
nology—that is the wellspring of innovation. This brings new
approaches to current technologies, and at the same time,
greatly increases the possibility of uncovering a path leading
to a paradigm shift in the industry. From this standpoint,

Canon will continue working diligently to reduce environ-
mental burdens with an eye to developing beneﬁ cial environ-
mental technologies and thoroughly eliminating waste.
We expect to face many hurdles in 2009 given the
extent of the global economic crisis. Undaunted by the
challenges ahead, the Group is unified in its commitment
to pursuing speed and quality in all of its activities and to
further improve its business structure by eliminating any
inefficiencies.

Tsuneji Uchida
President and COO
Canon Inc.

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

Photo:
The large-format imagePROGRAF inkjet printers
have been adopted by the School of the Art Insti-
tute of Chicago, earning high praise for combining
professional-level photographic image quality and
outstanding print speed.

EXCELLENT GLOBAL CORPORATION
PLAN—PHASE III

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

Canon will improve management quality
in preparation for the next stage of growth

In the face of an unprecedented global economic crisis, 2008 was a turbulent year of world
economic collapse. Taking these conditions into account, Canon responded decisively and
signiﬁ cantly changed the course of its Excellent Global Corporation Plan from sound growth
to improved management quality.
Having reconsidered our targets for ﬁ scal 2010, we are aiming for net sales of ¥3,700
billion or more and net income of ¥150 billion or more. Over the three years through ﬁ scal
2012, our objective is to establish a business structure that is capable of achieving the level
of sales and proﬁ ts necessary to surpass our ﬁ scal 2008 performance based on current
foreign currency exchange rates and to attain our original goal of joining the global top 100
companies in terms of key performance indicators.

In 2009, Canon will undertake exhaustive efforts aimed at fully realizing SCM that eliminates
all inefﬁ cient processes. The year will be a time to continue with steady investment in the devel-
opment of high-value-added products while aggressively preparing for the next wave of growth.

Excellent Global Corporation Plan
In 1996, Canon kicked off its medium- and long-term Excellent Global Corporation Plan, which is divided into a series of ﬁ ve-

year terms with distinct strategies and targets under a single overarching vision: “In accordance with the philosophy of kyosei,

Canon will continue contributing to society through technological innovation, aiming to be a corporation worthy of admira-

tion and respect worldwide.”

Phase I—Strengthening Financial Health

In Phase I of the Excellent Global Corporation Plan, Canon set out to strengthen its ﬁ nancial health with reforms in all aspects

of its business. The Company made all-out efforts to establish the policies of “total optimization” and “focus on proﬁ t” while

carrying out the selection and concentration of business areas.

Phase II—Becoming No. 1 in Core Businesses

Having solidiﬁ ed its ﬁ nancial foundation in Phase I, Canon launched Phase II with the goal of becoming No. 1 globally in all its

major areas of business. Placing strong emphasis on product competitiveness, the Company captured the top global market

share for many of its core products. Sales and income grew steadily each year.

5 KEY STRATEGIES

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

2. Expanding business operations through

diversiﬁ cation

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

(cid:129) Financial Times Global 500

(March 31, 2008 issue)
Market value ranking: 110
(9th in the Technology Hardware & Equipment Category)

(cid:129) FORTUNE Global 500

(July 21, 2008 issue)
Revenues ranking: 189
(5th in the Computers, Ofﬁ ce Equipment category)
Proﬁ ts ranking: 126
(5th in the Computers, Ofﬁ ce Equipment category)

(cid:129) BusinessWeek

“Best Global Brands” of 2008
(September 29, 2008 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

leveraging its Multifunction Embedded
Application Platform (MEAP), which
allows the customization of networked
multifunctional devices (MFDs). In 2008,
we surpassed the 100,000 mark for
cumulative MEAP application licenses.
Aiming to press ahead in 2009, the
Company has further stepped up the
development of its next-generation
platforms for multifunction products
with greatly enhanced systems and
operability.

In exposure equipment for LCDs,
Canon maintained its No. 1 position in
2008, enhancing its sales of the MPAsp-
H700 LCD exposure system for eighth-
generation panels.

Looking ahead, an important
element for achieving the overwhelm-
ing No. 1 position in the market is
cross-media imaging, a concept that
realizes high-level synergies among
Canon’s input and output products as
a means to meet the needs of our
information society.

EF lenses for EOS cameras enjoy wholehearted popularity as the telephoto lenses of choice for
sports media on site at international soccer matches and other sporting events around the world.

facility in Kawasaki, Japan, to develop
and produce in-house semiconductor
devices, including Complementary
Metal Oxide Semiconductor (CMOS)
sensors, which are key components of
digital cameras.
Also in cameras, Canon strength-
ened its lineups and released digital
single lens reﬂ ex (SLR) cameras for
advanced amateurs. In addition, the
Company worked to improve the perfor-
mance and processing power of its
DigitalImagingIC (DIGIC) imaging pro-
cessors, another key component of
digital cameras.

In ofﬁ ce imaging products, Canon is

Despite severe conditions in the global
economy, in 2008 Canon held its No. 1
position for core products, including
digital cameras, laser beam printers
(LBPs), exposure equipment for LCDs
and broadcasting lenses. To maintain
the top position, the Company will
work to differentiate its product
technologies and release new prod-
ucts to the marketplace with oppor-
tune timing.
Canon is strengthening the in-
house development of its key compo-
nents as a means to differentiate and
accumulate its technologies, increase
product quality and reduce costs. In
2008, the Company completed a new

strengthening its solutions business by

In-house production of CMOS sensors

2. Expanding business operations through diversiﬁ cation

Canon is accelerating the development of OLED
displays for incorporation into its products.

Canon pursues business diversiﬁ cation to
ensure future business growth. We are
currently placing priority on building up the
display business, which is a key of cross-
media imaging. In 2008, we acquired
a capital stake in Hitachi Displays, Ltd., and
strengthened operations centered on OLED
displays and small- to medium-size LCDs.
While focusing on efforts to further
enhance the basic properties of the Com-
pany’s unique SEDs, we are placing addi-
tional weight on the establishment of
technologies for mass production.
Canon is also bolstering its digital
radiography business with the develop-
ment of digital radiography systems
capable of viewing dynamic images and
capturing static X-ray images, which will
greatly improve diagnostic accuracy.
Strengthening its position in the
print-on-demand (POD) market, which it
entered in 2007, Canon released several
new products in the imagePRESS lineup
in 2008. We will continue to enhance

our POD lineups to consolidate our
position in this market.
Canon is also promoting the Group’s
expansion of independent businesses. In
2008, Canon Finetech Inc., which devel-
ops and manufactures ofﬁ ce MFDs and
their peripherals, increased its equity in
Nisca Corporation, a Japanese developer
and manufacturer of peripheral devices
for ofﬁ ce machines, with the aim of
enabling the further expansion of the
ofﬁ ce machine and peripheral business as
well as accelerating the development of
differentiated products. To this end, Nisca
was included in Canon’s scope of consoli-
dation as a wholly owned subsidiary.
As a part of its business diversiﬁ ca-
tion efforts, Canon U.S.A., Inc. is en-
deavoring to commercialize molecular

diagnostic equipment for the U.S. market,
where gene diagnosis is a highly ad-
vanced and rapidly growing ﬁ eld, through
the application of its imaging and high-
precision processing technologies.
Canon has been focusing on its solu-
tions business to provide optimal solutions
to networked printing environments in
ofﬁ ces. In particular, we are putting em-
phasis on the area of security, applying our
original MEAP to meet the characteristics
of each region. In 2008, we acquired
NEWCAL Industries, a California-based
reseller of document and print solutions, to
expand our solution business in the United
States. In addition, Canon Marketing Japan
Inc. established Canon IT Solutions Inc.
with an eye to cultivating IT solutions as a
core business.

The popular digital color press imagePRESS contributes to greater printing efﬁ ciency in the POD market.
The image in the print sample was designed by Europe Quality & Style Inc. N.Y.

EXCELLENT GLOBAL CORPORATION PLAN—PHASE III

3. Identifying new business domains and accumulating required

technologies

Canon and Japan’s Kyoto University have teamed up to promote R&D of high sensitivity magnetic sensors.

Canon pursues next-generation business
domains with due consideration given to
such factors as strong prospects for
market growth, technological innovation
potential, consistency with the Compa-
ny’s core capabilities and the likelihood
of the business positively impacting the
Company’s prospects for sound growth.
We have identiﬁ ed medical imaging
as an important new business domain.
As a key initiative, we have launched the
Canon-Kyoto University Joint Research
Project together with Kyoto University in
Japan. With a commitment to developing
next-generation diagnostic instruments

capable of detecting disease at the
earliest stages, the Company is applying
its sensing and imaging technologies to
research covering a broad range of areas,
including new technologies and clinical
applications, while continuing to carry
out collaborative research.

Industrial robotics is another next-
generation business domain for Canon.
The Company has already used robots
to assemble toner and inkjet cartridges
and is now working on developing
intelligent robots that can carry out
an even higher level of precise and
sophisticated actions.

In other promising ﬁ elds, Canon is

promoting R&D activities in such
leading-edge technologies as nanotech-
nology and biotechnology.

Collaborative research into semiconductor devices
for medical imaging with Stanford University

4. Establishing new production systems to sustain

international competitiveness

Canon is aggressively accumulating
valuable technologies toward the estab-
lishment of fully automated production
systems that consistently realize high
quality and improved productivity.

In 2008, Canon improved the precision

and efﬁ ciency of its automated toner
cartridge production with the installation
of new machinery at Oita Canon Materials
Inc. The machinery is based on a concept
of Canon automated production wherein
the entire production process is optimized
through the integration of development,
manufacturing and engineering technologies.

To decrease the environmental
burden associated with transportation
and to ﬂ exibly meet changes in global
demand, Canon has begun a shift to
localized production. In the United
States, we are carrying out plans for
large-scale expansion at Canon Virginia.
The expansion will include a new
toner cartridge manufacturing plant
that will introduce high-speed automat-
ed production systems, while also
making feasible the efﬁ cient transport of
Canon products.

Canon is also taking further steps

toward automated production by
introducing automated machinery into
sections of the assembly of inkjet print-
ers and LBPs.

Development of automation technology to
ensure a fully automated production system

5. Nurturing truly autonomous individuals and promoting

effective corporate reforms

For Canon to become a company that
ﬂ ourishes far into the future, it is vital
that the Company’s corporate culture is
passed down to new generations of
employees. Therefore, we further
strengthen the cultivation of manage-
ment and general employees to pass on
Canon’s accumulated corporate DNA—
respect for human dignity, an emphasis
on technology, and an enterprising spirit.
Speciﬁ cally, Canon carries out various
kinds of management training for
managers and communicates the Canon
corporate DNA. The Company’s executive
ofﬁ cer system, introduced in 2008,
provides opportunities for management

to directly put their ideas into practice.
In addition to corporate culture, we
recognize the necessity of passing down
competency in and knowledge of the
Company’s highly advanced technolo-
gies to future employees. From 2009,
Canon will commence activities at Oita
Manufacturing Training Center, Japan.
Equipped with various manufacturing
equipment, the center aims to nurture,
through technical skills training, new
generations of employees that will lead
the manufacturing industry worldwide in
the future.

To realize our vision of being “a
corporation worthy of admiration and

respect worldwide,” we recognize that
compliance must be thorough and
rooted in all Group activities. With this in
mind, we work continuously to strength-
en compliance activities across the Group.

Oita Manufacturing Training Center strengthens
the technical skills of Canon Group employees.

CORPORATE GOVERNANCE

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

Governance Structure (as of December 31, 2008)

Canon Inc.

General Meeting of Stockholders

Board of Directors

Chairman & CEO
President & COO
Executive Vice President & CFO

Subsidiaries &
Subsidiaries &
Affiliates
Affiliates

Executive Committee

Corporate Audit Center

Headquarters Administrative Divisions

Product Group Operations

Board of Corporate Auditors

Management Strategy Committee

New Business Development Committee

R&D Strategy Committee

Corporate Ethics and Compliance Committee

Marketing Subsidiaries & Affiliates

Internal Control Committee

Manufacturing Subsidiaries & Affiliates

R&D Subsidiaries & Affiliates

Disclosure Committee

Global Legal Affairs Coordination Committee

Directors & Corporate Auditors (as of December 31, 2008)

Chairman & CEO

Fujio Mitarai

President & COO

Tsuneji Uchida

Executive Vice President & CFO

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

Akiyoshi Moroe
Group Executive, External Relations Headquarters
Group Executive, General Affairs Headquarters

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

Managing Directors

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

Yasuo Mitsuhashi
Chief Executive, Peripheral Products Operations

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

Masahiro Osawa
Group Executive, Finance & Accounting Headquarters

Shigeyuki Matsumoto
Group Executive, Device Technology Development
Headquarters
Deputy Group Executive, Core Technology Development
Headquarters

Katsuichi Shimizu
Chief Executive, Inkjet Products Operations

Ryoichi Bamba
President, Canon Europa N.V.
President & CEO, Canon Europe Ltd.

Toshio Homma
Chief Executive, L Printer Products Operations

Masaki Nakaoka
Chief Executive, Ofﬁ ce Imaging Products Operations

Haruhisa Honda
Group Executive, Production Engineering Headquarters

Directors

Shunichi Uzawa
Executive Vice President, Canon U.S.A., Inc.

Toshiyuki Komatsu
Deputy Group Executive, Corporate Planning Development
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

Keijiro Yamazaki
Kunihiro Nagata
(Outside)
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 addressing key issues.
All of these bodies work together to ensure the appropriate man-
agement of the Group through an independent internal auditing
structure centered on the Corporate Audit Center and an informa-
tion disclosure system for management activities.

Board of Directors
Important business matters are discussed and ratiﬁ ed during
meetings of the Board of Directors and Executive Committee,
which are attended, in principle, by all directors. As of December
31, 2008, the Board consisted of 25 directors. In order to realize a
more streamlined and efﬁ cient management decision-making
process, Canon has not adopted an outside director system. The
main reason why directors are chosen from among Canon person-
nel is that they have followed the same codes of behavior and have
been subject to close scrutiny within the Group over many years.

Executive Ofﬁ cer System
On April 1, 2008, Canon adopted an executive ofﬁ cer system.
Taking into consideration the growth in the scope of its
scale of operations, Canon recognizes the need to bolster its
management execution structure. The Company is endeavoring
to realize more ﬂ exible and efﬁ cient management operations by
maintaining an appropriately sized organization of directors and
promoting capable human resources with accumulated execu-
tive knowledge across speciﬁ c business areas. To this end,
Canon will gradually increase the number of executive ofﬁ cers
and further solidify its management systems.

Executive ofﬁ cers are appointed and discharged by the
Board of Directors and have a term of ofﬁ ce of one year. The
number of executive ofﬁ cers was 10 as of April, 2009.

Auditing System
The Company has ﬁ ve corporate auditors, including three outside
auditors who have no personal or business afﬁ liations with Canon.
Auditors’ duties include attending meetings of the Board of Direc-
tors, Executive Committee and various management committees,
listening to business reports from directors, carefully examining

Compliance training via e-learning is conducted for employees at
Canon U.S.A.

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, with 58 members as of December 31, 2008,
monitors compliance, risk management and internal control
systems and provides assessments and recommendations.

Internal Control Committee
The Internal Control Committee, established in 2004, ensures the
reliability of ﬁ nancial reporting. It also conducts reviews of the
Group’s internal controls in order to gauge the true efﬁ ciency 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 inter-
nal control systems and implement all appropriate measures.
In order to strengthen internal controls, Canon conducts
comprehensive evaluations of internal controls across areas that
include accounting, management oversight, legal compliance, IT
systems and the promotion of corporate ethics. As of December
31, 2008, internal control over ﬁ nancial reporting has been as-
sessed as effective by the management and the independent
registered public accounting ﬁ rm. (Please refer to pages 95 and 97)

Other Corporate Governance Committees
Canon’s management committees are integral to its overall
governance system. Key among these are the Corporate Ethics
and Compliance Committee, which discusses and approves
compliance and corporate ethics policies, and the Global Legal
Affairs Coordination Committee, which analyzes trends in legal
developments and works to raise the level of employee
awareness regarding important legal issues facing the Group.

CORPORATE GOVERNANCE

Compliance
Shortly after its founding, Canon established 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 understanding one’s
situation and role in it. These principles remain the basis for em-
ployee education and provide the platform for the Canon
Group Code of Conduct.
Canon recognizes personal information as an important
form of information asset and does its utmost to protect it in
order to fulﬁ ll its social responsibilities. With the aim of keeping
its employees informed and aware, the Company conducts e-
learning-based personal information protection education
programs on an annual basis.

Disclosure
Canon makes every effort to disclose information on its man-
agement and business strategies as well as its performance
results to all stakeholders in an accurate, fair and timely man-
ner. To this end, Canon holds regular brieﬁ ngs and posts the
latest information on its Website together with a broad range
of disclosure materials. Canon has established its own Disclo-
sure Guidelines in addition to a Disclosure Committee that
serves to ensure strict compliance with disclosure regulations
prescribed by stock exchanges.
With 44.2% of Canon’s shares owned by non-Japanese
investors as of December 31, 2008, the Group goes to great
lengths to promote close relations with non-Japanese institu-
tional investors, maintaining investor relations bases in Europe
and the United States and working to ensure that investors
inside and outside Japan have access to the same information.
Canon will continue to promote transparency and understand-
ing of its activities by practicing thoroughgoing disclosure.

Signiﬁ cant Differences in Corporate Governance Prac-
tices 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 compa-
nies listed on the NYSE must comply with certain corporate
governance standards. 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 practices stipulated under the Manual. In
such circumstances, the foreign private issuer is required to
disclose the signiﬁ cant differences 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 companies with a board of corporate auditors
such as the Company, to appoint independent directors as
members of the board of directors. The NYSE Corporate
Governance Rules require non-management 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 independent
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
compensation 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 manage-
ment and reporting the results of these activities to the share-
holders 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 committee, each composed entirely of indepen-
dent directors, the Corporation Law does not require companies
to have speciﬁ ed committees, including those that are respon-
sible for director nomination, corporate governance and execu-
tive compensation.

The Company’s board of directors nominates candidates
for directorship and submits a proposal at the general meet-
ing 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 provide an amount or calculation method,
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
compensation 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 corpo-
rate auditors shall be exempt from the audit committee require-
ments, 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
ﬁ ve 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 corpo-
rate auditors prepares auditors’ reports and may veto a proposal
for the nomination 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 ofﬁ cer, manager, or employee of the Com-
pany or its subsidiaries. The Company’s current corporate
auditor system meets these requirements. Among the ﬁ ve
members on the Company’s board of auditors, three are
outside corporate auditors. The qualiﬁ cations 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 sharehold-
ers 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

Photo:
A Canon Hope elementary school, located in
Xinglong, Hebei Province, northeast of Beijing,
completed in November 2008. Canon supported the
construction of schools including this school in
China in 2008.

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

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

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

CORPORATE SOCIAL RESPONSIBILITY .... 28

RESEARCH & DEVELOPMENT

Canon nurtures its technological strengths to ensure its future growth
while developing and introducing new products to markets in a timely manner.

Bolstering Product Competitiveness
Canon continuously strengthens the development
of its key components and devices to differentiate
its products and further strengthen product com-
petitiveness. In 2008, Canon released the DIGIC 4
imaging processor, which boasts even faster pro-
cessing power for digital cameras and improved
noise reduction. Another highlight of the year
was the Company’s development of Liquid Crystal
on Silicon (LCOS) reﬂ ective LCD panels, ideal for
LCD projectors, which project high-resolution
images free of lattice-like grid patterns. Canon has
developed in-house all of the main parts for its
LCD projectors.
Canon is promoting cross-media imaging that
enables advanced synergies among input devices like
cameras or camcorders and output devices like dis-
plays or printers. The achievement of such outstanding
product collaboration is attributable to Canon’s long
experience in developing leading-edge digital platform
technologies shared across the Company, such as the
high-accuracy color management system Kyuanos,
system integration and telecommunication technolo-
gies. Canon will continue to enhance these digital
platform technologies as well as individual products to
lead the digital imaging world.

Raising Development Efﬁ ciency
To speed up product development and reduce costs,
Canon is constantly working to improve the efﬁ ciency

DIGIC 4 imaging processor offers exceptionally fast signal
processing for Canon’s digital cameras.

Canon utilizes
3D-CAD for the
development of
ofﬁ ce network MFDs.

* Source:

U.S. Patent and Trademark
Ofﬁ ce; Calculated based
upon publicly disclosed
weekly totals.

R&D Expenditure and Patents
Despite harsh market conditions in 2008, Canon contin-
ued to allocate a signiﬁ cant percentage of net sales
to R&D. R&D expenditure amounted to ¥374.0 billion,
and the ratio to net sales rose from 8.2% in ﬁ scal
2007 to 9.1% in ﬁ scal 2008. By business segment,
¥123.5 billion, or 33.0% of the total expenditure, was
allocated to Business Machines; ¥45.5 billion, or
12.2%, to Cameras; ¥50.8 billion, or 13.6%, to
Optical and Other Products; and ¥154.2 billion, or
41.2%, to basic R&D.
Canon’s commitment to R&D has also contrib-
uted to its leading position in intellectual property.
In 2008, Canon was granted 2,114* patents in the
United States, marking the 17th consecutive year it
has placed among the top three.
Cognizant that R&D is crucial to the next stage
of growth, Canon will continue to place high
priority on R&D expenditure.

Strengthening Our R&D Infrastructure
In January 2009, Canon improved its R&D manage-
ment system by consolidating several research divisions
into one headquarters to enhance efﬁ ciency and speed.
We are also strengthening cooperation between product
operations and R&D divisions while bolstering strategic
investments and collaborative partnerships in an effort
to further enhance technology development capabilities.

of its development processes. In 2008, we contin-
ued to promote our integrated IT systems based on
a uniﬁ ed 3D-CAD system that facilitates the sharing
of design information and links design through
production to strengthen concurrent processes.
The Company also started new initiatives to
reduce failure costs that stem from design changes
and to completely eliminate the need for proto-
types. We will pursue innovations of our current
virtual prototyping technologies, which include
Digital Mockup and Computer-Aided Engineering.
Efforts to improve product development quality

were boosted by the 2008 completion of the

Canon is actively advancing R&D on materials technolo-
gies, including anti-reﬂ ection coatings for lenses.

state-of-the-art Tamagawa measurement and testing
facility, which can test for industry accreditation speciﬁ -
cations such as noise and radio frequencies and ﬂ ame
retardance. Located in Kawasaki, Japan, the laboratory
will upgrade the Group’s measurement precision
capabilities and compliance with public standards.

Exploring Next-Generation Technologies
Canon is strengthening its basic research in do-
mains that offer considerable future potential. For
materials technology in particular, the Company
has been pursuing extensive research on numerous
materials, including nanomaterials and various
semiconductor materials, for the development of
new devices and components. Canon will promote
research into its capabilities in these areas and
develop technologies that trigger paradigm shifts.
To keep pace with global technology trends,

Canon collaborates in advanced research with
leading universities and institutes worldwide. In
2008, Canon announced plans for collaborative
research with the University of Arizona’s College of
Optical Sciences focusing on a broad range of
technologies, including optical materials and
measurement and medical-related applications.

Measuring electro-
magnetic waves
emitted by printers:
the Tamagawa
measurement and
testing facility
contributes to
enhancing the
efﬁ ciency of testing
operations and
raising the level of
precision measure-
ment technology.

PRODUCTION

Canon is raising the efﬁ ciency and quality of its production system to thoroughly
improve supply chain management.

Cell production of
interchangeable
lenses for SLR
cameras at Oita
Canon, Japan

Improving the Production System Based on
Supply Chain Management
Canon has been working to improve its SCM
through various reform activities to meet market
demands, supply products to the market in a timely
manner and eliminate inefﬁ cient operations. We
have developed a Uniﬁ ed Production Information
System to standardize these reform activities and
establish them throughout the Group. Initially intro-
duced in 2003, the system has been implemented
at 20 Group production sites as of January 31,
2009. The system integrates all production infor-
mation and immediately links to information on
design changes and ﬂ uctuations in market trends.
Owing to dramatic economic shifts, the Com-
pany was compelled to implement major reforms to

its production strategies. We worked to increase the
accuracy of our SCM to precisely respond to market
demands while reducing stocks. We continue to adjust
production volume through our ﬂ exible production

At Canon’s new Kawasaki Ofﬁ ce, CMOS sensor production
and automated technology development are conducted.

system based on cell production and just-in-time
production while endeavoring to reduce material costs
through the optimum procurement of materials.
Furthermore, Canon is now revamping its logistics
network for global production and distribution.
In another move, the Company began to
implement a policy of localized production. To
address such factors as the rising costs for transpor-
tation and the reduction of environmental burdens
related to transportation, the Company will carry
out manufacturing at locations that can ensure the
highest quality.

These initiatives are initially being realized with
the new establishment of a toner cartridge plant at
Canon Virginia. Canon’s operations in the United
States will come of age, encompassing all processes
from production to sales, collection and recycling.
Looking forward, Canon is considering the imple-
mentation of localized production in Europe with
an eye to optimizing production capacity in line
with global market demands.

Promoting In-House Production
Canon pursues in-house production as a strategy
for accumulating its technology and know-how,
thereby enabling the Company to differentiate its
products and raise product quality.

In 2008, the Company promoted the in-house
production of electrophotographic and optical key
parts, as well as metal molds. The Company also
established a new facility for the development and
in-house production of semiconductor devices,
including CMOS sensors, at the Kawasaki Ofﬁ ce in
Kanagawa, Japan.

Canon Workforce Development Center in Virginia. Canon
collaborates with a local college to conduct technical training.

Cell production for
inkjet printers at
Canon Vietnam Co.,
Ltd. In 2008, the new
Tien-Son plant
started operation.

In February 2008, Canon entered into a compre-

hensive alliance with Hitachi, Ltd., and Panasonic
Corporation (then Matsushita Electric Industrial
Co., Ltd.). The Company acquired a 24.9% stake in
Hitachi Displays, a Hitachi subsidiary that manufac-
tures small- and medium-sized LCD panels. With
this acquisition, we are able to undertake the in-
house production of LCD panels as key compo-
nents for Canon products.

Full Automation to Maintain International
Competitiveness
Canon pursues fully automated production as
a means of boosting productivity. In 2008, new
automation systems developed for toner cartridge
production by Canon and Canon Machinery Inc.
were installed and put into operation. Canon will
start automated production of toner cartridges in
Canon Virginia at the end of 2009.
Canon is working toward expanding the scope
of automation to other products. We have already
started automated production for inkjet cartridges
and expanded its operations in 2008. As a further
step in this direction, the Company began introduc-
ing automated machinery to certain sections of its
assembly cells for inkjet printers and LBPs in 2008.

In addition, to handle brisk demand for automated

machinery, Canon Machinery built a plant in Shiga,
Japan, in 2008, and expanded production with the
aims of increasing productivity and reducing costs.

SALES & MARKETING

Canon continues to bolster its sales and marketing activities in emerging economies
as it works toward early market dominance.

targeting a wide variety of markets, enhance sales
activities that highlight Canon’s strengths in total
imaging solutions that employ both input and
output products.

Europe
In January 2009, Canon Europa N.V., in the Nether-
lands, the operational headquarters for the Europe,
Middle East and Africa region, began the process
of transferring a number of strategic roles to
Canon Europe Ltd. in the United Kingdom.

Sales in Europe fell 10.5% year on year to
¥1,341.4 billion, representing 32.8% of Canon’s
consolidated net sales.

Economic conditions in Europe rapidly deceler-
ated as a result of such factors as ﬁ nancial instabil-
ity triggered by the subprime loan crisis and stag-
nant consumer spending in response to rising
prices. By region, year-on-year sales were down in
most countries of Western Europe, including the
United Kingdom, Germany and France. In Russia,
although sales were strong in the ﬁ rst half of the
ﬁ scal year, declining sales particularly in the fourth
quarter resulted in an overall drop in sales year on
year. On the other hand, sales in the Middle East
increased compared with the previous ﬁ scal year.
In 2008, we established Canon Eurasia A.S. in
Turkey to access the Turkish and Israeli markets and
began setting up a new locally based management
organization in Russia to support business

Canon U.S.A. is augmenting its marketing network by
further bolstering its direct sales capabilities.

Canon Communica-
tion Space Shanghai
was established to
show the latest
products and pro-
mote face-to-face
communication with
customers in China.

The Americas
Canon U.S.A., Inc. is the Company’s regional market-
ing headquarters in North, Central and South America.
As a whole, sales in the Americas amounted to
¥1,154.6 billion in ﬁ scal 2008, down 13.6% from
the previous year. This represented 28.2% of
Canon’s consolidated net sales.

By region, North America was hit hard by the

ﬁ nancial crisis, resulting in a decrease in sales
compared with the previous ﬁ scal year. In Latin
America, however, although the effects of the
economic recession were felt from autumn, full-
year sales were up year on year.

In the United States, we consolidated three
regional business solutions companies into the new
Canon Business Solutions, Inc. and continued to
bolster our direct sales and service network. In the
POD market, we more than doubled sales of the
imagePRESS C6000 and C7000VP series.

In Latin America, sales rose and Canon continued

to reinforce its sales and marketing infrastructure to
keep pace with regional growth, particularly for sales
and marketing subsidiaries in Argentina, Brazil and
Chile, while taking into account currency ﬂ uctuations
and risk management in each country.

Looking forward, we will intensify sales

promotions that cut across Company divisions and,

development through improved customer service
and the provision of business and consumer sup-
port. In addition, we intend to boost investment in
other emerging markets in the region, including
the Ukraine and Kazakhstan.

Asia and Oceania
Canon (China) Co., Ltd. serves as the regional head-
quarters for sales and marketing functions in Asia,
excluding Japan and Korea; Canon Australia Pty. Ltd.
for Oceania; and Canon Marketing Japan Inc. for Japan.
In Japan, sales dropped 8.4% from the previous
ﬁ scal year to ¥868.3 billion, representing 21.2% of
Canon’s consolidated net sales.

EOS Discovery seminars help spread the joy of photography
among amateur enthusiasts and semi-pro photographers.

Aiming to develop IT solutions into a core
business, Canon Marketing Japan reorganized
Group operations and established Canon IT Solu-
tions Inc., which will be merged with Canon Net-
work Communications Inc. in 2009.

In Asia and Oceania, sales climbed 4.5% year
on year to ¥729.9 billion, accounting for 17.8% of
consolidated net sales.
Canon continued to step up sales promotions
in countries and regions recording strong growth,
such as China, India and Vietnam. At the same
time, we emphasized the value of customer contact
points and set up new showrooms in cities such as
Shanghai and Mumbai.

Throughout Asia, we will continue to expand
contact points to improve after-sale service and call
centers in 2009. We will also implement sales and
marketing initiatives into the new business areas of
large-format printers, projectors and medical
equipment. In China, we will focus on expanding
business in second-tier cities and cultivating new
customer segments.

In Australia, Canon maintained strong market
shares across all consumer product categories while
strengthening its business solutions.

Over 500 Canon
imageRUNNERs have
been installed in
Fraport AG, the
operator of Frankfurt
Airport in Germany.

CORPORATE SOCIAL RESPONSIBILITY

Canon continues to contribute to the realization of a sustainable society by applying
technological innovations and reducing environmental burdens.

Environmentally Conscious Products
Canon continuously searches for new ways to
enhance its products to be more environmentally
conscious. In 2008, Canon and Toray Industries,
Inc., succeeded in jointly developing a bio-based
plastic—composed of more than 25% plant-
derived material—that achieves the world’s highest
level of ﬂ ame retardance for bio-based plastics.
Canon intends to use the bio-based plastic in
exterior plastic parts for its ofﬁ ce MFDs planned for
release in 2009.
Canon develops and applies energy-efﬁ cient
technologies that reduce power consumption for
its products while designing products and their
packaging to cut down on the amount of material
used. For example, power consumption for the
inkjet printer PIXMA MP630/MP638 was reduced
30% compared with the previous MP610 model.
Furthermore, package volume for the MP630/
MP638 was reduced 24% compared with the
MP610, thereby increasing load efﬁ ciency per
shipping container.

For the PowerShot E1 compact digital camera,
compared with the earlier PowerShot A560 model,
we reduced the volume of the packaging box by
48% and the number of pages in the manual
by 57% by including an additional manual in
electronic format.

Canon promotes modal shifts to reduce CO2 emissions
related to product transportation.

Canon U.S.A. held
the Canon Forest
Program, a nation-
wide promotional
campaign that plants
a tree for every 10
Canon environmen-
tally conscious
products registered
by customers. The
campaign achieved its
goal of 20,000 trees.

Canon’s Basic Approach to CSR
Canon’s corporate philosophy is kyosei, concisely
deﬁ ned as “Living and working together for the
common good.” The Company promotes the
practice of kyosei in its daily working operations
and through its numerous environmental conserva-
tion and social contribution activities all over the
world. Aiming to become a truly excellent global
corporation worthy of admiration and respect
worldwide, we are working toward creating a
sustainable society and environment with our
customers, stockholders, employees and the local
communities in which we operate.

Environmental Activities
Life Cycle Assessment Approach
Canon’s environmental approach begins from the
basic standpoint of life cycle assessment (LCA), a
method for reducing environmental burdens through-
out the entire product life cycle, from materials pro-
curement through production, transport and usage to
recycling. Even at the product design stage, we cut
waste by reducing the number of material prototypes
using digital mockups produced with 3D-CAD systems.
By pursuing technological innovations and streamlin-
ing operations, Canon aims to reduce environmental
burdens at every stage of the product life cycle.

Environmental Activities at Operational Sites
Canon practices thorough energy management
at its operational bases, where it has introduced
advanced energy-efficient equipment and de-
vices and makes every effort to cut greenhouse
gas emissions. Furthermore, the Company pro-
motes the reduction or elimination of harmful
chemical substances used in its production
processes and is achieving significant reductions
in the amount of resources used in these pro-
duction processes.
Canon has already achieved zero landfill
waste at all of its global manufacturing sites.
This goal was achieved in 2005 after the Com-
pany launched a zero landfill waste campaign
in 2001.

Contributing to Society
The following are a few examples of our longstand-
ing commitment to fulﬁ lling our corporate social
responsibility to assume a leading role as a good
corporate citizen.

The Canon Institute for Global Studies and the
Canon Foundation
At the end of 2008, we established both the Canon
Institute for Global Studies and the Canon Foundation
in Tokyo with the aim of contributing to the world’s
development. The former will assess world trends
from a global perspective as a political and economic
think tank, publishing research in the areas of macro-
economics, natural science, energy and the environ-
ment, and diplomacy and defense. The Canon
Foundation will support the activities of organizations
and individuals engaged in research, business and
education in the areas of science and technology as
well as cultural pursuits.

Canon Leadership Scholars Program
In its commitment to developing the business leaders
of tomorrow, Canon and Christopher Newport
University located in Virginia, the United States, where
Canon has a manufacturing company, created the
Canon Leadership Scholars Program. Each year begin-
ning in 2008, 25 students are awarded a scholarship
of $5,000 over four years for a total of $20,000, and
are offered opportunities to study abroad.

Canon strives to
reduce numerous
environmental
burdens at its
operational sites
through such meas-
ures as this rooftop
rainwater reuse
system installed at
Canon Belgium N.V./
S.A. that ﬁ lters
rainwater through
gravel on the roof.

Canon Hope Elementary Schools
Canon places a priority on providing educational
opportunities to nurture future generations. In
Dalian, China, the Company began supporting
“The Project Hope” in 1995, a program organized
by the China Youth Development Foundation for
supporting children who have difﬁ culty attending
school. Since then, Canon has funded the construc-
tion of schools and every year donates school
supplies and equipment such as liquid-crystal
projectors. In 2007, we extended the scope of
support activities to cover the entire country while
contributing to four more schools in 2008 and
2009. Canon employees donate to the project, and
the Company has actively promoted exchanges
with the schools, sending employee volunteers to
give lessons on digital cameras.

The Tsuzuri Project
Canon launched the Tsuzuri Project with Kyoto
Culture Association (NPO) in 2007 with the goal of
preserving and passing on important Japanese cultural
properties using advanced digital technologies. The
project employs Canon’s digital SLR cameras to photo-
graph historical artifacts and its large-format inkjet
printers to print out images. Skilled artisans can apply

Canon supports
research and educa-
tional activities at
Yellowstone National
Park by providing
equipment for use in
recording research
activities and the
digitization of the
park’s archives.

WWF Conservation Partner
Since becoming the ﬁ rst Conservation Partner of
WWF, the global wildlife conservation organization,
in 1998, Canon Europe has been supporting
various WWF activities in Europe, the Middle East
and Africa by providing them with equipment and
supplies as well as technical assistance. Canon
Europe helps WWF to digitize its superb image
collection and to make it readily available online to
its global network of WWF ofﬁ ces. There are
currently more than 16,000 images available in the
Photo Database.

Canon Europe has been the ﬁ rst Conservation Partner of the WWF since 1998.

traditional techniques to the prints to produce
works almost indistinguishable from the originals.
In 2008, Canon applied its own high-precision
color matching system to realize greatly shortened
production times and the faithful reproduction of
original colors. Between 2007 and March 2009,
replicas of 10 historic items were completed and
donated to associated temples and museums.

Nurturing Diverse Human Resources
To become a truly excellent global corporation,
Canon is committed to creating fair worker-man-
agement relations and using communication and
education to motivate each employee to continue
growing as an “excellent person.”
Canon nurtures human resources and actively
develops the abilities of its employees while provid-
ing various certiﬁ cation programs and recognizing
employee achievements. The Company also estab-
lishes and actively supports training centers
throughout the Group to raise the technical skills of
employees and contribute to the expansion of
employment opportunities in local communities.

In 2008, Canon began construction of the Oita

Manufacturing Training Center in Japan, to be

Reproduction of
Sesshu’s scroll,
Landscapes of the
Four Seasons: the
combination of
digital technologies
and traditional
techniques makes
possible the faithful
reproduction of
original works.

equipped with such manufacturing equipment as
grinding machines for lens processing, plastic-
molding machines and automation control equip-
ment. The Company also constructed the Canon
Workforce Development Center in Virginia, which
is equipped with top-of-the-line facilities to provide
technical skills training.
Oita Canon teamed up with a social welfare
corporation in Oita and established the joint
company Canon Wind Inc. to promote the employ-
ment of disabled people, especially those with
mental disabilities.

Established in 2008, Canon Wind is focusing efforts on
supporting people with disabilities.

PRODUCT GROUPS

Photo:
A camera shop
in Prague,
Czech Republic.
Canon is a popular
brand in Eastern
Europe.

Business Machines
OFFICE IMAGING PRODUCTS ... 34

Business Machines
COMPUTER PERIPHERALS ... 36

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

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

Business Machines
BUSINESS INFORMATION PRODUCTS

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

CAMERAS ... 38

OPTICAL AND OTHER PRODUCTS ... 40

(cid:129) Digital single lens reﬂ ex (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) Large format printers
(cid:129) Components, etc.

PRODUCT GROUPS

OFFICE IMAGING PRODUCTS
“ Canon will release new product lineups that
offer highly advanced platforms in ofﬁ ce imaging.”

Masaki Nakaoka

Chief Executive, Ofﬁ ce Imaging Products Operations

27.3%

Canon’s Ofﬁ ce Imaging Products busi-
ness comprises four main categories:
ofﬁ ce network multifunction devices
(MFDs), MFDs for SOHOs, document
solutions and commercial printers.
In ofﬁ ce network MFDs, market
demand was sluggish in 2008 owing to
economic uncertainty. Nevertheless,
Canon enjoyed increased unit sales of
color models, particularly in the low-end
range. The SOHO market remained
steady overall, but sales of high-end
models declined. In document solutions,
the Company strengthened its proposal-
style solutions that use its MEAP, which
enables the customization of MFDs
and the development of third-party

applications. Numerous applications based
on this platform have been released,
including smart card authentication for
business security. In commercial printers,
shipments of the highly acclaimed
imagePRESS C7000VP were strong
amidst favorable market conditions.
Canon has further strengthened its
direct sales structure in the United
States, which has seen successive reor-
ganizations of sales channels in the same
industry. In Europe, sales of color low-end
models were favorable. In Asia, growth in
emerging economies propelled unit sales.
In the mature Japanese market, unit sales
rose slightly owing to diligent efforts to
promote sales, for example, of MFDs to

convenience store chains. New markets in
both Asia and Latin America also recorded
strong unit sales, mainly for low-end
monochrome products.

We will work to release new prod-
ucts that offer a new standard in ofﬁ ce
information handling by incorporating
a highly advanced platform. For SOHO
use, we will introduce new stylish color
models. In commercial printers, Canon
will reinforce its lineups by expanding its
monochrome lineup, especially medium-
and light-production models. Further-
more, to boost sales in markets hit hard
by the global economic crisis, we will
bolster our sales structures in North
America and Europe.

Innovative Products and Technology—V-Toner Clear

Canon has developed the new and unique V-Toner Clear system,
which it introduced with the imagePRESS C1+ in 2008. The
system makes possible a visual texture treatment that greatly
expands design capabilities. It works by applying clear toner to
paper to control the degree of glossiness, enabling stunning
effects such as metallic characters, spot matt/gloss coating and
flood matt coating. The system also produces watermarks, an
attractive option for customers looking to increase the security
of their documents. With these features, V-Toner Clear allows for
the production of a wide array of innovative printing solutions,
providing added value for customers.

Color imageRUNNER C3480 (iR C3580 in some areas)

imagePRESS C7000VP

Fiscal 2008 Review
Net sales in the Ofﬁ ce Imaging Prod-
ucts business amounted to ¥1,119.5
billion, a decrease of 13.3% year on
year. Unit sales also fell as the Com-
pany’s performance in this business
was impacted by the global economic
downturn in the second half of the
year and the appreciation of the yen.
Sales of the Company’s ofﬁ ce
network MFDs were slow due to the
appreciation of the yen and restrained
investment in ofﬁ ce equipment. Sales
of its monochrome MFDs were down,
reﬂ ecting low demand as the market
continued to shift toward color

products. Canon’s sales of color
network MFDs showed robust growth
in 2008, and the Company released
several new models, including the
Color imageRUNNER C3480/C3080
series (iR C3580/C3080 in some
areas), which is targeted at small- to
medium-sized ofﬁ ces and workgroups.
In document solutions, the Com-
pany’s eCopy solution* for simple and
secure electronic distribution and the
sharing of paper documents was well
received in the United States. We also
recorded solid unit sales of our E-
maintenance service system, which
uses networks to automatically detect

problems involving the Company’s
MFDs and notify a service base as
necessary. The convenience of this
service resulted in a high rate of
system installations.

In commercial printers, Canon
expanded its business in the POD
market with the release of its new
imagePRESS C6000 digital press,
designed to meet the needs of small-
to medium-sized businesses. We also
introduced the imagePRESS C1+
model featuring a clear toner system
that offers new possibilities for graph-
ics and design. Sales of the new model
were particularly strong in Europe.

* eCopy is a trademark of eCopy, Inc.

Color imageRUNNER C3480
(iR C3580 in some areas)

imagePRESS C1+

imagePRESS C6000

PRODUCT GROUPS

COMPUTER PERIPHERALS
“ Canon is dedicated to producing products that are
superior in terms of image quality, speed, design and
ease of use.”

35.5%

Katsuichi Shimizu

Chief Executive, Inkjet Products Operations

In the latter half of 2008, the global
economic downturn severely affected
the inkjet printer market. However, unit
sales of Canon inkjet printers increased
year on year despite a drop in sales on a
value basis due to the impact of the
appreciation of the yen.

Against the backdrop of economic

recession, customers are extremely
cautious when selecting products,
limiting their choices to goods superior in
terms of performance and value. To meet
customer needs, Canon has returned to
its roots as a manufacturer and devel-
oped and released to the market “au-
thentic” products that demonstrate an
undying commitment to image quality,
speed, design and ease of use—ele-
ments that deﬁ ne any good printer. In

recognition of these efforts, in 2008
Canon’s products swept the top three
spots in the all-in-one printer category of
a well-known American magazine for
the second consecutive year.

In 2008, we boosted unit sales by
introducing powerful new printers and
strengthening product lineups. The
Company carried out reforms to core
technologies, including proprietary FINE
(Full-photolithography Inkjet Nozzle
Engineering) technology for high-speed
high-resolution printing and the Chroma-
Life 100+ system for creating beautiful,
long-lasting prints. In 2008, we devel-
oped new inks and photo paper and
expanded the range of color reproduction.
Targeting SOHOs, we released the PIXMA
MX7600 inkjet printer, that features

Pigment Reaction (PgR) technology.
Pursuing automation as a way to
improve productivity and ensure product
quality, in 2008 Canon inaugurated a
new inkjet printer cartridge production
plant at Oita Canon Materials in Japan
and began introducing automated
machinery in the assembly cell sections
at its plant in Thailand.

In 2009, we expect a severe global
economic environment. To reduce the
impact of declining printer prices and
strengthen Canon’s presence in the
global market, we will further strengthen
our sales structure. Moreover, we will
further differentiate our products by
enhancing image quality and speed
through FINE technology as well as by
improving operability and design.

Innovative Products and Technologies—Pigment Reaction (PgR) Technology

Canon has rewritten the rules of inkjet printing with its revolutionary
new PgR technology. This innovative ink system eliminates the
problems sometimes associated with inkjet printing—print-through,
print curling, ink bleeding—allowing high-deﬁ nition text, graphics
and photographs to be printed on plain paper.

PgR works by applying clear ink onto the paper when printing
begins. Pigment inks are ejected on the clear ink coating, reacting
with the clear ink to improve saturation, brightness and ink ﬁ xation.
PgR also ensures that the ﬁ nal product will be long-lasting and
water-fast.

Clear ink is applied to the paper.

Pigment inks are ejected.

Pigment inks and clear ink react
after pigment inks are placed.

Saturation, brightness and ink
ﬁ xation have improved.

LBP5975

PIXMA MP630

Fiscal 2008 Review
Net sales in the Computer Peripherals
business totaled ¥1,454.8 billion, a
decrease of 5.4% year on year.

In the market for laser beam
printers (LBPs), demand was sluggish
in the ﬁ rst half of the year and fell
sharply in the second half. As a
result, sales of LBPs were down 5.6%
on a value basis and 6% on a unit
basis year on year. However, unit
sales of color LBPs rose slightly, and
Canon bolstered its lineups and
released low-end models for personal
use and SOHOs.

Turning to inkjet printers, although
the world economy drastically deceler-
ated in the second half of the year,

Canon’s unit sales were up 3% year
on year. However, sales of inkjet
printers decreased 4.5% due to the
sudden rise of the yen.

Unit sales of the Company’s
multifunction printers (MFPs) in-
creased signiﬁ cantly, reﬂ ecting the
continuing shift in market demand
from single-function models to MFPs.
In emerging economies, the Compa-
ny’s sales of low-end models were
favorable and we increased market
share. Sales were especially strong for
products targeting the home market,
including the PIXMA MP620 MFP and
the PIXMA iP2600 single-function
printer. For the SOHO market, in 2008
Canon released the PIXMA MX7600

all-in-one inkjet printer featuring the
Company’s original revolutionary new
PgR technology. In addition, sales of
consumables such as inkjet cartridges
were strong.

In scanners, although the market

is shrinking due to the spread of
MFPs, the Company recorded strong
unit sales and solidiﬁ ed its No. 1
market position. In 2008, we released
the new CanoScan LiDE 200, which
contributed to the Company’s sales.
This compact CIS (compact image
sensor) scanner features a high resolu-
tion of 4,800dpi and improved maxi-
mum optical resolution compared
with the previous model.

LBP5050
(i-SENSYS LBP5050 in some areas)

PIXMA MX7600

PIXMA iP2600

CanoScan LiDE 200

PRODUCT GROUPS

CAMERAS
“ Aiming to maintain its No. 1 position in the global
market, Canon is introducing powerful new products
that redeﬁ ne the picture-taking experience. ”

Masaya Maeda

Chief Executive, Image Communication Products Operations

25.4%

In 2008, the Company held its No. 1
position for both digital SLR cameras
and compact digital cameras in the four
markets of North America, Europe,
Japan and China.
Canon increased unit sales and
expanded its market share for digital
SLR cameras on the back of continued
demand, and reinforced its lineups for
both low-end and mid-range models.
In compact digital cameras, Canon
increased unit sales despite stagnant
market conditions. We worked to further
enhance the functions of our compact
digital cameras, equipping models
with the new DIGIC 4 imaging pro -
cessor and upgrading our Face Detec-
tion Technology. Staying on top of

the worldwide shift to HD, Canon
introduced full HD camcorders to the
market, winning high praise for their
image quality and dual-ﬂ ash memory
concept that enables recording the
movie both to the internal memory
and a removable SDHC card.

Looking ahead, we will bolster
product lineups for digital SLR and
compact digital cameras, particularly for
mid-range models. Canon will offer
products that boast superior image
quality based on its core competencies
of optical technology, sensor technology
and imaging processors while elevating
the essential factors in capturing images,
such as ease of use, miniaturization and
design. From the beginning of 2009, we

will aggressively launch attractive and
powerful products across every product
category, aiming to offer unprecedented
levels of customer satisfaction. Canon
will reinforce the in-house production of
key components as a means of offering
high-value-added products that are
differentiated from those of its competi-
tors and, at the same time, re-examine
its systems for maintaining quality,
including the service support structure
for every category of user, from begin-
ners and advanced amateurs to profes-
sionals. Furthermore, the Company will
continue efforts to promote cross-media
imaging to realize advanced synergies
between input and output products.

Innovative Products and Technology—EOS 5D Mark II Digital SLR Camera

In 2008, Canon released the EOS 5D Mark II digital SLR camera.
Highly anticipated by customers, it features a newly developed 21.1-
megapixel 35mm full-frame CMOS sensor that realizes less noise and
a signiﬁ cantly expanded sensitivity range. The camera incorporates
the DIGIC 4 imaging processor to enable the high-speed processing of
the increased data generated by the high-pixel-count image sensor.
The EOS 5D Mark II is the world’s ﬁ rst digital SLR capable of
full HD (1,920 x 1,080 pixel) video capture. The Company applied
its highly advanced imaging, photography and video capture tech-
nologies to offer this function, signaling a new direction in digital
SLR cameras.

PowerShot SD880 IS DIGITAL ELPH (DIGITAL IXUS 870 IS in some areas)

VIXIA HF11 (HF11 in some areas)

Fiscal 2008 Review
Net sales in the Cameras business
totaled ¥1,042.0 billion, a year-on-
year decrease of 9.6%. Despite severe
conditions in the economy, unit sales of
Canon’s digital cameras increased approxi-
mately 4%. The drop in sales is attribut-
able to falling prices of digital cameras
and the appreciation of the yen.

In digital SLR cameras, Canon

introduced new products to the
market in both low-end and mid-
range models. The Company enjoyed
strong sales and worldwide popularity
of the new EOS Digital Rebel XSi (EOS
450D in some areas), as well as for
previous models, such as the ad-
vanced-amateur model EOS 40D. Also
in the advanced-amateur category,

amid high expectations from custom-
ers we released the EOS 5D Mark II,
which features not only enhanced
image quality but also full HD video
capturing—effectively redeﬁ ning the
digital SLR camera. In addition, unit
sales in emerging markets expanded,
led by the EOS Digital Rebel XS (EOS
1000D in some areas). In line with the
overall growth in the sales of digital
SLR cameras, unit sales of inter-
changeable lenses also increased.

In compact digital cameras, the

market grew slightly in 2008 but
demand plummeted toward the end
of the year and prices continued to
fall. Unit sales were up as the Com-
pany strengthened its product lineup
with 16 new models led by the stylish

PowerShot SD1100 IS DIGITAL ELPH
(DIGITAL IXUS 80 IS in some areas) and
the PowerShot SD880 IS DIGITAL ELPH
(DIGITAL IXUS 870 IS in some areas).
In HD camcorders, we launched
the VIXIA HF11 (HF11 in some areas)
camcorder, which can record full HD
images at 1,920 x 1,080 pixels to an
internal ﬂ ash memory (32GB) and
removable SDHC card.

In LCD projectors, Canon intro-

duced its top-of-the-line WUX10
projector in 2008. The Company
equipped the wide-screen projector
with its own WUXGA (1,920 x 1,200
pixel) LCOS panels and unique optical
engine, AISYS, to deliver precise color
reproduction and stunning resolution
that surpasses that of 1080 full HDTV.

EOS Digital Rebel XSi
(EOS 450D in some areas)

PowerShot SD1100 IS DIGITAL ELPH
(DIGITAL IXUS 80 IS in some areas)

VIXIA HF11
(HF11 in some areas)

REALiS WUX10
(XEED WUX10 in some areas)

PRODUCT GROUPS

OPTICAL AND OTHER PRODUCTS
“ In 2009, we will work tirelessly toward accelerating our
development capabilities to prepare for a turnaround in
the economy.”

9.6%

Junji Ichikawa

Chief Executive, Optical Products Operations

The market for semiconductor exposure
equipment was impacted by severe eco-
nomic conditions from the latter half of
2008. We responded by managing produc-
tion capacity to meet demand and also
made thorough efforts to reduce invento-
ries while strengthening new product
development to spur demand. In addition,
Canon continued to advance its immersion
technology for realizing the further minia-
turization of semiconductors. This has
served to lift the quality of its immersion
ArF equipment to even higher levels. We
also improved productivity by switching
entirely to the production of steppers that
cater to more competitive 300mm wafers.
With regard to the market for expo-
sure equipment for LCDs, conditions
were favorable as capital investment by

LCD manufacturers was on the upswing.
We strengthened the MPAsp-H700
lineup of LCD exposure equipment for
eighth-generation panels with continu-
ous upgrades to meet various needs
from LCD manufacturers.

In 2009, we expect harsh conditions
in the market for steppers, with declin-
ing demand and further price reductions
for semiconductor devices. To pursue
advances in semiconductor miniaturiza-
tion, Canon will bolster its immersion
technology through the use of double
patterning, a method that can signiﬁ -
cantly increase resolution. We will carry
out development in this area through
2011 as well as of new technologies that
improve the throughput capacity of
steppers that use KrF.

In exposure equipment for LCDs, we

expect a decline in capital investment
from LCD manufacturers in 2009. Despite
difﬁ cult conditions, we will work toward
the development of the SP platform,
which grew out of our H700 series, for
our next-generation LCD exposure
equipment. At the same time, we will
endeavor to further improve optical
performance.

We regard 2009 as a signiﬁ cant year
for thoroughly reinforcing the Company’s
development capabilities. Canon aims to
improve design quality to shorten equip-
ment installation times so customers can
start up operations quickly. The Company
will also step up in-house production to
further accumulate technological know-
how and raise product quality.

Innovative Product and Technology—Dynamic Imaging X-Ray Sensor

In 2008, Canon succeeded in developing a portable ﬂ at-panel digital
radiography (DR) system capable of viewing dynamic and capturing
static X-ray images.

Canon introduced the world’s ﬁ rst static-image DR system in

1998. Today, its wide lineup of systems for medical use includes
portable sensors essential to emergency medicine.

Canon’s newly developed prototype captures static X-ray images

and enables “X-ray ﬂ uoroscopy,” allowing radiographers to see
dynamic images of internal organs for optimal timing in capturing
static images. Canon hopes that this new technology will contribute
to widening the scope of medical diagnostic procedures and increas-
ing the speed of diagnosis.

Canon’s dynamic imaging X-ray sensor attracted the interest of
visitors to RSNA 2009.

FPA-7000AS7

DIGISUPER 100 xs

Fiscal 2008 Review
Net sales of Optical and Other Prod-
ucts slipped 0.2% compared with the
previous ﬁ scal year to ¥392.2 billion.
In the market for steppers, de-
mand fell signiﬁ cantly. Nevertheless,
Canon continued shipments of the
FPA-7000AS5 dry ArF scanning
stepper and the FPA-7000AS7 immer-
sion lithography scanning stepper.
Sales were also solid for the FPA-
5510iZ stepper, which won praise
among customers for its high produc-
tivity. Aiming to further expand its
market presence, Canon launched the
new FPA-5550iZ in November 2008.
This 300mm-wafer-capable, high-
throughput stepper achieves 50%
higher throughput than the previous
FPA-5510iZ model series.

The market for LCD exposure
equipment saw a rapid recovery in
2008, although the balance of supply
and demand deteriorated. Canon
recorded excellent sales of its MPA-
7800+ ﬁ fth-generation mirror projec-
tion mask aligners, particularly in
China. The Company also continued
shipments of its acclaimed MPAsp-
H700 LCD exposure equipment for
eighth-generation panels.

In digital radiography systems,
Canon released the CXDI-60G, which
features a detachable sensor cable for
easy installation in multiple locations.
The Company achieved strong sales
growth especially in China for its CXDI
series, particularly the 50G model.

In broadcast and communications,

Canon held on to its high market

share as the shift to HDTV drove
demand for upgraded equipment and
did brisk business related to the
holding of various events. Building on
the continued success of Canon’s
DIGISUPER 100AF and 86AF models,
we launched the DIGISUPER 27AF HD
studio lens featuring optical perfor-
mance optimized for high-vision
television and Auto Focus functions.

In the large-format printer market,
we strengthened the imagePROGRAF
lineup with the release of the iPF720.
Equipped with an 80GB hard drive,
the printer is capable of handling
multiple complex jobs and, in addition
to producing posters, it can produce
CAD drawings and GIS maps.

MPAsp-H700

CXDI-60G

DIGISUPER 27AF

imagePROGRAF iPF720

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.
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 Engineering (Thailand) Ltd.
Canon Vietnam Co., Ltd.
Canon Electronic Business Machines (H.K.) Co., Ltd.
Canon Imaging Systems Inc.

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.
Canon i-tech Inc.

(As of December 31, 2008)

MARKETING & OTHER
Canon Marketing Japan Inc.
Canon System and Support Inc.
Canon IT Solutions Inc.
Canon Software Inc.
e-System Corporation
Asia Paciﬁ c System Research Co., Ltd.
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, 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 Eurasia A.S.
Canon Portugal S.A.
Canon Middle East FZ-LIC
Canon South Africa Pty. Ltd.
Canon Australia Pty. Ltd.
Canon New Zealand Ltd.
Canon Finance Australia 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 India Pte. Ltd.
Canon Korea Consumer Imaging Inc.
Canon Semiconductor Engineering Korea Inc.
Canon Semiconductor Equipment Taiwan Inc.
Canon Engineering Hong Kong Co., Ltd.

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 Signiﬁ cant Accounting Policies

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

3 Foreign Operations ............................................................................ 73

Investments

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

Inventories

7 Property, Plant and Equipment

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

9 Acquisitions

10 Goodwill and Other Intangible Assets ............................................. 77

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

12 Trade Payables

13 Employee Retirement and Severance Beneﬁ ts ............................... 79

Income Taxes ..................................................................................... 83

15 Common Stock .................................................................................. 85

16 Legal Reserve and Retained Earnings .............................................. 86

17 Other Comprehensive Income (Loss)

18 Stock-Based Compensation ................................................................ 88

19 Net Income per Share ....................................................................... 89

20 Derivatives and Hedging Activities

21 Commitments and Contingent Liabilities ........................................ 90

Disclosures about the Fair Value of Financial Instruments and
Concentrations of Credit Risk ........................................................... 92

23 Fair Value Measurements ................................................................. 93

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 ﬁ nancial condition and results of operations.
References in this discussion to the “Company” are to Canon
Inc. and, unless otherwise indicated, references to the ﬁ nancial
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 manufac-
ture and sale of these products domestically and internationally.
Canon’s basic management policy is to contribute to the prosperity
and well-being of the world while endeavoring to become a truly
excellent global corporate group targeting continued growth
and development.
Canon divides its businesses into three product groups:
business machines, cameras, and optical and other products.
The business machines product group has three sub-groups:
ofﬁ ce imaging products, computer peripherals and business
information products.

Economic environment
Looking back at the global economy in 2008, while the effects
of the subprime loan crisis led to a slowdown that was felt in
major countries from the beginning of the year, stock markets
plunged and the real economy in these countries rapidly deterio-
rated, especially toward the end of the year, as a result of
increasing ﬁ nancial uncertainty triggered by the failures of major
ﬁ nancial institutions in the United States. Furthermore, growth
in Asia and other emerging economies slowed down sharply due
to a decline in exports, and the sense of a severe recession of
global proportions has gradually spread. As for foreign exchange
markets, the unilateral yen buying that began in early autumn
drove up the value of the yen against all other foreign currencies.

Market environment
As for the markets in which Canon operates amid these conditions,
within the digital camera segment, demand for digital single-lens
reﬂ ex (“SLR”) cameras continued to expand. While demand for
compact digital cameras declined sharply toward the end of the
year and prices continued to fall, the market staged healthy
growth for the year. As for the ofﬁ ce imaging products market,
sales of color network digital multifunction devices (“MFDs”)
showed robust growth amid the shift toward color models in each
region, although demand for monochrome models remained low.
As for computer peripherals, in addition to a drop in demand for
monochrome laser beam printers, sales of color-model printers,
which had enjoyed sustained healthy expansion, remained rela-
tively unchanged from the previous year. With regard to inkjet
printers, although demand continued to shift from single-function
to multifunction models, demand overall for the segment declined.
Within the optical equipment segment, while the market for
aligners, used to produce liquid crystal display (“LCD”) panels,
realized a rapid recovery thanks to an increase in capital spending
by LCD panel manufacturers, demand for steppers, utilized in

the production of semiconductors, fell signiﬁ cantly. The average
value of the yen during the year was ¥103.23 to the U.S. dollar,
a year-on-year appreciation of about 14%, and ¥151.46 to the
euro, a year-on-year appreciation of approximately 7%.

Summary of operations
Amid these conditions, Canon’s consolidated net sales for the
period was ¥4,094.2 billion (U.S.$44,991 million), a year-on-year
decline of 8.6%, due to the effects of the substantial rise in value
of the yen along with falling prices of such consumer products
as digital cameras and inkjet printers, and reduced sales volumes
due to decreased demand for network MFDs, laser beam printers,
and other ofﬁ ce equipment. Income before income taxes and
minority interests totaled ¥481.1 billion (U.S.$5,287 million), a
decline of 37.4% from the year-ago period, while net income
decreased 36.7% to ¥309.1 billion (U.S.$3,397 million).

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

Revenues
As Canon pursues to become a truly excellent global company,
one indicator upon which Canon’s management places strong
emphasis is revenue. The following are some of the KPIs related
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 less extent, provision
of services associated with its products. Sales vary depending
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, manage-
ment considers the evaluation of net sales by product group to
be important for the purpose of assessing Canon’s sales perfor-
mance in various product groups taking into account recent
market trends.
Gross proﬁ t ratio (ratio of gross proﬁ t to net sales) is another
KPI for Canon. Through its reforms in product development, Canon
has been striving to shorten product development lead times in
order to launch new, competitively priced products at a faster
pace. Furthermore, Canon has achieved cost reductions through
enhancement of efﬁ ciency in its production. Canon believes that
these achievements have contributed to improving Canon’s gross
proﬁ t ratio, and will continue pursuing the curtailment of product
development lead times and reductions in production costs.
Operating proﬁ t ratio (ratio of operating proﬁ t to net sales)
and research and development (“R&D”) expense to net sales
ratio are considered to be KPIs by Canon. Canon is focusing on
two areas for improvement. Canon strives to control and reduce
its selling, general and administrative expenses as its ﬁ rst key
point. Secondly, Canon’s R&D policy is designed to maintain a high
level of spending in core technology to sustain Canon’s leading
position in its current ﬁ elds of business and to seek possibilities
in other markets. Canon believes such investments will create
the basis for future success in its business and operations.

Cash ﬂ ow management
Canon also places signiﬁ cant emphasis on cash ﬂ ow management.
The following are the KPIs with regard to cash ﬂ ow management
that Canon’s management believes to be important.

Inventory turnover within days is a KPI because it measures the
adequacy of supply chain management. Inventories have inherent
risks of becoming obsolete, physically ruined or otherwise decreas-
ing signiﬁ cantly in value, which may adversely affect Canon’s
operating results. To mitigate these risks, management believes
that it is crucial to continue reducing inventories and decrease
production lead times in order to promptly collect related product
expenses by strengthening supply chain management.
Canon’s management seeks to meet its liquidity and capital
requirements primarily with cash ﬂ ow from operations.
Management also seeks debt-free operations. For a manufac-
turing company like Canon, it generally takes considerable time
to realize proﬁ t from a business as the process of R&D, manu-
facturing and sales has to be followed for success. Therefore,

management believes that it is important to have sufﬁ cient
ﬁ nancial strength so that the Company does not have to rely on
external funds. Canon has continued to reduce its dependency
on external funds 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 assets ratio
measures its long-term sustainability. Canon also believes that
achieving a high or rising stockholders’ equity ratio indicates
that Canon has maintained a good status or further improved
the constitution to fund debt obligations and other unexpected
expenses. In the long-term, Canon will be able to maintain a
high level of stable investments for its future operations and
development. As Canon puts strong emphasis on its research
and development activities, management believes that it is
important to maintain a stable ﬁ nancial base and, accordingly,
a high level of stockholders’ equity to total assets ratio.

KEY PERFORMANCE INDICATORS

Net sales (Millions of yen)
Gross proﬁ t to net sales ratio
R&D expense to net sales ratio
Operating proﬁ t to net sales ratio
Inventory turnover within days
Debt to total assets ratio
Stockholders’ equity to total assets ratio

2008
¥4,094,161
47.3%
9.1%
12.1%
47 days
0.4%
67.0%

2007
¥4,481,346
50.1%
8.2%
16.9%
44 days
0.6%
64.8%

2006
¥4,156,759
49.6%
7.4%
17.0%
45 days
0.7%
66.0%

2005
¥3,754,191
48.5%
7.6%
15.5%
47 days
0.8%
64.4%

2004
¥3,467,853
49.4%
7.9%
15.7%
49 days
1.1%
61.6%

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 ﬁ nancial statements are prepared in accor-
dance with U.S. generally accepted accounting principles and
based on the selection and application of signiﬁ cant accounting
policies which require management to make signiﬁ cant 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 ﬁ nancial condition and results
of operations.

Revenue recognition
Canon generates revenue principally through the sale of con-
sumer products, equipment, supplies, and related services under
separate contractual arrangements. Canon recognizes revenue
when persuasive evidence of an arrangement exists, delivery has
occurred and title and risk of loss have been transferred to the
customer or services have been rendered, the sales price is ﬁ xed
or determinable, and collectibility is probable.

Revenue from sales of consumer products including

ofﬁ ce 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 speciﬁ c criteria of the
equipment functionality are successfully tested and demonstrated
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 ofﬁ ce 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.

bundled with product maintenance contracts, revenue is ﬁ rst
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, ﬁ nancing 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 fulﬁ lled 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, speciﬁ c 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 ﬁ nancing
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 receiv-
ables 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
speciﬁ c reserves for individual accounts when Canon becomes
aware of a customer’s inability to meet its ﬁ nancial obligations
to Canon, such as in the case of bankruptcy ﬁ lings or deteriora-
tion in the customer’s operating results or ﬁ nancial 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 by the average method for domestic inventories and
principally the ﬁ rst-in, ﬁ rst-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 esti-
mated costs necessary to make a sale. Canon routinely reviews
its inventories for their salability and for indications of obsoles-
cence to determine if inventories should be written-down to
market value. Judgments and estimates must be made and used

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

Impairment of long-lived assets
In accordance with Statement of Financial Accounting Standards
No.144, “Accounting for the Impairment or Disposal 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 recov-
erable. If the carrying amount of the asset exceeds its estimated
undiscounted future cash ﬂ ows, an impairment charge is recog-
nized in the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Determining the fair value
of the asset involves the use of estimates and assumptions.
These estimates and assumptions include future market condi-
tions, net sales growth rate, gross margin and discount rate.
Though Canon believes that the estimates and assumptions are
reasonable, actual future results may differ from these estimates
and assumptions.

Property, plant and equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated principally by the declining-balance method, except
for certain assets which are depreciated by the straight-line
method over the estimated useful lives of the assets.

Income taxes
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 ﬁ nancial statements.

Valuation of deferred tax assets
Canon currently has signiﬁ cant 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 proﬁ tability 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
signiﬁ cant 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 beneﬁ t plans
Canon has signiﬁ cant employee retirement and severance
beneﬁ t 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 assumptions. Other
assumptions include assumed rate of increase in compensation
levels, mortality rate, and withdrawal rate. Changes in these
assumptions inherent in the valuation are reasonably likely to
occur from period to period. 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
beneﬁ t costs in the future.

In preparing its ﬁ nancial statements for ﬁ scal 2008, Canon
estimated a weighted-average discount rate of 2.5% for Japanese
plans and 5.1% for foreign plans and a weighted-average
expected long-term rate of return on plan assets of 3.7% for
Japanese plans and 6.5% for foreign plans. In estimating the
discount rate, Canon uses available information about rates of
return on high-quality ﬁ xed-income governmental and corporate
bonds currently available and expected to be available during the
period to the maturity of the pension beneﬁ ts. 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 beneﬁ t obligations which, in turn, could lead to an
increase in service cost and amortization cost through amortiza-
tion 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 beneﬁ t obligation by approximately 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 returns on plan assets may increase net

periodic beneﬁ t 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 ﬁ scal 2009, a change of 50 basis points
in the expected long-term rate of return on plan assets may cause
a change of approximately ¥2,464 million in net periodic beneﬁ t
cost. Canon multiplies management’s expected long-term rate
of return on plan assets by the value of its plan assets, to arrive
at the expected return on plan assets that is included in pension
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
ﬁ scal years and, ultimately, future pension expense.

In accordance with SFAS 158, “Employers’ Accounting for

Deﬁ ned Beneﬁ t Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”,
Canon recognizes the funded status (i.e., the difference between
the fair value of plan assets and the projected beneﬁ t obligations)
of its pension plans in its consolidated balance sheets, with a
corresponding adjustment to accumulated other comprehensive
income (loss), net of tax.

Effective January 1, 2007, the Company and certain of its
domestic subsidiaries amended their funded deﬁ ned beneﬁ t
pension plans. Under these funded deﬁ ned beneﬁ t pension plans,
the lifetime pension beneﬁ t is based upon amounts payable
during an initial period after retirement (the “guarantee period”)
and the subsequent period lasting for the remainder of the
retiree’s lifetime (the “post-guarantee period”). The Company
and certain of its domestic subsidiaries amended these plans to
increase the duration of this guarantee period from 15 years to
20 years to reﬂ ect an increase in the average lifespan of their
employees, resulting in reduced amounts payable during each of
the guarantee and post-guarantee periods. As a result of these
changes, the projected beneﬁ t obligation decreased by ¥101,620
million as of January 1, 2007. In conjunction with these plan
changes, the Company and certain of its domestic subsidiaries
also have implemented an unfunded retirement and severance
plan and a deﬁ ned contribution pension plan for certain future
pension beneﬁ ts attributable to employees’ future services.

CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY OF OPERATIONS

Net sales
Operating proﬁ t
Income before income taxes and minority interests
Net income

Millions of yen
2008
¥4,094,161

2007

2006

change

change
–8.6% ¥4,481,346 +7.8% ¥4,156,759 $44,990,780
5,451,363
5,287,330
3,397,231

756,673 +7.0
768,388 +6.8
488,332 +7.2

707,033
719,143
455,325

496,074 –34.4
481,147 –37.4
309,148 –36.7

Thousands of
U.S. dollars
2008

Operating expenses
The major components of operating expenses are payroll, R&D,
advertising expenses and other marketing expenses. While R&D
expenses increased slightly compared with the previous year,
Group-wide cost reduction efforts contributed to a decline in
total operating expenses of 3.2%.

Operating proﬁ t
Operating proﬁ t in ﬁ scal 2008 dropped 34.4% to a total of
¥496,074 million (U.S.$5,451 million) from ﬁ scal 2007, recording
12.1% to net sales.

Other income (deductions)
Other income (deductions) for ﬁ scal 2008 decreased by ¥26,642
million (U.S.$293 million) due to such factors as a reduction in
interest income stemming from a decrease in cash surplus and a
lower yield on investments, a decline in earnings on investments
in afﬁ liates accounted for by the equity method, and write-downs
of non-current marketable securities.

Income before income taxes and minority interests
Income before income taxes and minority interests in ﬁ scal 2008
was ¥481,147 million (U.S.$5,287 million), a decline of 37.4%
from ﬁ scal 2007, and constituted 11.8% of net sales.

Income taxes
Provision for income taxes in ﬁ scal 2008 decreased by ¥103,470
million (U.S.$1,137 million) from ﬁ scal 2007, primarily as a result
of the decline in income before income taxes and minority
interests. The effective tax rate during ﬁ scal 2008 declined by
1.0% compared with ﬁ scal 2007.

Net income
As a result, net income in ﬁ scal 2008 decreased by 36.7% to
¥309,148 million (U.S.$3,397 million), which represents a 7.6%
return on net sales.

Sales
Canon’s consolidated net sales in ﬁ scal 2008 totaled ¥4,094,161
million (U.S.$44,991 million). This represents an 8.6% decrease
from the previous ﬁ scal year, reﬂ ecting the effects of the signiﬁ -
cant appreciation of the yen coupled with declining prices of
products such as digital cameras and inkjet printers, and reduced
sales volumes stemming from decreased demand for network
MFDs, laser beam printers, and other ofﬁ ce equipment.
Overseas operations are signiﬁ cant to Canon’s operating
results and generated approximately 76% of total net sales in
ﬁ scal 2008. Such sales are denominated in the applicable local
currency and are subject to ﬂ uctuations in the value of the yen
to those currencies. Despite efforts to reduce the impact of
currency ﬂ uctuations on operating results, including localization
of manufacturing in some regions along with procuring parts
and materials from overseas suppliers, Canon believes such
ﬂ uctuations have had and will continue to have a signiﬁ cant
effect on its results of operations.

The average value of the yen in ﬁ scal 2008 was ¥103.23 to

the U.S. dollar, and ¥151.46 to the euro, representing a signiﬁ -
cant appreciation of about 14% to the U.S. dollar, and approxi-
mately 7% appreciation against the euro, compared with the
previous year. The effects of foreign exchange rate ﬂ uctuations
negatively impacted net sales by approximately ¥299,500 million
in 2008. This unfavorable impact was comprised of approximately
¥218,700 million for U.S. dollar denominated sales, ¥66,400
million for euro denominated sales and ¥14,400 million for
other foreign currency denominated sales.

Cost of sales
Cost of sales principally reﬂ ects 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. Many of these raw materials are
subject to ﬂ uctuations in world market prices accompanied by
ﬂ uctuations in 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 along with rent expenses. The ratio of cost of sales to
net sales for ﬁ scal 2008, 2007 and 2006 was 52.7%, 49.9%
and 50.4%, respectively.

Gross proﬁ t
Canon’s gross proﬁ t in ﬁ scal 2008 decreased by 13.8% to
¥1,938,008 million (U.S.$21,297 million) from ﬁ scal 2007. The
gross proﬁ t ratio deteriorated by 2.8 points year on year to 47.3%.
Despite the continued launch of new products and ongoing
cost-reduction efforts, the deteriorated gross proﬁ t ratio was
mainly the result of such factors as the sharp appreciation of
the yen, falling product prices accompanied by the rise in prices
of materials.

Product information
Canon divides its businesses into three product groups: business
machines, cameras and optical and other products.
(cid:129) The business machines product group includes ofﬁ ce
imaging products, computer peripherals and business
information products.
Ofﬁ ce imaging products mainly include ofﬁ ce network digital
MFDs, color network digital MFDs, ofﬁ ce copying machines,
personal-use copying machines and full-color copying
machines.
Computer peripherals mainly include laser beam printers,
inkjet multifunction peripherals, single function inkjet printers

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

(cid:129) The cameras product group mainly includes digital SLR

cameras, compact digital cameras, interchangeable lenses and
digital video camcorders.

(cid:129) The optical and other products product group mainly

includes semiconductor production equipment, mirror projection
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

Business machines:

Ofﬁ ce imaging products
Computer peripherals
Business information products

Cameras
Optical and other products

Total

Return on Sales
(%)

Millions of yen
2008

change

2007

change

2006

Thousands of
U.S.dollars
2008

1,454,768

¥1,119,523 –13.3% ¥1,290,788 +8.8% ¥1,185,925 $12,302,451
15,986,462
–5.4
942,065
85,728 –20.1
29,230,978
–9.4
11,449,967
–9.6
–0.2
4,309,835
–8.6% ¥4,481,346 +7.8% ¥4,156,759 $44,990,780

1,537,511 +9.9
107,243 +0.5
2,935,542 +9.1
1,152,663 +10.6
–7.2

1,398,408
106,754
2,691,087
1,041,865
423,807

2,660,019
1,041,947
392,195
¥4,094,161

393,141

Sales by Product
(Millions of yen)

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

5,000,000

Sales by Region
(Millions of yen)

Japan
Americas
Europe
Other areas

5,000,000

11.0

10.9

9.9

10.2

4,000,000

3,754,191

3,467,853

4,000,000

3,754,191

3,467,853

4,481,346

4,156,759

4,094,161

4,481,346

4,156,759

4,094,161

7.6

3,000,000

2,000,000

1,000,000

3,000,000

2,000,000

1,000,000

Sales of business machines, constituting 65.0% of consolidated
net sales, decreased by 9.4% to ¥2,660,019 million (U.S.$29,231
million) in ﬁ scal 2008.

In the business machines segment, as demand for network
digital MFDs shifted toward color models for the ofﬁ ce imaging
products category, the appreciation of the yen along with
restrained investment in ofﬁ ce equipment due to concern over
business performance led to ﬂ agging sales in major regions.
Consequently, sales for the category declined by 13.3% to
¥1,119,523 million (U.S.$12,302 million) in ﬁ scal 2008. Color
ofﬁ ce imaging products accounted for 37% in ﬁ scal 2008 and
35% in ﬁ scal 2007 of ofﬁ ce imaging products sales while
monochrome ofﬁ ce imaging products accounted for 41% and
45% in ﬁ scal 2008 and 2007, respectively. Sales of facsimiles
and information system business accounted for the residual
22% and 20% of ofﬁ ce imaging products sales in ﬁ scal 2008
and 2007, respectively.

Sales of computer peripherals decreased by 5.4% in ﬁ scal
2008 to ¥1,454,768 million (U.S.$15,986 million). Laser beam
printers sales suffered the signiﬁ cant impact of the strong yen
along with reduced demand, resulting in a decrease in sales
volume for monochrome models and slight increase for color
models. As for inkjet printers, while sales volume for single-
function models continued to drop, efforts focusing on expanded
sales of multifunction business-use models resulted in an overall
increase in sales volume.

Sales of business information products decreased by 20.1%,
to ¥85,728 million (U.S.$942 million) in ﬁ scal 2008 due to reduced
personal computer sales in the Japanese domestic market. With
regard to servers and personal computers, the 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.

Sales of cameras declined by 9.6% in ﬁ scal 2008, totaling
¥1,041,947 million (U.S.$11,450 million). The high-resolution,
competitively priced EOS Digital Rebel XSi (EOS 450D) and
advanced-amateur model EOS 40D enjoyed healthy sales,
contributing to growth in sales volume for digital SLR cameras.
Sales volume also increased for compact digital cameras despite
stagnant market conditions as the company bolstered its product
lineup with the introduction of 16 new models, including 6 new

ELPH (IXUS)-series models and 10 PowerShot-series models.
Consequently, unit sales of digital cameras increased by 4% year
on year. Sales of cameras constituted 25.4% of consolidated net
sales in ﬁ scal 2008.

Sales of optical and other products decreased by 0.2% in
ﬁ scal 2008, to ¥392,195 million (U.S.$4,310 million). Within this
segment, while sales of aligners, used to produce LCD panels,
gained momentum owing to a recovery in demand, sales of
steppers, used in the production of semiconductors, remained
stagnant due to deteriorating market conditions. Sales of optical
and other products constituted 9.6% of consolidated net sales
in ﬁ scal 2008.

Sales by region
A geographical analysis indicates that net sales in ﬁ scal 2008
decreased in each of the major regions.

In Japan, sales of ofﬁ ce imaging products within the business

machines segment dropped by 3.5% in ﬁ scal 2008 mainly due
to weakened sales of monochrome models of network digital
MFDs. Although sales of video camcorders recorded solid growth,
overall sales of the cameras segment decreased by 8.7% led by
reduced demand for compact digital cameras. Sales of optical
and other products decreased by 22.8% mainly due to a reduced
demand for steppers. As a result, net sales in the region
decreased by 8.4% in ﬁ scal 2008 from ﬁ scal 2007.

In the Americas, net sales decreased by 1.6% on a local
currency basis in ﬁ scal 2008, mainly due to reduced sales of
such products as monochrome network MFDs and compact
digital cameras. On a yen basis, net sales in the Americas declined
by 13.6% in ﬁ scal 2008 as the yen strengthened to the U.S.
dollar rapidly and signiﬁ cantly.

In Europe, net sales fell by 3.4% on a local currency basis in

ﬁ scal 2008, mainly due to reduced sales of such products as
compact digital cameras and laser beam printers. On a yen
basis, net sales in Europe dropped by 10.5% in ﬁ scal 2008
resulting from the impact of the rapid appreciation of the yen
to the euro.

Sales in other areas increased by 4.5% on a yen basis in
ﬁ scal 2008, reﬂ ecting the robust rise in sales of digital cameras
and aligners.
A summary of net sales by region is provided below:

SALES BY REGION

Japan
Americas
Europe
Other areas
Total

Millions of yen
2008
¥ 868,280
1,154,571 –13.6
1,341,400 –10.5
729,910 +4.5

¥4,094,161

2007

2006

change

change
–8.4% ¥ 947,587 +1.6% ¥ 932,290 $ 9,541,538
12,687,593
14,740,659
8,020,990
–8.6% ¥4,481,346 +7.8% ¥4,156,759 $44,990,780

1,336,168 +4.1
1,499,286 +14.1
698,305 +11.5

1,283,646
1,314,305
626,518

Thousands of
U.S.dollars
2008

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
2008 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets
Depreciation and amortization
Increase in property, plant and equipment

2007 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets
Depreciation and amortization
Increase in property, plant and equipment

2006 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets
Depreciation and amortization
Increase in property, plant and equipment

Thousands of U.S.dollars
2008 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets
Depreciation and amortization
Increase in property, plant and equipment

Business
Machines

Cameras

Optical and
Other Products

Corporate and
Eliminations

Consolidated

—
2,660,019
2,115,375

¥ 2,660,019 ¥ 1,041,947
—
1,041,947
854,160
¥ 544,644 ¥ 187,787
¥ 1,487,885 ¥ 499,287
39,412
43,086

163,920
172,197

(235,690)
(235,690)
(44,823)

¥ 392,195 ¥
235,690
627,885
673,375

— ¥ 4,094,161
—
4,094,161
3,598,087
¥ (45,490) ¥ (190,867) ¥ 496,074
¥ 495,095 ¥ 1,487,667 ¥ 3,969,934
341,337
88,017
361,988
68,542

49,988
78,163

¥ 2,935,542 ¥ 1,152,663
—
—
1,152,663
2,935,542
845,237
2,285,281
¥ 650,261 ¥ 307,426
¥ 1,762,167 ¥ 561,504
37,180
32,870

159,309
166,143

—

2,691,087
2,091,858

¥ 2,691,087 ¥ 1,041,865
—
1,041,865
773,127
¥ 599,229 ¥ 268,738
¥ 1,617,198 ¥ 542,866
28,756
31,517

127,873
154,259

¥ 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

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

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

75,362
151,087

(190,687)
(190,687)
11,722

— ¥ 4,156,759
—
4,156,759
3,449,726
¥ (202,409) ¥ 707,033
¥ 1,860,843 ¥ 4,521,915
262,294
379,657

68,647
157,609

Business
Machines

Cameras

Optical and
Other Products

Corporate and
Eliminations

Consolidated

$ 29,230,978 $ 11,449,967 $ 4,309,835 $

— $ 44,990,780
—
2,590,000 (2,590,000)
—
—
6,899,835 (2,590,000) 44,990,780
29,230,978 11,449,967
23,245,879 9,386,374
(492,561) 39,539,417
7,399,725
$ 5,985,099 $ 2,063,593 $ (499,890) $ (2,097,439) $ 5,451,363
$ 16,350,385 $ 5,486,670 $ 5,440,604 $ 16,347,989 $ 43,625,648
549,318 3,750,956
1,801,319
858,934 3,977,890
1,892,275

967,220
753,209

433,099
473,472

Notes:
1. General corporate expenses of ¥190,698 million (U.S.$2,096 million), ¥221,979 million and ¥202,328 million in the years ended December 31, 2008, 2007 and

2006, respectively, are included in “Corporate and Eliminations.”

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

4. As noted in Note 1-(k) 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 in the Business Machines segment, ¥6,451 million in the
Cameras segment, ¥15,540 million in the Optical and Other Products segment and ¥12,634 million in Corporate and Eliminations.

SEGMENT INFORMATION BY GEOGRAPHIC AREA

Millions of yen
2008 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
p
Operating proﬁ t
Assets

g p

2007 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets

2006 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets

Thousands of U.S.dollars
2008 Net sales:

Unafﬁ liated customers
Intersegment

Total

Operating cost and expenses
Operating proﬁ t
Assets

Japan

Americas

Europe

Others

Corporate and
Eliminations

Consolidated

¥ 998,676 ¥ 1,141,560 ¥ 1,337,147 ¥ 616,778 ¥

— ¥ 4,094,161
—
(2,997,286)
2,318,521
4,094,161
(2,997,286)
3,317,197
3,598,087
(2,857,655)
2,757,356
40,300 ¥ (139,631) ¥ 496,074
¥ 559,841 ¥
¥ 1,908,675 ¥ 458,189 ¥ 477,571 ¥ 317,684 ¥ 807,815 ¥ 3,969,934

3,758
1,145,318
1,136,288

670,678
1,287,456
1,247,156

4,329
1,341,476
1,314,942

26,534 ¥

9,030 ¥

¥ 1,048,310 ¥ 1,329,479 ¥ 1,499,821 ¥ 603,736 ¥

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

(3,327,199)
2,494,251
(3,327,199)
3,542,561
(3,100,082)
2,722,672
(227,117)
¥ 819,889 ¥
¥ 2,715,294 ¥ 506,295 ¥ 732,579 ¥ 367,234 ¥ 191,223

824,844
1,428,580
1,378,306

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

52,282 ¥

61,345 ¥

50,274 ¥

— ¥ 4,481,346
—
4,481,346
3,724,673
¥ 756,673
¥ 4,512,625

¥ 1,037,657 ¥ 1,277,867 ¥ 1,313,919 ¥ 527,316 ¥

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

(3,111,850)
2,311,482
(3,111,850)
3,349,139
(2,893,377)
2,558,685
(218,473)
¥ 790,454 ¥
¥ 2,644,116 ¥ 432,001 ¥ 682,381 ¥ 339,314 ¥ 424,103

792,018
1,319,334
1,275,817

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

46,493 ¥

45,042 ¥

43,517 ¥

— ¥ 4,156,759
—
4,156,759
3,449,726
¥ 707,033
¥ 4,521,915

Japan

Americas

Europe

Others

Corporate and
Eliminations

Consolidated

41,297

— $ 44,990,780
$ 10,974,462 $ 12,544,615 $ 14,693,923 $ 6,777,780 $
25,478,252
—
36,452,714 12,585,912 14,741,495 14,147,868 (32,937,209) 44,990,780
30,300,615 12,486,681 14,449,913 13,705,011 (31,402,803) 39,539,417
$ 6,152,099 $
442,857 $ (1,534,406) $ 5,451,363
$ 20,974,451 $ 5,035,044 $ 5,248,033 $ 3,491,033 $ 8,877,087 $ 43,625,648

47,572 7,370,088 (32,937,209)

291,582 $

99,231 $

Notes:
1. General corporate expenses of ¥190,698 million (U.S.$2,096 million), ¥221,979 million and ¥202,328 million in the years ended December 31, 2008, 2007 and

2006, respectively, are included in “Corporate and Eliminations.”

2. Corporate assets of ¥1,487,667 million (U.S.$16,348 million), ¥1,644,220 million and ¥1,860,933 million as of December 31, 2008, 2007 and 2006, respectively,
which mainly consist of cash and cash equivalents, short-term investments, 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 deﬁ ned 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 proﬁ t by product
Operating proﬁ t for business machines in ﬁ scal 2008
decreased by ¥105,617 million (U.S.$1,161 million) to ¥544,644
million (U.S.$5,985 million). This decrease resulted primarily
from the reduction in sales.

Operating proﬁ t for cameras in ﬁ scal 2008 decreased by
¥119,639 million (U.S.$1,315 million) to ¥187,787 million
(U.S.$2,064 million) as a result of the drop in sales value, coupled
with the signiﬁ cant decline in the gross proﬁ t ratio stemming
from falling prices and the effects of the strong yen.

Operating proﬁ t for optical and other products in ﬁ scal 2008
decreased by ¥66,570 million (U.S.$732 million) to a loss of
¥45,490 million (U.S.$500 million) as a result of a signiﬁ cant
increase in cost of sales and outlays due to such factors as the
disposal of inventories, which was carried out in response to
rising concerns that weak market sentiment may continue, the
appreciation of the yen, along with an impairment charge for
ﬁ xed assets equipped with current technologies.

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 proﬁ t ratio. To reduce the ﬁ nancial risks from changes
in foreign exchange rates, Canon utilizes derivative ﬁ nancial
instruments, which are comprised principally of forward currency
exchange contracts.

The return on foreign operation sales is usually lower than
that from domestic operations because foreign operations consist
mainly of marketing activities. Return on foreign operation sales
is calculated by dividing net income of foreign subsidiaries,
after factoring in consolidation adjustments between foreign
subsidiaries, by net sales of foreign subsidiaries. Marketing
activities are generally less proﬁ table than production activities,
which are mainly conducted by the Company and its domestic
subsidiaries. The returns on foreign operation sales in ﬁ scal
2008, 2007 and 2006 were 2.3%, 4.0% and 3.7%, respectively.
This compares with returns of 7.6%, 10.9% and 11.0% on
consolidated operations for the respective years.

LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in ﬁ scal 2008 decreased by
¥265,267 million (U.S.$2,915 million) to ¥679,196 million
(U.S.$7,464 million), compared with ¥944,463 million in ﬁ scal
2007 and ¥1,155,626 million in ﬁ scal 2006. 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.
Net cash provided by operating activities in ﬁ scal 2008
decreased by ¥222,585 million (U.S.$2,446 million) from the
previous year to ¥616,684 million (U.S.$6,777 million), reﬂ ecting
the decrease in sales and decreased cash proceeds from sales,
combined with a decrease in net income. Cash ﬂ ow from
operating activities consisted of the following key components:
the major component of Canon’s cash inﬂ ow is cash received
from customers, and the major components of Canon’s cash
outﬂ ow are payments for parts and materials, selling, general
and administrative expenses, and income taxes.

For ﬁ scal 2008, cash inﬂ ow from cash received from customers

decreased, due to the decrease in net sales. There were no
signiﬁ cant changes in Canon’s collection rates. Cash outﬂ ow for
payments for parts and materials also decreased, as a result of a
decrease in net sales and cost reductions. Cost reductions reﬂ ect
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 efﬁ ciency in operations. Cash outﬂ ow for
payments for selling, general and administrative expenses
increased despite cost-cutting efforts. Cash outﬂ ow for payments
of income taxes decreased, due to the decrease in taxable income.
Net cash used in investing activities in ﬁ scal 2008 was
¥472,480 million (U.S.$5,192 million), compared with ¥432,485
million in ﬁ scal 2007 and ¥460,805 million in ﬁ scal 2006,
consisting primarily of purchases of ﬁ xed assets. The purchases
of ﬁ xed assets which totaled ¥428,168 million (U.S.$4,705 mil-
lion) in ﬁ scal 2008 were mainly concentrated to items relevant
to reinforcing production and achieving cost reduction, along
with the acquisition of shares of Hitachi Displays, Ltd. toward
the launch of Canon’s display business.
Canon deﬁ nes “free cash ﬂ ow” by deducting the cash
ﬂ ows from investing activities from the cash ﬂ ows of operating
activities. For ﬁ scal 2008, free cash ﬂ ow totaled ¥144,204 million
(U.S.$1,585 million) as compared to ¥406,784 million for ﬁ scal
2007. Canon’s management recognizes that constant and

intensive investment in facilities and R&D is required to maintain
and strengthen the competitiveness of its products. Canon’s
management seeks to meet its capital requirements with cash
ﬂ ow principally earned from its operations, therefore, our capital
resources are primarily sourced from internally generated funds.
Accordingly, Canon has included the information with regard
to free cash ﬂ ow as its management frequently monitors this
indicator, and believes that such indicator is beneﬁ cial to the
understanding of investors. Furthermore, Canon’s management
believes that this indicator is signiﬁ cant in understanding Canon’s
current liquidity and the alternatives of use in ﬁ nancing activities
because it takes into consideration its operating and investing
activities. Canon refers to this indicator together with relevant
U.S. GAAP ﬁ nancial measures shown in its consolidated state-
ments of cash ﬂ ows and consolidated balance sheets for cash
availability analysis.
Net cash used in ﬁ nancing activities totaled ¥277,565 million
(U.S.$3,050 million) in ﬁ scal 2008, mainly resulting from the
¥100,000 million (U.S.$1,099 million) purchase of treasury stock
with the aim of improving capital efﬁ ciency and ensuring a ﬂ exible
capital strategy in addition to the dividend payout of ¥145,000
million (U.S.$1,593 million). The Company paid dividends in
ﬁ scal 2008 of ¥110.00 (U.S.$1.21) per share, the same dividend
amount as the prior year on a local currency basis.
Canon seeks to meet its capital requirements principally
with cash ﬂ ow from operations although Canon expects net cash
provided by operating activities in ﬁ scal 2009 is likely to decline.
In response to this expectation, Canon is currently endeavoring
to optimize the level of capital investments, by further raising
the efﬁ ciency of its investments and focusing investments on
selected material items. Consistent with this objective, Canon
continued to reduce its reliance on external funding for capital
investments in favor of relying upon internally generated cash
ﬂ ows. This approach is supplemented with group-wide treasury
and cash management activities undertaken at the parent
company level.

To the extent Canon relies on external funding for its liquidity
and capital requirements, it generally has access to various funding
sources, including the issuance of additional share capital, long-
term debt or short-term loans. While Canon has been able to
obtain funding from its traditional ﬁ nancing 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 ¥5,540 million (U.S.$61 million) at December
31, 2008 compared to ¥18,317 million at December 31, 2007.
Long-term debt (excluding current portion) amounted to ¥8,423
million (U.S.$93 million) at December 31, 2008 compared to
¥8,680 million at December 31, 2007.
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 27, 2009, 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 down-
grade 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.

Increase in property, plant and equipment on an accrual
basis in ﬁ scal 2008 amounted to ¥361,988 million (U.S.$3,978
million) compared with ¥428,549 million in ﬁ scal 2007 and
¥379,657 million in ﬁ scal 2006. In ﬁ scal 2008, increase in
property, plant and equipment was mainly used to reinforce
production and achieve cost reductions. For ﬁ scal 2009, Canon
projects its increase in property, plant and equipment will be
approximately ¥315,000 million (U.S.$3,462 million).

Employer contributions to Canon’s worldwide deﬁ ned beneﬁ t
pension plans were ¥23,033 million (U.S.$253 million) in ﬁ scal
2008, ¥21,720 million in ﬁ scal 2007, ¥44,981 million in ﬁ scal
2006. In addition, employer contributions to Canon’s worldwide
deﬁ ned contribution pension plans were ¥10,840 million
(U.S.$119 million) in ﬁ scal 2008, ¥10,262 million in ﬁ scal 2007,
and ¥6,233 million in ﬁ scal 2006.

Increase in Property,
Plant and Equipment
(Millions of yen)

500,000

400,000

300,000

200,000

100,000

428,549

383,784 379,657

361,988

318,730

OFF-BALANCE SHEET ARRANGEMENTS
As part of its ongoing business, Canon does not participate in
transactions that generate relationships with unconsolidated
entities or ﬁ nancial partnerships, such as entities often referred
to as structured ﬁ nance 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,
afﬁ liates 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 afﬁ liates and other companies. The maximum amount of
undiscounted payments Canon would have had to make in the
event of default by all borrowers was ¥22,308 million (U.S.$245
million) at December 31, 2008. The carrying amounts of the
liabilities recognized for Canon’s obligations as a guarantor
under those guarantees were insigniﬁ cant.

Working capital in ﬁ scal 2008 decreased by ¥231,234 million
(U.S.$2,541 million), to ¥1,120,848 million (U.S.$12,317 million),
compared with ¥1,352,082 million in ﬁ scal 2007 and ¥1,619,042
million in ﬁ scal 2006. This decrease was primarily a result of a
decrease in cash and cash equivalents. Canon believes its working
capital will be sufﬁ cient 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 purchases of ﬁ xed assets and investments. The working
capital ratio (ratio of current assets to current liabilities) for ﬁ scal
2008 was 2.19 compared to 2.08 for ﬁ scal 2007 and 2.39 for
ﬁ scal 2006.

Return on assets (net income divided by the average of total
assets) was 7.3% in ﬁ scal 2008, compared to 10.8% in ﬁ scal
2007 and 10.6% in ﬁ scal 2006.

Return on stockholders’ equity (net income divided by the
average of total stockholders’ equity) was 11.1% in ﬁ scal 2008
compared with 16.5% in ﬁ scal 2007 and 16.3% in ﬁ scal 2006.

Debt to total assets ratio was 0.4%, 0.6% and 0.7% as of
December 31, 2008, 2007 and 2006, respectively. Canon had
short-term loans and long-term debt of ¥13,963 million
(U.S.$153 million) as of December 31, 2008, ¥26,997 million
as of December 31, 2007 and ¥31,151 million as of December
31, 2006.

Working Capital Ratio

Return on Stockholders’ Eqiuty
(%)

3.0

2.5

2.0

1.5

1.0

0.5

0.0

2.39

2.27

2.28

2.19

2.08

16.8

16.0

16.3

16.5

11.1

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes Canon’s contractual obligations at December 31, 2008.

Millions of yen
Contractual obligations:

Long-term debt:

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

Property, plant and equipment
Parts and raw materials
Total

Total

Less than 1 year

1-3 years

3-5 years More than 5 years

Payments due by period

¥ 13,648
95
52,049

74,909
60,281
¥200,982

5,313
7
15,221

74,909
60,281
¥155,731

¥ 7,388
27
18,946

—
—
¥26,361

924
33
9,107

—
—
¥10,064

23
28
8,775

—
—
¥8,826

Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the speciﬁ c 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:

Property, plant and equipment
Parts and raw materials
Total

Total

Less than 1 year

1-3 years

3-5 years More than 5 years

Payments due by period

$ 149,978
1,044
571,967

58,385
77
167,264

823,176
662,429
$2,208,594

823,176
662,429
$1,711,331

$ 81,187
297
208,198

—
—
$289,682

$ 10,154
362
100,077

—
—
$110,593

252
308
96,428

—
—
$96,988

During ﬁ scal 2009, Canon expects to contribute ¥14,439
million (U.S.$159 million) to its Japanese deﬁ ned beneﬁ t pension
plans and ¥3,485 million (U.S.$38 million) to its foreign deﬁ ned
beneﬁ t pension plans.
Canon’s management believes that current ﬁ nancial resources,
cash generated from operations and Canon’s potential capacity
for additional debt and/or equity ﬁ nancing will be sufﬁ cient to
fund current and future capital requirements.

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,
speciﬁ c product class failures outside of the baseline experience,
material usage and service delivery costs incurred in correcting a
product failure. As of December 31, 2008, accrued product
warranty costs amounted to ¥17,372 million (U.S.$191 million).
At December 31, 2008, commitments outstanding for the
purchase of property, plant and equipment were approximately
¥74,909 million (U.S.$823 million), and commitments outstanding
for the purchase of parts and raw materials were approximately
¥60,281 million (U.S.$662 million), both for use in the ordinary
course of its business. Canon anticipates that funds needed to
fulﬁ ll these commitments will be generated internally through
operations.

Canon is developing and strengthening relationships with
universities and other research institutes, such as Kyoto University,
Tokyo Institute of Technology, Stanford University, the New
Energy and Industrial Technology Development Organization
and the National Institute of Advanced Industrial Science and
Technology, to assist with fundamental research and to develop
cutting-edge technologies.
Canon has fully introduced 3D-CAD systems across the
Canon group, boosting R&D efﬁ ciency to curtail product
development times and costs. Moreover, Canon enhanced and
evolved its simulation, measurement, and analysis technologies
by establishing 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. Each R&D center is
collaborating with other centers to achieve synergies, and is
cultivating closer ties in ﬁ elds ranging from basic research to
product development.
Canon’s consolidated R&D expenditures were ¥374,025
million (U.S.$4,110 million) in ﬁ scal 2008, ¥368,261 million in
ﬁ scal 2007 and ¥308,307 million in ﬁ scal 2006. The ratios of
R&D expenditures to the consolidated total net sales for ﬁ scal
2008, 2007 and 2006 were 9.1%, 8.2% and 7.4%, respectively.
Canon believes that new products protected by patents
will not easily allow competitors to compete 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 2008. This achieve-
ment marks Canon’s seventeenth consecutive year as one of the
top three patent-receiving private-sector organizations.

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
ﬁ nancial instruments.

RESEARCH AND DEVELOPMENT, PATENTS
AND LICENSES
Canon is in the third year of the Excellent Global Corporation
Plan, its 5-year (2006-2010) management plan. The slogan of
the third phase (“Phase III”) is “Innovation & Sound Growth”
and there are four core strategies:

• Realize an overwhelming No.1 position worldwide in all

current core businesses;

• Expand operations through diversiﬁ cation;
• Identify new business domains and accumulate necessary

technological capabilities; and

• Establish new production system to sustain global

competitiveness.

Canon is striving to implement the three R&D related strategies
as follows:

• Realize an overwhelming No.1 position worldwide in all
current core businesses: Pursue development of new
products which enable “cross-media imaging” by sophisti-
cated functional synergy among the variety of Canon’s
image handling products, beneﬁ ting from the proliferation
of broad band communication environment.

• Expand operations through diversiﬁ cation: Focus on

developing various types of display, including Surface-
conduction Electron-emitter Display (“SED”) and Organic
Light-Emitting Diode displays (“OLED”).

• Identify new business domains and accumulate necessary
technological capabilities: Accumulate technological
capability in each of the medical imaging sector, intelligent
robot industry and safety technology domain.

R&D Expenditure
(Millions of yen)

400,000

368,261

374,025

308,307

286,476

300,000

275,300

200,000

100,000

Equity price risk
Canon holds marketable securities included in current assets,
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 with original maturities of more than three months
were as follows at December 31, 2008.

Available-for-sale securities

Due within one year
Due after one year through ﬁ ve years
Due after ﬁ ve years through ten years
Equity securities

Millions of yen

Thousands of U.S. dollars

Cost

134
3,542
848
10,522
¥15,046

Fair value
150
¥
3,426
811
12,218
¥16,605

Cost
$ 1,473
38,923
9,318
115,627
$165,341

Fair value
$ 1,648
37,648
8,912
134,264
$182,472

Foreign currency exchange rate and interest
rate risk
Canon operates internationally, exposing it to the risk of changes
in foreign currency exchange rates. Derivative ﬁ nancial 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 evaluat-
ing hedging opportunities. Canon does not hold or issue deriva-
tive ﬁ nancial instruments for trading purposes. Canon is also
exposed to credit-related losses in the event of non-performance
by counterparties to derivative ﬁ nancial instruments, but it is not
expected that any counterparties will fail to meet their obligations.
Most of the counterparties are internationally recognized ﬁ nancial
institutions and selected by Canon taking into account their
ﬁ nancial condition, and contracts are diversiﬁ ed across a number
of major ﬁ nancial 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 speciﬁ c
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 ﬁ nancial instruments related to foreign currency
exchange transactions existing at December 31, 2008. All of the
foreign exchange contracts described in the following table have
a contractual maturity date in 2009.

U.S.$

Euro

Others

Total

¥179,239
8,391

¥152,423
(1,390)

¥19,297
710

¥350,959
7,711

¥ 24,518
(9)

¥ 1,000
7

¥ 9,729
2,129

¥ 35,247
2,127

U.S.$

Euro

Others

Total

$ 1,969,659
92,209

$ 1,674,978
(15,275)

$ 212,055
7,802

$ 3,856,692
84,736

$ 269,429
(99)

10,989
77

$ 106,912
23,395

$ 387,330
23,373

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

All of Canon’s long-term debt is ﬁ xed rate debt. Canon believes
that fair value changes, and cash ﬂ ows resulting from reasonable
near-term changes in interest rates would be immaterial.
Accordingly, Canon considers interest rate risk is insigniﬁ cant. See
also Note 11 of the Notes to Consolidated Financial Statements.
Changes in the fair value of derivative ﬁ nancial instruments
designated as cash ﬂ ow hedges, including foreign exchange
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassiﬁ ed into earnings
through other income (deductions) in the same period as the
hedged items affect earnings. Substantially all such 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, 2008, 2007 and 2006. The
amounts of net losses excluded from the assessment of hedge
effectiveness (time value component) which was recorded in
other income (deductions) was ¥3,701 million (U.S.$41 million),
¥6,883 million and ¥5,917 million for the years ended
December 31, 2008, 2007 and 2006, 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
Regarding the global economy, given the combined effects of
economic downturns in the leading industrialized countries and
deceleration in emerging countries, it is expected that growth
rates will decrease greatly and a strong sense of stagnation will
continue. The business conditions for Canon are also expected to
continue to be severe due to factors such as the trend of a strong
yen in the foreign exchange markets. Much of the deterioration
in market conditions for Canon’s three product groups occurred
in the fourth quarter of ﬁ scal 2008 so that the full-year 2009
net sales volumes for Canon’s product groups are likely to decline
further from ﬁ scal 2008 levels and continue to adversely affect
Canon’s operating results. Canon expects net sales volumes to
remain at suppressed levels in ﬁ scal 2010 and to continue to
adversely affect ﬁ scal 2010 operating results.
Under these conditions, Canon, in the fourth year of Phase
III (2006 to 2010) of its “Excellent Global Corporation Plan”, will
make the most of management reforms achieved to date and
take all measures for future growth in order to achieve further
improvements in management quality. In other words, Canon
will respond swiftly to the present difﬁ cult business conditions

and structure itself as a lean organization by using this year to
prepare to take advantage of improved conditions in the future.
Toward that goal, Canon’s key objectives will be, ﬁ rst of all,
to achieve timely introductions of new products satisfactory to
customers in every aspect of functionality, design, ease of use,
reliability and cost performance, and to secure No. 1 market
positions in each of its businesses.
Next, amid a strong yen, massive ﬂ uctuations in raw material
prices, falling product prices and conditions changing in other
respects, Canon will work to lower its costs by, for example,
pursuing production and procurement reform activities to an
even greater degree and practicing prototype-less development.
Furthermore, in the face of stagnant market conditions, Canon
will improve the quality of products thoroughly by renewing its
appreciation of product quality as the lifeblood of a manufacturer
and taking to heart the supremacy of quality.
Additionally, through collaboration with Hitachi Displays,
Ltd., of which Canon acquired shares during the current term,
Canon will concentrate on strengthening the display operation
as a new core business. Canon also aims to add signiﬁ cant
strength in new businesses by actively launching new products in
the ﬁ eld of medical equipment and by pursuing other initiatives
as well.
With eyes focused on taking Canon to new heights, promot-
ing its perpetual development and turning it into a truly excellent
global company that continues to prosper, Canon will work to
strengthen its unique core technology research system and
develop management personnel, while also devoting even
greater efforts to social contribution activities.

Business machines segment
Ofﬁ ce imaging products
In the ofﬁ ce 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 ofﬁ ce products,
Canon expects that the market for higher-end models and
low-end multifunction models will expand in the long term.
The market for color network digital MFDs continued to grow,
but sales of monochrome network digital MFDs decreased in
2008 due to the global economic downturn and the shifting
market trend from monochrome to color models. In recent
years, there has been a new printer-based multifunction printer
(“MFP”) market emerging that has been 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 software
product lineups and by improving functionality. In 2008, 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 slowdown in
market growth led by the global economic slowdown, and the
shift from single-function printers (“SFPs”) to MFPs. To manage
these trends, Canon has focused on selling mid-range to high-end
models which enables large volume of printing, including the
business-use multifunction models equipped with a facsimile
function, and simultaneously has strengthened its lineup to
entry models with the utmost effort to expand overall sales.
Canon’s laser beam printer business had been maintaining
a strong position in the market, which had consecutively displayed
solid growth. However, the deterioration of the current global
economy has led to a dramatic decline in the market as a whole,
raising uncertainty in the market. Within the monochrome
laser beam printer market, the reduced demand in emerging
economies, which had been driving market expansion, was sig-
niﬁ cant especially in Russia, in addition to the drop in developed
countries. This situation has led to the shrinkage of the overall
market. As for color laser beam printers, market growth
reversed from expansion to a slight contraction. Amid this severe
market conditions, Canon is accelerating the development of
competitive, strategic products in all segments to introduce
those products on a timely basis and prepare for the recovery of
the global economy. Canon is also focused to shift from selling
single-function models to multifunction models, as Canon
expects continued growth in demand for multifunction models.
The promotion of automated production of cartridges, along
with in-house production of parts to ensure stable procurement,
is concurrently in progress.

Business information products
As for document scanners, the adoption of internal information
management systems by corporations, and other factors are
driving a worldwide movement to digitize documents and
Canon expects the market for low-priced, compact scanners to
continue to expand. With regard to servers and personal com-
puters, demand from corporate clients in the Japanese market
held steady in ﬁ scal 2008, 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.

Cameras segment
The digital camera market expanded in 2008, despite the
slower growth starting in September 2008 due principally to
the ﬁ nancial crisis. Developed markets such as the United States
exhibited negative growth due to the ﬁ nancial crisis. However,
markets in emerging countries such as China and Eastern
Europe have continued to expand. The emergence of digital

imaging systems such as PC-free direct printing systems has
contributed to this growth by expanding digital imaging func-
tionality through network connectivity. The improvement of the
user-friendly image processing interfaces and software have also
boosted growth.
Currently, the overall market for digital cameras is stagnant
due to the current economic crisis. However, digital cameras are
popular among individuals and further expansion is expected
once the economy recovers. Nevertheless, as with most other
digital consumer electronics, the digital camera market is now
confronted with a ﬁ erce price war and intensiﬁ ed technological
competition in terms of picture quality and functionality. Proﬁ t
margins have been shrinking overall in the industry, and Canon’s
proﬁ t ratio has fallen due to the sharp economic downturn and
ﬂ uctuations in the foreign exchange rates. Canon expects the
market for compact digital cameras to expand in the medium
term, thanks to growth in emerging market countries. However,
industry proﬁ t margins are eroding due to falling prices and
increased competition. Therefore, Canon seeks to continue
cutting production costs while expanding sales volumes.
Canon believes that it played a major role in the continued
expansion of the digital SLR market in ﬁ scal 2008. Although the
difﬁ cult global economic situation has resulted in slowed growth,
this market is expected to continue to grow in the near term. The
trend towards high ISO speeds has moved at a dramatic pace in
this digital age. It has become possible with a digital SLR camera
to easily take beautiful shots in dark places where shooting with
ﬁ lm cameras is impossible. Also, movie functions were added to
SLR cameras this year, marking the beginning of a new age for
these products. These functions have expanded the possibilities
for shooting, and by supporting new user needs, Canon believes
it can develop the market even further.
Canon expects the interchangeable lens market for SLRs to
grow as a result of the market penetration in the digital SLR
camera market. Canon aims to expand its sales and market
share by introducing the most suitable products for the digital
SLR camera users, including products with Canon’s Image
Stabilizer capability.
Diversiﬁ cation in the global video camcorder market has
occurred with various new media appearing, such as DVDs, hard
disks and ﬂ ash memories. However, starting in 2008, it became
apparent that the trend is heading for ﬂ ash memories to become
mainstream in the global video camcorder market and towards
High Deﬁ nition (“HD”). Canon believes that these two trends
will lead to higher picture quality from smaller video camcorders
with longer battery life, and will likely support growth in the
overall digital video market. Canon is working to expand sales of
its powerful lineup of products that meet a wide range of user

Forward looking statements
The foregoing discussion and other disclosure in this report
contains forward-looking statements that reﬂ ect management’s
current views with respect to certain future events and ﬁ nancial
performance. Actual results may differ materially from those
projected or implied in the forward-looking statements. Further,
certain forward-looking statements are based upon assumptions
of future events that may not prove to be accurate. The following
important factors could cause actual results to differ materially
from those projected or implied in any forward-looking statements:
foreign currency exchange rate ﬂ uctuations; 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 ﬂ uctuations; uncertainty as to economic conditions in
Canon’s major markets; uncertainty of continued demand for
Canon’s high-value-added products; uncertainty as to the recovery
of computer and related markets; uncertainty of recovery in
demand for Canon’s semiconductor production equipment;
Canon’s ability to continue to develop products and to market
products that incorporate new technology on a timely basis,
are competitively priced, and achieve market acceptance; the
possibility of losses resulting from foreign currency transactions
designed to reduce ﬁ nancial risks from changes in foreign
currency exchange rates; and inventory risk due to shifts in
market demand.

needs and that use high-quality HD imaging and dual ﬂ ash
memory technologies.

The business application projector market experienced the
effects of the current global economic downturn beginning in the
fourth quarter of 2008. Canon has reduced its unit and monetary
projections for 2009.

The economic slowdown has affected high value-added
products ﬁ rst, and the effects have started to be observed in
Canon’s high-resolution, high-brightness (high-luminosity), and
high value-added products. Notwithstanding this trend, Canon
continues to receive inquiries from system integrators and other
imaging professionals, and is seeking to expand high value-added
sales despite this current global economic downturn.

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. In
particular, there has been increased demand for lenses used for
broadcasting sporting events and for producing dramas and
documentaries in HDTV. Although Canon has observed a slow-
down in demand for these TV lenses starting at the end of ﬁ scal
2008 due to the current global economic downturn, in the
medium term, Canon still expects that digitization will drive
worldwide replacement demand. At the same time, there have
been signs of expanded HDTV applications by the media, starting
with relatively inexpensive HDTV production, as the TV lens
market structure shows signs of change. Canon already has
signiﬁ cant market share worldwide for this class of lens and intends
to continue to strengthen its market position in this market.

The economic downturn has caused a decline in the large
format printer market, accordingly, Canon’s sales fell below last
year’s sales performance. Canon will continue to lower costs of
production and improve inventory turnover by expanding its
market share and achieving economics of scale that improve
its proﬁ tability.

TEN-YEAR FINANCIAL SUMMARY

Net sales:

Domestic
Overseas
Total

Percentage of previous year

Net income

Percentage of sales

Advertising
Research and development expenses
Depreciation of property, plant and equipment
Increase in property, plant and equipment

Long-term debt, excluding current installments
Stockholders’ equity
Total assets
Per share data:

Income before cumulative effect of change
in accounting principle:

Basic
Diluted
Net income:

Basic
Diluted

Cash dividends declared
Stock price:

High
Low

Millions of yen (except per share amounts)

2008

2007

2006

2005

¥ 868,280 ¥ 947,587 ¥ 932,290 ¥ 856,205
2,897,986
3,754,191
108.3%

3,533,759
4,481,346
107.8%

3,225,881
4,094,161
91.4%

3,224,469
4,156,759
110.7%

309,148
7.6%

488,332
10.9%

455,325
11.0%

384,096
10.2%

112,810
374,025
304,622
361,988

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

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

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

8,423 ¥

8,680 ¥

15,789 ¥

2,659,792
3,969,934

2,922,336
4,512,625

2,986,606
4,521,915

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

246.21 ¥
246.20

377.59 ¥
377.53

341.95 ¥
341.84

288.63
288.36

246.21
246.20
110.00

5,820
2,215

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

Average number of common shares in thousands
Number of employees

1,255,626
166,980

1,293,296
131,352

1,331,542
118,499

1,330,761
115,583

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

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

2004

2003

2002

2001

2000

1999

2008

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

¥ 849,734 ¥ 801,400 ¥ 732,551 ¥ 827,288 ¥ 779,366 ¥ 718,513
1,812,383
2,530,896
92.5%

1,917,054
2,696,420
106.5%

2,207,577
2,940,128
101.1%

2,618,119
3,467,853
108.4%

2,396,672
3,198,072
108.8%

2,080,285
2,907,573
107.8%

343,344
9.9%

275,730
8.6%

190,737
6.5%

167,561
5.8%

134,088
5.0%

70,234
2.8%

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

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

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

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

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

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

28,651 ¥

59,260 ¥

81,349 ¥

2,209,896
3,587,021

1,865,545
3,182,148

1,591,950
2,942,706

95,526 ¥ 142,925 ¥ 165,277
1,202,003
1,298,914
2,587,532
2,832,125

1,458,476
2,844,756

258.53 ¥
257.85

209.21 ¥
207.17

145.04 ¥
143.20

124.71 ¥
123.03

102.44 ¥
101.01

258.53
257.85
43.33

3,880
3,273

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

1,328,048
108,257

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

$ 9,541,538
35,449,242
44,990,780
91.4%

3,397,231
7.6%

1,239,670
4,110,165
3,347,494
3,977,890

92,560
29,228,484
43,625,648

2.71
2.71

2.71
2.71
1.21

63.96
24.34

Notes:
1. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY91, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December

30, 2008.

2. The Company made a three-for-two stock split on July 1, 2006. The average number of common shares and the per share data for the periods prior to the stock

split have been adjusted to reﬂ ect the stock split.

CONSOLIDATED BALANCE SHEETS
CANON INC. AND SUBSIDIARIES

ASSETS
Current assets:

Cash and cash equivalents (Note 1)
Short-term investments (Note 4)
Trade receivables, net (Note 5)
Inventories (Note 6)
Prepaid expenses and other current assets (Notes 8 and 14)

Total current assets

Noncurrent receivables (Note 21)
Investments (Note 4)
Property, plant and equipment, net (Notes 7 and 8)
Intangible assets (Notes 9 and 10)
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 (Notes 13 and 21)
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 21)
Stockholders’ equity:
Common stock

Authorized 3,000,000,000 shares;
issued 1,333,763,464 shares in 2008 and
1,333,636,210 shares in 2007 (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; 99,275,245 shares in 2008 and
72,588,428 shares in 2007
Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes to consolidated ﬁ nancial statements.

December 31, 2008 and 2007

Millions of yen

Thousands of
U.S. dollars (Note 2)

2008

2007

2008

¥ 679,196
7,651
595,422
506,919
275,660
2,064,848
14,752
88,825
1,357,186
119,140
325,183
¥ 3,969,934

5,540
406,746
69,961
277,117
184,636
944,000
8,423
110,784
55,745
1,118,952
191,190

¥ 944,463
20,499
794,240
563,474
286,111
2,608,787
15,239
90,086
1,364,702
112,516
321,295
¥ 4,512,625

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

$ 7,463,692
84,077
6,543,099
5,570,538
3,029,231
22,690,637
162,110
976,099
14,914,132
1,309,231
3,573,439
$ 43,625,648

60,879
4,469,736
768,802
3,045,242
2,028,967
10,373,626
92,560
1,217,407
612,583
12,296,176
2,100,988

174,762
403,790
53,706
2,876,576
(292,820)

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

1,920,462
4,437,253
590,176
31,610,725
(3,217,802)

(556,222)
2,659,792
¥ 3,969,934

(456,186)
2,922,336
¥ 4,512,625

(6,112,330)
29,228,484
$ 43,625,648

CONSOLIDATED STATEMENTS OF INCOME
CANON INC. AND SUBSIDIARIES

Net sales
Cost of sales (Notes 7, 10, 13 and 21)

Gross proﬁ t

Operating expenses (Notes 1, 7, 10, 13, 18 and 21):

Selling, general and administrative expenses
Research and development expenses

Operating proﬁ t

Other income (deductions):

Interest and dividend income
Interest expense
Other, net (Notes 1, 4 and 20)

Income before income taxes and minority interests

Years ended December 31, 2008, 2007 and 2006

2008
¥ 4,094,161
2,156,153
1,938,008

Millions of yen

2007
¥ 4,481,346
2,234,365
2,246,981

2006
¥ 4,156,759
2,096,279
2,060,480

Thousands of
U.S. dollars (Note 2)

2008
$ 44,990,780
23,693,989
21,296,791

1,067,909
374,025
1,441,934
496,074

19,442
(837)
(33,532)
(14,927)
481,147

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

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

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

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

11,735,263
4,110,165
15,845,428
5,451,363

213,648
(9,198)
(368,483)
(164,033)
5,287,330

Income taxes (Note 14)

Income before minority interests

160,788
320,359

264,258
504,130

248,233
470,910

1,766,901
3,520,429

Minority interests

Net income

11,211
¥ 309,148

15,798
¥ 488,332

15,585
¥ 455,325

123,198
$ 3,397,231

Yen

U.S. dollars (Note 2)

Net income per share (Note 19):

Basic
Diluted

Cash dividends per share

See accompanying notes to consolidated ﬁ nancial statements.

246.21
246.20
110.00

377.59
377.53
110.00

341.95
341.84
83.33

2.71
2.71
1.21

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CANON INC. AND SUBSIDIARIES

Millions of yen

Accumulated
other
comprehensive
income (loss)
¥ (28,212)

Treasury
stock
(5,410)

Common
stock
¥ 174,438
165

Additional
paid-in
capital
¥ 403,246
264

Legal
reserve
¥ 42,331

Retained
earnings
¥ 2,018,289

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
64

3
402,991
824

46,017

2,720,146

34,670

(450,314)
(456,186)

7,689

(145,024)
(7,689)

309,148

(258,764)
(5,152)
2,342
(65,916)

¥ 174,762

(25)
¥ 403,790

¥ 53,706

(5)
¥ 2,876,576

¥ (292,820)

(100,036)
¥ (556,222)

$ 1,919,759
703

$ 4,428,473
9,055

Thousands of U.S. dollars (Note 2)

$ 505,681

$ 29,891,714

$ 380,989

$ (5,013,034)

84,495

(1,593,670)
(84,495)

3,397,231

(2,843,560)
(56,615)
25,736
(724,352)

$ 1,920,462

(275)
$ 4,437,253

$ 590,176

(55)
$ 31,610,725

$ (3,217,802)

(1,099,296)
$ (6,112,330)

Total
stockholders’
equity
¥ 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
888
(145,024)
—

309,148

(258,764)
(5,152)
2,342
(65,916)
(18,342)
(100,066)
¥ 2,659,792

$ 32,113,582
9,758
(1,593,670)
—

3,397,231

(2,843,560)
(56,615)
25,736
(724,352)
(201,560)
(1,099,626)
$ 29,228,484

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
Repurchase of treasury stock, net
Balance at December 31, 2006
Cumulative effect of a change in accounting principle - adoption
of EITF 06-2, net of tax
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
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, 2008

Balance at December 31, 2007
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, 2008

See accompanying notes to consolidated ﬁ nancial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
CANON INC. AND SUBSIDIARIES

Cash ﬂ ows 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) decrease in trade receivables
(Increase) decrease in inventories
Increase (decrease) in trade payables
Increase (decrease) in accrued income taxes
Increase (decrease) in accrued expenses
Decrease in accrued (prepaid) pension and
severance cost
Other, net

Net cash provided by operating activities

Cash ﬂ ows from investing activities:
Purchases of ﬁ xed assets (Note 7)
Proceeds from sale of ﬁ xed assets (Note 7)
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 ﬂ ows from ﬁ nancing 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 ﬁ nancing 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 ﬂ ow information:

Cash paid during the year for:

Interest
Income taxes

See accompanying notes to consolidated ﬁ nancial statements.

Years ended December 31, 2008, 2007 and 2006

Millions of yen

Thousands of
U.S. dollars (Note 2)

2008

2007

2006

2008

¥ 309,148

¥ 488,332

¥ 455,325

$ 3,397,231

341,337
11,811
(32,497)
83,521
49,547
(36,719)
(77,340)
(30,694)

(12,128)
10,698
616,684

(428,168)
7,453
(7,307)

4,320
10,000
2,892
(5,999)
(45,473)
(10,198)
(472,480)

6,841
(15,397)
(2,643)
(145,024)
(100,066)
(21,276)
(277,565)

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)

3,750,956
129,791
(357,110)
917,813
544,473
(403,505)
(849,890)
(337,297)

(133,275)
117,560
6,776,747

(4,705,143)
81,901
(80,297)

47,473
109,890
31,780
(65,923)
(499,703)
(112,066)
(5,192,088)

75,176
(169,198)
(29,044)
(1,593,670)
(1,099,626)
(233,803)
(3,050,165)

(131,906)
(265,267)
944,463
¥ 679,196

(13,564)
(211,163)
1,155,626
¥ 944,463

23,724
150,673
1,004,953
¥ 1,155,626

(1,449,516)
(2,915,022)
10,378,714
$ 7,463,692

901
263,392

1,476
273,888

2,146
244,236

9,901
2,894,418

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CANON INC. AND SUBSIDIARIES

1. Basis of Presentation and Signiﬁ cant Accounting Policies
(a) Description of Business
Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”)
is one of the world’s leading manufacturers in such ﬁ elds as ofﬁ ce
imaging products, computer peripherals, business information
products, cameras, and optical related products. Ofﬁ ce 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 reﬂ ex
(“SLR”) cameras, compact digital cameras, interchangeable
lenses and digital video camcorders. Optical and other products
include semiconductor production equipment, mirror projection
mask aligners for liquid crystal display (“LCD”) panels, broad-
casting equipment, medical equipment and large format printers.
Canon’s consolidated net sales for the years ended December 31,
2008, 2007 and 2006 were distributed as follows: ofﬁ ce imaging
products 27%, 29% and 28%, computer peripherals 36%, 34%
and 34%, business information products 2%, 2% and 3%,
cameras 25%, 26% and 25%, and optical and other products
10%, 9% and 10%, respectively.

Sales are made principally under the Canon brand name,
almost entirely through sales subsidiaries. These subsidiaries are
responsible for marketing and distribution, and primarily sell to
retail dealers in their geographical area. Approximately 76%, 77%
and 75% of consolidated net sales for the years ended December
31, 2008, 2007 and 2006 were generated outside Japan, with
28%, 30% and 31% in the Americas, 33%, 33% and 31% in
Europe, and 15%, 14% and 13% in other areas, respectively.
Canon sells laser beam printers on an OEM basis to
Hewlett-Packard Company; such sales constituted approximately
23%, 22% and 22% of consolidated net sales for the years
ended December 31, 2008, 2007 and 2006, respectively.
Canon’s manufacturing operations are conducted primarily
at 25 plants in Japan and 18 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 ﬁ nancial accounting standards of
Japan. Foreign subsidiaries maintain their books of account in
conformity with ﬁ nancial accounting standards of the countries
of their domicile.
Certain adjustments and reclassiﬁ cations have been incor-
porated in the accompanying consolidated ﬁ nancial statements
to conform with U.S. generally accepted accounting principles.
These adjustments were not recorded in the statutory books
of account.

“Consolidation of Variable Interest Entities.” All signiﬁ cant
intercompany balances and transactions have been eliminated.

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

(e) 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 ﬁ nancial 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) in the consolidated statements of
income. Foreign currency exchange losses, net were ¥11,212
million ($123,209 thousand), ¥31,943 million and ¥25,804
million for the years ended December 31, 2008, 2007 and
2006, respectively.

(f) Cash Equivalents
All highly liquid investments acquired with original maturities
of three months or less are considered to be cash equivalents.
Certain debt securities with original maturities of less than three
months classiﬁ ed as available-for-sale securities of ¥194,030
million ($2,132,198 thousand) and ¥164,610 million at December
31, 2008 and 2007, respectively, are included in cash and cash
equivalents in the consolidated balance sheets. Additionally,
certain debt securities with original maturities of less than three
months classiﬁ ed as held-to-maturity securities of ¥997 million
($10,956 thousand) and ¥5,992 million at December 31, 2008
and 2007, respectively, are also included in cash and cash
equivalents. Fair value for these securities approximates their cost.

(c) Principles of Consolidation
The consolidated ﬁ nancial statements include the accounts of the
Company, its majority owned subsidiaries and those variable interest
entities where the Company or its consolidated subsidiaries are
the primary beneﬁ ciaries under Financial Accounting Standards
Board (“FASB”) Interpretation No. 46 (revised December 2003),

(g) Investments
Investments consist primarily of time deposits with original
maturities of more than three months, debt and marketable
equity securities, investments in afﬁ liated companies and non-
marketable equity securities. Canon reports investments with
maturities of less than one year as short-term investments.

Canon classiﬁ es 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 ﬁ nancial
condition and near-term prospects of the issuer and Canon’s
intent and ability to retain the investment for a period of time
sufﬁ cient to allow for any anticipated recovery in market value.
When such a decline exists, Canon recognizes an impairment loss
to the extent by which the cost basis of the investment exceeds
the fair value of the investment. Fair value is determined based
on quoted market prices, projected discounted cash ﬂ ows or
other valuation techniques as appropriate.

Realized gains and losses are determined on the average

cost method and reﬂ ected in earnings.

Investments in afﬁ liated companies over which Canon has the
ability to exercise signiﬁ cant inﬂ uence, but does not hold a con-
trolling ﬁ nancial interest, are accounted for by the equity method.
Non-marketable equity securities in companies over which
Canon does not have the ability to exercise signiﬁ cant inﬂ uence
are stated at cost and reviewed periodically for impairment.

(h) Allowance for Doubtful Receivables
Allowance for doubtful trade and ﬁ nance receivables is maintained
for all customers based on a combination of factors, including
aging analysis, macroeconomic conditions, signiﬁ cant 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 ﬁ nancial obligations, such as
in the case of bankruptcy ﬁ lings. 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 uncollectable and charged against
the allowance.

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

(j) 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 and the estimated

undiscounted future cash ﬂ ows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated
undiscounted future cash ﬂ ows, an impairment charge is recog-
nized 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.

(k) 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 ﬁ xed-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 allocation
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 represented
a change in accounting estimate effected by a change in account-
ing principle. Accordingly, the affects of the change have been
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 depreciation expense
by ¥63,773 million 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, ¥24.99 and ¥24.99,
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.

(l) Goodwill and Other Intangible Assets
Goodwill and other intangible assets with indeﬁ nite 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 ﬁ nite useful
lives, consisting primarily of software and license fees, are amor-
tized 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 develop-
ment. Costs incurred in connection with developing internal use
software are capitalized at the application development stage.

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

In addition, Canon develops or obtains certain software to be
sold where related costs are capitalized after establishment of
technological feasibility.

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

(n) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
ﬁ nancial 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 valua-
tion allowance to reduce the deferred tax assets to the amount
that is more likely than not realizable.
Canon recognizes the ﬁ nancial statement effects of tax
positions when it is more likely than not, based on the technical
merits, that the tax positions will be sustained upon examination
by the tax authorities. Beneﬁ ts from tax positions that meet the
more-likely-than-not recognition threshold are measured at the
largest amount of beneﬁ t that is greater than 50 percent likely
of being realized upon settlement. Interest and penalties accrued
related to unrecognized tax beneﬁ ts are included in income
taxes in the consolidated statements of income.

(o) 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.

(p) Stock-Based Compensation
Canon measures stock-based compensation cost at the grant
date, based on the fair value of the award, and recognizes the
cost on a straight-line basis over the requisite service period,
which is the vesting period.

(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 issuances of common stock based on the
assumptions that all convertible debentures were converted into
common stock and all stock options were exercised.

(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 per-
suasive evidence of an arrangement exists, delivery has occurred
and title and risk of loss have been transferred to the customer
or services have been rendered, the sales price is ﬁ xed or
determinable, and collectibility is probable.

Revenue from sales of consumer products including ofﬁ ce
imaging products, computer peripherals, business information
products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the
customer.

Revenue from the sale of equipment under sales-type leases
is recognized at the inception of the lease. Income on sales-type
leases and direct-ﬁ nancing leases is recognized over the life of
each respective lease using the interest method. Leases not qualify-
ing as sales-type leases or direct-ﬁ nancing leases are accounted
for as operating leases and related revenue is recognized ratably
over the lease term. When equipment leases are bundled with
product maintenance contracts, revenue is ﬁ rst allocated consid-
ering 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, ﬁ nancing 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 fulﬁ lled 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.

Taxes collected from customers and remitted to governmental

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

other comprehensive income (loss), until earnings are affected
by the variability in cash ﬂ ows of the hedged item. Gains and
losses from hedging ineffectiveness are included in other income
(deductions). Gains and losses related to the components of
hedging instruments excluded from the assessment of hedge
effectiveness are included in other income (deductions).
Canon also uses certain derivative ﬁ nancial instruments
which are not designated as hedges. Canon records these
derivative ﬁ nancial instruments in the consolidated balance
sheets at fair value. The changes in fair values are immediately
recorded in earnings.
Canon classiﬁ es cash ﬂ ows from derivatives as cash ﬂ ows from
operating activities in the consolidated statements of cash ﬂ ows.

(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 ¥112,810 million ($1,239,670 thousand), ¥132,429 million
and ¥116,809 million for the years ended December 31, 2008,
2007 and 2006, respectively.

(u) Shipping and Handling Costs
Shipping and handling costs totaled ¥62,128 million ($682,725
thousand), ¥63,708 million and ¥62,626 million for the years
ended December 31, 2008, 2007 and 2006, 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 deriva-
tive as either a hedge of the fair value of a recognized asset or
liability or of an unrecognized ﬁ rm commitment (“fair value”
hedge), or a hedge of a forecasted transaction or the variability
of cash ﬂ ows to be received or paid related to a recognized asset
or liability (“cash ﬂ ow” 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 deriv-
atives that are used in hedging transactions are highly effective in
offsetting changes in fair values or cash ﬂ ows 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 qualiﬁ es as a fair-value hedge, along with the loss or gain on
the hedged asset or liability or unrecognized ﬁ rm 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 qualiﬁ es as a cash-ﬂ ow hedge are recorded in

(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 September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS 157”). SFAS 157 deﬁ nes fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This statement clariﬁ es
how to measure fair value as permitted or required under other
accounting pronouncements, but does not require any new fair
value measurements. In February 2008, the FASB issued Staff
Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement
No. 157,” which delays the effective date of SFAS 157 for one
year for certain nonﬁ nancial assets and liabilities. Canon adopted
SFAS 157 in the ﬁ rst quarter beginning January 1, 2008 for all
ﬁ nancial assets and liabilities that are recognized or disclosed at
fair value in the ﬁ nancial statements. This adoption did not have
a material impact on Canon’s consolidated results of operations
and ﬁ nancial condition. The adoption of SFAS 157 for all
nonﬁ nancial assets and liabilities beginning January 1, 2009
will not have a material impact on Canon’s consolidated results
of operations and ﬁ nancial condition. See Note 23 for the
disclosures required by SFAS 157.

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
159”). SFAS 159 provides companies with an option to report
selected ﬁ nancial assets and liabilities at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are recognized in earnings. SFAS 159 is effective for
ﬁ scal years beginning after November 15, 2007 and was adopted
by Canon in the ﬁ rst quarter beginning January 1, 2008. The
adoption of SFAS 159 did not have an impact on Canon’s
consolidated results of operations and ﬁ nancial condition as
Canon did not elect to report ﬁ nancial assets and liabilities
under the fair value option.

In June 2007, the FASB ratiﬁ ed the consensus in EITF Issue
No. 07-3, “Accounting for Nonrefundable Advance Payments
for Goods or Services Received for Use in Future Research and

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

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 recognized as an expense as the
related goods are delivered or the related services are performed.
EITF 07-3 is effective, on a prospective basis, for ﬁ scal years
beginning after December 15, 2007 and was adopted by Canon
in the ﬁ rst quarter beginning January 1, 2008. The adoption of
EITF 07-3 did not have a material impact on Canon’s consolidated
results of operations and ﬁ nancial 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 rec-
ognizes and measures in its ﬁ nancial statements the identiﬁ able
assets acquired, the liabilities assumed, any noncontrolling interest
in the acquiree and the goodwill acquired in a business combina-
tion. SFAS 141R also establishes disclosure requirements to enable
the evaluation of the nature and ﬁ nancial effects of the business
combination. SFAS 141R is effective for ﬁ scal years beginning on
or after December 15, 2008 and is required to be adopted by
Canon for any business combinations with an acquisition date
on or after January 1, 2009. The impact of the adoption of
SFAS 141R on Canon’s consolidated results of operations and
ﬁ nancial condition will be largely dependent on the size and
nature of the business combinations completed after the
adoption of this statement.

In December 2007, the FASB issued SFAS No. 160,

“Noncontrolling Interests in Consolidated Financial Statements, 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 ﬁ scal years
beginning on or after December 15, 2008 on a prospective basis,
except for certain presentation and disclosure requirements,
which will be applied retrospectively for all periods presented,
and is required to be adopted by Canon in the ﬁ rst quarter
beginning January 1, 2009. The adoption of SFAS 160 will
impact the presentation of Canon’s consolidated balance sheets

and consolidated statements of income; however, it will not have
a material impact on Canon’s consolidated results of operations
and ﬁ nancial condition.

In March 2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amend-
ment of FASB Statement No. 133” (“SFAS 161”). SFAS 161
amends and expands the current disclosures required by SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”). SFAS 161 requires entities to provide
greater transparency about how and why an entity uses derivative
instruments, how derivative instruments and related hedged
items are accounted for under SFAS 133 and its interpretations,
and how derivative instruments and related hedged items affect
an entity’s ﬁ nancial position, result of operations and cash ﬂ ows.
SFAS 161 does not change the existing standards relative to
recognition and measurement of derivative instruments and
hedging activities. SFAS 161 is effective for ﬁ nancial statements
issued for ﬁ scal years and interim periods beginning after
November 15, 2008 and is required to be adopted by Canon in
the ﬁ rst quarter beginning January 1, 2009. The adoption of
SFAS 161 will not have an impact on Canon’s consolidated
results of operations and ﬁ nancial condition.

In December 2008, the FASB issued FSP FAS No. 132(R)-1,
“Employers’ Disclosures about Postretirement Beneﬁ t Plan Assets”
(“FSP 132R-1”). FSP 132R-1 requires additional disclosures about
plan assets including investment allocation, fair value of major
categories of plan assets, development of fair value measurements,
and concentrations of risk. FSP 132R-1 is effective for ﬁ scal years
ending after December 15, 2009 and is required to be adopted
by Canon in the year ending December 31, 2009. Canon is
currently evaluating the requirements of these additional disclo-
sures, but does not expect the adoption of FSP 132R-1 to have
an impact on Canon’s consolidated results of operations and
ﬁ nancial condition.

(y) Reclassiﬁ cation
Time deposits with original maturities of more than three
months and marketable securities, which were previously dis-
closed separately in the consolidated balance sheets, have been
reclassiﬁ ed to short-term investments to conform to the current
year presentation.

Intangible assets, which were previously included in other
assets, have been reclassiﬁ ed to intangible assets in the consoli-
dated balance sheets to conform to the current year presentation.

2. Basis of Financial Statement Translation
The consolidated ﬁ nancial 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 ¥91 = U.S.$1, the approximate exchange rate prevailing

on the Tokyo Foreign Exchange Market on December 30, 2008.
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 ﬁ nancial 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

Millions of yen

2008

2007

2006

Thousands of
U.S. dollars

2008

¥ 1,502,451
850,491

¥ 2,077,268
1,024,150

¥ 1,995,927
907,845

$ 16,510,451
9,346,055

¥ 3,095,485
72,520

¥ 3,433,036
136,560

¥ 3,119,102
114,916

$ 34,016,318
796,923

4. Investments
The cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for available-for-sale securities and
held-to-maturity securities included in short-term investments

and investments by major security type at December 31, 2008
and 2007 were as follows:

December 31

Millions of yen
2008: Current:

Available-for-sale:

Government bonds
Fund trusts

Noncurrent:

Available-for-sale:

Government bonds
Corporate debt securities
Fund trusts
Equity securities

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

Gross
unrealized
holding
gains

Gross
unrealized
holding
losses

Cost

Fair value

1
133
134

¥ — ¥ — ¥

16
16

—
¥ — ¥

1
149
150

431
1,593
2,366
10,522
¥ 14,912

Cost

¥ — ¥
27
40
2,532
¥ 2,599

18
32
170
836
¥ 1,056

Gross
unrealized
holding
gains

Gross
unrealized
holding
losses

413
1,588
2,236
12,218
¥ 16,455

Fair value

—

¥ —

10,115
¥ 10,166

—
¥ —

496
3,183
3,573
12,666
¥ 19,918

—
31
1,158
10,233
¥ 11,422

—
¥ —

¥ 25
49
3
583
¥ 660

10,115
¥ 10,166

471
3,165
4,728
22,316
¥ 30,680

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

Thousands of U.S. dollars
2008: Current:

Available-for-sale:

Government bonds
Fund trusts

Noncurrent:

Available-for-sale:

Government bonds
Corporate debt securities
Fund trusts
Equity securities

Gross
unrealized
holding
gains

Gross
unrealized
holding
losses

Cost

Fair value

11
1,462
$ 1,473

$ — $ — $

11
1,637
$ — $ 1,648

—

175
175

$ 4,736
17,505
26,000
115,627
$ 163,868

$ — $
297
440
27,824
$ 28,561

198
352
1,868
9,187
$ 11,605

$ 4,538
17,450
24,572
134,264
$ 180,824

Maturities of available-for-sale debt securities and fund trusts
included in short-term investments and investments in the

accompanying consolidated balance sheets were as follows at
December 31, 2008:

Available-for-sale securities

Due within one year
Due after one year through ﬁ ve years
Due after ﬁ ve years through ten years

Millions of yen

Cost
¥ 134
3,542
848
¥ 4,524

Fair value
¥ 150
3,426
811
¥ 4,387

Thousands of
U.S. dollars

Cost
$ 1,473
38,923
9,318
$ 49,714

Fair value
$ 1,648
37,648
8,912
$ 48,208

The gross realized gains were ¥116 million ($1,275 thousand),

¥1,512 million and ¥674 million for the years ended December
31, 2008, 2007 and 2006, respectively. The gross realized losses,
including write-downs for impairments that were other than
temporary, were ¥7,868 million ($86,462 thousand) for the year
ended December 31, 2008, and were not signiﬁ cant for the
years ended December 31, 2007 and 2006.
At December 31, 2008, substantially all of the available-for-
sale securities with unrealized losses had been in a continuous
unrealized loss position for less than 12 months.

Time deposits with original maturities of more than three
months are ¥7,430 million ($81,648 thousand) and ¥10,333
million at December 31, 2008 and 2007, respectively, and are
included in short-term investments in the accompanying
consolidated balance sheets.
Aggregate cost of non-marketable equity securities accounted
for under the cost method totaled ¥10,684 million ($117,407

thousand) and ¥14,017 million at December 31, 2008 and 2007,
respectively. Investments with an aggregate cost of ¥10,572
million ($116,176 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 signiﬁ cant
adverse effects on the fair value of those investments.

Investments in afﬁ liated companies accounted for by the
equity method amounted to ¥59,428 million ($653,055 thousand)
and ¥42,817 million at December 31, 2008 and 2007, respectively.
Canon’s share of the net earnings (losses) in afﬁ liated companies
accounted for by the equity method, included in other income
(deductions), was a loss of ¥20,047 million ($220,297 thousand)
for the year ended December 31, 2008, and earnings of ¥5,634
million and ¥4,237 million for the years ended December 31,
2007 and 2006, 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

Millions of yen

2008
¥ 20,303
584,437
604,740
(9,318)
¥ 595,422

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

Thousands of
U.S. dollars

2008
$ 223,110
6,422,385
6,645,495
(102,396)
$ 6,543,099

Millions of yen

2008
¥ 316,533
171,511
18,875
¥ 506,919

2007
¥ 366,845
175,704
20,925
¥ 563,474

Thousands of
U.S. dollars

2008
$ 3,478,385
1,884,736
207,417
$ 5,570,538

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

2008
¥ 247,602
1,268,388
1,395,451
81,346
2,992,787
(1,635,601)
¥ 1,357,186

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

Thousands of
U.S. dollars

2008
$ 2,720,901
13,938,330
15,334,626
893,912
32,887,769
(17,973,637)
$ 14,914,132

Depreciation expense for the years ended December 31, 2008,
2007 and 2006 was ¥304,622 million ($3,347,494 thousand),
¥309,815 million and ¥235,804 million, respectively.
Amounts due for purchases of property, plant and equipment
were ¥98,398 million ($1,081,297 thousand) and ¥120,823 million
at December 31, 2008 and 2007, respectively, and are included
in other current liabilities in the accompanying consolidated
balance sheets. Fixed assets presented in the consolidated state-
ments of cash ﬂ ows includes property, plant and equipment and
intangible assets.
Canon recognized impairment losses of ¥11,164 million
($122,681 thousand) related primarily to property, plant and

equipment of its semiconductor production equipment business
during the year ended December 31, 2008. As a result of
declining demand in the semiconductor manufacturing industry
and diminished proﬁ tability of the semiconductor production
equipment business, Canon evaluated the ongoing value of the
related long-lived assets and estimated that the carrying amounts
would not be recoverable from the future cash ﬂ ows. The fair
value of the property, plant and equipment was based on the
estimated discounted future cash ﬂ ows expected to be generated
from the use of them. The impairment losses are included in
selling, general and administrative expenses in the consolidated
statements of income.

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

8. Finance Receivables and Operating Leases
Finance receivables represent ﬁ nancing leases which consist of
sales-type leases and direct-ﬁ nancing leases resulting from the
marketing of Canon’s and complementary third-party products.
These receivables typically have terms ranging from 1 year to 7

years. The components of the ﬁ nance 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

2008
¥ 198,611
16,310
(1,729)
(26,658)
186,534
(8,268)
178,266
(59,608)
¥ 118,658

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

Thousands of
U.S. dollars

2008
$ 2,182,538
179,231
(19,000)
(292,945)
2,049,824
(90,857)
1,958,967
(655,033)
$ 1,303,934

The cost of equipment leased to customers under operating

leases included in property, plant and equipment, net at
December 31, 2008 and 2007 was ¥50,388 million ($553,714
thousand) and ¥63,190 million, respectively. Accumulated
depreciation on equipment under operating leases at December

31, 2008 and 2007 was ¥37,284 million ($409,714 thousand)
and ¥48,818 million, respectively.

The following is a schedule by year of the future minimum

lease payments to be received under ﬁ nancing leases and
non-cancelable operating leases at December 31, 2008.

Year ending December 31:

Millions of yen

Thousands of U.S. dollars

2009
2010
2011
2012
2013
Thereafter

Financing leases
¥ 76,599
57,305
38,152
19,024
6,743
788
¥ 198,611

Operating leases
¥ 4,225
1,585
832
390
54
7
¥ 7,093

Financing leases
$ 841,747
629,725
419,253
209,055
74,099
8,659
$ 2,182,538

Operating leases
$ 46,429
17,417
9,143
4,286
593
77
$ 77,945

9. Acquisitions
In 2007, the Company and one of its subsidiaries acquired
two companies for a total cost of ¥26,387 million. 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-ﬁ lm solar
cells. The other company, which was acquired with cash and
share exchange by the subsidiary of the Company, is engaged in
providing architecture, management and maintenance services
for information systems. In connection with those transactions,
Canon recognized goodwill of ¥7,556 million, which is included
in other assets, and intangible assets of ¥7,131 million, which are
included in intangible assets in the accompanying consolidated
balance sheets. Intangible assets consist primarily of manufacturing

technology, trademarks, patents, customer contracts and related
customer relationships, and are subject to a weighted average
amortization period of approximately 13 years as of the date
of acquisition.
Canon acquired businesses other than those described above
during the years ended December 31, 2008, 2007 and 2006
that were not material to its consolidated ﬁ nancial 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.

10. Goodwill and Other Intangible Assets
Intangible assets developed or acquired during the year ended
December 31, 2008 totaled ¥47,050 million ($517,033 thou-
sand), which are subject to amortization and primarily consist of
software of ¥38,986 million ($428,418 thousand), which is
mainly for internal use, and license fees of ¥2,217 million
($24,363 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

acquired businesses. The weighted average amortization period
for software, license fees and intangible assets in total is
approximately 4 years, 7 years and 4 years, respectively.

The components of intangible assets subject to amortization

at December 31, 2008 and 2007 were as follows:

2008

2007

Gross carrying
amount
¥ 187,920
21,537
34,341
¥ 243,798

Accumulated
amortization
¥ 103,535
11,104
10,925
¥ 125,564

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

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

2008

Gross carrying
amount
$ 2,065,055
236,670
377,374
$ 2,679,099

Accumulated
amortization
$ 1,137,747
122,022
120,055
$ 1,379,824

Aggregate amortization expense for the years ended
December 31, 2008, 2007 and 2006 was ¥36,715 million
($403,462 thousand), ¥31,879 million and ¥26,490 million,
respectively. Estimated amortization expense for intangible assets
currently held for the next ﬁ ve years ending December 31 is
¥35,010 million ($384,725 thousand) in 2009, ¥27,402 million
($301,121 thousand) in 2010, ¥16,455 million ($180,824

thousand) in 2011, ¥9,030 million ($99,231 thousand) in 2012,
and ¥6,016 million ($66,110 thousand) in 2013.

Intangible assets not subject to amortization other than
goodwill at December 31, 2008 and 2007 were not signiﬁ cant.
The changes in the carrying amount of goodwill, which is
included in other assets in the consolidated balance sheets, for
the years ended December 31, 2008 and 2007 were as follows:

Years ended December 31

Balance at beginning of year
Goodwill acquired during the year
Translation adjustments and other
Balance at end of year

Millions of yen

2008
¥ 56,783
4,975
(11,004)
¥ 50,754

2007
¥ 40,801
13,573
2,409
¥ 56,783

Thousands of
U.S. dollars

2008
$ 623,989
54,670
(120,923)
$ 557,736

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

11. Short-Term Loans and Long-Term Debt
Short-term loans consisting of bank borrowings at December 31,
2008 and 2007 were ¥220 million ($2,417 thousand) and
¥2,888 million, respectively. The weighted average interest rates

on short-term loans outstanding at December 31, 2008 and
2007 were 6.21% and 3.16%, respectively.

Long-term debt consisted of the following:

December 31

Loans, principally from banks, maturing in installments through 2017;
bearing weighted average interest of 2.93% and 1.80%
at December 31, 2008 and 2007, respectively
2.27% Japanese yen notes, due 2008
1.30% Japanese yen convertible debentures, due 2008
Capital lease obligations

Less current portion

Millions of yen

2008

2007

95
—
—
13,648
13,743
(5,320)
¥ 8,423

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

Thousands of
U.S. dollars

2008

$ 1,044
—
—
149,978
151,022
(58,462)
$ 92,560

The aggregate annual maturities of long-term debt outstanding

at December 31, 2008 were as follows:

Year ending December 31:

2009
2010
2011
2012
2013
Thereafter

Millions of yen
¥ 5,320
4,410
3,005
822
135
51
¥ 13,743

Thousands of
U.S. dollars
$ 58,462
48,462
33,022
9,033
1,483
560
$ 151,022

12. Trade Payables
Trade payables are summarized as follows:

December 31

Notes
Accounts

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.

Millions of yen

2008
¥ 14,544
392,202
¥ 406,746

2007
¥ 17,088
497,138
¥ 514,226

Thousands of
U.S. dollars

2008
$ 159,824
4,309,912
$ 4,469,736

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

the guarantee and post-guarantee periods. As a result of these
changes, the projected beneﬁ t obligation decreased by ¥101,620
million. In conjunction with these plan changes, the Company
and certain of its domestic subsidiaries also have implemented
an unfunded retirement and severance plan and a deﬁ ned
contribution pension plan for certain future pension beneﬁ ts
attributable to employees’ future services.

The amounts of cost recognized for the deﬁ ned contribution

pension plans of the Company and certain of its subsidiaries for
the years ended December 31, 2008, 2007 and 2006 were
¥10,840 million ($119,121 thousand), ¥10,262 million and
¥6,233 million, respectively.

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

December 31

Japanese plans

Foreign plans

Millions of yen

2008

2007

Thousands of
U.S. dollars
2008

Millions of yen

2008

2007

Thousands of
U.S. dollars
2008

Change in beneﬁ t obligations:

Beneﬁ t obligations at beginning of year ¥ 493,478 ¥ 578,086 $ 5,422,835
228,418
Service cost
Interest cost
134,648
Plan participants’ contributions
Amendments
Actuarial (gain) loss
Beneﬁ ts paid
Acquisition
Foreign currency exchange rate changes
g
g
Beneﬁ t obligations at end of year

20,786
12,253
—
(204)
10,160
(14,488)
—
—
521,985

20,161
11,888
—

2,474
—
493,478

(101,620)
(4,623)
(12,888)

(2,242)
111,649
(159,209)

5,736,099

—
—

3,141
4,991
1,460
(86)
(4,521)
(2,210)

¥ 113,833 ¥ 110,505 $ 1,250,912
34,516
4,016
54,846
4,947
16,044
1,613
(945)
—
(49,681)
(24,286)
—
(419,120)
862,286

(778)
113,833

(38,140)
78,468

(3,293)
(3,177)

—

Change in plan assets:

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

Funded status at end of year

511,450
(81,981)
14,716

—

520,476
(15,796)
17,510
—

5,620,330
(900,890)
161,714

—

(12,498)

(157,308)

(14,315)
—
—

1,758
—
4,723,846
511,450
¥ (92,115) ¥ 17,972 $ (1,012,253)

429,870

—
—

92,908
(8,453)
8,317
1,460
(1,556)
—
(29,680)
62,996

87,173
2,283
4,210
1,613
(2,242)

—

(129)
92,908

1,020,967
(92,890)
91,396
16,044
(17,099)
—
(326,154)
692,264
$ (170,022)

¥ (15,472) ¥ (20,925)

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

Amounts recognized in the consolidated balance sheets at
December 31, 2008 and 2007 are as follows:

December 31

Japanese plans

Foreign plans

Millions of yen

2008

2007

Thousands of
U.S. dollars
2008

Millions of yen

2008

2007

Thousands of
U.S. dollars
2008

Other assets
Accrued expenses
Accrued pension and severance cost

806
—
(92,921)
¥ (92,115)

¥ 41,567 $

8,857

—

(23,595)

(1,021,110)
¥ 17,972 $ (1,012,253)

¥ 2,461 ¥

347 $ 27,044
(769)
(157)
(196,297)
(21,115)
$ (170,022)
¥ (15,472) ¥ (20,925)

(70)
(17,863)

Amounts recognized in accumulated other comprehensive
income (loss) at December 31, 2008 and 2007 are as follows:

December 31

Japanese plans

Foreign plans

Millions of yen

2007

Thousands of
U.S. dollars
2008

Actuarial loss
Prior service credit
Net transition obligation

2008
¥ 251,731
(168,904)
2,166
¥ 84,993

(182,073)

¥ 146,937 $ 2,766,275
(1,856,088)
23,802
$ 933,989

¥ (32,248)

2,888

Millions of yen

2008

2007

¥ 15,650 ¥ 16,905

(768)
—

(953)
—
¥ 14,882 ¥ 15,952

Thousands of
U.S. dollars
2008
$ 171,978
(8,440)
—
$ 163,538

The accumulated beneﬁ t obligation for all deﬁ ned beneﬁ t

plans was as follows:

December 31

Japanese plans

Foreign plans

Accumulated beneﬁ t obligation

2008
¥ 493,559

Millions of yen

2007

Thousands of
U.S. dollars
2008

Millions of yen

2008

2007

¥ 471,146 $ 5,423,725

¥ 71,627 ¥ 104,275

Thousands of
U.S. dollars
2008
$ 787,110

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

2008

2007

Thousands of
U.S. dollars
2008

Millions of yen

2008

2007

Thousands of
U.S. dollars
2008

Plans with projected beneﬁ t obligations
in excess of plan assets:

Projected beneﬁ t obligations
Fair value of plan assets

¥ 516,646
423,725

¥ 179,455 $ 5,677,429
4,656,319

155,860

¥ 77,083 ¥ 113,790
92,518

59,150

$ 847,066
650,000

Plans with accumulated beneﬁ t obligations
in excess of plan assets:

Accumulated beneﬁ t obligations
Fair value of plan assets

¥ 485,436
420,341

¥ 46,789 $ 5,334,462
4,619,132

29,599

¥ 69,471 ¥ 104,119
92,401

59,089

$ 763,418
649,330

Components of net periodic beneﬁ t cost and other
amounts recognized in other comprehensive income (loss)
Net periodic beneﬁ t cost for Canon’s employee retirement and

severance deﬁ ned beneﬁ t plans for the years ended December 31,
2008, 2007 and 2006 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

2008

Millions of yen
2007
¥ 20,786 ¥ 20,161 ¥ 23,916
11,888 13,411
12,253
(21,148) (21,705)
(19,721)

2006

Thousands of
U.S. dollars
2008
$ 228,418
134,648
(216,714)

2008

Millions of yen
2007
¥ 3,141 ¥ 4,016 ¥ 3,483
3,898
4,947
4,991
(4,494)
(5,427)
(5,519)

2006

Thousands of
U.S. dollars
2008
$ 34,516
54,846
(60,648)

722

345

7,934

— — —

—

(13,479) (7,436)
(13,373)
7,068
4,868 3,377
¥ 7,735 ¥ 3,012 ¥ 11,908

(146,956)
77,670
$ 85,000

(113)
(86)
(271)
898
402
887
¥ 3,240 ¥ 4,337 ¥ 3,176

(2,978)
9,868
$ 35,604

Other changes in plan assets and beneﬁ t obligations recog-
nized in other comprehensive income (loss) for the years ended
December 31, 2008 and 2007 were summarized as follows:

Years ended December 31

Japanese plans

Foreign plans

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

Thousands of
U.S. dollars
2008

Millions of yen

2008

2007
¥ 111,862 ¥ 32,321 $ 1,229,253
(77,670)
(2,242)
146,956
(7,934)
$ 1,288,363

(4,868)
(101,620)
13,479
(722)
¥ 117,241 ¥ (61,410)

(7,068)
(204)
13,373
(722)

Millions of yen

2008
¥ 9,451
(898)
(86)
271
—
¥ 8,738

2007
¥ (149)
(887)

—
86
—

¥ (950)

Thousands of
U.S. dollars
2008
$ 103,857
(9,868)
(945)
2,978
—
$ 96,022

The estimated net transition obligation, prior service credit
and actuarial loss for the deﬁ ned beneﬁ t pension plans that will
be amortized from accumulated other comprehensive income

(loss) into net periodic beneﬁ t cost over the next year are
summarized as follows:

Japanese plans

Foreign plans

Millions of yen
722
(13,514)
13,249

Thousands of
U.S. dollars

7,934
(148,505)
145,593

Millions of yen

¥ —
(117)
1,122

Thousands of
U.S. dollars
$ —
(1,286)
12,330

Net transition obligation
Prior service credit
Actuarial loss

Assumptions
Weighted-average assumptions used to determine beneﬁ t
obligations are as follows:

December 31

Discount rate
Assumed rate of increase in future compensation levels

Japanese plans

Foreign plans

2008
2.4%
3.0%

2007
2.5%
2.9%

2008
5.3%
3.1%

2007
5.1%
3.1%

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

Weighted-average assumptions used to determine net
periodic beneﬁ t 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

2008
2.5%

2.9%
3.7%

2007
2.5%

2.9%
3.9%

2006
2.5%

2.9%
4.5%

2008
5.1%

3.1%
6.5%

2007
4.5%

2.9%
6.0%

2006
4.8%

2.6%
6.4%

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 beneﬁ t plans
at December 31, 2008 and 2007 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

2008

2007

Target
allocation

2008

2007

Target
allocation

22.7%
52.0
0.6
23.8
0.9

33.6%
45.2
1.1
19.5
0.6
100.0% 100.0% 100.0%

31.9%
46.7
0.1
20.4
0.9

43.3%
42.5
1.3
—
12.9

52.4%
33.8
—
—
13.8
100.0% 100.0% 100.0%

30.3%
59.9
1.6
—
8.2

Canon’s investment policies are designed to ensure adequate
plan assets are available to provide future payments of pension
beneﬁ ts 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 ¥485
million ($5,330 thousand) and ¥1,257 million at December 31,
2008 and 2007, respectively.

Contributions
Canon expects to contribute ¥14,439 million ($158,670
thousand) to its Japanese deﬁ ned beneﬁ t pension plans and
¥3,485 million ($38,297 thousand) to its foreign deﬁ ned beneﬁ t
pension plans for the year ending December 31, 2009.

Estimated future beneﬁ t payments
The following beneﬁ t payments, which reﬂ ect expected future
service, as appropriate, are expected to be paid:

Year ending December 31:

Japanese plans

Foreign plans

2009
2010
2011
2012
2013
2014—2018

Millions of yen
¥ 11,779
12,849
14,506
15,700
16,918
105,706

Thousands of
U.S. dollars
$ 129,440
141,198
159,407
172,527
185,912
1,161,604

Millions of yen
¥ 1,566
1,733
1,784
1,902
1,851
12,483

Thousands of
U.S. dollars
$ 17,209
19,044
19,604
20,901
20,341
137,176

14. Income Taxes
Domestic and foreign components of income before income
taxes and minority interests, and the current and deferred

Years ended December 31

2008:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2007:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2006:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

2008:

Income before income taxes and minority interests
Income taxes:
Current
Deferred

income tax expense (beneﬁ t) attributable to such income are
summarized as follows:

Japanese
¥ 382,299

¥ 168,428
(34,073)
¥ 134,355

Millions of yen

Foreign
¥ 98,848

¥ 24,857
1,576
¥ 26,433

Total
¥ 481,147

¥ 193,285
(32,497)
¥ 160,788

¥ 575,017

¥ 193,371

¥ 768,388

¥ 238,921
(31,930)
¥ 206,991

¥ 60,358
(3,091)
¥ 57,267

¥ 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

Thousands of U.S. dollars

Japanese
$ 4,201,088

Foreign
$ 1,086,242

Total
$ 5,287,330

$ 1,850,857
(374,428)
$ 1,476,429

$ 273,154
17,318
$ 290,472

$ 2,124,011
(357,110)
$ 1,766,901

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, 2008, 2007 and 2006.

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

2008
40.0%

0.5

(2.6)
(4.6)
0.1
33.4%

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%

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

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

The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at December 31,
2008 and 2007 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

2008
¥ 96,613
130,378
(2,491)
(29,075)
¥ 195,425

2007
¥ 79,846
68,178
(4,506)
(28,157)
¥ 115,361

Thousands of
U.S. dollars

2008
$ 1,061,681
1,432,725
(27,374)
(319,505)
$ 2,147,527

Millions of yen

2008

2007

¥ 36,817
5,183
51,713
41,661
58,682
27,748
6,745
44,894
273,443
(10,817)
262,626

(10,407)
(607)
(8,119)
(31,035)
(2,644)
(14,389)
(67,201)
¥ 195,425

¥ 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

Thousands of
U.S. dollars

2008

$ 404,582
56,956
568,275
457,813
644,857
304,923
74,121
493,341
3,004,868
(118,868)
2,886,000

(114,363)
(6,670)
(89,220)
(341,044)
(29,055)
(158,121)
(738,473)
$ 2,147,527

The net changes in the total valuation allowance were
increases of ¥1,490 million ($16,374 thousand), ¥2,827 million
and ¥3,155 million for the years ended December 31, 2008,
2007 and 2006, respectively.

Based upon the level of historical taxable income and
projections for future taxable income over the periods which
the net deductible temporary differences are expected to
reverse, management believes it is more likely than not that

Canon will realize the beneﬁ ts of these deferred tax assets, net
of the existing valuation allowance, at December 31, 2008.
At December 31, 2008, Canon had net operating losses
which can be carried forward for income tax purposes of
¥18,322 million ($201,341 thousand) to reduce future taxable
income. Periods available to reduce future taxable income vary
in each tax jurisdiction and generally range from one year to
ten years as follows:

Within one year
After one year through ﬁ ve years
After ﬁ ve years through ten years
Indeﬁ nite period

Total

Millions of yen
233
¥
2,945
10,293
4,851
¥ 18,322

Thousands of
U.S. dollars
$ 2,560
32,363
113,110
53,308
$ 201,341

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 ¥37,208
million ($408,879 thousand) for a portion of undistributed
earnings of foreign subsidiaries that arose for the year ended
December 31, 2008 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, 2008, such undistributed earnings of these
subsidiaries were ¥728,410 million ($8,004,505 thousand).

Effective January 1, 2007, Canon adopted FASB Interpretation

No. 48, “Accounting for Uncertainty in Income Taxes, an inter-
pretation of FASB Statement No. 109”. A reconciliation of the
beginning and ending amount of unrecognized tax beneﬁ ts is
as follows:

Years ended December 31

Balance at beginning of year
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 with tax authorities
Other
Balance at end of year

Millions of yen

2008
¥ 15,791
8,700
1,354
(8,512)
—
(1,208)
(3,436)
¥ 12,689

2007
¥ 16,087
994
1,902
(1,340)
(1,311)
(322)
(219)
¥ 15,791

Thousands of
U.S. dollars

2008
$ 173,527
95,604
14,879
(93,538)
—
(13,274)
(37,758)
$ 139,440

The total amounts of unrecognized tax beneﬁ ts that would
reduce the effective tax rate, if recognized, are ¥4,405 million
($48,407 thousand) and ¥8,278 million at December 31, 2008
and 2007, respectively.
Although Canon believes its estimates and assumptions of
unrecognized tax beneﬁ ts are reasonable, uncertainty regarding
the ﬁ nal determination of tax audit settlements and any related
litigation could affect the effective tax rate in the future period.
Based on each of the items of which Canon is aware at
December 31, 2008, no signiﬁ cant changes to the unrecognized
tax beneﬁ ts are expected within the next twelve months.
Canon recognizes interest and penalties accrued related to
unrecognized tax beneﬁ ts in income taxes. Both interest and
penalties accrued at December 31, 2008 and 2007, and interest
and penalties included in income taxes for the years ended

December 31, 2008 and 2007 are not material.
Canon ﬁ les 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 speciﬁ c indication by the tax
authority that Canon will be subject to a transfer pricing
examination in the near future, the tax authority could conduct
a transfer pricing examination for years after 2001. In other
major foreign tax jurisdictions, including the United States and
Netherlands, Canon is no longer subject to income tax
examinations by tax authorities for years before 2004 with few
exceptions. The tax authorities are currently conducting income
tax examinations of Canon’s income tax returns for years after
2005 in Japan and for certain years after 2003 in major foreign
tax jurisdictions.

15. Common Stock
For the years ended December 31, 2008, 2007 and 2006, the
Company issued 127,254 shares, 190,380 shares and 331,661
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,
2008, 2007 and 2006 represent dividends paid out during

those years and the related appropriations to the legal reserve.
Retained earnings at December 31, 2008 do not reﬂ ect current
year-end dividends in the amount of ¥67,897 million ($746,121
thousand) which will be payable in March 2009 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 ﬁ nancial
accounting standards of Japan. Such amount was ¥1,363,838
million ($14,987,231 thousand) at December 31, 2008.

Retained earnings at December 31, 2008 included Canon’s
equity in undistributed earnings of afﬁ liated companies accounted
for by the equity method in the amount of ¥17,745 million
($195,000 thousand).

17. Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) are
as follows:

Years ended December 31

Millions of yen

2008

2007

2006

Thousands of
U.S. dollars

2008

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

¥ 22,796
(258,764)
(235,968)

¥ 22,858
(62)
22,796

¥ (25,772)
48,630
22,858

$ 250,505
(2,843,560)
(2,593,055)

6,287
(5,152)
1,135

(849)
2,342
1,493

—
—
—
—

6,436
(65,916)
—
(59,480)

34,670
(327,490)
—
¥ (292,820)

8,065
(1,778)
6,287

(1,663)
814
(849)

—
—
—
—

(26,542)
32,978
—
6,436

2,718
31,952
—
¥ 34,670

6,073
1,992
8,065

(1,174)
(489)
(1,663)

(7,339)
(3,575)
10,914
—

—
—
(26,542)
(26,542)

69,088
(56,615)
12,473

(9,329)
25,736
16,407

—
—
—
—

70,725
(724,352)
—
(653,627)

(28,212)
46,558
(15,628)
¥ 2,718

380,989
(3,598,791)
—
$ (3,217,802)

Tax effects allocated to each component of other com-
prehensive income (loss) and reclassiﬁ cation adjustments are
as follows:

Years ended December 31

2008:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Before-tax
amount

Millions of yen

Tax (expense)
or beneﬁ t

Net-of-tax
amount

¥ (264,657)

¥ 5,893

¥ (258,764)

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

(15,957)
7,374
(8,583)

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year
Pension liability adjustments:

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

Other comprehensive income (loss)

23,131
(19,229)
3,902

(106,937)
(4,556)
(111,493)
¥ (380,831)

43,595
1,982
45,577
¥ 53,341

6,532
(3,101)
3,431

(9,248)
7,688
(1,560)

(9,425)
4,273
(5,152)

13,883
(11,541)
2,342

(63,342)
(2,574)
(65,916)
¥ (327,490)

2007:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

(370)

308

(62)

Amount arising during the year
Reclassiﬁ cation 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
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year
Pension liability adjustments:

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

Other comprehensive income (loss)

(7,237)
(293)
(7,530)

590
772
1,362

3,037
2,715
5,752

(236)
(312)
(548)

(4,200)
2,422
(1,778)

354
460
814

62,768
(5,766)
57,002
¥ 50,464

(26,502)
2,478
(24,024)
¥ (18,512)

36,266
(3,288)
32,978
¥ 31,952

2006:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

¥ 49,518

(888)

¥ 48,630

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

3,708
(388)
3,320

(1,502)
174
(1,328)

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

Minimum pension liability adjustments
Other comprehensive income (loss)

(7,126)
6,309
(817)
(4,391)
¥ 47,630

2,858
(2,530)
328
816
¥ (1,072)

2,206
(214)
1,992

(4,268)
3,779
(489)
(3,575)
¥ 46,558

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

2008:

Foreign currency translation adjustments
Net unrealized gains and losses on securities:

Thousands of U.S. dollars

Before-tax
amount

Tax (expense)
or beneﬁ t

Net-of-tax
amount

$ (2,908,318)

$ 64,758

$ (2,843,560)

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

(175,351)
81,033
(94,318)

Net gains and losses on derivative instruments:

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year
Pension liability adjustments:

254,187
(211,308)
42,879

Amount arising during the year
Reclassiﬁ cation adjustments for gains and losses realized in net income
Net change during the year

Other comprehensive income (loss)

(1,175,132)
(50,066)
(1,225,198)
$ (4,184,955)

71,780
(34,077)
37,703

(101,627)
84,484
(17,143)

(103,571)
46,956
(56,615)

152,560
(126,824)
25,736

479,066
21,780
500,846
$ 586,164

(696,066)
(28,286)
(724,352)
$ (3,598,791)

18. Stock-Based Compensation
On May 1, 2008, based on the approval of the stockholders,
the Company granted stock options to its directors, executive
ofﬁ cers and certain employees to acquire 592,000 shares of
common stock.

These option awards vest after two years of continuous
service beginning on the grant date and have a four year con-
tractual term. The grant date fair value of each option granted
was ¥1,247 ($13.70).

The compensation cost recognized for these stock options for

the year ended December 31, 2008 was ¥246 million ($2,703
thousand) and is included in selling, general and administrative
expenses in the consolidated statements of income.

The fair value of each option award is estimated on the date
of grant using the Black-Scholes option pricing model that uses
the assumptions presented below:

Expected term of option (in years)
Expected volatility

Dividend yield

Risk-free interest rate

4.0
37.39%
2.10%
0.95%

A summary of option activity under the stock option plan as of
and for the year ended December 31, 2008 is presented below:

Outstanding at January 1, 2008
Granted
Forfeited
Outstanding at December 31, 2008

Weighted-average
exercise price

Weighted-
average
remaining
contractual
term

Aggregate
intrinsic value

Yen

U.S. dollars

Year

Millions of yen

Thousands of
U.S. dollars

—
¥5,502
—
¥5,502

—
$60.46
—
$60.46

3.3

¥ —

$ —

—
592,000
—
592,000

At December 31, 2008, all option awards were nonvested,
but expected to be vested, and there was ¥492 million ($5,407
thousand) of total unrecognized compensation cost related to

nonvested stock option. That cost is expected to be recognized
over 1.33 years.

19. Net Income per Share
A reconciliation of the numerators and denominators of basic
and diluted net income per share computations is as follows:

Years ended December 31

Net income
Effect of dilutive securities:

1.30% Japanese yen convertible debentures,
due 2008

Diluted net income

Average common shares outstanding
Effect of dilutive securities:

1.30% Japanese yen convertible debentures,
due 2008

Diluted common shares outstanding

Net income per share:

Basic
Diluted

2008
¥ 309,148

Millions of yen

2007
¥ 488,332

2006
¥ 455,325

Thousands of
U.S. dollars

2008
$ 3,397,231

2
¥ 309,150

4
¥ 488,336

8
¥ 455,333

22
$ 3,397,253

1,255,626,490 1,293,295,680 1,331,542,074

Number of shares

79,929

474,796
1,255,706,419 1,293,517,431 1,332,016,870

221,751

Yen

¥377.59
377.53

¥246.21
246.20

¥341.95
341.84

U.S. dollars

$2.71
2.71

The computation of diluted net income per share for the year

ended December 31, 2008 excludes outstanding stock options
because the effect would be anti-dilutive.

20. Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of changes
in foreign currency exchange rates. Derivative ﬁ nancial 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 ﬁ nancial
instruments for trading purposes. Canon is also exposed to credit-
related losses in the event of non-performance by counterparties
to derivative ﬁ nancial instruments, but it is not expected that any
counterparties will fail to meet their obligations. Most of the
counterparties are internationally recognized ﬁ nancial institutions
and selected by Canon taking into account their ﬁ nancial
condition, and contracts are diversiﬁ ed across a number of
major ﬁ nancial 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 forecasted intercompany sales
and intercompany trade receivables which are denominated in
foreign currencies. In accordance with Canon’s policy, a speciﬁ c
portion of foreign currency exposure resulting from forecasted
intercompany sales are hedged using foreign exchange contracts
which principally mature within three months.

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

Cash ﬂ ow hedge
Changes in the fair value of derivative ﬁ nancial instruments
designated as cash ﬂ ow hedges, including foreign exchange
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss).
These amounts are subsequently reclassiﬁ ed 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, 2008, 2007 and 2006. 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 ¥3,701 million
($40,670 thousand), ¥6,883 million and ¥5,917 million for the
years ended December 31, 2008, 2007 and 2006, 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, 2008 and 2007 are set forth below:

December 31

To sell foreign currencies
To buy foreign currencies

Millions of yen

2008
¥ 350,959
35,247

2007
¥ 697,240
46,897

Thousands of
U.S. dollars

2008
$ 3,856,692
387,330

21. Commitments and Contingent Liabilities
Commitments
At December 31, 2008, commitments outstanding for the
purchase of property, plant and equipment approximated
¥74,909 million ($823,176 thousand), and commitments
outstanding for the purchase of parts and raw materials
approximated ¥60,281 million ($662,429 thousand).
Canon occupies sales ofﬁ ces and other facilities under lease
arrangements accounted for as operating leases. Deposits made
under such arrangements aggregated ¥14,223 million ($156,297
thousand) and ¥14,440 million at December 31, 2008 and 2007,

respectively, and are included in noncurrent receivables in the
accompanying consolidated balance sheets. Rental expenses
under the operating lease arrangements amounted to ¥41,169
million ($452,407 thousand), ¥36,900 million and ¥36,157
million for the years ended December 31, 2008, 2007 and
2006, respectively.

Future minimum lease payments required under noncancelable

operating leases that have initial or remaining lease terms in
excess of one year at December 31, 2008 are as follows:

Millions of yen

¥ 14,726
11,127
7,090
5,105
3,348
8,440
¥ 49,836

Thousands of
U.S. dollars

$ 161,824
122,275
77,912
56,099
36,791
92,747
$ 547,648

Year ending December 31:

2009
2010
2011
2012
2013
Thereafter

Total future minimum lease payments

Guarantees
Canon provides guarantees for bank loans of its employees,
afﬁ liates and other companies. The guarantees for the employees
are principally made for their housing loans. The guarantees of
loans of its afﬁ liates and other companies are made to ensure
that those companies operate with less ﬁ nancial 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 afﬁ liates and other companies. The maximum amount of

undiscounted payments Canon would have had to make in
the event of default is ¥22,308 million ($245,143 thousand) at
December 31, 2008. The carrying amounts of the liabilities
recognized for Canon’s obligations as a guarantor under those
guarantees at December 31, 2008 were not signiﬁ cant.
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, 2008 and 2007 are summarized as follows:

Years ended December 31

Balance at beginning of year
Addition
Utilization
Other
Balance at end of year

Millions of yen

2008
¥ 20,138
30,644
(26,846)
(6,564)
¥ 17,372

2007
¥ 18,144
31,053
(26,199)
(2,860)
¥ 20,138

Thousands of
U.S. dollars

2008
$ 221,297
336,747
(295,011)
(72,132)
$ 190,901

Legal proceedings
In October 2003, a lawsuit was ﬁ led 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 ($504,088 thousand) as reasonable remuneration 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 ($10,989 thousand) and interest thereon. On
January 30, 2007, the Tokyo District Court of Japan ordered the
Company to pay the former employee approximately ¥33.5
million ($368 thousand) and interest thereon. On the same day,
the Company appealed the decision. On February 26, 2009, the
Intellectual Property High Court of Japan issued a judgment in
the appellate court review and ordered the Company to pay the
former employee approximately ¥69.6 million ($765 thousand),
consisting of reasonable remuneration of approximately ¥56.3
million ($619 thousand) and interest thereon. On March 12,
2009, the Company appealed the decision to the Supreme Court.
In Germany, Verwertungsgesellschaft Wort (“VG Wort”), a

collecting agency representing certain copyright holders, has
ﬁ led 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 ﬁ led a civil lawsuit against Hewlett-Packard GmbH
seeking levies on multi-function printers sold in Germany during
the period from 1997 through 2001. 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 ﬁ nal decision of this court case. In 2008, the
Federal Supreme Court delivered its short judgment in favor of
VG Wort, whereby the court decided that, for MFPs sold during
the period from 1997 through 2001, the same full tariff as

applicable to photocopier (EUR38.35 to EUR 613.56 per unit,
depending on the printing speed and color printing capability)
should be applied. Hewlett-Packard GmbH ﬁ led a claim with the
Federal Constitutional Court challenging the judgment of the
Federal Supreme Court in August 2008. For the multi-function
printers sold during the period from 2002 through 2007, VG Wort
made a request for arbitration with Canon before an arbitration
court in January 2007, and the arbitration court delivered their
settlement proposal in December 2008. However, VG Wort
rejected such settlement proposals in January 2009. VG Wort is
now able to transfer this case to a court of appeals. With regard
to single-function printers, VG Wort ﬁ led a separate lawsuit in
January 2006 against Canon seeking payment of copyright levies,
and the court of ﬁ rst 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 before the court of
appeals in Düsseldorf. Following a dicision by the same court of
appeals in Düsseldorf on January 23, 2007 in relation to a similar
court case seeking copyright levies on single-function printers of
Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita
Deutschland GmbH, whereby the court rejected such alleged
levies, in its judgment of November 13, 2007, the court of
appeals rejected VG Wort’s claim against Canon. VG Wort
appealed further against said decision of the court of appeals
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.
VG Wort has already ﬁ led 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 extension of
the levy scope. Based on industry opposition to the extension

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

of levies to digital products, Canon’s assessments of the ﬁ nal
conclusion of these court cases including the amount of levies to
be imposed and the associated ﬁ nancial impact on Canon remains
uncertain. In, 2007, an amendment of German copyright law
was carried out, and a new law has been effective from January
1, 2008 for both multi-function printers and single-function
printers. The new law sets forth that the scope and tariff of
copyright levies will be agreed between industry and the collect-
ing society. Industry and the collecting society, based on the
requirement under the new law, reached an agreement in
December 2008. This agreement is applicable retroactively from
January 1, 2008 and will remain effective through end of 2010.
Accordingly, there is no longer any uncertainty with respect to
levies for sales of printers on and after January 1, 2008.

In April 2005, a lawsuit was ﬁ led by Nano-Proprietary Inc.,
currently Applied Nanotech Holdings, 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 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 ﬁ led a notice of appeal to the United States Court
of Appeals for the Fifth Circuit (“Appeals Court”), appealing the
District Court’s prior ruling that Canon had breached the patent
license agreement and allowing NPI to terminate that agreement.
On June 4, 2007, NPI also ﬁ led a notice of appeal, appealing the
District Court’s determination that NPI had sustained no damages.
On July 25, 2008, the Appeals Court reversed the District Court’s
judgment and found that termination of the patent license
agreement was ineffective and that the 100% owned SED Inc.
is a subsidiary of Canon. The Appeal Court also afﬁ rmed the
District Court’s judgment denying damages to NPI. NPI petitioned
for rehearing of the judgment, but the Appeals Court denied
the petition. Since NPI did not appeal to the Supreme Court
within the required time limit, the Fifth Circuit’s judgment is
deﬁ nitive and conclusive in favor of Canon.
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 reﬂ ect 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 speciﬁ c 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 ﬁ nancial position, results of operations, or
cash ﬂ ows. 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
ﬁ nancial position, results of operations, or cash ﬂ ows could be
materially affected in any particular period by the unfavorable
resolution of one or more of these matters.

22. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
Fair value of ﬁ nancial instruments
The estimated fair values of Canon’s ﬁ nancial instruments at
December 31, 2008 and 2007 are set forth below. The following
summary excludes cash and cash equivalents, trade receivables,

ﬁ nance receivables, noncurrent receivables, short-term loans,
trade payables and accrued expenses for which fair values
approximate their carrying amounts. The summary also excludes
investments which are disclosed in Note 4.

December 31

Millions of yen

Thousand of U.S. dollars

Long-term debt, including current installments ¥ (13,743) ¥ (13,727)
Foreign exchange contracts:

¥ (24,109) ¥ (24,714)

$ (151,022) $ (150,846)

2008

2007

2008

Carrying
amount

Estimated
fair value

Carrying
amount

Estimated
fair value

Carrying
amount

Estimated
fair value

Assets
Liabilities

10,516
(678)

806
(12,335)

115,560
(7,451)

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 ﬂ ows 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 counterparties or third parties.

Limitations
Fair value estimates are made at a speciﬁ c point in time, based
on relevant market information and information about the
ﬁ nancial instruments. These estimates are subjective in nature
and involve uncertainties and matters of signiﬁ cant judgment
and therefore cannot be determined with precision. Changes in
assumptions could signiﬁ cantly affect the estimates.

Concentrations of credit risk
At December 31, 2008 and 2007, one customer accounted for
approximately 19% and 16% 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.

23. Fair Value Measurements
SFAS 157 deﬁ nes fair value as the price that would be received
to sell an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset or liability
in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a three-level fair value
hierarchy that prioritizes the inputs used to measure fair value
as follows:

that are derived principally from or corroborated by
observable market data by correlation or other means.
Level 3 — Inputs are derived from valuation techniques in which

one or more signiﬁ cant inputs or value drivers are
unobservable, which reﬂ ect the reporting entity’s own
assumptions about the assumptions that market
participants would use in establishing a price.

Level 1 — Inputs are quoted prices in active markets for identical

assets or liabilities.

Level 2 — Inputs are quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable, and inputs

Assets and Liabilities Measured at Fair Value
on a Recurring Basis
The following table presents Canon’s assets and liabilities that
are measured at fair value on a recurring basis at December 31,
2008 consistent with the fair value hierarchy provisions of SFAS
No. 157.

Assets:

Cash and cash equivalents
Investments
Derivatives

Total assets
Liabilities:

Derivatives
Total liabilities

Level 1

Level 2

Level 3

Total

Millions of yen

¥ —
14,108
—

¥ 14,108

¥ 194,030
981
10,516
¥ 205,527

¥ —
1,516
—

¥ 1,516

¥ 194,030
16,605
10,516
¥ 221,151

¥ —
¥ —

¥
¥

678
678

¥ —
¥ —

¥
¥

678
678

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

Thousands of U.S. dollars

Level 1

Level 2

Level 3

Total

Assets:

Cash and cash equivalents
Investments
Derivatives

Total assets
Liabilities:

Derivatives
Total liabilities

155,033

$ 155,033

— $ 2,132,198
10,780
115,560
$ 2,258,538

—

$ — $ 2,132,198
182,472
115,560
$ 2,430,230

16,659
—

$ 16,659

$
$

— $
— $

7,451
7,451

$ — $
$ — $

7,451
7,451

Level 1 investments are comprised principally of equity
securities, which are valued using an unadjusted quoted market
price in active markets with sufﬁ cient volume and frequency of
transactions. Level 2 cash and cash equivalents are valued using
quoted prices for identical assets in markets that are not active.
Level 3 investments are comprised of corporate debt securities,
which are valued based on unobservable inputs as the market
for the assets was not active at the measurement date.

Derivative ﬁ nancial instruments are comprised of foreign
exchange contracts. Level 2 derivatives are valued using quotes
obtained from counterparties or third parties, which are periodi-
cally validated by pricing models using observable market inputs,
such as foreign currency exchange rates and interest rates.

The following table presents the changes in Level 3 assets
measured on a recurring basis, consisting solely of corporate
debt securities, for the year ended December 31, 2008.

Balance at beginning of year

Total gains or losses (realized or unrealized):

Included in earnings
Included in other comprehensive income (loss)

Purchases, issuances, and settlements

Balance at end of year

All gains and losses included in earnings are related to
corporate debt securities still held at December 31, 2008, and are
reported in “Other, net” in the consolidated statements of income.

Millions of yen
¥ 1,889

(559)
(8)
194
¥ 1,516

Thousands of
U.S. dollars
$ 20,758

(6,143)
(88)
2,132
$ 16,659

Assets and Liabilities Measured at Fair Value
on a Nonrecurring Basis
Non-marketable equity securities with a carrying amount of
¥513 million ($5,638 thousand) were written down to their fair
value of ¥112 million ($1,231 thousand), resulting in an other-
than-temporary impairment charge of ¥401 million ($4,407
thousand), which was included in earnings for the year ended
December 31, 2008. All impaired non-marketable equity securities
were classiﬁ ed as Level 3 instruments, as Canon uses unobservable
inputs to value these investments.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Canon is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting.
Internal control over ﬁ nancial reporting is deﬁ ned in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 , as
amended, as a process designed by, or under the supervision of, the company’s principal executive and principal ﬁ nancial ofﬁ cers and
effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of ﬁ nancial reporting and the preparation of ﬁ nancial 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 reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of ﬁ nancial 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 ﬁ nancial statements.

Because of its inherent limitations, internal control over ﬁ nancial 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 ﬁ nancial reporting as of December 31, 2008. 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, 2008, Canon’s internal control over ﬁ nancial reporting
was effective based on the COSO criteria.

Canon’s independent registered public accounting ﬁ rm, Ernst & Young ShinNihon LLC, has issued an audit report on the effectiveness
of our internal control over ﬁ nancial 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, 2008 and 2007,
and the related consolidated statements of income, stockholders’ equity, and cash ﬂ ows for each of the three years in the period
ended December 31, 2008, all expressed in Japanese yen. These ﬁ nancial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these ﬁ nancial 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 ﬁ nancial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by
management, as well as evaluating the overall ﬁ nancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

The Company’s consolidated ﬁ nancial 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 ﬁ nancial statements
referred to above present fairly, in all material respects, the consolidated ﬁ nancial position of Canon Inc. and subsidiaries at
December 31, 2008 and 2007, and the consolidated results of their operations and their cash ﬂ ows for each of the three years in
the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated ﬁ nancial 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 ﬁ nancial reporting as of December 31, 2008, 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 16,
2009 expressed an unqualiﬁ ed opinion thereon.

We have also recomputed the translation of the consolidated ﬁ nancial statements as of and for the year ended December 31, 2008
into United States dollars. In our opinion, the consolidated ﬁ nancial statements expressed in Japanese yen have been translated into
United States dollars on the basis described in Note 2.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 ﬁ nancial reporting as of December 31, 2008, 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 ﬁ nancial reporting, and for its
assessment of the effectiveness of internal control over ﬁ nancial 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 ﬁ nancial
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
ﬁ nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
ﬁ nancial 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 ﬁ nancial reporting is a process designed to provide reasonable assurance regarding the reliability of
ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with generally accepted account-
ing principles. A company’s internal control over ﬁ nancial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reﬂ ect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial 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 regard-
ing prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material
effect on the ﬁ nancial statements.

In our opinion, Canon Inc. maintained, in all material respects, effective internal control over ﬁ nancial reporting as of December 31,
2008, 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, 2008 and 2007, and the related con-
solidated statements of income, stockholders’ equity, and cash ﬂ ows for each of the three years in the period ended December 31,
2008, all expressed in Japanese yen, and our report thereon dated March 16, 2009 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 ﬁ nancial statements referred to above present fairly, in all material respects, the consolidated ﬁ nancial
position of Canon Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their
cash ﬂ ows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.

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 27, 2009, in Tokyo

Further Information:
For publications or information, please contact the
External Relations Headquarters, 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

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

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CANON ANNUAL REPORT 2008

Fiscal Year Ended December 31, 2008

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

PUB. BEP018 0409SZ16.5 Printed in Japan