##### Table of Contents



o
    
    REGISTRATION STATEMENT PURSUANT TOSECTION 12(b)OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2007ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  toORo
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Date
of event requiring this shell company report
 
  
     JAPAN
 
  
   Title of each class
    
    Name of each exchange on which registered(1) Common Stock (the shares)
    
    New York Stock Exchange*(2) American Depositary Shares
(ADSs), each of which
represents one share
    
    New York Stock Exchange
  
 
 
   
  þ o
  o þ
  þ o
  þ o o
  þ o
  þ  o  o
  o o
  o þ




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##### Table of Contents



Page numberCERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
    
    1FORWARD-LOOKING INFORMATION
    1PART IItem 1.      Identity of Directors, Senior Management and Advisers

    
    2Item 2.      Offer Statistics and Expected Timetable
    
    2Item 3.      Key Information
    
    2A.
    
    Selected financial data
    
    2B.
    
    Capitalization and indebtedness
    
    3C.
    
    Reasons for the offer and use of proceeds
    
    3D.
    
    Risk factors
    
    3Item 4.      Information on the Company
    
    8A.
    
    History and development of the Company
    
    8B.
    
    Business overview
    
    9Products
    
    9Marketing and distribution
    
    11Service
    
    11Seasonality
    
    11Sources of supply
    
    11Net sales by product group and geographic area
    
    12Competition
    
    13Patents and licenses
    
    13Environmental regulations
    
    14C.
    
    Organizational structure
    
    16D.
    
    Property, plants and equipment
    
    17Item 4A.   Unresolved Staff Comments
    
    19Item 5.      Operating and Financial Review and Prospects
    
    20A.
    
    Operating results
    
    20Overview
    
    20Critical accounting policies and estimates
    
    21Consolidated result of operations
    
    23Fiscal 2007 compared with fiscal 2006
    
    23Fiscal 2006 compared with fiscal 2005
    
    25Foreign operations and foreign currency transactions
    
    30Recent developments
    
    30B.
    
    Liquidity and capital resources
    
    30C.
    
    Research and development, patents and licenses
    
    31D.
    
    Trend information
    
    32E.
    
    Off-balance sheet arrangements
    
    33F.
    
    Contractual obligations
    
    34Item 6.      Directors, Senior Management and Employees
    
    35A.
    
    Directors and senior management
    
    35B.
    
    Compensation
    
    39C.
    
    Board practices
    
    41D.
    
    Employees
    
    42E.
    
    Share ownership
    
    43Item 7.      Major Shareholders and Related Party Transactions
    
    44A.
    
    Major shareholders
    
    44B.
    
    Related party transactions
    
    44C.
    
    Interests of experts and counsel
    
    44
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Page numberItem 8.      Financial Information
    
    
    45A.
    
    Consolidated financial statements and other financial information
    
    45Consolidated financial statements
    
    45Legal proceedings
    
    45Dividend policy
    
    46B.
    
    Significant changes
    
    46Item 9.      The Offer and Listing
   
    47A.
    
    Offer and listing details
    
    47Trading in domestic markets
    
    47Trading in foreign markets
    
    48B.
    
    Plan of distribution
    
    48C.
    
    Markets
    
    48D.
    
    Selling shareholders
    
    48E.
    
    Dilution
    
    48F.
    
    Expenses of the issue
    
    48Item 10.     Additional Information
    
    49A.
    
    Share capital
    
    49B.
    
    Memorandum and articles of association
    
    49C.
    
    Material contracts
    
    53D.
    
    Exchange controls
    
    54E.
    
    Taxation
    
    55F.
    
    Dividends and paying agents
    
    57G.
    
    Statement by experts
    
    57H.
    
    Documents on display
    
    57I.
    
    Subsidiary information
    
    57Item 11.     Quantitative and Qualitative Disclosures about Market Risk
    
    57Market risk exposures
    
    57Equity price risk
    
    57Foreign currency exchange rate and interest rate risk
    
    58Item 12.     Description of Securities Other than Equity Securities
    
    58PART IIItem 13.     Defaults, Dividend Arrearages and Delinquencies
    
    59Item 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    59Item 15.     Controls and Procedures
    
    59Item 16A.  Audit Committee Financial Expert
    
    60Item 16B.   Code of Ethics
    
    60Item 16C.   Principal Accountant Fees and Services
    
    60Item 16D.   Exemptions from the Listing Standards for Audit Committees
    
    61Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    62PART IIIItem 17.     Financial Statements
    
    63Report of Independent Registered Public Accounting Firm
    
    64Consolidated Balance Sheets
    
    66Consolidated Statements of Income
    
    67Consolidated
Statements of Stockholders Equity
    
    68Consolidated Statements of Cash Flows
    
    69Notes to Consolidated Financial Statements
    
    70Valuation and Qualifying Accounts
    
    96Item 18.     Financial Statements
    
    97Item 19.     Exhibits
    
    97SIGNATURES
 98EXHIBIT INDEX
    99
  ii




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1




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 
 A. Selected financial data
  Selected financial data *1:
    

2007 *4
    
    2006
    
    2005
    
    2004
    
    2003(Millions of yen, except average number of shares and per share data)Net sales
    
    ¥
    4,481,346
    
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191
    
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072Operating profit
    
    
    756,673
    
    
    
    707,033
    
    
    
    583,043
    
    
    
    543,793
    
    
    
    454,424Net income
    
    
    488,332
    
    
    
    455,325
    
    
    
    384,096
    
    
    
    343,344
    
    
    
    275,730Advertising expenses
    
    
    132,429
    
    
    
    116,809
    
    
    
    106,250
    
    
    
    111,770
    
    
    
    100,278Research and development expenses
    
    
    368,261
    
    
    
    308,307
    
    
    
    286,476
    
    
    
    275,300
    
    
    
    259,140Depreciation of property, plant and equipment
    
    
    309,815
    
    
    
    235,804
    
    
    
    205,727
    
    
    
    174,397
    
    
    
    168,636Capital expenditures
    
    
    428,549
    
    
    
    379,657
    
    
    
    383,784
    
    
    
    318,730
    
    
    
    210,038Long-term debt, excluding current installments
    
    
    8,680
    
    
    
    15,789
    
    
    
    27,082
    
    
    
    28,651
    
    
    
    59,260Common stock
    
    
    174,698
    
    
    
    174,603
    
    
    
    174,438
    
    
    
    173,864
    
    
    
    168,892Stockholders equity
    
    
    2,922,336
    
    
    
    2,986,606
    
    
    
    2,604,682
    
    
    
    2,209,896
    
    
    
    1,865,545Total assets
    
    
    4,512,625
    
    
    
    4,521,915
    
    
    
    4,043,553
    
    
    
    3,587,021
    
    
    
    3,182,148Average
number of common shares in thousands *2
    
    
    1,293,296
    
    
    
    1,331,542
    
    
    
    1,330,761
    
    
    
    1,328,048
    
    
    
    1,317,974Per share data *2:Net income:Basic
    
    ¥
    377.59
    
    
    ¥
    341.95
    
    
    ¥
    288.63
    
    
    ¥
    258.53
    
    
    ¥
    209.21Diluted
    
    
    377.53
    
    
    
    341.84
    
    
    
    288.36
    
    
    
    257.85
    
    
    
    207.17Cash dividends declared
    
    
    110.00
    
    
    
    83.33
    
    
    
    66.67
    
    
    
    43.33
    
    
    
    33.33Cash dividends declared (U.S.$)*3
    
    $
    1.034
    
    
    $
    0.709
    
    
    $
    0.580
    
    
    $
    0.401
    
    
    $
    0.309
  1.
    
    The above financial data is prepared in accordance with U.S. generally accepted accounting principles.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 presented have been adjusted to reflect the stock split.3.
    
    Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average of the
noon buying rates for yen in New York City as reported by the Federal Reserve Bank of New York in
effect on the date of each semiannual dividend payment or on the latest practicable date.4.
    
    See Note 1-(l) of Notes to Consolidated Financial Statements for information regarding accounting change.
 2




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Yen exchange rates per U.S. dollar:
    
    Average
    
    Term end
    
    High
    
    Low2003
    
    
    115.83
    
    
    
    107.13
    
    
    
    121.42
    
    
    
    106.932004
    
    
    107.63
    
    
    
    102.68
    
    
    
    114.30
    
    
    
    102.562005
    
    
    110.74
    
    
    
    117.88
    
    
    
    120.93
    
    
    
    102.262006
    
    
    115.99
    
    
    
    119.02
    
    
    
    119.81
    
    
    
    110.072007 -Year
    
    
    117.45
    
    
    
    111.71
    
    
    
    124.09
    
    
    
    108.17- 1(st) half
    
    
    
    
    
    
    123.39
    
    
    
    124.09
    
    
    
    116.01- July
    
    
    
    
    
    
    119.13
    
    
    
    123.34
    
    
    
    118.41- August
    
    
    
    
    
    
    115.83
    
    
    
    119.76
    
    
    
    113.81- September
    
    
    
    
    
    
    114.97
    
    
    
    116.21
    
    
    
    113.43- October
    
    
    
    
    
    
    115.27
    
    
    
    117.71
    
    
    
    113.94- November
    
    
    
    
    
    
    111.02
    
    
    
    114.87
    
    
    
    108.17- December
    
    
    
    
    
    
    111.71
    
    
    
    114.45
    
    
    
    109.682008 - January
    
    
    
    
    
    
    106.74
    
    
    
    109.70
    
    
    
    105.42- February
    
    
    
    
    
    
    104.19
    
    
    
    108.15
    
    
    
    104.19
  
 B. Capitalization and indebtedness
  
 C. Reasons for the offer and use of proceeds
  
 D. Risk Factors
   Risks Related to Canons Industries
 Canon has invested and will continue to invest heavily in next-generation technologies. If the
market for these technologies does not develop as Canon expects or if its competitors produce these
or competing technologies in a more timely or effective manner, Canons operating results could be
materially adversely affected.
   If Canon does not effectively manage transitions in its products and services, its operating
results may decline.
  Canons digital camera business operates in a highly competitive environment.
  3




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Because the semiconductor industry is highly cyclical, Canon may be adversely affected by any
downturn in the industry.
   Downturns in the semiconductor industry have caused Canons customers to change their
operating strategies, which in turn may affect Canons business.
   The semiconductor equipment industry is characterized by rapid technological change. If Canon
does not constantly develop new products to keep pace with technological change and meet its
customer requirements, Canon may lose customers and its business may suffer.
  Growing popularity of High Definition (HD) and increased diversification of recording media
may adversely affect Canons video camcorder business.
   Risks Related to Canons Business
 Canon derives a significant percentage of its revenues from Hewlett-Packard.
  Canon depends on a limited number of suppliers for certain key components.
  Although competition is increasing in the market for sales of supplies and services following
initial product placement, Canon maintains a high market share in sales of such supplies. As a
result, Canon may be subject to antitrust-related suits, investigations or proceedings which may
adversely affect its operating results or reputation.
  Increases in counterfeit Canon products may adversely affect Canons brand image and its
operating results.
  4




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Per unit production costs are highest when a new product is introduced, and if such new
products are not successful or if Canon fails to achieve cost reductions over time, Canons gross
profits may be adversely affected.
  
    
    engineering improvements;
    
    economies of scale;
    
    improvements in manufacturing processes;
    
    improved serviceability of products; and
    
    reduced inventories of parts and products.
  Cyclical patterns in sales of Canons products make planning and inventory management
difficult and future financial results less predictable.
  Canons business is subject to changes in the sales environment.
  Canon is subject to financial and reputational risks due to product quality and liability
issues.
  Canons success depends on the value of its brand name, and if the value of the brand name is
diminished, operating results and prospects will be adversely affected.
  A substantial portion of Canons business activity is conducted outside Japan, exposing Canon
to the risks of international operations.
  
    
    less developed technological infrastructure, which can affect
production or other activities or result in lower customer acceptance
of Canons services;
    
    difficulties in recruiting and retaining personnel;
    
    potentially adverse tax consequences;
    
    longer payment cycles;
    
    political turmoil or unfavorable economic factors; and
    
    unexpected legal or regulatory changes.
      5




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Canon depends on efficient logistics services to distribute its products worldwide.
     Economic trends in Canons major markets may adversely affect its results of operations.
   Risks Related to Environmental Issues
 Canons business is subject to environmental laws and regulations.
   Environmental clean-up and remediation costs relating to Canons properties and associated
litigation could decrease Canons net cash flow, adversely affect its results of operations and
impair its financial condition.
   Risks Related to Intellectual Property
 Canon may be subject to intellectual property litigation and infringement claims, which could
cause it to incur significant expenses or prevent it from selling its products.
   
    
    competitors will be able to develop similar technology independently;
    
    Canons pending patent applications may not be issued;
    
    the steps Canon takes to prevent misappropriation or infringement of its intellectual property may not be successful; and
    
    intellectual property laws may not adequately protect Canons intellectual property, particularly in some emerging markets.
   
    
    refrain from selling the affected product in certain markets;
    
    pay monetary damages;
    
    seek to develop non-infringing technologies, which may not be feasible; or
    
    seek to acquire licenses to the infringed technology and to make
royalty payments, which may not be available on commercially reasonable
terms, if at all.
   6




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Disputes involving payment of remuneration for employee inventions may adversely affect
Canons brand image as well as its business.
  Other Risks
 Canon must attract and retain highly qualified professionals.
   Canons physical facilities, information systems and information security systems are subject
to damage as a result of disasters, outages or similar events.
  Canons operating and financing activities expose Canon to foreign currency exchange and
interest rate risks that may adversely affect its revenues and profitability.
  The cooperation and alliances with, and strategic investments in, third parties undertaken by
Canon may not produce successful results. Also, unexpected emergence of strong competitors through
mergers and acquisitions, may affect Canons business environment.
   Canon may be adversely affected by fluctuations in the stock and bond markets.
  Confidential information may be inadvertently disclosed which could lead to damage claims or
harm Canons reputation, and may have an adverse effect upon Canon s business.
   7




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Item 4. Information on the Company
 
 A. History and development of the Company
     
    
    In January 2003, Canon Aptex Inc. and Copyer Co., Ltd., two of Canon
Inc.s manufacturing subsidiaries in Japan, merged to become Canon
Finetech Inc. The merger was conducted with the aim of concentrating
and further strengthening the core competencies of the two merged
companies in office equipment-related technologies.
    
    In April 2003, Fukushima Canon Inc. was established as a wholly-owned
subsidiary through the spin-off of Fukushima Plant, with the aim of
establishing a high value-added manufacturing company equipped with
product-launching capability.
    
    In April 2003, Canon N.T.C.s marketing operations were spun off and
merged with Canon System & Support Inc., and its real estate
operations were spun off into Canon Facility Management, Inc.
Following the corporate spin-offs, Canon N.T.C.s operations focuses
on development and manufacturing.
    
    In January 2004, Canon Precision Inc., or Canon Precision, a
wholly-owned subsidiary of Canon Inc., merged with Hirosaki Precision,
Inc., or Hirosaki Precision, a wholly-owned subsidiary of Canon
Precision. Hirosaki Precision was merged into Canon Precision, the
surviving company. Canon Precision targets the improved efficiency and
specialization of business operations. Since both Canon Precision and
Hirosaki Precision were consolidated subsidiaries of Canon Inc., the
merger had no impact on Canons business results.
    
    On October 15, 2004, the Company entered into an agreement with Canon
Sales Co., Inc. and Canotec Co., Inc., or Canotec, joint equity
shareholders of Niigata Canotec Co., Inc., or Niigata Canotec, to
acquire all outstanding shares of Niigata Canotec. Therefore, on
January 1, 2005, Niigata Canotec became a wholly-owned subsidiary of
the Company and changed its name to Canon Imaging System Technologies
Inc. By making Canon Imaging System Technologies, Inc. a wholly-owned
subsidiary of the Company, Canon aims to raise the level of its
technical capacity and improve development efficiency by enabling
closer coordination.
    
    On January 1, 2005, Canotec and FastNet, Inc. merged, and the merged
entity changed its name to Canon Network Communications, Inc. The
purpose of the merger was to increase management efficiency by
consolidating the Canon groups network and Internet service
operations. Canon Network Communications, Inc. aims to strengthen
Information Technology Management Services, dealing with all stages
from the establishment of comprehensive network systems to their
operation and management.
    
    On September 30, 2005, Canon acquired all of the issued and
outstanding shares of ANELVA Corporation, which possesses advanced
vacuum technology, and made it into a subsidiary. ANELVA Corporations
corporate name was changed to Canon ANELVA Corporation as of October
1, 2005. By making Canon ANELVA Corporation a subsidiary of the
Company, Canon aims to promote the in-house production of
manufacturing equipment which is indispensable to differentiate Canon
products from the competitors in various fields, including Canons
new display business.
    
    On October 19, 2005, Canon acquired the shares of NEC Machinery
Corporation (listed on the Second Section of the Osaka Securities
Exchange Co., Ltd.), which possesses advanced automation technologies,
through a tender offer, making it a subsidiary of Canon. NEC Machinery
Corporations corporate name was changed to Canon Machinery Inc. as of
December 17, 2005. By making Canon Machinery Inc. a subsidiary of the
Company, Canon aims to make further advances in its production reform
activities, including the automation of production processes for Canon
products.
    
    On December 27, 2006, Canon Electronics Inc. acquired the shares of
e-System Corporation (listed on the Hercules Section of the Osaka
Securities Exchange) through a third party distribution in order to
strengthen its groups information-related business and develop it
into a core business, and made that company its subsidiary.
    
    On June 21, 2007, Canon Marketing Japan Inc. acquired the shares of
Argo21 Corporation through a tender offer for outstanding common stock,
making it a subsidiary of Canon. In addition, Canon Marketing Japan made
it into a wholly-owned subsidiary on November 1, 2007 by share
exchange in order to strengthen its IT solutions business.
    
    On December 28, 2007, Canon acquired the shares of Tokki Corporation
(listed on the JASDAQ Securities Exchange Inc.) through a tender offer
for outstanding common stock, making it a subsidiary of Canon. With Tokki
Corporation as a subsidiary, Canon aims to accelerate the development
of the display business.
   8




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B. Business overview
       
 Products
  - Business machines -
  Office imaging products
        Computer peripherals
     9




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Business information products
     -Cameras -
          Optical and other products
   10




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th
      
 Marketing and distribution
        
 Service
    
 Seasonality
  
 Sources of supply
    11




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##### Table of Contents



NET SALES BY PRODUCT GROUP
 Years ended December 312007
    
    
    change
    
    
    2006
    
    
    change
    
    
    2005(Millions of yen except percentage data)Business machines:Office imaging products
    
    ¥
    1,290,788
    
    
    
    +8.8
    %
    
    ¥
    1,185,925
    
    
    
    +2.8
    %
    
    ¥
    1,153,240Computer peripherals
    
    
    1,537,511
    
    
    
    +9.9
    
    
    
    1,398,408
    
    
    
    +12.3
    
    
    
    1,244,906Business information products
    
    
    107,243
    
    
    
    +0.5
    
    
    
    106,754
    
    
    
    +2.4
    
    
    
    104,2552,935,542
    
    
    
    +9.1
    
    
    
    2,691,087
    
    
    
    +7.5
    
    
    
    2,502,401Cameras
    
    
    1,152,663
    
    
    
    +10.6
    
    
    
    1,041,865
    
    
    
    +18.5
    
    
    
    879,186Optical and other products
    
    
    393,141
    
    
    
    -7.2
    
    
    
    423,807
    
    
    
    +13.7
    
    
    
    372,604Total
    
    ¥
    4,481,346
    
    
    
    +7.8
    
    
    ¥
    4,156,759
    
    
    
    +10.7
    
    
    ¥
    3,754,191
 NET SALES BY GEOGRAPHIC AREA
 Years ended December 312007
    
    
    change
    
    
    2006
    
    
    change
    
    
    2005(Millions of yen except percentage data)JapanUnaffiliated customers
    
    ¥
    1,048,310
    
    
    
    +1.0
    %
    
    ¥
    1,037,657
    
    
    
    +5.9
    %
    
    ¥
    979,748Intersegment
    
    
    2,494,251
    
    
    
    +7.9
    
    
    
    2,311,482
    
    
    
    +13.0
    
    
    
    2,046,173Total
    
    
    3,542,561
    
    
    
    +5.8
    
    
    
    3,349,139
    
    
    
    +10.7
    
    
    
    3,025,921AmericasUnaffiliated customers
    
    ¥
    1,329,479
    
    
    
    +4.0
    %
    
    ¥
    1,277,867
    
    
    
    +12.1
    %
    
    ¥
    1,139,784Intersegment
    
    
    4,608
    
    
    
    -3.3
    
    
    
    4,764
    
    
    
    -35.8
    
    
    
    7,424Total
    
    
    1,334,087
    
    
    
    +4.0
    
    
    
    1,282,631
    
    
    
    +11.8
    
    
    
    1,147,208EuropeUnaffiliated customers
    
    ¥
    1,499,821
    
    
    
    +14.1
    %
    
    ¥
    1,313,919
    
    
    
    +11.5
    %
    
    ¥
    1,178,672Intersegment
    
    
    3,496
    
    
    
    -2.5
    
    
    
    3,586
    
    
    
    +62.6
    
    
    
    2,206Total
    
    
    1,503,317
    
    
    
    +14.1
    
    
    
    1,317,505
    
    
    
    +11.6
    
    
    
    1,180,878OthersUnaffiliated customers
    
    ¥
    603,736
    
    
    
    +14.5
    %
    
    ¥
    527,316
    
    
    
    +15.6
    %
    
    ¥
    455,987Intersegment
    
    
    824,844
    
    
    
    +4.1
    
    
    
    792,018
    
    
    
    +22.5
    
    
    
    646,530Total
    
    
    1,428,580
    
    
    
    +8.3
    
    
    
    1,319,334
    
    
    
    +19.7
    
    
    
    1,102,517EliminationsUnaffiliated customers
    
    ¥
    
    
    
    
    
    %
    
    ¥
    
    
    
    
    
    %
    
    ¥
    Intersegment
    
    
    (3,327,199
    )
    
    
    
    
    
    
    (3,111,850
    )
    
    
    
    
    
    
    (2,702,333
    )Total
    
    
    (3,327,199
    )
    
    
    
    
    
    
    (3,111,850
    )
    
    
    
    
    
    
    (2,702,333
    )ConsolidatedUnaffiliated customers
    
    ¥
    4,481,346
    
    
    
    +7.8
    %
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191Intersegment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,481,346
    
    
    
    +7.8
    
    
    
    4,156,759
    
    
    
    +10.7
    
    
    
    3,754,191
 Note:
    
    The segments are defined under
accounting principles generally
accepted in Japan (Japanese GAAP). In grouping of
segment information by product,
Japanese GAAP requires that
consideration be given to similarities
of product types and characteristics,
manufacturing methods, sales markets,
and other factors that are similar. 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.
Segment information by geographic area
is determined by the location of the
Company or its relevant subsidiary
making the sale.
  12




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##### Table of Contents



Competition
    
    
    Business machines
   
    
    Cameras
       
    
    Steppers and Aligners
    
 Patents and licenses
   13




---



##### Table of Contents



Oki Electric Industry Co., Ltd.
    
    (LED printers, multifunction printers and facsimiles)Matsushita Electric Industrial Co., Ltd.
    
    (electrophotography)Ricoh Company, Ltd.
    
    (electrophotography)Sanyo Electric Co., Ltd.
    
    (electronic still camera)Samsung Electronics Co., Ltd.
    
    (laser beam printers, multifunction printers and facsimiles)Kyocera Mita Corporation
    
    (electrophotography)Konica Minolta Holding Co.,Ltd.
    
    (business machines)Toshiba Corporation
    
    (business machines)Sharp Corporation
    
    (electrophotography)
   Jerome H. Lemelson Patent Incentives, Inc.
    
    (computer systems, image recording apparatus and communication apparatus)Energy Conversion Devices, Inc.
    
    (solar battery)Honeywell
International Inc.
    
    (camera and video products)Gilbert P. Hyatt U.S. Philips Corporation
    
    (microcomputer)St. Clair Intellectual Property Consultants, Inc.
    
    (Selection of digital cameras image format)
   International Business Machines Corporation
    
    (information handling systems)Hewlett-Packard Company
    
    (bubble jet printers)Xerox Corporation
    
    (business machines)Matsushita Electric Industrial Co., Ltd.
    
    (video tape recorders and video cameras)Eastman
Kodak Company
    
    (electrophotography and image processing technology)Ricoh Company, Ltd.
    
    (electrophotography products, facsimiles and word processors)
  
 Environmental regulations
  1.
    
    European Union Directive on the Restriction of the Use of Certain Hazardous Substances in
Electrical and Electronic Equipment (the RoHS Directive), and Directive on Waste Electrical and
Electronic Equipment (theWEEE Directive).
    2.
    
    Soil Pollution Prevention Law of Japan
    14




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##### Table of Contents



3.
    
    Law for Promotion of Effective Utilization of Resources of Japan
  4.
    
    Law on Promoting Green Purchasing of Japan
   
    manufacture of products that consume less electricity to prevent global warming and to conserve energy,
    use of recycled parts and recycled materials,
    reduction of the types of raw materials used in order to conserve resources, and
    acceleration of the date by which the requirements of the law are implemented to promote the elimination of hazardous substances.
  5.
    
    European Union (EU) Directive on Batteries and Accumulators and Waste Batteries and
Accumulators
  6.
    
    Administrative Measures on the Control of Pollution Caused by Electronic Information Products
of China
     7.
    
    U.S. States and Canadas Legislations concerning Waste Electric and Electronic Products and
RoHS-like Regulations
   8.
    
    The European Framework for the management of chemical substances, or REACH Regulations
     15




---



##### Table of Contents



9.
    
    The European Framework for the Setting of Requirements for Energy-Using Products (so-called
EuP Directive)
  10.
    
    Kyoto Protocol to the United Nations Framework Convention on Climate Change
     11.
    
    Other environmental activities
 th
  
 C. Organizational structure
   Proportion of
    
    
    Proportion ofownership interest
    
    
    voting powerName of company
    
    Head office location
    
    
    owned
    
    
    heldCanon Marketing Japan Inc.
    
    Tokyo, Japan
    
    
    50.1
    %
    
    
    51.8
    %Canon U.S.A., Inc.
    
    New York, U.S.A.
    
    
    100.0
    %
    
    
    100.0
    %Canon Europa N.V.
    
    Amstelveen, The Netherlands
    
    
    100.0
    %
    
    
    100.0
    %
 16




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##### Table of Contents



D. Property, plants and equipment
  Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Headquarters, Tokyo
    
    
    2,471
    
    
    R&D, corporate administration
and other functionsCanon Global Management Institute, Tokyo
    
    
    172
    
    
    Training & administrationKawasaki Office, Kanagawa
    
    
    259
    
    
    Development of production engineeringKosugi Office, Kanagawa
    
    
    395
    
    
    Development of software for office imaging productsFuji-Susono Research Park, Shizuoka
    
    
    1,037
    
    
    R&D in electrophotographic technologiesAyase Office, Kanagawa
    
    
    393
    
    
    R&D and manufacturing of semiconductor devicesOptics R&D Center, Tochigi
    
    
    473
    
    
    R&D in optical technologies, development and sales of
broadcasting equipmentYako Development Center, Kanagawa
    
    
    905
    
    
    Development of inkjet printers, inkjet chemical productsUtsunomiya Plant, Tochigi
    
    
    855
    
    
    Manufacturing of lenses for cameras
and other applicationsToride Plant, Ibaraki
    
    
    2,934
    
    
    R&D in electrophotographic technologies,
mass-production trials and support; manufacturing of
office imaging products, chemical products; training of
manufacturingAmi Plant, Ibaraki
    
    
    1,177
    
    
    Manufacturing of semiconductor production equipment and
LCD production equipment; design and manufacturing of
factory automation equipment and metal moldsUtsunomiya Optical Products Plant, Tochigi
    
    
    1,417
    
    
    R&D, manufacturing, sales and servicing of
semiconductor production equipmentCanon Electronics Inc., Saitama and Gunma
    
    
    1,170
    
    
    Camera components, magnetic heads, sensors,
micrographics, document scanners, LBPs, laser scanner
units and portable data terminalsCanon Finetech Inc., Saitama, Ibaraki, and Fukui
    
    
    988
    
    
    Copying machines, copying machines peripherals,
chemical products and business-use printersCanon Precision Inc., Aomori
    
    
    1,090
    
    
    Motors, toner cartridges and sensorsOptron Inc., Ibaraki
    
    
    142
    
    
    Optical crystals (for steppers, cameras, telescopes)
and vapor deposition materials
 17




---



##### Table of Contents



Floor space(includingName and location
    
    leased space)
    
    Principal activities and products manufacturedDomestic
    
    (Thousands ofsquare feet)Canon Chemicals Inc., Ibaraki
    
    
    2,103
    
    
    Toner cartridges and rubber functional componentsCanon Components Inc., Saitama
    
    
    607
    
    
    Image sensor units, printed circuit boards, ink cartridges and
medical equipmentOita Canon Inc., Oita
    
    
    1,344
    
    
    Digital cameras, cameras and digital video camcordersNagahama Canon Inc., Shiga
    
    
    1,097
    
    
    LBPs, toner cartridges and A-Si drumsOita Canon Materials Inc., Oita
    
    
    2,015
    
    
    Chemical products for copying machines and printersUeno Canon Materials Inc., Mie
    
    
    638
    
    
    Chemical products for copying machines and printersFukushima Canon Inc., Fukushima
    
    
    971
    
    
    Inkjet printers and inkjet cartridgesCanon Semiconductor Equipment Inc., Ibaraki
    
    
    553
    
    
    Semiconductor production-related equipment, copying machines and
copying machine unitsCanon Ecology Industry Inc., Ibaraki
    
    
    399
    
    
    Recycling of toner cartridges and business machine repairNisca Corporation, Yamanashi
    
    
    377
    
    
    Scanner units and optical equipmentMiyazaki Daishin Canon Co., Ltd., Miyazaki
    
    
    129
    
    
    Digital camerasCanon Mold Co., Ltd., Ibaraki
    
    
    171
    
    
    MoldsCanon ANELVA Corporation, Kanagawa and Yamanashi
    
    
    940
    
    
    Production equipment for electron
devices, Flat Panel Display and semiconductorCanon Machinery Inc., Shiga
    
    
    294
    
    
    Production equipment for cartridges and semiconductorTokki Corporation, Tokyo and Niigata
    
    
    187
    
    
    Vacuum technology-related equipmentSED Inc., Kanagawa
    
    
    1,106
    
    
    Flat-screen SED (Surface-conduction Electron-emitter Display) panels
 18




---



##### Table of Contents



Floor space(includingName and location
    

Leased space)
    
    Principal activities and products manufacturedOverseas
    
    (Thousands ofsquare feet)[Europe]Canon Giessen GmbH, Giessen, Germany
    
    
    362
    
    
    Copying machines, toner cartridges and
semiconductor production equipmentCanon Bretagne S.A.S., Liffre, France
    
    
    506
    
    
    Toner cartridges and recycling of
toner cartridges[America]Canon Virginia, Inc.,Virginia, U.S.
    
    
    828
    
    
    Toner and toner cartridges[Asia]Canon Inc., Taiwan, Taiwan
    
    
    414
    
    
    Cameras and lensesCanon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia
    
    
    581
    
    
    Digital cameras, lenses and optical lens partsCanon Dalian Business Machines, Inc., Dalian, China
    
    
    1,355
    
    
    LBPs and toner cartridgesCanon Zhuhai, Inc., Zhuhai, China
    
    
    661
    
    
    LBPs and digital camerasTianjin Canon Inc., Tianjin, China
    
    
    148
    
    
    Copying machinesCanon Hi-Tech Thailand Ltd., Ayutthaya, Thailand
    
    
    1,309
    
    
    Inkjet printersCanon Ayutthaya Thailand Ltd., Ayutthaya, Thailand
    
    
    182
    
    
    Circuit boards for inkjet printersCanon Engineering Thailand Ltd., Ayutthaya, Thailand
    
    
    129
    
    
    Metal molds and plastic injection mold partsCanon Zhougshan Business Machines Co., Ltd., Zhougshan, China
    
    
    840
    
    
    LBPsCanon Vietnam Co., Ltd., Hanoi, Vietnam
    
    
    2,492
    
    
    Inkjet printers and LBPsCanon (Suzhou) Inc., Suzhou, China
    
    
    771
    
    
    Copying machinesCanon Finetech (Suzhou) Business Machines Inc. , Suzhou, China
    
    
    355
    
    
    Copying machinesThai Nisca Co.Ltd., Ayutthaya, Thailand
    
    
    190
    
    
    Optical equipment and copying machine peripheralsCanon Finetech Nisca (Shenzhen) Inc., Shenzhen, China
    
    
    217
    
    
    Copying machines and LBP peripherals
  Main facilities under construction for establishment/expansion
 .
    
    Canon Precision Inc.: New Production Base (Business Machines Operations)
   
 Item 4A. Unresolved Staff Comments
  19




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##### Table of Contents



Item 5. Operating and Financial Review and Prospects
 
 A. Operating Results
  
 Overview
   Economic environment
  Market environment
  Summary of operations
  Key performance indicators
  KEY PERFORMANCE INDICATORS
 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Net sales (Millions of yen)
    
    ¥
    4,481,346
    
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191
    
    
    ¥
    3,467,853
    
    
    ¥
    3,198,072Gross profit to net sales ratio
    
    
    50.1
    %
    
    
    49.6
    %
    
    
    48.5
    %
    
    
    49.4
    %
    
    
    50.3
    %R&D expense to net sales ratio
    
    
    8.2
    %
    
    
    7.4
    %
    
    
    7.6
    %
    
    
    7.9
    %
    
    
    8.1
    %Operating profit to net sales ratio
    
    
    16.9
    %
    
    
    17.0
    %
    
    
    15.5
    %
    
    
    15.7
    %
    
    
    14.2
    %Inventory turnover within days
    
    44 days
    
    
    45 days
    
    
    47 days
    
    
    49 days
    
    
    49 daysDebt to total assets ratio
    
    
    0.6
    %
    
    
    0.7
    %
    
    
    0.8
    %
    
    
    1.1
    %
    
    
    3.1
    %Stockholders equity to total assets ratio
    
    
    64.8
    %
    
    
    66.0
    %
    
    
    64.4
    %
    
    
    61.6
    %
    
    
    58.6
    %
       20




---



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Critical accounting policies and estimates
               21




---



##### Table of Contents



22




---



##### Table of Contents



Consolidated result of operations
 
 Fiscal 2007 compared with fiscal 2006
  2007
    
    
    Change
    
    
    2006(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    4,481,346
    
    
    
    + 7.8
    %
    
    ¥
    4,156,759Operating profit
    
    
    756,673
    
    
    
    + 7.0
    
    
    
    707,033Income before income taxes and minority interests
    
    
    768,388
    
    
    
    + 6.8
    
    
    
    719,143Net income
    
    
    488,332
    
    
    
    + 7.2
    
    
    
    455,325Net income per share:Basic
    
    
    377.59
    
    
    
    +10.4
    
    
    
    341.95Diluted
    
    
    377.53
    
    
    
    +10.4
    
    
    
    341.84
  Sales
    Cost of sales
  Gross profit
  Operating expenses
  Operating profit
   Other income (deductions)
  Income before income taxes and minority interests
  Income taxes
  Net income
    
    
    The business machines product groupincludes office imaging products, computer peripherals and business information products.
 
    
    Office imaging products include mainly office network digital MFDs, color network digital MFDs, office copying machines, personal-use copying
machines and full-color copying machines.
    
    Computer peripherals include mainly laser beam printers, inkjet multifunction peripherals, single function inkjet printers and image scanners.
    
    Business information products include mainly computer information systems, document scanners and personal information products.
 
    
    The cameras product groupincludes mainly digital single lens reflex (SLR) cameras, digital compact cameras, interchangeable lenses and digital video camcorders.
    
    The optical and other products product groupincludes mainly semiconductor production equipment, mirror projection mask aligners for LCD panels, broadcasting equipment, medical equipment, large format printers and related components.
 23




---



##### Table of Contents



Sales by product
  2007
    
    
    Change
    
    
    2006(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,290,788
    
    
    
    + 8.8
    %
    
    ¥
    1,185,925Computer peripherals
    
    
    1,537,511
    
    
    
    + 9.9
    
    
    
    1,398,408Business information products
    
    
    107,243
    
    
    
    + 0.5
    
    
    
    106,754Total business machines
    
    
    2,935,542
    
    
    
    + 9.1
    
    
    
    2,691,087Cameras
    
    
    1,152,663
    
    
    
    +10.6
    
    
    
    1,041,865Optical and other products
    
    
    393,141
    
    
    
    - 7.2
    
    
    
    423,807Total
    
    ¥
    4,481,346
    
    
    
    + 7.8
    %
    
    ¥
    4,156,759
       Sales by region
  2007
    
    
    Change
    
    
    2006(Millions of yen, except percentage data)Japan
    
    ¥
    947,587
    
    
    
    + 1.6
    %
    
    ¥
    932,290Americas
    
    
    1,336,168
    
    
    
    + 4.1
    
    
    
    1,283,646Europe
    
    
    1,499,286
    
    
    
    +14.1
    
    
    
    1,314,305Others
    
    
    698,305
    
    
    
    +11.5
    
    
    
    626,518Total
    
    ¥
    4,481,346
    
    
    
    + 7.8
    %
    
    ¥
    4,156,759
       Operating profit by product
    24




---



##### Table of Contents



Fiscal 2006 compared with fiscal 2005
  2006
    
    
    Change
    
    
    2005(Millions of yen, except per shareamounts and percentage data)Net sales
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191Operating profit
    
    
    707,033
    
    
    
    +21.3
    
    
    
    583,043Income before income taxes and minority interests
    
    
    719,143
    
    
    
    +17.5
    
    
    
    612,004Net income
    
    
    455,325
    
    
    
    +18.5
    
    
    
    384,096Net income per share:Basic
    
    
    341.95
    
    
    
    +18.5
    
    
    
    288.63Diluted
    
    
    341.84
    
    
    
    +18.5
    
    
    
    288.36
  Sales
    Cost of sales
  Gross profit
  Operating expenses
  Operating profit
  Other income (deductions)
  Income before income taxes and minority interests
  Income taxes
  Net income
  25




---



##### Table of Contents



Product information
  
    
    The business machines product group includes office imaging products, computer peripherals and business information products.
 
    
    Office imaging products include office network digital MFDs, color network digital MFDs, office copying machines, personal-use copying
machines and full-color copying machines.
    
    Computer peripherals include laser beam printers, single function inkjet printers, inkjet multifunction peripherals and image scanners.
    
    Business information products include micrographic equipment, personal computers and calculators.
 
    
    The cameras product group includes single lens reflex (SLR) cameras, compact cameras, digital cameras and digital video camcorders.
    
    The optical and other products product group includes steppers for semiconductor chip production, mirror projection mask aligners used in the production of LCDs, television broadcasting lenses and medical equipment.
 Sales by product
  2006
    
    
    Change
    
    
    2005(Millions of yen, except percentage data)Business machines:Office imaging products
    
    ¥
    1,185,925
    
    
    
    +2.8
    %
    
    ¥
    1,153,240Computer peripherals
    
    
    1,398,408
    
    
    
    +12.3
    
    
    
    1,244,906Business information products
    
    
    106,754
    
    
    
    +2.4
    
    
    
    104,255Total business machines
    
    
    2,691,087
    
    
    
    +7.5
    
    
    
    2,502,401Cameras
    
    
    1,041,865
    
    
    
    +18.5
    
    
    
    879,186Optical and other products
    
    
    423,807
    
    
    
    +13.7
    
    
    
    372,604Total
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191
       26




---



##### Table of Contents



Sales by region
  2006
    
    
    Change
    
    
    2005(Millions of yen, except percentage data)Japan
    
    ¥
    932,290
    
    
    
    +8.9
    %
    
    ¥
    856,205Americas
    
    
    1,283,646
    
    
    
    +12.0
    
    
    
    1,145,950Europe
    
    
    1,314,305
    
    
    
    +11.3
    
    
    
    1,181,258Others
    
    
    626,518
    
    
    
    +9.8
    
    
    
    570,778Total
    
    ¥
    4,156,759
    
    
    
    +10.7
    %
    
    ¥
    3,754,191
       Operating profit by product
    27




---



##### Table of Contents



Segment information by product and geographic area
   As of/for the year ended December 31, 2007OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,935,542
    
    
    ¥
    1,152,663
    
    
    ¥
    393,141
    
    
    ¥
    
    
    
    ¥
    4,481,346Intersegment
    
    
    
    
    
    
    
    
    
    
    238,659
    
    
    
    (238,659
    )
    
    
    Total
    
    
    2,935,542
    
    
    
    1,152,663
    
    
    
    631,800
    
    
    
    (238,659
    )
    
    
    4,481,346Operating cost and expenses
    
    
    2,285,281
    
    
    
    845,237
    
    
    
    610,720
    
    
    
    (16,565
    )
    
    
    3,724,673Operating profit
    
    ¥
    650,261
    
    
    ¥
    307,426
    
    
    ¥
    21,080
    
    
    ¥
    (222,094
    )
    
    ¥
    756,673Assets
    
    ¥
    1,762,167
    
    
    ¥
    561,504
    
    
    ¥
    544,734
    
    
    ¥
    1,644,220
    
    
    ¥
    4,512,625Depreciation and amortization
    
    
    159,309
    
    
    
    37,180
    
    
    
    69,843
    
    
    
    75,362
    
    
    
    341,694Capital expenditure
    
    
    166,143
    
    
    
    32,870
    
    
    
    78,449
    
    
    
    151,087
    
    
    
    428,549
 As of/for the year ended December 31, 2006OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,691,087
    
    
    ¥
    1,041,865
    
    
    ¥
    423,807
    
    
    ¥
    
    
    
    ¥
    4,156,759Intersegment
    
    
    
    
    
    
    
    
    
    
    190,687
    
    
    
    (190,687
    )
    
    
    Total
    
    
    2,691,087
    
    
    
    1,041,865
    
    
    
    614,494
    
    
    
    (190,687
    )
    
    
    4,156,759Operating cost and expenses
    
    
    2,091,858
    
    
    
    773,127
    
    
    
    573,019
    
    
    
    11,722
    
    
    
    3,449,726Operating profit
    
    ¥
    599,229
    
    
    ¥
    268,738
    
    
    ¥
    41,475
    
    
    ¥
    (202,409
    )
    
    ¥
    707,033Assets
    
    ¥
    1,617,198
    
    
    ¥
    542,866
    
    
    ¥
    501,008
    
    
    ¥
    1,860,843
    
    
    ¥
    4,521,915Depreciation and amortization
    
    
    127,873
    
    
    
    28,756
    
    
    
    37,018
    
    
    
    68,647
    
    
    
    262,294Capital expenditure
    
    
    154,259
    
    
    
    31,517
    
    
    
    36,272
    
    
    
    157,609
    
    
    
    379,657
 As of/for the year ended December 31, 2005OpticalBusiness
    
    
    
    
    
    
    and other
    
    
    Corporate andmachines
    
    
    Cameras
    
    
    products
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    2,502,401
    
    
    ¥
    879,186
    
    
    ¥
    372,604
    
    
    ¥
    
    
    
    ¥
    3,754,191Intersegment
    
    
    
    
    
    
    
    
    
    
    158,114
    
    
    
    (158,114
    )
    
    
    Total
    
    
    2,502,401
    
    
    
    879,186
    
    
    
    530,718
    
    
    
    (158,114
    )
    
    
    3,754,191Operating cost and expenses
    
    
    1,960,373
    
    
    
    705,480
    
    
    
    491,898
    
    
    
    13,397
    
    
    
    3,171,148Operating profit
    
    ¥
    542,028
    
    
    ¥
    173,706
    
    
    ¥
    38,820
    
    
    ¥
    (171,511
    )
    
    ¥
    583,043Assets
    
    ¥
    1,427,277
    
    
    ¥
    480,957
    
    
    ¥
    517,527
    
    
    ¥
    1,617,792
    
    
    ¥
    4,043,553Depreciation and amortization
    
    
    123,037
    
    
    
    27,662
    
    
    
    28,011
    
    
    
    47,231
    
    
    
    225,941Capital expenditure
    
    
    201,887
    
    
    
    57,678
    
    
    
    15,955
    
    
    
    108,264
    
    
    
    383,784
  (1)
    
    General corporate expenses of ¥221,979 million, ¥202,328 million and
¥171,522 million in the years ended December 31, 2007, 2006 and 2005,
respectively, are included in Corporate and Eliminations.(2)
    
    Corporate assets of ¥1,644,220 million, ¥1,860,933 million and
¥1,239,255 million as of December 31, 2007, 2006 and 2005,
respectively, which mainly consist of cash and cash equivalents, time
deposits, marketable securities, investments and corporate properties,
are included in Corporate and Eliminations.(3)
    
    The segments are defined under Japanese GAAP. In grouping of segment
information by product, Japanese GAAP requires that consideration be
given to similarities of product types and characteristics,
manufacturing methods, sales markets, and other factors that are
similar.(4)
    
    As noted in Note 1-(l) of the Notes to Consolidated Financial
Statements, Effective April 1, 2007, the Company and its domestic
subsidiaries elected to change the declining-balance method of
depreciating machinery and equipment.
The change in depreciation
methods caused an increase in depreciation expense by ¥29,148 million
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.
 28




---



##### Table of Contents



As of/for the year ended December 31, 2007Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    1,048,310
    
    
    ¥
    1,329,479
    
    
    ¥
    1,499,821
    
    
    ¥
    603,736
    
    
    ¥
    
    
    
    ¥
    4,481,346Intersegment
    
    
    2,494,251
    
    
    
    4,608
    
    
    
    3,496
    
    
    
    824,844
    
    
    
    (3,327,199
    )
    
    
    Total
    
    
    3,542,561
    
    
    
    1,334,087
    
    
    
    1,503,317
    
    
    
    1,428,580
    
    
    
    (3,327,199
    )
    
    
    4,481,346Operating cost and
expenses
    
    
    2,722,672
    
    
    
    1,281,805
    
    
    
    1,441,972
    
    
    
    1,378,306
    
    
    
    (3,100,082
    )
    
    
    3,724,673Operating profit
    
    ¥
    819,889
    
    
    ¥
    52,282
    
    
    ¥
    61,345
    
    
    ¥
    50,274
    
    
    ¥
    (227,117
    )
    
    ¥
    756,673Assets
    
    ¥
    2,715,294
    
    
    ¥
    506,295
    
    
    ¥
    732,579
    
    
    ¥
    367,234
    
    
    ¥
    191,223
    
    
    ¥
    4,512,625
 As of/for the year ended December 31, 2006Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    1,037,657
    
    
    ¥
    1,277,867
    
    
    ¥
    1,313,919
    
    
    ¥
    527,316
    
    
    ¥
    
    
    
    ¥
    4,156,759Intersegment
    
    
    2,311,482
    
    
    
    4,764
    
    
    
    3,586
    
    
    
    792,018
    
    
    
    (3,111,850
    )
    
    
    Total
    
    
    3,349,139
    
    
    
    1,282,631
    
    
    
    1,317,505
    
    
    
    1,319,334
    
    
    
    (3,111,850
    )
    
    
    4,156,759Operating cost and expenses
    
    
    2,558,685
    
    
    
    1,236,138
    
    
    
    1,272,463
    
    
    
    1,275,817
    
    
    
    (2,893,377
    )
    
    
    3,449,726Operating profit
    
    ¥
    790,454
    
    
    ¥
    46,493
    
    
    ¥
    45,042
    
    
    ¥
    43,517
    
    
    ¥
    (218,473
    )
    
    ¥
    707,033Assets
    
    ¥
    2,644,116
    
    
    ¥
    432,001
    
    
    ¥
    682,381
    
    
    ¥
    339,314
    
    
    ¥
    424,103
    
    
    ¥
    4,521,915
 As of/for the year ended December 31, 2005Corporate andJapan
    
    
    Americas
    
    
    Europe
    
    
    Others
    
    
    Eliminations
    
    
    Consolidated(Millions of yen)Net sales:Unaffiliated customers
    
    ¥
    979,748
    
    
    ¥
    1,139,784
    
    
    ¥
    1,178,672
    
    
    ¥
    455,987
    
    
    ¥
    
    
    
    ¥
    3,754,191Intersegment
    
    
    2,046,173
    
    
    
    7,424
    
    
    
    2,206
    
    
    
    646,530
    
    
    
    (2,702,333
    )
    
    
    Total
    
    
    3,025,921
    
    
    
    1,147,208
    
    
    
    1,180,878
    
    
    
    1,102,517
    
    
    
    (2,702,333
    )
    
    
    3,754,191Operating cost and expenses
    
    
    2,362,019
    
    
    
    1,110,415
    
    
    
    1,147,658
    
    
    
    1,071,155
    
    
    
    (2,520,099
    )
    
    
    3,171,148Operating profit
    
    ¥
    663,902
    
    
    ¥
    36,793
    
    
    ¥
    33,220
    
    
    ¥
    31,362
    
    
    ¥
    (182,234
    )
    
    ¥
    583,043Assets
    
    ¥
    2,419,012
    
    
    ¥
    406,101
    
    
    ¥
    569,750
    
    
    ¥
    312,472
    
    
    ¥
    336,218
    
    
    ¥
    4,043,553
  (1)
    
    General corporate expenses of ¥221,979 million, ¥202,328 million and
¥171,522 million in the years ended December 31, 2007, 2006 and 2005,
respectively, are included in Corporate and Eliminations.(2)
    
    Corporate assets of ¥1,644,220 million, ¥1,860,933 million and
¥1,239,255 million as of December 31, 2007, 2006 and 2005,
respectively, which mainly consist of cash and cash equivalents, time
deposits, marketable securities, investments and corporate properties,
are included in Corporate and Eliminations.(3)
    
    Segment information by geographic area is determined by the location
of the Company or its relevant subsidiary making the sale. The
segments are defined under Japanese GAAP. In grouping of segment
information by geographic area, Japanese GAAP requires that
consideration be given to geographic proximity, as well as
similarities of economic activities, interrelationships of business
activities and other similar factors.
 29




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##### Table of Contents



Foreign operations and foreign currency transactions
   
 Recent developments
     
 B. Liquidity and capital resources
            30




---



##### Table of Contents



C. Research and development, patents and licenses
  Canon has established the following as key strategies:
    
    Realize an overwhelming No.1 position worldwide in all current core businesses,
    
    Expand operations through diversification and
    
    Identify new business domains and accumulate necessary technological capabilities.
 Canon is striving to achieve these strategies as follows:
    
    Realize an overwhelming No.1 position worldwide in all current core businesses:
Product R&D divisions will work together with the corporate R&D headquarters to
bolster product competitiveness through development of extremely superior
next-generation products.
    
    Expand operations through diversification: Canon is studying existing
technologies to expand business domains. Furthermore, Canon will continue to
develop various types of displays, such as Surface-conduction Electron-emitter
Display (SED) and Organic Light-Emitting Diode displays (OLED), in order to
realize cross-media imaging  a sophisticated combination of imaging input
and output equipment for data, still images and video that allows users to
intuitively process images and information in any context in daily life or
industry.
    
    Identify new business domains and accumulate necessary technological
capabilities: Canon established a Strategic Committee for New Domains. As a
result of discussions in that committee, Canon targeted the medical sector and
intelligent robot industry as new business domains, and safety technology as
a common base technology, and recommended strengthening research and development
of related technologies. In addition, Canon is developing and strengthening
relationships with universities and other research institutes, such as Stanford
University, Kyoto University, Tokyo Institute of Technology and the National
Institute of Advanced Industrial Science and Technology, to carry on fundamental
research and develop cutting-edge technologies.
    ®
 31




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##### Table of Contents



D. Trend information
        Business machines segment
           32




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##### Table of Contents



Cameras segment
          Optical and other products segment
      
 E. Off-balance sheet arrangements
   33




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##### Table of Contents



F. Contractual obligations
  Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsContractual obligations:Long-Term Debt:Capital Lease Obligations
    
    ¥
    10,988
    
    
    ¥
    4,651
    
    
    ¥
    5,055
    
    
    ¥
    1,268
    
    
    ¥
    14Other Long-Term Debt
    
    
    13,121
    
    
    
    10,778
    
    
    
    1,443
    
    
    
    691
    
    
    
    209Operating Lease Obligations
    
    
    57,401
    
    
    
    16,365
    
    
    
    20,019
    
    
    
    9,736
    
    
    
    11,281Purchase commitments for :Property, Plant and Equipment
    
    
    117,119
    
    
    
    117,119
    
    
    
    
    
    
    
    
    
    
    
    Parts and Raw Materials
    
    
    91,882
    
    
    
    91,882
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    ¥
    290,511
    
    
    ¥
    240,795
    
    
    ¥
    26,517
    
    
    ¥
    11,695
    
    
    ¥
    11,504
       34




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##### Table of Contents



Item 6. Directors, Senior Management and Employees
 
 A. Directors and senior management
  Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Fujio Mitarai
    
    Chairman & CEO
    
    4/1961
    
    Entered the Company(Sept. 23, 1935)
    
    
    
    1/1979
    
    President of Canon U.S.A., Inc.3/1981
    
    Director3/1985
    
    Managing Director1/1989
    
    In charge of HQ administration3/1989
    
    Senior Managing Director3/1993
    
    Executive Vice President9/1995
    
    President & CEO3/2006
    
    Chairman of the Board & President & CEO5/2006
    
    Chairman & CEO*Tsuneji Uchida
    
    President & COO
    
    4/1965
    
    Entered the Company(Oct. 30, 1941)
    
    
    
    4/1995
    
    Group Executive of Lens Products Group3/1997
    
    Director4/1997
    
    Deputy Chief Executive of Camera Operations HQ
Group Executive of Photo Products Group4/1999
    
    Chief Executive of Camera Operations HQ7/1999
    
    In charge of promotion of digital photo business1/2000
    
    In charge of promotion of digital photo home business1/2001
    
    Chief Executive of Image Communications Products HQ3/2001
    
    Managing Director3/2003
    
    Senior Managing Director3/2006
    
    Executive Vice President5/2006
    
    President & COO *Toshizo Tanaka
    
    Executive Vice President
    
    4/1964
    
    Entered the Company(Oct. 8, 1940)
    

(Group
Executive of Policy and EconomyResearch HQ)
    
    1/1992
    
    Deputy Group Executive of Finance & Accounting HQ3/1995
    
    Director4/1995
    
    Group Executive of Finance & Accounting HQ3/1997
    
    Managing Director3/2001
    
    Senior Managing Director1/2007
    
    Group Executive of Policy and Economy Research HQ*3/2007
    
    Executive Vice President*Nobuyoshi Tanaka
    
    Senior Managing Director
    
    4/1970
    
    Entered the Company(Dec. 23, 1945)
    
    (Group Executive of Corporate
IntellectualProperty & Legal HQ)
    
    1/1991
    
    Senior General Manager of Semiconductor Production
Equipment Development Center3/1993
    
    Director4/1993
    
    Chief Executive of Optical Products HQ4/1999
    
    Group Executive of Corporate Intellectual Property & Legal HQ*3/2001
    
    Managing Director3/2006
    
    Senior Managing Director*Junji Ichikawa
    
    Senior Managing Director
    
    4/1965
    
    Entered Shiba Electronics Co., Ltd.(Feb. 9, 1943)
    
    (Chief Executive of Optical Products HQ)
    
    1/1970
    
    Entered the Company4/1994
    
    Group Executive of Peripheral Group 13/1997
    
    Director4/1997
    
    Deputy Chief Executive of Peripheral Products HQ4/2000
    
    Chief Executive of Peripheral Products HQ3/2001
    
    Managing Director4/2003
    
    Group Executive of Production Management HQ4/2004
    
    Chief Executive of Optical Products HQ*3/2006
    
    Senior Managing Director*Akiyoshi Moroe
    
    Senior Managing Director
    
    4/1968
    
    Entered the Company(Sept. 28, 1944)
    
    (Group Executive of External
Relations HQ,Group Executive of
General
Affairs HQ,Group Executive of
Human ResourceManagement &
Organization HQ)
    
    7/1996
    
    Deputy Group of Executive of Human Resource
Management & Organization HQ3/1999
    
    Director4/1999
    
    Group Executive of General Affairs HQ10/2000
    
    Group Executive of Information & Communications Systems HQ3/2003
    
    Managing Director5/2006
    
    Group Executive of External Relations HQ*4/2007
    
    Group Executive of Human Resource Management & Organization
HQ*3/2008
    
    Senior Managing Director *Group
Executive of General Affairs HQ *Kunio Watanabe
    
    Senior Managing Director
    
    4/1969
    
    Entered the Company(Oct. 3, 1944)
    
    (Group Executive of Corporate
Planning &Development
HQ, Deputy Group Executive of
Policy and Economy Research HQ)
    
    4/1995
    

Group
Executive of Corporate Planning & Development HQ*3/1999
    
    Director3/2003
    
    Managing Director1/2007
    
    Deputy Group Executive of Policy and Economy Research HQ*3/2008
    
    Senior Managing Director*Yoroku Adachi
    
    Managing Director
    
    4/1970
    
    Entered the Company(Jan. 11, 1948)
    
    
    
    3/2001
    
    Chairman of Canon Singapore Pte. Ltd.
Chairman of Canon Hong Kong Co., Ltd.
Director4/2003
    
    President of Canon (China) Co., Ltd.3/2005
    
    Managing Director *4/2005
    
    President of Canon U.S.A., Inc.*
 35




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Yasuo Mitsuhashi
    
    Managing Director
    
    4/1974
    
    Entered the Company(Nov. 23, 1949)
    
    (Chief Executive of Peripheral Products HQ)
    
    2/2001
    
    Chief Executive of Chemical Products HQ3/2001
    
    Director4/2003
    
    Chief Executive of Peripheral Products HQ*3/2005
    
    Managing Director *Tomonori Iwashita
    
    Managing Director
    
    4/1972
    
    Entered the Company(Jan. 28, 1949)
    
    (Group Executive of Environment HQ,
Group Executive of Quality
Management HQ)
    
    4/1999
    
    Senior General Manager of Camera Development Center1/2001
    
    Group Executive of Photo Products Group3/2003
    
    Director4/2003
    
    Deputy Chief Executive of Image Communication Products HQ4/2006
    
    Chief Executive of Image Communication Products HQ3/2007
    
    Managing Director*
Group Executive of Global Environment Promotion HQ4/2007
    
    Group Executive of Quality Management HQ *1/2008
    
    Group Executive of Environment HQ*Masahiro Osawa
    
    Managing Director
    
    4/1971
    
    Entered the Company(May 26, 1947)
    
    (Group Executive of Finance
& Accounting HQ)
    
    7/1997
    
    Vice President of Canon U.S.A., Inc.2/2003
    
    Senior Vice President of Canon U.S.A., Inc.7/2003
    
    Deputy Group Executive of Finance & Accounting HQ3/2004
    
    Director4/2004
    
    Group Executive of Global Procurement HQ3/2007
    
    Managing Director*4/2007
    
    Group Executive of Finance & Accounting HQ*Shigeyuki Matsumoto
    
    Managing Director
    
    4/1977
    
    Entered the Company(Nov. 15, 1950)
    
    (Group Executive of Device
Technology Development HQ)
    
    1/2002
    
    Group Executive of Device Technology Development HQ*3/2004
    
    Director3/2007
    
    Managing Director*Katsuichi Shimizu
    
    Managing Director
    
    4/1970
    
    Entered the Company(Nov. 13, 1946)
    
    (Chief Executive of Inkjet Products HQ)
    
    4/2001
    
    Deputy Chief Executive of Office Imaging Products HQ3/2003
    
    Director4/2003
    
    Chief Executive of Inkjet Products HQ*3/2008
    
    Managing Director*Ryoichi Bamba
    
    Managing Director
    
    4/1972
    
    Entered the Company(Nov. 25, 1946)
    
    
    
    4/1998
    
    Senior Vice President of Canon U.S.A., Inc.2/2003
    
    Executive Vice President of Canon U.S.A., Inc.3/2003
    
    Director2/2008
    
    President of Canon Europa N.V.*3/2008
    
    Managing Director*Toshio Honma
    
    Managing Director
    
    4/1972
    
    Entered the Company(Mar. 10, 1949)
    
    (Chief Executive of L Printer
Products HQ)
    
    4/2001
    
    Deputy Chief Executive of i Printer Products HQ3/2003
    
    Director4/2003
    
    Group Executive of Business Promotion HQ7/2003
    
    Group Executive of L Printer Business Promotion HQ1/2007
    
    Chief Executive of L Printer Products HQ*3/2008
    
    Managing Director*Masaki Nakaoka
    
    Managing Director
    
    4/1975
    
    Entered the Company(Jan. 3, 1950)
    
    (Chief Executive of Office
Imaging Products HQ)
    
    1/1997
    
    Senior General Manager of Office Imaging Products
Development Center 14/1999
    
    Group Executive of Office Imaging Products Group 14/2001
    
    Deputy Chief Executive of Office Imaging Products HQ3/2004
    
    Director4/2005
    
    Chief Executive of Office Imaging Products HQ*3/2008
    
    Managing Director*Haruhisa Honda
    
    Managing Director
    
    4/1974
    
    Entered the Company(Oct. 14, 1948)
    
    (Group Executive of
Production Engineering HQ)
    
    4/1995
    
    Senior General Manager of Cartridge Development Center3/2004
    
    Director4/2004
    
    Chief Executive of Chemical Products Operations3/2007
    
    Group Executive of Production Engineering HQ*3/2008
    
    Managing Director*
 36




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Shunichi Uzawa
    
    Director
    
    8/1978
    
    Entered the Company(Jan. 26, 1949)
    
    (Group Executive of Core
Technology Development
HQ)
    
    1/1998
    
    Senior General Manager of Nano-technology Research Center4/2001
    
    Deputy Group Executive of Display Development HQ3/2004
    
    Director*4/2004
    
    Group Executive of SED Development HQ10/2004
    
    President of SED Inc.1/2006
    
    Group Executive of Core Technology (koa tekunoroji) Development HQ1/2008
    
    Group Executive of Core Technology (kiban gijutsu) Development HQ*Toshiyuki Komatsu
    
    Director
    
    4/1972
    
    Entered the Company(Jan. 19, 1950)
    
    (Group Executive of
Technology Frontier
Research
HQ)
    
    1/1998
    
    Senior General Manager of Canon Research Center1/2000
    
    Deputy Group Executive of Core Technology Development HQ3/2004
    
    Director*4/2004
    

Group
Executive of Leading-Edge Technology Research HQ7/2005
    
    Group Executive of Core Technology Development HQ1/2008
    
    Group Executive of Technology Frontier Research HQ*Tetsuro Tahara
    
    Director
    
    4/1971
    
    Entered the Company(Jan. 31, 1949)
    
    (Group Executive of Global
Manufacturing & Logistics
HQ)
    
    4/1999
    
    Senior General Manager of Office Imaging Products
Production Management Center4/2002
    
    Deputy Chief Executive of Office Imaging Products HQ4/2003
    
    President of Canon (Suzhou) Inc.3/2006
    
    Director*4/2006
    
    Group Executive of Global Manufacturing & Logistics HQ*Seijiro Sekine
    
    Director
    
    4/1972
    
    Entered the Company(Oct. 20, 1948)
    
    (Group Executive of
Information &
Communication Systems HQ)
    
    4/1995
    
    General Manager of Business Information Systems Division1/2001
    
    Deputy Group Executive of Information & Communication Systems HQ10/2004
    
    Group Executive of Logistics HQ3/2006
    
    Director*4/2006
    
    Group Executive of Information & Communication Systems HQ,
Deputy Group Executive of Global Manufacturing & Logistics HQ1/2007
    
    Group Executive of Information & Communication Systems HQ*Shunji Onda(Mar. 13, 1950)
    
    Director
(Group Executive of Global
Procurement HQ)
    
    4/1972
    
    Entered Canon Sales Co., Inc.
(renamed Canon Marketing Japan Inc.)7/1980
    
    Entered the Company1/1999
    
    General Manager of Peripheral Products Chief Executive Office1/2002
    
    General Manager of Finance Division4/2004
    
    Senior General Manager of Optical Products Business Administration Center3/2006
    
    Director*4/2006
    
    Deputy Group Executive of Finance & Accounting HQ4/2007
    
    Group Executive of Global Procurement HQ*Kazunori Fukuma
    
    Director
    
    4/1972
    
    Entered Toshiba Corporation(Feb. 24, 1950)
    
    
    
    6/2005
    
    Executive Officer & Corporate Vice President of Toshiba Corporation1/2006
    
    President of SED Inc.*1/2007
    
    Entered the Company3/2007
    
    Director*Hideki Ozawa(Apr. 28, 1950)
    
    Director
    
    4/1973
    
    Entered Canon Sales Co., Inc.
(renamed Canon Marketing Japan Inc.)7/1980
    
    Entered the Company4/2004
    
    President of Canon Singapore Pte. Ltd.4/2005
    
    President of Canon (China) Co.,Ltd.*3/2007
    
    Director*Masaya Maeda
    
    Director
    
    4/1975
    
    Entered the Company(Oct. 17, 1952)
    
    (Chief Executive of Image
Communications Products
HQ)
    
    1/2002
    
    Senior General Manager of Digital Consumer Products
Development Center of Toshiba Corporation7/2003
    
    Deputy Group Executive of Digital Imaging Business Group1/2006
    
    Group Executive of Digital Imaging Business Group3/2007
    
    Director*4/2007
    
    Chief Executive of Image Communications Products HQ*
 37




---



##### Table of Contents



Name
    
    Position
    
    Date of
    
    Business experience(Date of birth)
    
    (Group executive/function)
    
    commencement
    
    (*current position/function)Keijiro Yamazaki
    
    Corporate Auditor
    
    4/1971
    
    Entered the Company(Oct. 14, 1948)
    
    
    
    4/1999
    
    General Manager of Human Resource Management & Organization Div.1/2000
    
    Deputy Group Executive of Human Resource Management & Organization HQ3/2004
    
    Director4/2004
    
    Group Executive of Information & Communications Systems HQ3/2006
    
    Group Executive of Human Resource Management & Organization HQ4/2007
    
    Group Executive of General Affairs HQ3/2008
    
    Corporate Auditor *Kunihiro Nagata
    
    Corporate Auditor
    
    4/1970
    
    Entered the Company(Mar.16, 1948)
    
    
    
    1/1991
    
    General Manager of Business Machines Accounting Dept.4/1995
    
    Senior General Manager of Business Machines Accounting &
Production Planning Center10/2000
    
    General Manager of Corporate Planning Division1/2003
    
    Deputy Group Executive of Corporate Strategy Development HQ3/2004
    
    Corporate Auditor *Tadashi Ohe
    
    Corporate Auditor
    
    4/1969
    
    Registration as a lawyer*(May 20, 1944)
    
    
    
    4/1989
    
    Instructor of Judicial Research and Training Institute3/1994
    

Corporate Auditor *Yoshinobu Shimizu
    
    Corporate Auditor
    
    3/1973
    
    Registered as Certified Public Accountant*(Oct. 26, 1944)
    
    
    
    6/1990
    
    Representative Partner of Showa Ota & Co.5/2002
    
    Deputy Chief Executive Officer of Century Ota Showa & Co.
(renamed Ernst & Young ShinNihon)3/2006
    

Corporate Auditor *Minoru Shishikura
    
    Corporate Auditor
    
    4/1976
    
    Entered The Dai-Ichi Mutual Life Insurance Co.(Sept. 13, 1953)
    
    
    
    4/1998
    
    General Manager of Metropolitan Corporate Loan Dept. of
The Dai-Ichi Mutual Life Insurance Co.4/2000
    
    General Manager of Loan Department of The Dai-Ichi Mutual Life
Insurance Co.4/2002
    
    General Manager of Credit Department of The Dai-Ichi
Mutual Life Insurance Co.3/2006
    
    Corporate Auditor*
 Term
     Board of Directors and Corporate Auditors
      38




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##### Table of Contents



Introduction of an Executive Officer System
  
 B. Compensation
                     39




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##### Table of Contents



= Exercise
Price before adjustment ×
    
    1Ratio of Share Splitting or Share Consolidation
   Number of Issued and Outstanding Shares +
    
    Number of Newly Issued Shares × Payment amount per ShareMarket PriceNumber of Issued and Outstanding Shares + Number of Newly Issued Shares
           40




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##### Table of Contents



C. Board practices
  41




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##### Table of Contents



D. Employees
  Total
    
    
    Japan
    
    
    Americas
    
    
    Europe
    
    
    OtherDecember 31, 2007Business machines
    
    
    87,334
    
    
    
    32,575
    
    
    
    7,633
    
    
    
    9,993
    
    
    
    37,133Cameras
    
    
    19,170
    
    
    
    5,893
    
    
    
    1,755
    
    
    
    1,490
    
    
    
    10,032Optical and other products
    
    
    19,208
    
    
    
    11,412
    
    
    
    1,350
    
    
    
    802
    
    
    
    5,644Corporate
    
    
    5,640
    
    
    
    5,347
    
    
    
    
    
    
    
    
    
    
    
    293Total
    
    
    131,352
    
    
    
    55,227
    
    
    
    10,738
    
    
    
    12,285
    
    
    
    53,102December 31, 2006Business machines
    
    
    79,293
    
    
    
    30,046
    
    
    
    7,409
    
    
    
    9,202
    
    
    
    32,636Cameras
    
    
    16,841
    
    
    
    5,422
    
    
    
    1,652
    
    
    
    1,381
    
    
    
    8,386Optical and other products
    
    
    16,494
    
    
    
    9,768
    
    
    
    1,164
    
    
    
    703
    
    
    
    4,859Corporate
    
    
    5,871
    
    
    
    5,517
    
    
    
    44
    
    
    
    
    
    
    
    310Total
    
    
    118,499
    
    
    
    50,753
    
    
    
    10,269
    
    
    
    11,286
    
    
    
    46,191December 31, 2005Business machines
    
    
    77,906
    
    
    
    29,964
    
    
    
    7,297
    
    
    
    8,988
    
    
    
    31,657Cameras
    
    
    18,308
    
    
    
    5,263
    
    
    
    1,552
    
    
    
    1,405
    
    
    
    10,088Optical and other products
    
    
    13,762
    
    
    
    8,249
    
    
    
    999
    
    
    
    435
    
    
    
    4,079Corporate
    
    
    5,607
    
    
    
    5,161
    
    
    
    90
    
    
    
    94
    
    
    
    262Total
    
    
    115,583
    
    
    
    48,637
    
    
    
    9,938
    
    
    
    10,922
    
    
    
    46,086
    42




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##### Table of Contents



E. Share ownership
  Name
    
    Position
    
    Number of sharesFujio Mitarai
    
    Chairman & CEO
    
    
    93,200Tsuneji Uchida
    
    President & COO
    
    
    11,200Toshizo Tanaka
    
    Executive Vice President
    
    
    17,852Nobuyoshi Tanaka
    
    Senior Managing Director
    
    
    20,432Junji Ichikawa
    
    Senior Managing Director
    
    
    19,546Akiyoshi Moroe
    
    Senior Managing Director
    
    
    17,332Kunio Watanabe
    
    Senior Managing Director
    
    
    14,252Yoroku Adachi
    
    Managing Director
    
    
    12,142Yasuo Mitsuhashi
    
    Managing Director
    
    
    9,777Tomonori Iwashita
    
    Managing Director
    
    
    7,150Masahiro Osawa
    
    Managing Director
    
    
    5,842Shigeyuki Matsumoto
    
    Managing Director
    
    
    4,952Katsuichi Shimizu
    
    Managing Director
    
    
    10,937Ryoichi Bamba
    
    Managing Director
    
    
    6,300Toshio Honma
    
    Managing Director
    
    
    11,292Masaki Nakaoka
    
    Managing Director
    
    
    3,700Haruhisa Honda
    
    Managing Director
    
    
    6,989Shunichi Uzawa
    
    Director
    
    
    7,492Toshiyuki Komatsu
    
    Director
    
    
    4,000Tetsuro Tahara
    
    Director
    
    
    3,052Seijiro Sekine
    
    Director
    
    
    5,790Shunji Onda
    
    Director
    
    
    5,502Kazunori Fukuma
    
    Director
    
    
    1,300Hideki Ozawa
    
    Director
    
    
    1,719Masaya Maeda
    
    Director
    
    
    1,200Keijiro Yamazaki
    
    Corporate Auditor
    
    
    7,050Kunihiro Nagata
    
    Corporate Auditor
    
    
    2,350Tadashi Ohe
    
    Corporate Auditor
    
    
    25,100Yoshinobu Shimizu
    
    Corporate Auditor
    
    
    2,300Minoru Shishikura
    
    Corporate Auditor
    
    
    1,800Total
    
    
    341,550
  43




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##### Table of Contents



Item 7. Major Shareholders and Related Party Transactions
 
 A. Major shareholders
  Name
of major shareholder
    

Shares owned
    
    

Percentage(In thousands)The Dai-Ichi Mutual Life Insurance Co.
    
    
    93,312
    
    
    
    7.0
    %Moxley & Co.
    
    
    73,640
    
    
    
    5.5
    %Japan
Trustee Services Bank, Ltd. (Trust Account)
    
    
    68,801
    
    
    
    5.2
    %The Master
Trust Bank of Japan, Ltd. (Trust Account)
    
    
    62,200
    
    
    
    4.7
    %State Street Bank and Trust Company
    
    
    36,165
    
    
    
    2.7
    %Nomura Securities Co., Ltd.
    
    
    30,525
    
    
    
    2.3
    %Mizuho Corporate Bank, Ltd.
    
    
    28,419
    
    
    
    2.1
    %Sompo Japan Insurance Inc.
    
    
    22,910
    
    
    
    1.7
    %BNP Paribas Securities (Japan) Limited
    
    
    22,229
    
    
    
    1.7
    %State Street Bank and Trust Company 505103
    
    
    21,730
    
    
    
    1.6
    %
      As of July 13, 2007Number of shares held
    
    
    Number of shares held /(In thousands)
    
    
    Number of shares issuedMizuho Corporate Bank, Ltd.
    
    
    36,124
    
    
    
    2.7
    %Mizuho Bank, Ltd.
    
    
    8,853
    
    
    
    0.7
    %Mizuho Trust & Banking Co., Ltd.
    
    
    24,150
    
    
    
    1.8
    %Dai-Ichi Kangyo Asset Management Co., Ltd.
(Subsequently renamed as Mizuho Asset Management Co., Ltd.)
    
    
    2,762
    
    
    
    0.2
    %total
    
    
    71,889
    
    
    
    5.4
    %
    
 B. Related party transactions
    
 C. Interests of experts and counsel
  44




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##### Table of Contents



Item 8. Financial Information
 
 A. Consolidated financial statements and other financial information
 
 Consolidated financial statements
   
 Legal proceedings
  
    
    In December 2002, the European Commission instituted an investigation
into the printer and supply market. Canon received a questionnaire in
connection with the investigation of the printer and supply market in
January 2003 and Canon has submitted its response. The investigation
is yet to be closed.
    
    In January 2003, the Dusseldorf District Court in Germany issued
rulings in Canons favor in two patent infringement actions filed by
Canon against Pelikan Hardcopy Deutschland GmbH and Pelikan Hardcopy
European Logistics & Services GmbH (collectively, Pelikan Hardcopy).
Pelikan Hardcopy has appealed against the decision. In November 2003,
the Dusseldorf District Court in Germany issued a ruling in Canons
favor in another patent infringement action filed by Canon against
Pelikan Hardcopy. Pelikan Hardcopy has appealed against the decision.
The Dusseldorf High Court issued rulings in Canons favor in two of
the three appeals by Pelikan Hardcopy. The rulings have become finally
binding, and now the procedures for enforcing the ruling are underway.
Canon withdrew the complaint regarding the remaining case in view of
the judicial economy.
    
    In October 2003, a lawsuit was filed by a former employee against the
Company at the Tokyo District Court in Japan. The lawsuit alleges that
the former employee is entitled to ¥45,872 million as compensation for
an invention related to certain technology used by the Company, and
the former employee has sued for a partial payment of ¥1,000 million
and interest thereon. On January 30, 2007, the Tokyo District Court in
Japan ordered the Company to pay the former employee approximately
¥33.5 million and interest thereon. On the same day, the Company
appealed the decision. This lawsuit is currently under trial in the
Intellectual Property High Court.
    
    In Germany, Verwertungsgesellschaft Wort (VG Wort), a collecting
agency representing certain copyright holders, has filed a series of
lawsuits seeking to impose copyright levies upon digital products such
as PCs and printers, that allegedly enable the reproduction of
copyrighted materials, against the companies importing and
distributing these digital products. In May 2004, VG Wort filed a
civil lawsuit against Hewlett-Packard GmbH seeking levies on
multi-function printers. This is an industry test case under which
Hewlett-Packard GmbH represents other companies sharing common
interests, and Canon has undertaken to be bound by the final decision
of this court case. The court of first instance and the court of
appeals held that the multi-function printers were subject to a levy.
In particular, the court of appeals ordered Hewlett-Packard GmbH to
pay the amount equivalent to the levies imposed on photocopiers (EUR
38.35 to EUR 613.56 per unit, depending on printing speed and color
printing capability). On January 30, 2008, the Federal Supreme Court
delivered its short judgment in favor of VG Wort, maintaining the
judgment of the court of appeals, whereby the court decided that, for
MFPs sold during the period from 1997 through 2001, the same full
tariff as applicable to photocopier should be applied. It is expected
that the Federal Supreme Court will issue a written full judgment
explaining the rationale underlying its decision sometime in the next
several months. If Hewlett-Packard GmbH decides to file a claim with
the Federal Constitutional Court challenging the judgment of the
Federal Supreme Court, it will have 30 days to file a claim from
receipt of the Federal Supreme Courts written full judgment. With
regard to single-function printers, VG Wort filed a separate lawsuit
in January 2006 against Canon, seeking payment of copyright levies,
and the court of first instance in Düsseldorf ruled in favor of the
claim by VG Wort in November 2006. Canon lodged an appeal against such
decision in December 2006. In a similar court case, which does not
include Canon, seeking copyright levies on single-function printers of
Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita Deutschland GmbH,
the court of appeals in Düsseldorf rejected such alleged levies on
January 23, 2007. Consistent with the last decision, Canon won its
appeal at the court of appeal. In its judgment of November 13, 2007,
the court of appeal rejected VG Worts claim against Canon. VG Wort
appealed further against decisions of the court of appeal for both
Epson et al. and Canon cases before the Federal Supreme Court. In
December 2007, for a similar Hewlett-Packard GmbH case relating to
single-function printers, the Federal Supreme Court delivered its
judgment in favor of Hewlett-Packard GmbH and dismissed VG Worts
claim. Written full judgment by the Federal Supreme Court was issued
on January 24, 2008. Canon was informed that VG Wort already filed a
constitutional complaint with the Federal Constitutional Court against
said judgment of the Federal Supreme Court. Canon, other companies and the
industry associations have expressed opposition to such extension of
the levy scope. Based on industry opposition to the extension of
levies to digital products, Canons assessments of the merits of
various proceeding and Canons estimates of the units impacted and
levies, Canon has accrued amounts that it believes are adequate to
address the matters described above. However, the final conclusion of
these court cases including the amount of levies to be imposed and the
associated financial impact on Canon remains uncertain.
    
    In April 2004, Canon filed two patent infringement actions against
RecycleAssist Co., Ltd. (Recycle Assist) before the Tokyo District
Court. In December 2004, the Tokyo District Court issued rulings in
Recycle Assists favor in the two actions. In December 2004, Canon
appealed against the decisions of the two actions. In January 2006,
the Intellectual Property High Court issued a ruling in favor of Canon
in one of the two appeal cases. In February 2006, Recycle Assist
further appealed against this ruling before the Supreme Court. In
November 2007, the Supreme Court rendered a judgment in favor of
Canon, and currently execution procedures are ongoing. Canon withdrew
the remaining appeal case in based on efficiency considerations.
 45




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##### Table of Contents




    
    In April 2005, a lawsuit was filed by Nano-Proprietary Inc. (NPI)
against the Company and Canon U.S.A., Inc. in the United States
District Court of Texas alleging that SED Inc., a joint venture
company established by the Company and Toshiba Corporation, was not
regarded as a subsidiary under the Patent License
Agreement between
the Company and NPI and 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 requests rescission of the agreement and compensatory damages. In
November 2006, the Court denied Canons motion for a
summary judgment
that SED Inc. was a subsidiary of the Company. In January 2007, the
Company purchased all the shares of SED Inc. owned by Toshiba
Corporation, making SED Inc. a 100% owned subsidiary of the Company.
However, on February 22, 2007, the Court issued a summary judgment
stating that SED Inc. (before the above stock purchase) was not a
subsidiary of the Company, that the Company had materially breached the
patent license agreement and that NPI was allowed to terminate that
agreement. Thereafter, a trial was held from April 30 to
May 3, 2007, in Austin, Texas. NPIs fraud claims against Canon were
withdrawn by NPI and the jury returned a verdict that NPI had
sustained no damages. All claims against Canon U.S.A., Inc. were also
withdrawn by NPI. On May 15, 2007, Canon filed a notice of appeal to
the United States Court of Appeals for the Fifth Circuit, appealing
the District Courts prior ruling that Canon had breached the
patent license agreement with NPI and that allowed NPI to terminate that agreement. On
June 4, 2007, NPI also filed a notice of appeal, appealing the District
Courts determination that NPI had sustained no damages. These
appeals are still pending.
 
 Dividend policy
      
 B. Significant changes
  46




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##### Table of Contents



Item 9. The Offer and Listing
 
 A. Offer and listing details
 
 Trading in domestic markets
   TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    

(Reference
data)
    
    

(Reference data)(Japanese yen)
    
    

(Points)
    
    

(Japanese yen)Period
    

High
    
    

Low
    
    

High
    
    

Low
    
    

High
    
    

Low2003 Year
    
    ¥
    4,140
    
    
    ¥
    2,607
    
    
    
    1,114.40
    
    
    
    770.46
    
    
    ¥
    11,161.71
    
    
    ¥
    7,607.882004 Year
    
    
    3,880
    
    
    
    3,273
    
    
    
    1,225.97
    
    
    
    1,017.84
    
    
    
    12,195.66
    
    
    
    10,299.432005 Year
    
    
    4,780
    
    
    
    3,460
    
    
    
    1,673.18
    
    
    
    1,104.30
    
    
    
    16,445.56
    
    
    
    10,770.582006 1(st) quarter
    
    
    5,287
    
    
    
    4,567
    
    
    
    1,735.25
    
    
    
    1,538.85
    
    
    
    17,125.64
    
    
    
    15,059.522(nd) quarter
    
    
    6,013
    
    
    
    5,173
    
    
    
    1,783.72
    
    
    
    1,439.00
    
    
    
    17,563.37
    
    
    
    14,045.533(rd) quarter
    
    
    6,160
    
    
    
    5,240
    
    
    
    1,655.27
    
    
    
    1,473.59
    
    
    
    16,414.94
    
    
    
    14,437.244(th) quarter
    
    
    6,780
    
    
    
    5,840
    
    
    
    1,685.76
    
    
    
    1,526.37
    
    
    
    17,301.69
    
    
    
    15,615.562006 Year
    
    
    6,780
    
    
    
    4,567
    
    
    
    1,783.72
    
    
    
    1,439.00
    
    
    
    17,563.37
    
    
    
    14,045.532007 1(st) quarter
    
    
    6,750
    
    
    
    6,020
    
    
    
    1,823.89
    
    
    
    1,650.82
    
    
    
    18,300.39
    
    
    
    16,532.912(nd) quarter
    
    
    7,450
    
    
    
    6,210
    
    
    
    1,793.61
    
    
    
    1,682.49
    
    
    
    18,297.00
    
    
    
    16,999.053(rd) quarter
    
    
    7,330
    
    
    
    5,340
    
    
    
    1,796.89
    
    
    
    1,479.82
    
    
    
    18,295.27
    
    
    
    15,262.104(th) quarter
    
    
    6,500
    
    
    
    5,190
    
    
    
    1,679.71
    
    
    
    1,417.47
    
    
    
    17,488.97
    
    
    
    14,669.852007 Year
    
    
    7,450
    
    
    
    5,190
    
    
    
    1,823.89
    
    
    
    1,417.47
    
    
    
    18,300.39
    
    
    
    14,669.85
 TSE
    
    
    TOPIX
    
    
    Nikkei Stock Average(Canon Inc.)
    
    

(Reference data)
    
    

(Reference data)(Japanese yen)
    
    

(Points)
    
    

(Japanese yen)Period
    

High
    
    

Low
    
    

High
    
    

Low
    
    

High
    
    

Low2007 July
    
    ¥
    7,330
    
    
    ¥
    6,230
    
    
    
    1,796.89
    
    
    
    1,676.69
    
    
    ¥
    18,295.27
    
    
    ¥
    17,042.66August
    
    
    6,660
    
    
    
    5,340
    
    
    
    1,698.33
    
    
    
    1,479.82
    
    
    
    17,274.33
    
    
    
    15,262.10September
    
    
    6,760
    
    
    
    5,800
    
    
    
    1,622.49
    
    
    
    1,506.19
    
    
    
    16,929.26
    
    
    
    15,610.65October
    
    
    6,500
    
    
    
    5,490
    
    
    
    1,679.71
    
    
    
    1,539.09
    
    
    
    17,488.97
    
    
    
    16,199.02November
    
    
    5,970
    
    
    
    5,300
    
    
    
    1,638.71
    
    
    
    1,417.47
    
    
    
    16,887.04
    
    
    
    14,669.85December
    
    
    5,940
    
    
    
    5,190
    
    
    
    1,578.39
    
    
    
    1,447.54
    
    
    
    16,107.65
    
    
    
    14,998.012008 January
    
    
    5,040
    
    
    
    4,190
    
    
    
    1,461.31
    
    
    
    1,219.95
    
    
    
    15,156.66
    
    
    
    12,572.68February
    
    
    5,100
    
    
    
    4,230
    
    
    
    1,372.82
    
    
    
    1,274.08
    
    
    
    14,105.47
    
    
    
    12,923.42
  47




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##### Table of Contents



Trading in foreign markets
    NYSE(Canon Inc.)(U.S. dollars)Period
    

High
    
    

Low2003 Year
    
    $
    35.333
    
    
    $
    22.4872004 Year
    
    
    36.260
    
    
    
    29.6272005 Year
    
    
    40.280
    
    
    
    32.6402006 1(st) quarter
    
    
    44.620
    
    
    
    39.6302(nd) quarter
    
    
    53.100
    
    
    
    42.1603(rd) quarter
    
    
    52.380
    
    
    
    44.3104(th) quarter
    
    
    57.320
    
    
    
    50.8402006 Year
    
    
    57.320
    
    
    
    39.6302007 1(st) quarter
    
    
    56.990
    
    
    
    50.7202(nd) quarter
    
    
    60.160
    
    
    
    53.0203(rd) quarter
    
    
    59.390
    
    
    
    48.3504(th) quarter
    
    
    55.990
    
    
    
    45.6802007 Year
    
    
    60.160
    
    
    
    45.680
 (Canon Inc.)(U.S. dollars)Period
    

High
    
    

Low2007 July
    
    $
    59.390
    
    
    $
    52.190August
    
    
    57.320
    
    
    
    48.350September
    
    
    57.850
    
    
    
    50.980October
    
    
    55.990
    
    
    
    49.180November
    
    
    53.840
    
    
    
    48.550December
    
    
    53.690
    
    
    
    45.6802008 January
    
    
    46.470
    
    
    
    38.440February
    
    
    46.980
    
    
    
    40.010
   
 B. Plan of distribution
  
 C. Markets
  
 D. Selling shareholders
  
 E. Dilution
  
 F.
Expenses of the issue
  48




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##### Table of Contents



Item 10. Additional Information
 
 A. Share capital
  
 B. Memorandum and articles of association
 Objects and Purposes in the Companys Articles of Incorporation
  (1)
    
    Manufacture and sale of optical machineries and instruments of various kinds.(2)
    
    Manufacture and sale of acoustic, electrical and electronic machineries and instruments of various kinds.(3)
    
    Manufacture and sale of precision machineries and instruments of various kinds.(4)
    
    Manufacture and sale of medical machineries and instruments of various kinds.(5)
    
    Manufacture and sale of general machineries, instruments and equipments of various kinds.(6)
    
    Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of the preceding items.(7)
    
    Production and sale of software products.(8)
    
    Manufacture and sale of pharmaceutical products.(9)
    
    Telecommunications business, and information service business such as information processing service business,
information providing service business, etc.(10)
    
    Contracting for telecommunications works, electrical works and machinery and equipment installation works.(11)
    
    Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and
supervision of construction works.(12)
    
    Manpower providing business, property leasing business and travel business.(13)
    
    Business relative to investigation, analysis of the environment and purification process of soil, water, etc.(14)
    
    Any and all business relevant to each of the preceding items.
 Provisions Regarding Directors
 kabushiki kaisha
     Holding of Shares by Foreign Investors
  Rights of Shareholders
  49




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##### Table of Contents



General
     Distributions of Surplus
    Restriction on Distributions of Surplus
           50




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##### Table of Contents



renketsu haito kisei tekiyo kaisha
  Stock Splits
  Japanese Unit Share System
  Transferability of Shares Representing Less than One Unit
   Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its
Shares
  Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares
up to a Whole Unit
  51




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Voting Rights of a Holder of Shares Representing Less than One Unit
    
    
    to receive annual and interim dividends,
 
    
    to receive cash or other assets in case of consolidation or split of shares, exchange or transfer of shares or corporate merger,
 
    
    to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and
 
    
    to participate in any distribution of surplus assets upon liquidation.
 Ordinary and Extraordinary General Meeting of Shareholders
  Voting Rights
   
    
    a reduction of stated capital,
 
    
    amendment of the Articles of Incorporation (except amendments which the Board of Directors are authorized to make under the
Corporation Law of Japan as described in Stock Splits and Japanese Unit Share System above),
 
    
    the removal of a director or corporate auditor,
 
    
    establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,
 
    
    a dissolution, merger or consolidation,
 
    
    a corporate separation,
 
    
    the transfer of the whole or an important part of the Companys business,
 
    
    the taking over of the whole of the business of any other corporation,
 
    
    any issuance of new shares at a specially favorable price, stock acquisition rights (shinkabu yoyakuken) with specially
favorable conditions or bonds with stock acquisition rights (shinkabu yoyakuken-tsuki shasai) with specially favorable
conditions to persons other than shareholders,
 
    
    release of part of Directors or Corporate Auditors liabilities to the Company,
 
    
    distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make
such distribution in cash instead of in kind,
 
    
    purchase of shares by the Company from a specific shareholder other than its subsidiaries,
 
    
    consolidation of shares, and
 
    
    discharge of a portion of liabilities of Directors, Corporate Auditors or independent auditors that are owed to the Company.
   Subscription Rights
  52




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##### Table of Contents



Stock Acquisition Rights
  Liquidation Rights
  Liability to Further Calls or Assessments
  Share Registrar
  Record Date
   Repurchase by the Company of Shares
    
 C. Material contracts
  53




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D. Exchange controls
               54




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##### Table of Contents



E. Taxation
       
    
    certain financial institutions;
    
    insurance companies;
    
    dealers and traders in securities or foreign currencies;
    
    persons holding Canon shares or ADSs as part of a hedge, straddle, conversion or other integrated transaction;
    
    persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
    
    partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
    
    persons liable for the alternative minimum tax;
    
    tax-exempt organizations;
    
    persons holding Canon shares or ADSs that own or are deemed to own 10% or more of any class of Canon stock; or
    
    persons who acquired Canon shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation.
   
    
    a citizen or resident of the United States;
    
    a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the
United States or any political subdivision thereof; or
    
    an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
  55




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Taxation of Distributions
    Sale and Other Disposition of Canon Shares or ADSs
  Passive Foreign Investment Company Rules
    Information Reporting and Backup Withholding
   56




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##### Table of Contents



F. Dividends and paying agents
  
 G. Statement by experts
  
 H. Documents on display
  
  
   
  
 I. Subsidiary information
  
 Item 11. Quantitative and Qualitative Disclosures about Market Risk
 
 Market risk exposures
  
 Equity price risk
    2007
    
    
    2006Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    51
    
    
    ¥
    51
    
    
    ¥
    295
    
    
    ¥
    294Due after one year through five years
    
    
    3,430
    
    
    
    3,638
    
    
    
    5,606
    
    
    
    7,104Due after five years
    
    
    3,822
    
    
    
    4,726
    
    
    
    2,891
    
    
    
    2,947Equity securities
    
    
    12,666
    
    
    
    22,316
    
    
    
    12,648
    
    
    
    29,852¥
    19,969
    
    
    ¥
    30,731
    
    
    ¥
    21,440
    
    
    ¥
    40,197
  2007
    
    
    2006Cost
    
    
    Fair value
    
    
    Cost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    10,115
    
    
    ¥
    10,115
    
    
    ¥
    10,151
    
    
    ¥
    10,151Due after one year through five years
    
    
    
    
    
    
    
    
    
    
    10,311
    
    
    
    10,311¥
    10,115
    
    
    ¥
    10,115
    
    
    ¥
    20,462
    
    
    ¥
    20,462
 57




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##### Table of Contents



Foreign currency exchange rate and interest rate risk
    Millions of yenU.S.$
    
    
    euro
    
    
    Others
    
    
    TotalForwards to sell foreign currencies:Contract amounts
    
    ¥
    361,582
    
    
    ¥
    294,355
    
    
    ¥
    41,303
    
    
    ¥
    697,240Estimated fair value
    
    
    (6,253
    )
    
    
    (5,132
    )
    
    
    (62
    )
    
    
    (11,447
    )Forwards to buy foreign currencies:Contract amounts
    
    ¥
    29,826
    
    
    ¥
    2,451
    
    
    ¥
    14,620
    
    
    ¥
    46,897Estimated fair value
    
    
    (53
    )
    
    
    9
    
    
    
    (38
    )
    
    
    (82
    )
     Long-term debt (including due within one year)
 Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates
    
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended December 31, 2007:Japanese yen notes
    
    
    2.27
    %
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    10,065Japanese yen convertible debentures
    
    
    1.30
    
    
    
    128
    
    
    
    128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    668Other long-term debt
    
    
    1.80
    
    
    
    13,981
    
    
    
    5,301
    
    
    
    4,052
    
    
    
    2,446
    
    
    
    1,504
    
    
    
    455
    
    
    
    223
    
    
    
    13,981Total
    
    
    
    
    
    ¥
    24,109
    
    
    ¥
    15,429
    
    
    ¥
    4,052
    
    
    ¥
    2,446
    
    
    ¥
    1,504
    
    
    ¥
    455
    
    
    ¥
    223
    
    
    ¥
    24,714Weighted Average
    
    
    
    
    
    
    Expected maturity dateinterest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Estimatedrates
    
    
    Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    fair value(Millions of yen except interest rate data)Year ended December 31, 2006:Japanese yen notes
    
    
    2.61
    %
    
    ¥
    20,000
    
    
    ¥
    10,000
    
    
    ¥
    10,000
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    20,319Japanese yen convertible debentures
    
    
    1.30
    
    
    
    318
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,819Other long-term debt
    
    
    1.34
    
    
    
    10,734
    
    
    
    5,263
    
    
    
    3,132
    
    
    
    1,832
    
    
    
    418
    
    
    
    69
    
    
    
    20
    
    
    
    10,657Total
    
    
    
    
    
    ¥
    31,052
    
    
    ¥
    15,263
    
    
    ¥
    13,450
    
    
    ¥
    1,832
    
    
    ¥
    418
    
    
    ¥
    69
    
    
    ¥
    20
    
    
    ¥
    32,795
 
 Item 12. Description of Securities Other than Equity Securities
  58




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PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
        
 Item 15. Controls and Procedures
 Evaluation of disclosure controls and procedures
   Managements Report on Internal Control over Financial Reporting
   59




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##### Table of Contents



Internal Control-Integrated
Framework
   Changes in internal controls over financial reporting
  
 Item 16A. Audit Committee Financial Expert
  
 Item 16B. Code of Ethics
  
 Item 16C. Principal Accountant Fees and Services
 Policy on Pre-Approval of Audit and Non-Audit Services of Independent Auditors
   
    
    All services provided to Canon necessary to perform an annual or
semi-annual audit or review to comply with the standards of the Public
Company Accounting Oversight Board (United States), in any
jurisdiction, including tax services and accounting consultation
necessary to comply with the standards of the Public Company
Accounting Oversight Board (United States) in those jurisdictions, and
any engagement of an Independent Registered Public Accounting Firm for
any audit or non-audit service involving estimated fees exceeding
¥10,000,000 per single engagement must be approved by the full board
of corporate auditors.
 
    
    Certain other services may be pre-approved under detailed categories
of audit and non-audit services established annually by the board of
corporate auditors, as long as those services do not exceed specified
maximum yen limits for aggregate fees relating to each of those
categories. Any engagement of an Independent Registered Public
Accounting Firm by these means must be reported to the board of
corporate auditors at its next regularly scheduled meeting.
 
    
    For services that are not covered by the above two means of
pre-approval, the board of corporate auditors has delegated
pre-approval authority to the Chairman of the board of corporate
auditors. Any engagement of an Independent Registered Public
Accounting Firm by the Chairman is required to be reported to the
board of corporate auditors at its next regularly scheduled meeting.
   60




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##### Table of Contents



Fees and Services.
  Year ended
    
    
    Year endedDecember 31, 2007
    
    
    December 31, 2006(Millions of yen)Audit fees
    
    ¥
    2,503
    
    
    ¥
    2,052Audit-related fees
    
    
    16
    
    
    
    69Tax fees
    
    
    15
    
    
    
    53All other fees
    
    
    7
    
    
    
    3Total
    
    ¥
    2,541
    
    
    ¥
    2,177
 Audit fees
 Audit-related fees
 Tax fees
 All other fees
  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
   
    
    the board of corporate auditors is established pursuant to
applicable Japanese law and Canons Articles of Incorporation;
 
    
    under Japanese legal requirements, the board of corporate auditors is separate from the board of directors;
 
    
    the board of corporate auditors is not elected by the management of Canon and no executive officer of Canon is a member
of the board of corporate auditors;
 
    
    all of the members of the board of corporate auditors meet specific independence requirements from Canon and the Canon
group, the management and the auditing firm, as set forth by Japanese legal provisions;
 
    
    the board of corporate auditors, in accordance with and to the extent permitted by Japanese law, is responsible for the
appointment, retention and oversight of the work of Canons external auditors engaged for the purpose of issuing audit
reports on Canons annual financial statements;
 
    
    the board of corporate auditors adopted a complaints procedure (which became effective prior to July 31, 2005) in
accordance with Rule 10A-3(b)(3) of the Exchange Act;
 
    
    the board of corporate auditors is authorized to engage
independent counsel and other advisers, as it deems appropriate; and
 
    
    the board of corporate auditors is provided with appropriate funding for payment of (i) compensation to Canons
independent registered public accounting firm engaged for the purpose of issuing audit reports on Canons annual
financial statements, (ii) compensation to independent counsel and other advisers engaged by the board of corporate
auditors, and (iii) ordinary administrative expenses of the board of corporate auditors in carrying out its duties.
  61




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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
  Period
    
    (a) Total Number of
    
    
    (b) Average Price
    
    
    (c) Total Number of
    
    
    (d) Maximum Number ofShares Purchased
    
    
    Paid per Share
    
    
    Shares Purchased as
    
    
    Shares that MayPart of Publicly
    
    
    Yet Be PurchasedAnnounced Plans or
    
    
    Under the Plans or(Shares)
    
    
    (Yen)
    
    
    Programs
    
    
    ProgramsJanuary 1 - January 31
    
    
    7,281
    
    
    
    6,498
    
    
    
    
    
    
    
    February 1 - February 28
    
    
    7,118,730
    
    
    
    6,585
    
    
    
    7,113,700
    
    
    
    March 1 - March 31
    
    
    24,057,191
    
    
    
    6,368
    
    
    
    24,051,800
    
    
    
    April 1 - April 30
    
    
    5,547
    
    
    
    6,478
    
    
    
    
    
    
    
    May 1 - May 31
    
    
    7,278
    
    
    
    6,953
    
    
    
    
    
    
    
    June 1 - June 30
    
    
    5,418
    
    
    
    7,200
    
    
    
    
    
    
    
    July 1 - July 31
    
    
    4,895
    
    
    
    7,167
    
    
    
    
    
    
    
    August 1 - August 31
    
    
    22,419,109
    
    
    
    6,292
    
    
    
    22,416,300
    
    
    
    September 1- September 30
    
    
    17,167,914
    
    
    
    6,348
    
    
    
    17,165,100
    
    
    
    October 1 - October 31
    
    
    3,216
    
    
    
    6,138
    
    
    
    
    
    
    
    November 1 - November 30
    
    
    1,798
    
    
    
    5,644
    
    
    
    
    
    
    
    December 1 - December 31
    
    
    1,256
    
    
    
    5,694
    
    
    
    
    
    
    
    
         62




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PART III
 
 Item 17. Financial Statements
 Consolidated financial statement of Canon Inc. and Subsidiaries:
    
    Page numberReports of Ernst & Young ShinNihon, Independent Registered Public Accounting Firm
    
    64Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    66Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005
    
    67Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005
    
    68Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005
    
    69Notes to Consolidated Financial Statements
    
    70Schedule:Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2007, 2006 and 2005
    
    96
  63




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.
   
 65




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December 312007
    
    
    2006(Millions of yen)AssetsCurrent assets:Cash and cash equivalents
    
    ¥
    944,463
    
    
    ¥
    1,155,626Time deposits
    
    
    10,333
    
    
    
    41,953Marketable
securities (Notes 3 and 10)
    
    
    10,166
    
    
    
    10,445Trade receivables, net (Note 4)
    
    
    794,240
    
    
    
    761,947Inventories (Note 5)
    
    
    563,474
    
    
    
    539,057Prepaid expenses and other current assets (Notes 7 and 13)
    
    
    286,111
    
    
    
    273,321Total current assets
    
    
    2,608,787
    
    
    
    2,782,349Noncurrent receivables (Note 19)
    
    
    15,239
    
    
    
    14,335Investments (Note 3)
    
    
    90,086
    
    
    
    110,418Property, plant and equipment, net (Notes 6, 7 and 10)
    
    
    1,364,702
    
    
    
    1,266,425Other assets (Notes 7, 8, 9, 12 and 13)
    
    
    433,811
    
    
    
    348,388Total assets
    
    ¥
    4,512,625
    
    
    ¥
    4,521,915Liabilities and stockholders equityCurrent liabilities:Short-term
loans and current portion of long-term debt (Note 10)
    
    ¥
    18,317
    
    
    ¥
    15,362Trade payables (Note 11)
    
    
    514,226
    
    
    
    493,058Accrued income taxes (Note 13)
    
    
    150,726
    
    
    
    133,745Accrued expenses (Note 19)
    
    
    357,525
    
    
    
    303,353Other current liabilities (Notes 6 and 13)
    
    
    215,911
    
    
    
    217,789Total current liabilities
    
    
    1,256,705
    
    
    
    1,163,307Long-term debt, excluding current installments (Note 10)
    
    
    8,680
    
    
    
    15,789Accrued pension and severance cost (Note 12)
    
    
    44,710
    
    
    
    83,876Other noncurrent liabilities (Note 13)
    
    
    57,324
    
    
    
    55,536Total liabilities
    
    
    1,367,419
    
    
    
    1,318,508Minority interests
    
    
    222,870
    
    
    
    216,801Commitments and contingent liabilities (Note 19)Stockholders equity:Common stockAuthorized 3,000,000,000 shares; issued 1,333,636,210 shares in 2007 and
1,333,445,830 shares in 2006 (Note 14)
    
    
    174,698
    
    
    
    174,603Additional paid-in capital (Note 14)
    
    
    402,991
    
    
    
    403,510Legal reserve (Note 15)
    
    
    46,017
    
    
    
    43,600Retained earnings (Note 15)
    
    
    2,720,146
    
    
    
    2,368,047Accumulated other comprehensive income (loss) (Note 16)
    
    
    34,670
    
    
    
    2,718Treasury stock, at cost 72,588,428 shares in 2007 and 1,794,390 shares in 2006
    
    
    (456,186
    )
    
    
    (5,872
    )Total stockholders equity
    
    
    2,922,336
    
    
    
    2,986,606Total liabilities and stockholders equity
    
    ¥
    4,512,625
    
    
    ¥
    4,521,915
 See accompanying notes to consolidated financial statements.
 66




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##### Table of Contents



Years ended December 312007
    
    
    2006
    
    
    2005(Millions of yen)Net sales
    
    ¥
    4,481,346
    
    
    ¥
    4,156,759
    
    
    ¥
    3,754,191Cost of
sales (Notes 6, 9, 12 and 19)
    
    
    2,234,365
    
    
    
    2,096,279
    
    
    
    1,935,148Gross profit
    
    
    2,246,981
    
    
    
    2,060,480
    
    
    
    1,819,043Operating
expenses (Notes 1, 6, 9, 12 and 19):Selling, general and administrative expenses
    
    
    1,122,047
    
    
    
    1,045,140
    
    
    
    949,524Research and development expenses
    
    
    368,261
    
    
    
    308,307
    
    
    
    286,4761,490,308
    
    
    
    1,353,447
    
    
    
    1,236,000Operating profit
    
    
    756,673
    
    
    
    707,033
    
    
    
    583,043Other income (deductions):Interest and dividend income
    
    
    32,819
    
    
    
    27,153
    
    
    
    14,252Interest expense
    
    
    (1,471
    )
    
    
    (2,190
    )
    
    
    (1,741
    )Other, net (Notes 1, 3 and 18)
    
    
    (19,633
    )
    
    
    (12,853
    )
    
    
    16,45011,715
    
    
    
    12,110
    
    
    
    28,961Income before income taxes and minority interests
    
    
    768,388
    
    
    
    719,143
    
    
    
    612,004Income taxes (Note 13)
    
    
    264,258
    
    
    
    248,233
    
    
    
    212,785Income before minority interests
    
    
    504,130
    
    
    
    470,910
    
    
    
    399,219Minority interests
    
    
    15,798
    
    
    
    15,585
    
    
    
    15,123Net income
    
    ¥
    488,332
    
    
    ¥
    455,325
    
    
    ¥
    384,096(Yen)Net income per share (Note 17):Basic
    
    ¥
    377.59
    
    
    ¥
    341.95
    
    
    ¥
    288.63Diluted
    
    
    377.53
    
    
    
    341.84
    
    
    
    288.36Cash dividends per share
    
    
    110.00
    
    
    
    83.33
    
    
    
    66.67
 See accompanying notes to consolidated financial statements.
 67




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AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    other
    
    
    
    
    
    
    TotalCommon
    
    
    paid-in
    
    
    Legal
    
    
    Retained
    
    
    comprehensive
    
    
    Treasury
    
    
    stockholdersstock
    
    
    capital
    
    
    reserve
    
    
    earnings
    
    
    income (loss)
    
    
    stock
    
    
    equity(Millions of yen)Balance at December 31, 2004
    
    ¥
    173,864
    
    
    ¥
    401,773
    
    
    ¥
    41,200
    
    
    ¥
    1,699,634
    
    
    ¥
    (101,312
    )
    
    ¥
    (5,263
    )
    
    ¥
    2,209,896Conversion of convertible debt and other
    
    
    574
    
    
    
    574
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,148Capital transaction by consolidated subsidiaries
and affiliated companies
    
    
    
    
    
    
    899
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    899Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,310
    )
    
    
    
    
    
    
    
    
    
    
    (64,310
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    1,131
    
    
    
    (1,131
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    384,096
    
    
    
    
    
    
    
    
    
    
    
    384,096Other comprehensive income (loss), net of tax
(Note 16):Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,979
    
    
    
    
    
    
    
    53,979Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,397
    )
    
    
    
    
    
    
    (1,397
    )Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (481
    )
    
    
    
    
    
    
    (481
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,999
    
    
    
    
    
    
    
    20,999Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    457,196Repurchase of treasury stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    (147
    )Balance at December 31, 2005
    
    
    174,438
    
    
    
    403,246
    
    
    
    42,331
    
    
    
    2,018,289
    
    
    
    (28,212
    )
    
    
    (5,410
    )
    
    
    2,604,682Conversion of convertible debt and other
    
    
    165
    
    
    
    264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    429Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104,298
    )
    
    
    
    
    
    
    
    
    
    
    (104,298
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    1,269
    
    
    
    (1,269
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455,325
    
    
    
    
    
    
    
    
    
    
    
    455,325Other comprehensive income (loss), net of tax
(Note 16):Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,630
    
    
    
    
    
    
    
    48,630Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,992
    
    
    
    
    
    
    
    1,992Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (489
    )
    
    
    
    
    
    
    (489
    )Minimum pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,575
    )
    
    
    
    
    
    
    (3,575
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501,883Adjustment to initially apply SFAS 158,
net of tax (Note 12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,628
    )
    
    
    
    
    
    
    (15,628
    )Repurchase of treasury stock, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (462
    )
    
    
    (462
    )Balance at December 31, 2006
    
    
    174,603
    
    
    
    403,510
    
    
    
    43,600
    
    
    
    2,368,047
    
    
    
    2,718
    
    
    
    (5,872
    )
    
    
    2,986,606Cumulative effect of a change in accounting
principle-adoption of EITF 06-2, net of tax (Note
1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,204
    )
    
    
    
    
    
    
    
    
    
    
    (2,204
    )Conversion of convertible debt and other
    
    
    95
    
    
    
    (522
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (427
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131,612
    )
    
    
    
    
    
    
    
    
    
    
    (131,612
    )Transfer to legal reserve
    
    
    
    
    
    
    
    
    
    
    2,417
    
    
    
    (2,417
    )
    
    
    
    
    
    
    
    
    
    
    Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488,332
    
    
    
    
    
    
    
    
    
    
    
    488,332Other comprehensive income (loss), net of tax
(Note 16):Foreign currency translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Net unrealized gains and losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,778
    )
    
    
    
    
    
    
    (1,778
    )Net gains and losses on derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    814Pension liability adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,978
    
    
    
    
    
    
    
    32,978Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    520,284Repurchase of treasury stock, net
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (450,314
    )
    
    
    (450,311
    )Balance at December 31, 2007
    
    ¥
    174,698
    
    
    ¥
    402,991
    
    
    ¥
    46,017
    
    
    ¥
    2,720,146
    
    
    ¥
    34,670
    
    
    ¥
    (456,186
    )
    
    ¥
    2,922,336
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##### Table of Contents



Years ended December 312007
    
    
    2006
    
    
    2005(Millions of yen)Cash flows from operating activities:Net income
    
    ¥
    488,332
    
    
    ¥
    455,325
    
    
    ¥
    384,096Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    341,694
    
    
    
    262,294
    
    
    
    225,941Loss on disposal of property, plant and equipment
    
    
    9,985
    
    
    
    16,182
    
    
    
    13,784Deferred income taxes
    
    
    (35,021
    )
    
    
    (6,945
    )
    
    
    (766
    )Increase in trade receivables
    
    
    (10,722
    )
    
    
    (40,969
    )
    
    
    (48,391
    )(Increase) decrease in inventories
    
    
    (26,643
    )
    
    
    (5,542
    )
    
    
    27,558Increase (decrease) in trade payables
    
    
    21,136
    
    
    
    (2,313
    )
    
    
    16,018Increase in accrued income taxes
    
    
    14,988
    
    
    
    22,657
    
    
    
    1,998Increase in accrued expenses
    
    
    43,035
    
    
    
    36,165
    
    
    
    31,241Decrease in accrued pension and severance cost
    
    
    (15,387
    )
    
    
    (20,309
    )
    
    
    (16,221
    )Other, net
    
    
    7,872
    
    
    
    (21,304
    )
    
    
    (29,580
    )Net cash provided by operating activities
    
    
    839,269
    
    
    
    695,241
    
    
    
    605,678Cash flows from investing activities:Purchases of fixed assets
    
    
    (474,285
    )
    
    
    (424,862
    )
    
    
    (395,055
    )Proceeds from sale of fixed assets
    
    
    9,635
    
    
    
    12,507
    
    
    
    14,827Purchases of available-for-sale securities
    
    
    (2,281
    )
    
    
    (7,768
    )
    
    
    (5,680
    )Proceeds from sale and maturity of available-for-sale securities
    
    
    8,614
    
    
    
    4,047
    
    
    
    12,337Proceeds from maturity of held-to-maturity securities
    
    
    10,000
    
    
    
    
    
    
    
    (Increase) decrease in time deposits
    
    
    31,681
    
    
    
    (35,863
    )
    
    
    (6,090
    )Acquisitions of subsidiaries, net of cash acquired
    
    
    (15,675
    )
    
    
    (2,485
    )
    
    
    (17,657
    )Purchases of other investments
    
    
    (2,432
    )
    
    
    (8,911
    )
    
    
    (19,531
    )Other, net
    
    
    2,258
    
    
    
    2,530
    
    
    
    15,708Net cash used in investing activities
    
    
    (432,485
    )
    
    
    (460,805
    )
    
    
    (401,141
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    2,635
    
    
    
    1,053
    
    
    
    1,716Repayments of long-term debt
    
    
    (13,046
    )
    
    
    (5,861
    )
    
    
    (15,187
    )Decrease in short-term loans
    
    
    (358
    )
    
    
    (828
    )
    
    
    (12,011
    )Dividends paid
    
    
    (131,612
    )
    
    
    (104,298
    )
    
    
    (64,310
    )Repurchases of treasury stock, net
    
    
    (450,311
    )
    
    
    (462
    )
    
    
    (147
    )Other, net
    
    
    (11,691
    )
    
    
    2,909
    
    
    
    (4,000
    )Net cash used in financing activities
    
    
    (604,383
    )
    
    
    (107,487
    )
    
    
    (93,939
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (13,564
    )
    
    
    23,724
    
    
    
    6,581Net increase (decrease) in cash and cash equivalents
    
    
    (211,163
    )
    
    
    150,673
    
    
    
    117,179Cash and cash equivalents at beginning of year
    
    
    1,155,626
    
    
    
    1,004,953
    
    
    
    887,774Cash and cash equivalents at end of year
    
    ¥
    944,463
    
    
    ¥
    1,155,626
    
    
    ¥
    1,004,953Supplemental disclosure for cash flow information (Note 21):Cash paid during the year for:Interest
    
    ¥
    1,476
    
    
    ¥
    2,146
    
    
    ¥
    1,919Income taxes
    
    
    273,888
    
    
    
    244,236
    
    
    
    211,540
 See accompanying notes to consolidated financial statements.
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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies(a)
    
    Description of BusinessCanon Inc. (the Company) and subsidiaries (collectively Canon) is one of the worlds leading
manufacturers in such fields as office imaging products, computer peripherals, business
information products, cameras, and optical related products. Office imaging products consist
mainly of network multifunction devices and copying machines. Computer peripherals consist
mainly of laser beam and inkjet printers. Business information products consist mainly of
computer information systems, document scanners and calculators. Cameras consist mainly of
digital single lens reflex (SLR) cameras, digital compact cameras, interchangeable lenses and
digital video camcorders. Optical and other products include semiconductor production equipment,
mirror projection mask aligners for liquid crystal displays (LCDs) panels, broadcasting
equipment, medical equipment and large format printers. Canons consolidated net sales for the
years ended December 31, 2007, 2006 and 2005 were distributed as follows: office imaging products
29%, 28% and 31%, computer peripherals 34%, 34% and 33%, business information products 2%, 3% and
3%, cameras 26%, 25% and 23%, and optical and other products 9%, 10% and 10%, respectively.Sales are made principally under the Canon brand name, almost entirely through sales
subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily
sell to retail dealers in their geographical area. Approximately 77%, 75% and 74% of
consolidated net sales for the years ended December 31, 2007, 2006 and 2005 were generated
outside Japan, with 30%, 31% and 30% in the Americas, 33%, 31% and 32% in Europe, and 14%, 13%
and 12% in other areas, respectively.Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales
constituted approximately 22%, 22% and 21% of consolidated net sales for the years ended December
31, 2007, 2006 and 2005, respectively.Canons manufacturing operations are conducted primarily at 24 plants in Japan and 17 overseas
plants which are located in countries or regions such as the United States, Germany, France,
Taiwan, China, Malaysia, Thailand and Vietnam.(b)
    
    Basis of PresentationThe Company and its domestic subsidiaries maintain their books of account in conformity with
financial accounting standards of Japan. Foreign subsidiaries maintain their books of account in
conformity with financial accounting standards of the countries of their domicile.Certain adjustments and reclassifications have been incorporated in the accompanying consolidated
financial statements to conform with U.S. generally accepted accounting principles. These
adjustments were not recorded in the statutory books of account.(c)
    
    Principles of ConsolidationThe consolidated financial 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 beneficiaries under Financial Accounting Standards Board (FASB)
Interpretation No. 46 (revised December 2003) (FIN 46R), Consolidation of Variable Interest
Entities. All significant intercompany balances and transactions have been eliminated.(d)
    
    Use of EstimatesThe preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amount of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Significant estimates and assumptions are reflected in
valuation and disclosure of revenue recognition, allowance for doubtful receivables, valuation of
inventories, environmental liabilities, valuation of deferred tax assets, uncertain tax positions
and employee retirement and severance benefit plans. Actual results could differ materially from
those estimates.(e)
    
    Cash EquivalentsAll highly liquid investments acquired with an original maturity of three months or less are
considered to be cash equivalents.(f)
    
    Time DepositsTime deposits with original maturities of more than three months are included in the consolidated
balance sheets under the caption of time deposits.(g)
    
    Translation of Foreign CurrenciesAssets and liabilities of the Companys subsidiaries located outside Japan with functional
currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in
effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are reported in other comprehensive income
(loss).Gains and losses resulting from foreign currency transactions, including foreign exchange
contracts, and translation of assets and liabilities denominated in foreign currencies are
included in other income (deductions). Foreign currency exchange losses, net were ¥31,943
million, ¥25,804 million and ¥3,710 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
 70




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(h)
    
    Marketable Securities and InvestmentsCanon classifies investments in debt and marketable equity securities as available-for-sale or
held-to-maturity securities. Canon does not hold any trading securities, which are bought and
held primarily for the purpose of sale in the near term. Available-for-sale securities are
recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are
reported as a separate component of other comprehensive income (loss) until realized.
Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.Available-for-sale and held-to-maturity securities are regularly reviewed for
other-than-temporary declines in carrying value based on criteria that include the length of time
and the extent to which the market value has been less than cost, the financial condition and
near-term prospects of the issuer and Canons intent and ability to retain the investment for a
period of time sufficient to allow for any anticipated recovery in market value. When such a
decline exists, Canon recognizes an impairment loss to the extent by which the cost basis of the
investment exceeds the fair value of the investment. Fair value is determined based on quoted
market prices, projected discounted cash flows or other valuation techniques as appropriate.Realized gains and losses are determined on the average cost method and reflected in earnings.Investments in affiliated companies over which Canon has the ability to exercise significant
influence, but does not hold a controlling financial interest, are accounted for by the equity
method.Non-marketable equity securities in companies over which Canon does not have the ability to
exercise significant influence are stated at cost and reviewed periodically for impairment.(i)
    
    Allowance for Doubtful ReceivablesAllowance for doubtful trade and finance receivables is maintained for all customers based on a
combination of factors, including aging analysis, macroeconomic conditions, significant one-time
events, and historical experience. An additional reserve for individual accounts is recorded
when Canon becomes aware of a customers inability to meet its financial obligations, such as in
the case of bankruptcy filings. If circumstances related to customers change, estimates of the
recoverability of receivables would be further adjusted. When all collection options are
exhausted including legal recourse, the accounts or portions thereof are deemed to be
uncollectible and charged against the allowance.(j)
    
    InventoriesInventories are stated at the lower of cost or market value. Cost is determined principally by the
average method for domestic inventories and the first-in, first-out method for overseas
inventories.(k)
    
    Impairment of Long-Lived AssetsLong-lived assets, such as property, plant and equipment, and acquired intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the carrying amount of
the asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.(l)
    
    Property, Plant and Equipment and Accounting ChangeProperty, plant and equipment are stated at cost. Depreciation is calculated principally by the
declining-balance method, except for certain assets which are depreciated by the straight-line
method over the estimated useful lives of the assets.Effective April 1, 2007, the Company and its domestic subsidiaries elected to change the
declining-balance method of depreciating machinery and equipment from the
fixed-percentage-on-declining base application to the 250% declining-balance application.
Estimated residual values were also reduced in conjunction with this change. The Company and its
domestic subsidiaries believe that the 250% declining-balance application is preferable because
it provides a better matching of the 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 represents a change in accounting estimate effected by a
change in accounting principle. Accordingly, the affects of the change are accounted for
prospectively beginning with the period of change and prior period results have not been
restated. The change in depreciation methods caused an increase in 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.
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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(m)
    
    Goodwill and Other Intangible AssetsGoodwill and other intangible assets with indefinite useful lives are not amortized, but are
instead tested for impairment annually in the fourth quarter of each year, or more frequently if
indicators of potential impairment exist. Intangible assets with finite useful lives, consisting
primarily of software and license fees, are amortized using the straight-line method over the
estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years
for license fees. Certain costs incurred in connection with developing or obtaining internal use
software are capitalized. These costs consist primarily of payments made to third parties and
the salaries of employees working on such software development. Costs incurred in connection
with developing internal use software are capitalized at the application development stage. In
addition, Canon develops or obtains certain software to be sold where related costs are
capitalized after establishment of technological feasibility.(n)
    
    Environmental LiabilitiesLiabilities for environmental remediation and other environmental costs are accrued when
environmental assessments or remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information develops or circumstances
change. Costs of future obligations are not discounted to their present values.(o)
    
    Income TaxesDeferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Canon records a valuation
allowance to reduce the deferred tax assets to the amount that is more likely than not
realizable.Canon recognizes the financial statement effects of tax positions when they are more likely
than not, based on the technical merits, that the tax positions will be sustained upon examination
by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition
threshold are measured at the largest amount of benefit that is greater than 50 percent likely of
being realized upon settlement. Interest and penalties accrued related to unrecognized tax benefits
are included in income taxes in the consolidated statements of income.(p)
    
    Issuance of Stock by Subsidiaries and Equity InvesteesThe change in the Companys proportionate share of a subsidiarys or equity investees equity
resulting from the issuance of stock by the subsidiary or equity investee is accounted for as an
equity transaction.(q)
    
    Net Income per ShareBasic net income per share is computed by dividing net income by the weighted-average number of
common shares outstanding during each year. Diluted net income per share includes the effect
from potential issuance of common stock based on the assumption that all convertible debentures
were converted into common stock.(r)
    
    Revenue RecognitionCanon generates revenue principally through the sale of consumer products, equipment,
supplies, and related services under separate contractual arrangements. Canon recognizes revenue
when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of
loss have been transferred to the customer or services have been rendered, the sales price is
fixed or determinable, and collectibility is probable.Revenue from sales of consumer products including office imaging products, computer
peripherals, business information products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the customer.Revenue from sales of optical equipment, such as steppers and aligners that are sold with
customer acceptance provisions related to their functionality, is recognized when the equipment
is installed at the customer site and the specific criteria of the equipment functionality are
successfully tested and 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 office imaging
products, for which the customer typically pays a stated base service fee plus a variable amount
based on usage. Revenue from these service maintenance contracts is measured at the stated
amount of the contract and recognized as services are provided and variable amounts are earned.Revenue from the sale of equipment under sales-type leases is recognized at the inception of the
lease. Income on sales-type leases and direct-financing leases is recognized over the life of
each respective lease using the interest method. Leases not qualifying as sales-type leases or
direct-financing leases are accounted for as operating leases and related revenue is recognized
ratably over the lease term. When equipment leases are bundled with product maintenance
contracts, revenue is first allocated considering the relative fair value of the lease and
non-lease deliverables based upon the estimated relative fair values of each element. Lease
deliverables generally include equipment, financing and executory costs, while non-lease
deliverables generally consist of product maintenance contracts and supplies.For all other arrangements with multiple elements, Canon allocates revenue to each element based
on its relative fair value if such element meets the criteria for treatment as a separate unit of
accounting as prescribed in the Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. Otherwise, revenue is deferred until the undelivered
elements are fulfilled and accounted for as a single unit of accounting.
 72




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##### Table of Contents



1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(r)
    
    Revenue Recognition (continued)Canon records estimated reductions to sales at the time of sale for sales incentive programs
including product discounts, customer promotions and volume-based rebates. Estimated reductions
in sales are based upon historical trends and other known factors at the time of sale. In
addition, Canon provides price protection to certain resellers of its products, and records
reductions to sales for the estimated impact of price protection obligations when announced.Estimated product warranty costs are recorded at the time revenue is recognized and are
included in selling, general and administrative expenses. Estimates for accrued product warranty
costs are based on historical experience, and are affected by ongoing product failure rates,
specific product class failures outside of the baseline experience, material usage and service
delivery costs incurred in correcting a product failure.Taxes collected from customers and remitted to governmental authorities are excluded from
revenues in the consolidated statements of income.(s)
    
    Research and Development CostsResearch and development costs are expensed as incurred.(t)
    
    Advertising CostsAdvertising costs are expensed as incurred. Advertising expenses were ¥132,429 million, ¥116,809
million and ¥106,250 million for the years ended December 31, 2007, 2006 and 2005, respectively.(u)
    
    Shipping and Handling CostsShipping and handling costs totaled ¥63,708 million, ¥62,626 million and ¥50,052 million for the
years ended December 31, 2007, 2006 and 2005, respectively, and are included in selling, general
and administrative expenses in the consolidated statements of income.(v)
    
    Derivative Financial InstrumentsAll derivatives are recognized at fair value and are included in prepaid expenses and other
current assets, or other current liabilities in the consolidated balance sheets. On the date the
derivative contract is entered into, Canon designates the derivative as either a hedge of the
fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value
hedge), or a hedge of a forecasted transaction or the variability of cash flows to be received or
paid related to a recognized asset or liability (cash flow hedge). Canon formally documents
all relationships between hedging instruments and hedged items, as well as its risk-management
objective and strategy for undertaking various hedge transactions. Canon also formally assesses,
both at the hedges inception and on an ongoing basis, whether the derivatives that are used in
hedging transactions are highly effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly effective as a hedge or that
it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively.Changes in the fair value of a derivative that is designated and qualifies as a fair-value
hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm
commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings.
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge
are recorded in other comprehensive income (loss), until earnings are affected by the
variability in cash flows of the hedged item. Gains and losses from hedging ineffectiveness are
included in other income (deductions). Gains and losses excluded from the assessment of hedge
effectiveness are included in other income (deductions).Canon also uses certain derivative financial instruments which are not designated as hedges.
Canon records these derivative financial instruments in the consolidated balance sheets at fair
value. The changes in fair values are immediately recorded in earnings.Canon classifies cash flows from derivatives as cash flows from operating activities in the
consolidated statements of cash flows.(w)
    
    GuaranteesCanon 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 StandardsIn June 2006, the FASB ratified the EITF consensus on EITF Issue No. 06-2, Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB
Statement No. 43 (EITF 06-2). EITF
06-2 provides guidance for an accrual of compensated absences that require a minimum service
period but have no increase in the benefit even with additional years of service. EITF 06-2 is
effective for fiscal years beginning after December 15, 2006, and was adopted by Canon in the
first quarter beginning January 1, 2007 through a cumulative-effect adjustment which increased
accrued expenses by ¥4,402 million and decreased retained earnings by ¥2,204 million.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition threshold a tax
position is required to meet before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006, and was adopted by Canon in the first quarter beginning January 1, 2007. See
Note 13 for further discussion of the effect of adopting FIN 48 on Canons consolidated financial
statements.
 73




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1.
    
    Basis of Presentation and Significant Accounting Policies (continued)(x)
    
    New Accounting Standards (continued)In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and is required to be adopted by Canon in the first quarter beginning January
1, 2008. In February 2008, the FASB issued Staff Positions No. FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and
No. FAS 157-2, Effective Date of FASB Statement No. 157, which partially delay the effective
date of SFAS 157 for one year for certain nonfinancial assets and liabilities and remove certain
leasing transactions from its scope. The adoption of SFAS 157 will not have a material impact on
Canons consolidated results of operations and financial condition.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, Including an amendment of FASB Statement No. 115 (SFAS 159). SFAS 159
provides companies with an option to report selected financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has been elected
will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November
15, 2007 and is required to be adopted by Canon in the first quarter beginning January 1, 2008.
The adoption of SFAS 159 will not have a material impact on Canons consolidated results of
operations and financial condition.In June 2007, the FASB ratified the EITF consensus on EITF Issued No. 07-3, Accounting for
Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and
Development Activities (EITF 07-3). EITF 07-3 requires that nonrefundable advance payments
for goods or services that will be used or rendered for future research and development
activities be deferred and capitalized and recognized as an expense as the goods are delivered or
the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal
years beginning after December 15, 2007 and is required to be adopted by Canon in the first
quarter beginning January 1, 2008. The adoption of EITF 07-3 will not have a material impact on
Canons consolidated results of operations and financial condition.In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations  (SFAS
141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141R is effective for fiscal years beginning on or after December 15,
2008 and is required to be adopted by Canon in the first quarter beginning January 1, 2009. Canon
is currently evaluating the potential effect, if any, that the adoption of SFAS 141R will have on
Canons consolidated results of operations and financial condition.In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statement, an amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties other than the
parent, the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest, and the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes
disclosure requirements that clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning
on or after December 15, 2008 and is required to be adopted by Canon in the first quarter
beginning January 1, 2009. Canon is currently evaluating the effect that the adoption of SFAS 160
will have on its consolidated results of operations and financial condition.(y)
    
    ReclassificationTime deposits with original maturities of more than three months, which were previously
included in prepaid expenses and other current assets, have been reclassified to time
deposits in the consolidated balance sheets to conform to the current year presentation.
 74




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2.
    
    Foreign Operations
  2007
    
    2006
    
    2005(Millions of yen)December 31:Total assets
    
    ¥
    2,077,268
    
    
    ¥
    1,995,927
    
    
    ¥
    1,751,011Net assets
    
    
    1,024,150
    
    
    
    907,845
    
    
    
    767,711Years ended December 31:Net sales
    
    ¥
    3,433,036
    
    
    ¥
    3,119,102
    
    
    
    2,774,443Net income
    
    
    136,560
    
    
    
    114,916
    
    
    
    81,916
 3.
    
    Marketable Securities and Investments
  December 31, 2007Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Bank debt securities
    
    ¥
    51
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    51Held-to-maturity:Corporate debt securities
    
    
    10,115
    
    
    
    
    
    
    
    
    
    
    
    10,115¥
    10,166
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    10,166Noncurrent:Available-for-sale:Government bonds
    
    ¥
    496
    
    
    ¥
    
    
    
    ¥
    25
    
    
    ¥
    471Corporate debt securities
    
    
    3,183
    
    
    
    31
    
    
    
    49
    
    
    
    3,165Fund trusts
    
    
    3,573
    
    
    
    1,158
    
    
    
    3
    
    
    
    4,728Equity securities
    
    
    12,666
    
    
    
    10,233
    
    
    
    583
    
    
    
    22,316¥
    19,918
    
    
    ¥
    11,422
    
    
    ¥
    660
    
    
    ¥
    30,680
 75




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##### Table of Contents



3. Marketable Securities and Investments (continued)
 December 31, 2006Gross
    
    
    Grossunrealized
    
    
    unrealizedholding
    
    
    holding
    
    
    FairCost
    
    
    gains
    
    
    losses
    
    
    value(Millions of yen)Current:Available-for-sale:Government bonds
    
    ¥
    224
    
    
    ¥
    
    
    
    ¥
    
    
    
    ¥
    224Bank debt securities
    
    
    71
    
    
    
    
    
    
    
    1
    
    
    
    70295
    
    
    
    
    
    
    
    1
    
    
    
    294Held-to-maturity:Corporate debt securities
    
    
    10,151
    
    
    
    
    
    
    
    
    
    
    
    10,151¥
    10,446
    
    
    ¥
    
    
    
    ¥
    1
    
    
    ¥
    10,445Noncurrent:Available-for-sale:Government bonds
    
    ¥
    335
    
    
    ¥
    
    
    
    ¥
    15
    
    
    ¥
    320Corporate debt securities
    
    
    4,090
    
    
    
    35
    
    
    
    1
    
    
    
    4,124Fund trusts
    
    
    4,072
    
    
    
    1,536
    
    
    
    1
    
    
    
    5,607Equity securities
    
    
    12,648
    
    
    
    17,479
    
    
    
    275
    
    
    
    29,85221,145
    
    
    
    19,050
    
    
    
    292
    
    
    
    39,903Held-to-maturity:Corporate debt securities
    
    
    10,311
    
    
    
    
    
    
    
    
    
    
    
    10,311¥
    31,456
    
    
    ¥
    19,050
    
    
    ¥
    292
    
    
    ¥
    50,214
  Available-for-sale securitiesCost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    51
    
    
    ¥
    51Due after one year through five years
    
    
    3,430
    
    
    
    3,638Due after five years
    
    
    3,822
    
    
    
    4,726¥
    7,303
    
    
    ¥
    8,415Held-to-maturity securitiesCost
    
    
    Fair value(Millions of yen)Due within one year
    
    ¥
    10,115
    
    
    ¥
    10,115
     76




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##### Table of Contents



4.
    
    Trade Receivables
  December 312007
    
    

2006(Millions of yen)Notes
    
    ¥
    23,632
    
    
    ¥
    24,241Accounts
    
    
    785,155
    
    
    
    751,555808,787
    
    
    
    775,796Less allowance for doubtful receivables
    
    
    (14,547
    )
    
    
    (13,849
    )¥
    794,240
    
    
    ¥
    761,947
 5.
    
    Inventories
  December 312007
    
    

2006(Millions of yen)Finished goods
    
    ¥
    366,845
    
    
    ¥
    359,471Work in process
    
    
    175,704
    
    
    
    160,231Raw materials
    
    
    20,925
    
    
    
    19,355¥
    563,474
    
    
    ¥
    539,057
 6.
    
    Property, Plant and Equipment
  December 312007
    
    

2006(Millions of yen)Land
    
    ¥
    249,959
    
    
    ¥
    231,026Buildings
    
    
    1,198,519
    
    
    
    1,077,585Machinery and equipment
    
    
    1,406,849
    
    
    
    1,261,176Construction in progress
    
    
    103,749
    
    
    
    79,5822,959,076
    
    
    
    2,649,369Less accumulated depreciation
    
    
    (1,594,374
    )
    
    
    (1,382,944
    )¥
    1,364,702
    
    
    ¥
    1,266,425
   77




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##### Table of Contents



7.
    
    Finance Receivables and Operating Leases
  December 312007
    
    

2006(Millions of yen)Total minimum lease payments receivable
    
    ¥
    229,229
    
    
    ¥
    216,697Unguaranteed residual values
    
    
    17,036
    
    
    
    14,377Executory costs
    
    
    (2,960
    )
    
    
    (2,923
    )Unearned income
    
    
    (27,756
    )
    
    
    (24,930
    )215,549
    
    
    
    203,221Less allowance for doubtful receivables
    
    
    (8,590
    )
    
    
    (7,871
    )206,959
    
    
    
    195,350Less current portion
    
    
    (72,776
    )
    
    
    (72,808
    )¥
    134,183
    
    
    ¥
    122,542
   Financing
    
    
    Operatingleases
    
    
    leases(Millions of yen)Year ending December 31:2008
    
    ¥
    88,947
    
    
    ¥
    8,1752009
    
    
    66,846
    
    
    
    4,1922010
    
    
    43,217
    
    
    
    2,4272011
    
    
    20,918
    
    
    
    1,2502012
    
    
    7,373
    
    
    
    416Thereafter
    
    
    1,928
    
    
    
    4¥
    229,229
    
    
    ¥
    16,464
 8.
    
    Acquisitions
     78




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##### Table of Contents



9. Goodwill and Other Intangible Assets
   December 31, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    Grosscarrying
    
    
    Accumulated
    
    
    carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    amount
    
    
    amortization(Millions of yen)Software
    
    ¥
    174,645
    
    
    ¥
    96,445
    
    
    ¥
    140,756
    
    
    ¥
    76,120License fees
    
    
    22,825
    
    
    
    11,697
    
    
    
    23,681
    
    
    
    11,257Other
    
    
    31,488
    
    
    
    9,241
    
    
    
    24,899
    
    
    
    4,919¥
    228,958
    
    
    ¥
    117,383
    
    
    ¥
    189,336
    
    
    ¥
    92,296
    Years ended December 312007
    
    
    2006(Millions of yen)Balance at beginning of year
    
    ¥
    40,801
    
    
    ¥
    40,161Goodwill acquired during the year
    
    
    13,573
    
    
    
    2,297Recognition of acquired companys tax benefits
    
    
    
    
    
    
    (1,038
    )Translation adjustments and other
    
    
    2,409
    
    
    
    (619
    )Balance at end of year
    
    ¥
    56,783
    
    
    ¥
    40,801
  79




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##### Table of Contents



10. Short-Term Loans and Long-Term Debt
   December 312007
    
    
    2006(Millions of yen)Loans, principally from banks, maturing in
installments through 2017; bearing weighted
average interest of 1.80% and 1.34% at December
31, 2007 and 2006, respectively, partially secured
by mortgage of property, plant and equipment
    
    ¥
    2,993
    
    
    ¥
    1492.95% Japanese yen notes, due 2007
    
    
    
    
    
    
    10,0002.27% Japanese yen notes, due 2008
    
    
    10,000
    
    
    
    10,0001.30% Japanese yen convertible debentures, due 2008
    
    
    128
    
    
    
    318Capital lease obligations
    
    
    10,988
    
    
    
    10,58524,109
    
    
    
    31,052Less current portion
    
    
    (15,429
    )
    
    
    (15,263
    )¥
    8,680
    
    
    ¥
    15,789
  (Millions of yen)Year ending December 31:2008
    
    ¥
    15,4292009
    
    
    4,0522010
    
    
    2,4462011
    
    
    1,5042012
    
    
    455Thereafter
    
    
    223¥
    24,109
     11. Trade Payables
  December 312007
    
    
    2006(Millions of yen)Notes
    
    ¥
    17,088
    
    
    ¥
    15,902Accounts
    
    
    497,138
    
    
    
    477,156¥
    514,226
    
    
    ¥
    493,058
 80




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##### Table of Contents



12. Employee Retirement and Severance Benefits
      Obligations and funded status
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006(Millions of yen)Change in benefit obligations:Benefit obligations at beginning of year
    
    ¥
    578,086
    
    
    ¥
    539,212
    
    
    ¥
    110,505
    
    
    ¥
    81,281Service cost
    
    
    20,161
    
    
    
    23,916
    
    
    
    4,016
    
    
    
    3,483Interest cost
    
    
    11,888
    
    
    
    13,411
    
    
    
    4,947
    
    
    
    3,898Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    1,613
    
    
    
    1,412Amendments
    
    
    (101,620
    )
    
    
    (954
    )
    
    
    
    
    
    
    Actuarial gain (loss)
    
    
    (4,623
    )
    
    
    13,200
    
    
    
    (3,293
    )
    
    
    10,386Benefits paid
    
    
    (12,888
    )
    
    
    (11,413
    )
    
    
    (3,177
    )
    
    
    (1,651
    )Acquisition
    
    
    2,474
    
    
    
    714
    
    
    
    
    
    
    
    Foreign currency exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (778
    )
    
    
    11,696Benefit obligations at end of year
    
    
    493,478
    
    
    
    578,086
    
    
    
    113,833
    
    
    
    110,505Change in plan assets:Fair value of plan assets at beginning of year
    
    
    520,476
    
    
    
    475,344
    
    
    
    87,173
    
    
    
    70,174Actual return on plan assets
    
    
    (15,796
    )
    
    
    14,803
    
    
    
    2,283
    
    
    
    4,055Employer contributions
    
    
    17,510
    
    
    
    41,422
    
    
    
    4,210
    
    
    
    3,559Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    1,613
    
    
    
    1,412Benefits paid
    
    
    (12,498
    )
    
    
    (11,413
    )
    
    
    (2,242
    )
    
    
    (1,651
    )Acquisition
    
    
    1,758
    
    
    
    320
    
    
    
    
    
    
    
    Foreign currency exchange rate changes
    
    
    
    
    
    
    
    
    
    
    (129
    )
    
    
    9,624Fair value of plan assets at end of year
    
    
    511,450
    
    
    
    520,476
    
    
    
    92,908
    
    
    
    87,173Funded status at end of year
    
    ¥
    17,972
    
    
    ¥
    (57,610
    )
    
    ¥
    (20,925
    )
    
    ¥
    (23,332
    )
 81




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##### Table of Contents



12. Employee Retirement and Severance Benefits (continued)
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006(Millions
of yen)Other assets
    
    ¥
    41,567
    
    
    ¥
    3,018
    
    
    ¥
    347
    
    
    ¥
    6Accrued expenses
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    (90
    )Accrued pension and severance cost
    
    
    (23,595
    )
    
    
    (60,628
    )
    
    
    (21,115
    )
    
    
    (23,248
    )¥
    17,972
    
    
    ¥
    (57,610
    )
    
    ¥
    (20,925
    )
    
    ¥
    (23,332
    )
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006(Millions
of yen)Actuarial loss
    
    ¥
    146,937
    
    
    ¥
    119,484
    
    
    ¥
    16,905
    
    
    ¥
    19,821Prior service credit
    
    
    (182,073
    )
    
    
    (93,932
    )
    
    
    (953
    )
    
    
    (1,003
    )Net transition obligation
    
    
    2,888
    
    
    
    3,610
    
    
    
    
    
    
    
    ¥
    (32,248
    )
    
    ¥
    29,162
    
    
    ¥
    15,952
    
    
    ¥
    18,818
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006(Millions
of yen)Accumulated benefit obligation
    
    ¥
    471,146
    
    
    ¥
    542,610
    
    
    ¥
    104,275
    
    
    ¥
    98,589
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006(Millions
of yen)Plans with projected benefit obligations in excess of plan assets:Projected benefit obligations
    
    ¥
    179,455
    
    
    ¥
    546,221
    
    
    ¥
    113,790
    
    
    ¥
    110,501Fair value of plan assets
    
    
    155,860
    
    
    
    485,593
    
    
    
    92,518
    
    
    
    87,163Plans with accumulated benefit obligations in excess of plan assets:Accumulated benefit obligations
    
    ¥
    46,789
    
    
    ¥
    510,223
    
    
    ¥
    104,119
    
    
    ¥
    98,589Fair value of plan assets
    
    
    29,599
    
    
    
    481,452
    
    
    
    92,401
    
    
    
    87,163
 Components of net periodic benefit cost and other amounts recognized in other comprehensive income
(loss)
  Japanese plans
    
    
    Foreign plansYears ended December 31
    
    
    Years ended December 312007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005(Millions
of yen)Service cost
    
    ¥
    20,161
    
    
    ¥
    23,916
    
    
    ¥
    22,799
    
    
    ¥
    4,016
    
    
    ¥
    3,483
    
    
    ¥
    3,002Interest cost
    
    
    11,888
    
    
    
    13,411
    
    
    
    12,769
    
    
    
    4,947
    
    
    
    3,898
    
    
    
    3,403Expected return on plan assets
    
    
    (21,148
    )
    
    
    (21,705
    )
    
    
    (15,964
    )
    
    
    (5,427
    )
    
    
    (4,494
    )
    
    
    (3,687
    )Amortization of net transition obligation
    
    
    722
    
    
    
    345
    
    
    
    345
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service credit
    
    
    (13,479
    )
    
    
    (7,436
    )
    
    
    (6,855
    )
    
    
    (86
    )
    
    
    (113
    )
    
    
    (1,152
    )Amortization of actuarial loss
    
    
    4,868
    
    
    
    3,377
    
    
    
    8,222
    
    
    
    887
    
    
    
    402
    
    
    
    2,320¥
    3,012
    
    
    ¥
    11,908
    
    
    ¥
    21,316
    
    
    ¥
    4,337
    
    
    ¥
    3,176
    
    
    ¥
    3,886
 82




---



##### Table of Contents



12. Employee Retirement and Severance Benefits (continued)
  Japanese plans
    
    
    Foreign plans(Millions of yen)Current year actuarial (gain) loss
    
    ¥
    32,321
    
    
    ¥
    (149
    )Amortization of actuarial loss
    
    
    (4,868
    )
    
    
    (887
    )Prior service credit due to amendments
    
    
    (101,620
    )
    
    
    Amortization of prior service credit
    
    
    13,479
    
    
    
    86Amortization of net transition obligation
    
    
    (722
    )
    
    
    ¥
    (61,410
    )
    
    ¥
    (950
    )
  Japanese plans
    
    
    Foreign plans(Millions
of yen)Net transition obligation
    
    ¥
    722
    
    
    ¥
    Prior service credit
    
    
    (13,361
    )
    
    
    (86
    )Actuarial loss
    
    
    6,685
    
    
    
    849
 Assumptions
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 312007
    
    
    2006
    
    
    2007
    
    
    2006Discount rate
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    5.1
    %
    
    
    4.5
    %Assumed rate of increase in future compensation levels
    
    
    2.9
    %
    
    
    2.9
    %
    
    
    3.1
    %
    
    
    2.9
    %
  Japanese plans
    
    
    Foreign plansYears ended December 31
    
    
    Years ended December 312007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Discount rate
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    2.5
    %
    
    
    4.5
    %
    
    
    4.8
    %
    
    
    4.8
    %Assumed rate of increase in future compensation levels
    
    
    2.9
    %
    
    
    2.9
    %
    
    
    3.1
    %
    
    
    2.9
    %
    
    
    2.6
    %
    
    
    2.7
    %Expected long-term rate of return on plan assets
    
    
    3.9
    %
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    6.0
    %
    
    
    6.4
    %
    
    
    6.6
    %
  Plan assets
  Japanese plans
    
    
    Foreign plansDecember 31
    
    
    December 31Target
    
    
    
    
    
    
    
    
    
    
    Target2007
    
    
    2006
    
    
    allocation
    
    
    2007
    
    
    2006
    
    
    allocationAsset category:Equity securities
    
    
    33.6
    %
    
    
    43.0
    %
    
    
    35.4
    %
    
    
    52.4
    %
    
    
    57.9
    %
    
    
    52.3
    %Debt securities
    
    
    45.2
    
    
    
    37.5
    
    
    
    45.2
    
    
    
    33.8
    
    
    
    25.9
    
    
    
    33.4Cash
    
    
    1.1
    
    
    
    0.5
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    Life insurance company general accounts
    
    
    19.5
    
    
    
    18.6
    
    
    
    18.7
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.5
    
    
    
    13.8
    
    
    
    16.2
    
    
    
    14.3100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 83




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##### Table of Contents



12. Employee Retirement and Severance Benefits (continued)
   Contributions
  Estimated future benefit payments
  Japanese plans
    
    
    Foreign plans(Millions
of yen)Year ending December 312008
    
    ¥
    10,949
    
    
    ¥
    2,1632009
    
    
    11,981
    
    
    
    2,2582010
    
    
    13,209
    
    
    
    2,3762011
    
    
    14,901
    
    
    
    2,5702012
    
    
    16,119
    
    
    
    2,6782013  2017
    
    
    100,323
    
    
    
    16,852
 84




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##### Table of Contents



13. Income Taxes
  Year ended December 31, 2007Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income taxes and minority interests
    
    ¥
    575,017
    
    
    ¥
    193,371
    
    
    ¥
    768,388Income taxes:Current
    
    ¥
    238,921
    
    
    ¥
    60,358
    
    
    ¥
    299,279Deferred
    
    
    (31,930
    )
    
    
    (3,091
    )
    
    
    (35,021
    )¥
    206,991
    
    
    ¥
    57,267
    
    
    ¥
    264,258
 Year ended December 31, 2006Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income taxes and minority interests
    
    ¥
    556,759
    
    
    ¥
    162,384
    
    
    ¥
    719,143Income taxes:Current
    
    ¥
    201,022
    
    
    ¥
    54,156
    
    
    ¥
    255,178Deferred
    
    
    (73
    )
    
    
    (6,872
    )
    
    
    (6,945
    )¥
    200,949
    
    
    ¥
    47,284
    
    
    ¥
    248,233
 Year ended December 31, 2005Japanese
    
    
    Foreign
    
    
    Total(Millions of yen)Income before income taxes and minority interests
    
    ¥
    492,709
    
    
    ¥
    119,295
    
    
    ¥
    612,004Income taxes:Current
    
    ¥
    172,595
    
    
    ¥
    40,956
    
    
    ¥
    213,551Deferred
    
    
    3,441
    
    
    
    (4,207
    )
    
    
    (766
    )¥
    176,036
    
    
    ¥
    36,749
    
    
    ¥
    212,785
 85




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##### Table of Contents



13. Income Taxes (continued)
   Years ended December 312007
    
    
    2006
    
    
    2005Japanese statutory income tax rate
    
    
    40.0
    %
    
    
    40.0
    %
    
    
    40.0
    %Increase (reduction) in income taxes resulting from:Expenses not deductible for tax purposes
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate
    
    
    (2.8
    )
    
    
    (2.1
    )
    
    
    (1.9
    )Tax credit for research and development expenses
    
    
    (4.5
    )
    
    
    (4.1
    )
    
    
    (3.9
    )Other
    
    
    1.4
    
    
    
    0.4
    
    
    
    0.3Effective income tax rate
    
    
    34.4
    %
    
    
    34.5
    %
    
    
    34.8
    %
  December 312007
    
    
    2006(Millions of yen)Prepaid expenses and other current assets
    
    ¥
    79,846
    
    
    ¥
    66,839Other assets
    
    
    68,178
    
    
    
    67,568Other current liabilities
    
    
    (4,506
    )
    
    
    (4,133
    )Other noncurrent liabilities
    
    
    (28,157
    )
    
    
    (39,299
    )¥
    115,361
    
    
    ¥
    90,975
  December 312007
    
    
    2006(Millions of yen)Deferred tax assets:Inventories
    
    ¥
    17,359
    
    
    ¥
    20,077Accrued business tax
    
    
    11,555
    
    
    
    10,654Accrued pension and severance cost
    
    
    16,336
    
    
    
    37,385Research and development  costs capitalized for tax purposes
    
    
    42,434
    
    
    
    31,068Property, plant and equipment
    
    
    53,487
    
    
    
    26,577Accrued expenses
    
    
    27,903
    
    
    
    21,277Net operating losses carried forward
    
    
    4,080
    
    
    
    1,767Other
    
    
    34,448
    
    
    
    28,061207,602
    
    
    
    176,866Less valuation allowance
    
    
    (9,327
    )
    
    
    (6,500
    )Total deferred tax assets
    
    
    198,275
    
    
    
    170,366Deferred tax liabilities:Undistributed earnings of foreign subsidiaries
    
    
    (13,566
    )
    
    
    (9,138
    )Net unrealized gains on securities
    
    
    (4,440
    )
    
    
    (7,521
    )Tax deductible reserve
    
    
    (8,574
    )
    
    
    (11,955
    )Financing lease revenue
    
    
    (26,892
    )
    
    
    (35,990
    )Prepaid pension and severance cost
    
    
    (10,604
    )
    
    
    (3,752
    )Other
    
    
    (18,838
    )
    
    
    (11,035
    )Total deferred tax liabilities
    
    
    (82,914
    )
    
    
    (79,391
    )Net deferred tax assets
    
    ¥
    115,361
    
    
    ¥
    90,975
 86




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##### Table of Contents



13. Income Taxes (continued)
    (Millions of yen)Within one year
    
    ¥
    After one year through five years
    
    
    1,717After five years through ten years
    
    
    6,009Indefinite period
    
    
    4,069Total
    
    ¥
    11,795
     (Millions of yen)Balance at January 1, 2007
    
    ¥
    16,087Additions for tax positions of the current year
    
    
    994Additions for tax positions of prior years
    
    
    1,902Reductions for tax positions of prior years
    
    
    (1,340
    )Lapse of the applicable statute of limitations
    
    
    (1,311
    )Settlements
    
    
    (322
    )Other
    
    
    (219
    )Balance at December 31, 2007
    
    ¥
    15,791
     87




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##### Table of Contents



14. Common Stock
   15. Legal Reserve and Retained Earnings
     88




---



##### Table of Contents



16. Other Comprehensive Income (Loss)
  Years ended December 312007
    
    
    2006
    
    
    2005(Millions of yen)Foreign currency translation adjustments:Balance at beginning of year
    
    ¥
    22,858
    
    
    ¥
    (25,772
    )
    
    ¥
    (79,751
    )Adjustments for the year
    
    
    (62
    )
    
    
    48,630
    
    
    
    53,979Balance at end of year
    
    
    22,796
    
    
    
    22,858
    
    
    
    (25,772
    )Net unrealized gains and losses on securities:Balance at beginning of year
    
    
    8,065
    
    
    
    6,073
    
    
    
    7,470Adjustments for the year
    
    
    (1,778
    )
    
    
    1,992
    
    
    
    (1,397
    )Balance at end of year
    
    
    6,287
    
    
    
    8,065
    
    
    
    6,073Net gains and losses on derivative instruments:Balance at beginning of year
    
    
    (1,663
    )
    
    
    (1,174
    )
    
    
    (693
    )Adjustments for the year
    
    
    814
    
    
    
    (489
    )
    
    
    (481
    )Balance at end of year
    
    
    (849
    )
    
    
    (1,663
    )
    
    
    (1,174
    )Minimum pension liability adjustments:Balance at beginning of year
    
    
    
    
    
    
    (7,339
    )
    
    
    (28,338
    )Adjustments for the year
    
    
    
    
    
    
    (3,575
    )
    
    
    20,999Adjustment to initially apply SFAS 158
    
    
    
    
    
    
    10,914
    
    
    
    Balance at end of year
    
    
    
    
    
    
    
    
    
    
    (7,339
    )Pension liability adjustments:Balance at beginning of year
    
    
    (26,542
    )
    
    
    
    
    
    
    Adjustments for the year
    
    
    32,978
    
    
    
    
    
    
    
    Adjustment to initially apply SFAS 158
    
    
    
    
    
    
    (26,542
    )
    
    
    Balance at end of year
    
    
    6,436
    
    
    
    (26,542
    )
    
    
    Total accumulated other comprehensive income (loss):Balance at beginning of year
    
    
    2,718
    
    
    
    (28,212
    )
    
    
    (101,312
    )Adjustments for the year
    
    
    31,952
    
    
    
    46,558
    
    
    
    73,100Adjustment to initially apply SFAS 158
    
    
    
    
    
    
    (15,628
    )
    
    
    Balance at end of year
    
    ¥
    34,670
    
    
    ¥
    2,718
    
    
    ¥
    (28,212
    )
 89




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##### Table of Contents



16. Other Comprehensive Income (Loss) (continued)
  Year ended December 31Before-tax amount
    
    
    Tax (expense) or benefit
    
    
    Net-of-tax amount(Millions of yen)2007:Foreign currency translation adjustments
    
    ¥
    (370
    )
    
    ¥
    308
    
    
    ¥
    (62
    )Net unrealized gains and losses on securities:Amount arising during the year
    
    
    (7,237
    )
    
    
    3,037
    
    
    
    (4,200
    )Reclassification adjustments for gains and losses realized in net income
    
    
    (293
    )
    
    
    2,715
    
    
    
    2,422Net change during the year
    
    
    (7,530
    )
    
    
    5,752
    
    
    
    (1,778
    )Net gains and losses on derivative instruments:Amount arising during the year
    
    
    590
    
    
    
    (236
    )
    
    
    354Reclassification adjustments for gains and losses realized in net income
    
    
    772
    
    
    
    (312
    )
    
    
    460Net change during the year
    
    
    1,362
    
    
    
    (548
    )
    
    
    814Pension liability adjustments:Amount arising during the year
    
    
    62,768
    
    
    
    (26,502
    )
    
    
    36,266Reclassification adjustments for gains and losses realized in net income
    
    
    (5,766
    )
    
    
    2,478
    
    
    
    (3,288
    )Net change during the year
    
    
    57,002
    
    
    
    (24,024
    )
    
    
    32,978Other comprehensive income (loss)
    
    ¥
    50,464
    
    
    ¥
    (18,512
    )
    
    ¥
    31,9522006:Foreign currency translation adjustments
    
    ¥
    49,518
    
    
    ¥
    (888
    )
    
    ¥
    48,630Net unrealized gains and losses on securities:Amount arising during the year
    
    
    3,708
    
    
    
    (1,502
    )
    
    
    2,206Reclassification adjustments for gains and losses realized in net income
    
    
    (388
    )
    
    
    174
    
    
    
    (214
    )Net change during the year
    
    
    3,320
    
    
    
    (1,328
    )
    
    
    1,992Net gains and losses on derivative instruments:Amount arising during the year
    
    
    (7,126
    )
    
    
    2,858
    
    
    
    (4,268
    )Reclassification adjustments for gains and losses realized in net income
    
    
    6,309
    
    
    
    (2,530
    )
    
    
    3,779Net change during the year
    
    
    (817
    )
    
    
    328
    
    
    
    (489
    )Minimum pension liability adjustments
    
    
    (4,391
    )
    
    
    816
    
    
    
    (3,575
    )Other comprehensive income (loss)
    
    ¥
    47,630
    
    
    ¥
    (1,072
    )
    
    ¥
    46,5582005:Foreign currency translation adjustments
    
    ¥
    55,345
    
    
    ¥
    (1,366
    )
    
    ¥
    53,979Net unrealized gains and losses on securities:Amount arising during the year
    
    
    9,005
    
    
    
    (3,892
    )
    
    
    5,113Reclassification adjustments for gains and losses realized in net income
    
    
    (10,793
    )
    
    
    4,283
    
    
    
    (6,510
    )Net change during the year
    
    
    (1,788
    )
    
    
    391
    
    
    
    (1,397
    )Net gains and losses on derivative instruments:Amount arising during the year
    
    
    (9,137
    )
    
    
    3,658
    
    
    
    (5,479
    )Reclassification adjustments for gains and losses realized in net income
    
    
    8,333
    
    
    
    (3,335
    )
    
    
    4,998Net change during the year
    
    
    (804
    )
    
    
    323
    
    
    
    (481
    )Minimum pension liability adjustments
    
    
    40,364
    
    
    
    (19,365
    )
    
    
    20,999Other comprehensive income (loss)
    
    ¥
    93,117
    
    
    ¥
    (20,017
    )
    
    ¥
    73,100
 90




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##### Table of Contents



17. Net Income per Share
   Years ended December 312007
    
    
    2006
    
    
    2005(Millions of yen)Net income
    
    ¥
    488,332
    
    
    ¥
    455,325
    
    
    ¥
    384,096Effect of dilutive securities:1.20% Japanese yen convertible debentures, due 2005
    
    
    
    
    
    
    
    
    
    
    51.30% Japanese yen convertible debentures, due 2008
    
    
    4
    
    
    
    8
    
    
    
    18Diluted net income
    
    ¥
    488,336
    
    
    ¥
    455,333
    
    
    ¥
    384,119(Number of shares)Average common shares outstanding
    
    
    1,293,295,680
    
    
    
    1,331,542,074
    
    
    
    1,330,760,715Effect of dilutive securities:1.20% Japanese yen convertible debentures, due 2005
    
    
    
    
    
    
    
    
    
    
    185,7551.30% Japanese yen convertible debentures, due 2008
    
    
    221,751
    
    
    
    474,796
    
    
    
    1,118,931Diluted common shares outstanding
    
    
    1,293,517,431
    
    
    
    1,332,016,870
    
    
    
    1,332,065,401(Yen)Net income per share:Basic
    
    ¥
    377.59
    
    
    ¥
    341.95
    
    
    ¥
    288.63Diluted
    
    
    377.53
    
    
    
    341.84
    
    
    
    288.36
 91




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##### Table of Contents



18. Derivatives and Hedging Activities
 Risk management policy
  Foreign currency exchange rate risk management
  Cash flow hedge
   Derivatives not designated as hedges
   December 312007
    
    2006(Millions of yen)To sell foreign currencies
    
    ¥
    697,240
    
    
    ¥
    717,136To buy foreign currencies
    
    
    46,897
    
    
    
    51,189
 92




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##### Table of Contents



19. Commitments and Contingent Liabilities
 Commitments
    (Millions of yen)Year ending December 31:2008
    
    ¥
    16,3652009
    
    
    12,3822010
    
    
    7,6372011
    
    
    5,6812012
    
    
    4,055Thereafter
    
    
    11,281Total future minimum lease payments
    
    ¥
    57,401
 Guarantees
    Years ended December 312007
    
    
    2006(Millions of yen)Balance at beginning of year
    
    ¥
    18,144
    
    
    ¥
    16,746Addition
    
    
    31,053
    
    
    
    18,686Utilization
    
    
    (26,199
    )
    
    
    (18,377
    )Other
    
    
    (2,860
    )
    
    
    1,089Balance at end of year
    
    ¥
    20,138
    
    
    ¥
    18,144
 93




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##### Table of Contents



19. Commitments and Contingent Liabilities (continued)
 Legal proceedings
     94




---



##### Table of Contents



20. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk
 Fair value of financial instruments
  December 312007
    
    
2006Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    Estimatedamount
    
    
    fair value
    
    
    amount
    
    
    fair value(Millions of yen)Long-term debt, including
current installments
    
    ¥
    (24,109
    )
    
    ¥
    (24,714
    )
    
    ¥
    (31,052
    )
    
    ¥
    (32,795
    )Foreign exchange contracts:Assets
    
    
    806
    
    
    
    806
    
    
    
    307
    
    
    
    307Liabilities
    
    
    (12,335
    )
    
    
    (12,335
    )
    
    
    (17,534
    )
    
    
    (17,534
    )
  Long-term debt
  Foreign exchange contracts
  Limitations
  Concentrations of credit risk
  21. Supplemental Cash Flow Information
  22. Subsequent Event
 
 95




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##### Table of Contents



Balance at
    
    
    Add
    
    
    Deduct
    
    
    Add
    
    
    Balancebeginning of
    
    
    charge to
    
    
    bad debts
    
    
    translation
    
    
    at end ofperiod
    
    
    income
    
    
    written off
    
    
    adjustments
    
    
    period(Millions of yen)Year ended December 31, 2007:Allowance for doubtful receivables
    
    ¥
    13,849
    
    
    ¥
    3,527
    
    
    ¥
    2,978
    
    
    ¥
    149
    
    
    ¥
    14,547Year ended December 31, 2006:Allowance for doubtful receivables
    
    ¥
    11,728
    
    
    ¥
    3,384
    
    
    ¥
    2,058
    
    
    ¥
    795
    
    
    ¥
    13,849Year ended December 31, 2005:Allowance for doubtful receivables
    
    ¥
    11,657
    
    
    ¥
    560
    
    
    ¥
    1,180
    
    
    ¥
    691
    
    
    ¥
    11,728
 96




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##### Table of Contents



Item 18. Financial Statements
  
 Item 19. Exhibits
  1.1
    
    Articles of Incorporation of Canon
Inc. (Translation), incorporated by reference from the annual report
on Form 20-F (Commission file number 0-15122) filed on April 5, 20071.2
    
    Regulations of the Board of
Directors of Canon Inc. (Translation)2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)8
    
    List of Significant Subsidiaries (See Organizational Structure in Item 4.C. of this
Form 20-F)11.1
    
    Canon Group Code of Conduct (Translation) , incorporated by reference from the annual
report on Form20-F (Commission file number 0-15122) filed on June 10, 200411.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct) (Translation), incorporated by
reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 200412
    
    Certifications of Chairman &
CEO and Managing Director, Group Executive of Finance and Accounting
Headquarters pursuant to Section 302 of the Sarbanes-Oxley Act13
    
    Certification of Chairman &
CEO and Managing Director, Group Executive of Finance and Accounting
Headquarters pursuant to Section 906 of the Sarbanes-Oxley Act
 97




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##### Table of Contents



CANON INC.
(Registrant)By:
    
    /s/ Masahiro OsawaMasahiro OsawaManaging
DirectorGroup Executive of Finance and Accounting HeadquartersCanon Inc.
30-2, Shimomaruko 3-chome,
Ohta-ku, Tokyo 146-8501, Japan
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##### Table of Contents



EXHIBIT INDEX
 Exhibit number
    
    TitleExhibit 1.1
    
    Articles of Incorporation of Canon
Inc. (Translation), incorporated by reference from the annual report
on Form 20-F (Commission file number 0-15122) filed on April 5, 2007Exhibit 1.2
    
    Regulations Of the Board of Directors of Canon Inc. (Translation)Exhibit 2
    
    Regulations for Handling of Shares of Canon Inc. (Translation)Exhibit 8
    
    List of Significant Subsidiaries (See Organizational Structure in Item
4.C. of this Form 20-F)Exhibit 11.1
    
    Canon Group Code of Conduct (Translation) , incorporated by reference from
the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004Exhibit 11.2
    
    Code of Ethics (Supplement to The Canon Group Code of Conduct)
(Translation), incorporated by reference from the annual report on Form20-F (Commission file number 0-15122) filed on June 10, 2004Exhibit 12
    
    Certifications of Chairman &
CEO and Managing Director, Group Executive of Finance and Accounting
Headquarters pursuant to Section 302 of the Sarbanes-Oxley ActExhibit 13
    
    Certification of Chairman &
CEO and Managing Director, Group Executive of Finance and Accounting
Headquarters pursuant to Section 906 of the Sarbanes-Oxley Act
 99