UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

o		REGISTRATION STATEMENT PURSUANT TO
		SECTION 12(b)
		OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
		OR
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2010
		OR
o		TRANSITION REPORT PURSUANT TO SECTION 13
		OR 15(d)
		OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                      to
		OR
o		SHELL COMPANY REPORT PURSUANT TO SECTION 13
		OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		Date of event requiring this shell company report

Commission file number 001-15122

CANON KABUSHIKI KAISHA

(Exact name of Registrant in Japanese as specified in its charter)

CANON INC.

(Exact name of Registrant in English as specified in its charter)

JAPAN
(Jurisdiction of incorporation or organization)

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
(Address of principal executive offices)

Shinichiro Hanabusa, +81-3-3758-2111, +81-3-5482-9680, 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

(Name, Telephone, Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

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

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None
(Title of Class)

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
(Title of Class)

* Not for trading, but only for technical purposes in connection with the registration of ADSs.

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2010, 1,228,467,489 shares of common stock, including 43,665,675
ADSs, were outstanding.

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes þ     No o

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o     No þ

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

          þ U.S. GAAP
          o International Financial Reporting Standards as issued by the International Accounting Standards Board
          o Other

     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17     o Item 18

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

 

 

TABLE OF CONTENTS

						Page number
CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION							1
FORWARD-LOOKING INFORMATION							1
PART I
Item 1.      Identity of Directors, Senior Management and Advisers							2
Item 2.      Offer Statistics and Expected Timetable							2
Item 3.      Key Information							2
A.				Selected financial data			2
B.				Capitalization and indebtedness			3
C.				Reasons for the offer and use of proceeds			3
D.				Risk factors			3
Item 4.      Information on the Company							10
A.				History and development of the Company			10
B.				Business overview			10
				Products			11
				Marketing and distribution			13
				Service			13
				Seasonality			13
				Sources of supply			13
				Net sales by segment and geographic area			14
				Competition			14
				Patents and licenses			15
				Environmental regulations			15
C.				Organizational structure			17
D.				Property, plants and equipment			18
Item 4A.   Unresolved Staff Comments							20
Item 5.      Operating and Financial Review and Prospects							21
A.				Operating results			21
				Overview			21
				Critical accounting policies and estimates			22
				Consolidated results of operations			24
				Fiscal 2010 compared with fiscal 2009			24
				Fiscal 2009 compared with fiscal 2008			26
				Foreign operations and foreign currency transactions			28
				Recent development			28
B.				Liquidity and capital resources			28
C.				Research and development, patents and licenses			29
D.				Trend information			30
E.				Off-balance sheet arrangements			32
F.				Contractual obligations			33
Item 6.      Directors, Senior Management and Employees							34
A.				Directors and senior management			34
B.				Compensation			38
C.				Board practices			45
D.				Employees			46
E.				Share ownership			47
Item 7.      Major Shareholders and Related Party Transactions							48
A.				Major shareholders			48
B.				Related party transactions			48
C.				Interests of experts and counsel			48
Item 8.      Financial Information							49
A.				Consolidated financial statements and other financial information			49
				Consolidated financial statements			49
				Legal proceedings			49
				Dividend policy			50
B.				Significant changes			50

						Page number
Item 9.      The Offer and Listing							51
A.				Offer and listing details			51
				Trading in domestic markets			51
				Trading in foreign markets			52
B.				Plan of distribution			52
C.				Markets			52
D.				Selling shareholders			52
E.				Dilution			52
F.				Expenses of the issue			52
Item 10.      Additional Information							53
A.				Share capital			53
B.				Memorandum and articles of association			53
C.				Material contracts			57
D.				Exchange controls			57
E.				Taxation			58
F.				Dividends and paying agents			59
G.				Statement by experts			59
H.				Documents on display			60
I.				Subsidiary information			60
Item 11.      Quantitative and Qualitative Disclosures about Market Risk							60
				Market risk exposures			60
				Equity price risk			60
				Foreign currency exchange rate and interest rate risk			61
Item 12.      Description of Securities Other than Equity Securities							62
A.				Debt securities			62
B.				Warrants and rights			62
C.				Other securities			62
D.				American Depositary Shares			62
PART II
Item 13.      Defaults, Dividend Arrearages and Delinquencies							63
Item 14.      Material Modifications to the Rights of Security Holders and Use of Proceeds							63
Item 15.      Controls and Procedures							63
Item 16A.   Audit Committee Financial Expert							64
Item 16B.   Code of Ethics							64
Item 16C.   Principal Accountant Fees and Services							64
Item 16D.   Exemptions from the Listing Standards for Audit Committees							65
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers							65
Item 16F.   Change in Registrant’s Certifying Accountant							65
Item 16G.   Corporate Governance							66
PART III
Item 17.      Financial Statements							67
Item 18.      Financial Statements							67
				Reports of Independent Registered Public Accounting Firm			68
				Consolidated Balance Sheets			70
				Consolidated Statements of Income			71
				Consolidated Statements of Equity			72
				Consolidated Statements of Cash Flows			74
				Notes to Consolidated Financial Statements			75
				Schedule II — Valuation and Qualifying Accounts			112
Item 19.      Exhibits							113
SIGNATURES							114
EXHIBIT INDEX							115

CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 2010 unless otherwise specified.

References in this discussion to the “Company” are to Canon Inc. and, unless otherwise indicated, references to the financial condition or operating results of “Canon” refer to Canon Inc. and its consolidated subsidiaries.

On March 18, 2011, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥81.14 = U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “fiscal 2010” refers to the Company’s fiscal year ended December 31, 2010, and other fiscal years of the Company are referred to in a corresponding manner.

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements and information relating to Canon that are based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”, reflect the current views and assumptions of the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by Canon’s targeted customers, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume any obligation to update these forward-looking statements.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

     Not applicable.

Item 2. Offer Statistics and Expected Timetable

     Not applicable.

Item 3. Key Information

     A. Selected financial data

     The following information should be read in conjunction with and qualified in its entirety by reference to the Consolidated Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this Annual Report.

Selected financial data *1:		2010 *4				2009 *4				2008 *4				2007 *4				2006
		(Millions of yen, except average number of shares and per share data)
Net sales		¥	3,706,901			¥	3,209,201			¥	4,094,161			¥	4,481,346			¥	4,156,759
Operating profit			387,552				217,055				496,074				756,673				707,033
Net income attributable to Canon Inc.			246,603				131,647				309,148				488,332				455,325
Advertising expenses			94,794				78,009				112,810				132,429				116,809
Research and development expenses			315,817				304,600				374,025				368,261				308,307
Depreciation of property, plant and equipment			232,327				277,399				304,622				309,815				235,804
Increase in property, plant and equipment			158,976				216,128				361,988				428,549				379,657
Long-term debt, excluding current installments			4,131				4,912				8,423				8,680				15,789
Common stock			174,762				174,762				174,762				174,698				174,603
Canon Inc. stockholders’ equity			2,645,782				2,688,109				2,659,792				2,922,336				2,986,606
Total assets			3,983,820				3,847,557				3,969,934				4,512,625				4,521,915
Average number of common shares in thousands *2			1,234,818				1,234,482				1,255,626				1,293,296				1,331,542
Per share data *2:
Net income attributable to Canon Inc. stockholders per share:
Basic		¥	199.71			¥	106.64			¥	246.21			¥	377.59			¥	341.95
Diluted			199.70				106.64				246.20				377.53				341.84
Cash dividends declared			120.00				110.00				110.00				110.00				83.33
Cash dividends declared (U.S.$)*3		$	1.447			$	1.196			$	1.073			$	1.034			$	0.709

Notes:

     The following table provides the noon buying rates for Japanese yen in New York City as reported by the Federal Reserve Bank of New York expressed in Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for Japanese yen per U.S.$1 during the months indicated. On March 18, 2011, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥81.14 = U.S.$1.

Yen exchange rates per U.S. dollar:		Average				Term end				High				Low
2006			115.99				119.02				119.81				110.07
2007			117.45				111.71				124.09				108.17
2008			102.85				90.79				110.48				87.84
2009			93.67				93.08				100.71				86.12
2010 -Year			87.16				81.67				94.68				80.48
- 1(st) half							88.49				94.68				88.39
- July							86.43				88.59				86.40
- August							84.10				86.42				84.10
- September							83.53				85.77				83.05
- October							80.48				83.33				80.48
- November							83.56				84.34				80.61
- December							81.67				84.23				81.67
2011 - January							81.97				83.36				81.56
- February							81.94				83.79				81.48

Note: The average exchange rates for the periods are the average of the exchange rates on the last day of each month during the period.

     B. Capitalization and indebtedness

     Not applicable.

     C. Reasons for the offer and use of proceeds

     Not applicable.

     D. Risk factors

     Canon is one of the world’s leading manufacturers of plain paper copying machines, digital multifunction devices, laser printers, cameras, inkjet printers, semiconductor lithography equipment and LCD lithography equipment.

     Primarily because of the nature of the business and geographic areas in which Canon operates and the highly competitive nature of the industries to which it belongs, Canon is subject to a variety of risks and uncertainties, including, but not limited to, the following:

Risk Related to Earthquake in Northeastern Japan and its Aftermath

     The earthquake and resulting tsunami that took place in Northeastern Japan on March 11, 2011 have had and will continue to have a significant negative impact on the Japanese economy. Canon has suffered from the direct effects of the disaster, including damages to certain of its buildings and other assets. In addition, Canon has suffered and may continue to suffer indirect effects of the disaster, including disruptions of electricity and water supplies as a result of damage to infrastructure, supply shortages of components resulting from damages to its suppliers, interruption of logistics services and a general decline in demand in the Japanese market. These factors and others may lead to reduced production turnover or suspension of production, which may cause harmful effect on Canon’s business operations. In the short term, this could negatively affect Canon’s revenue and generate increased costs, adversely affecting Canon’s operating results and financial position.

Risks Related to Canon’s Industries

     Canon has invested and will continue to invest actively 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, there could be a material adverse effect on Canon’s operating results.

     Canon has made and will continue to make investments in next-generation technology research and development initiatives. Canon’s competitors may achieve research and development breakthroughs in these technologies more quickly than Canon, or may achieve advances in competing technologies that render products under development by Canon uncompetitive. For several years, Canon has continued its investments in development and manufacturing in order to keep pace with technological evolution. If Canon’s business strategies diverge from market demands, Canon may not recover some or all of its investments, or may lose business opportunities, or both, which may have a material adverse effect on Canon’s operating results.

     In addition, Canon has sought to develop production technology and equipment to accelerate the automation of its manufacturing processes and in-house production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, and consequently lose business opportunities, which may adversely affect Canon’s operating results. While differentiation in technology and product development is an important part of Canon’s strategy, Canon must also accurately assess the demand for and commercial acceptance of new technologies and products that it develops. If Canon pursues technologies or develops products that are not well received by the market, its operating results could be adversely affected.

     Entering new business areas through the development of next-generation technologies is a focal point of Canon’s corporate strategy. To the extent that Canon enters into such new business areas, Canon may not be able to establish a successful business models or may face severe competition with new competitors. If such events occur, Canon’s operating results may be adversely affected.

     If Canon does not effectively manage transitions in its products and services, its operating results may decline.

     Many of the businesses areas in which Canon competes are characterized by rapid technological advances in hardware performance, software functionality and product features; frequent introduction of new products; short product life cycles; and continued qualitative improvements to current products at stable price levels. If Canon does not make effective transitions from existing products and services to new offerings, its revenue and profits may decline. Among the risks associated with the introduction of new products and services are delays in development or manufacturing, low marketability due to an improper product quality during the introductory period, variations in manufacturing costs, delays of customer purchasing decisions in anticipation of further introductions, uncertainty in predicting customer demand for new offerings and difficulty in effectively managing inventory levels in line with anticipated demand. Moreover, if Canon is unable to respond quickly to unexpected technological innovations with respects to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation of such new information technologies into existing products and services as well as new offerings.

     Canon’s revenue and gross margin also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a product has a short life cycle or when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. Furthermore, sales of Canon’s new products and services may replace sales of, or result in discounting of, some of its current products and services, potentially offsetting the benefits derived from the introduction of a successful new product or service. Canon must also ensure that its new products are not wholly or partially duplicative of existing products and operations. Given the competitive nature of Canon’s businesses, if any of these risks materialize, future demand for its products and services could be reduced, and its operating results could decline.

     Canon’s digital camera business operates in a highly competitive environment.

     The market for digital single-lens-reflex (“SLR”) cameras is a key business area for Canon. Recently, a new type of interchangeable lens camera has been developed that eliminates the mirror mechanism, one of the key components of conventional digital SLRs, allowing for a more compact and lightweight product. During 2010, so-called “mirrorless” digital cameras were released by a number of our competitors, and these models have competed and will continue to compete for market share with Canon’s existing products. If the growth of the mirrorless digital camera market erodes the market share of standard digital SLRs, or if Canon’s digital SLR offerings are otherwise unable to remain competitive with mirrorless digital cameras produced by its competitors, Canon’s current leading position in the digital camera market may suffer, which would have a material adverse effect on Canon’s business, financial condition and operating results.

     The markets for digital media and video recording technologies are subject to rapid technological change.

     The markets in which Canon operates are subject to rapid technological change. The video camcorder industry has almost completed a transition to digital formats, and the increase in High Definition (“HD”) television broadcasts has accelerated the shift away from the Standard Definition (“SD”) format. Similarly, recording media are also experiencing a rapid transition to flash memory and away from Mini DV tapes, DVDs, and hard disk drives. The pace of technological change has made predicting future market trends more difficult than was previously the case. If Canon is unable to forecast accurately the demand for particular new recording or media formats, this could reduce demand for its products, which would have a material adverse effect on Canon’s business, financial condition and operating results.

     Video camcorders are no longer the only products on the market that are capable of recording movies. Digital SLRs and compact digital cameras are now also capable of recording HD movies. Although the image quality of webcams is inferior to that of standard video camcorders, digital SLRs and compact digital cameras, the relatively low price of webcams has led to solid growth in sales volume, particularly in North America. An increase in market share of these new products and resultant contraction of the video camcorder market could have a material adverse effect on Canon’s business, financial condition and operating results.

     Because the lithography equipment industry is highly cyclical, Canon may be adversely affected by any downturn in the industry.

     The lithography equipment industry is characterized by business cycles, the timing, length and volatility of which are difficult to predict. Recurring periods of oversupply of semiconductor devices and LCD panels have at times led to significantly reduced demand for capital equipment, including the semiconductor lithography equipment and LCD lithography equipment that Canon produces. Despite this cyclicality, Canon must maintain significant levels of research and development expenditures to remain competitive. A future cyclical downturn in the lithography equipment industry and related fluctuations in the demand for capital equipment could cause cash flow from sales to fall below the level necessary to offset Canon’s expenditures, including those arising from research and development, and could consequently have a material adverse effect on Canon’s operating results and financial condition. In addition, LCD panel manufacturers are facing demands for severe price reductions of LCD panels as a result of intense competition among makers of televisions and personal computer monitors. As a result, panel manufacturers may reduce their investment in equipment, which may adversely affect Canon’s operating results.

     Downturns in the semiconductor and LCD industries have caused Canon’s customers to change their operating strategies, which in turn may affect Canon’s business.

     Many device manufacturers have changed their business models to focus on the design of semiconductors, while consigning the production of semiconductors to lower-cost foundries. On the other hand, an oligopoly is developing in the large-sized LCD panel production industry. Therefore, if Canon is insufficiently responsive to market trends, including market reorganization led by these manufacturers, Canon may not be able to maintain its customer base, which may result in a material adverse effect on Canon’s business operations. In addition, it is difficult for Canon to predict the future effects of these trends on its business. However, as research and development, manufacturing and sales activities become increasingly globalized in response to these trends, shifting particularly to emerging markets, unexpected global developments, such as adverse regulatory or legal changes, and unanticipated events, such as natural disasters, may adversely affect Canon’s business.

     The lithography equipment industry is characterized by rapid technological change. If Canon does not consistently develop new products to keep pace with technological change and meet its customers’ requirements, Canon may lose customers, and its business may suffer.

     Canon’s semiconductor and LCD lithography equipments are subject to rapid technological change and can quickly become obsolete. Future success in the semiconductor and LCD lithography equipments business depend on Canon’s ability to enhance its existing products and develop new products using new and more advanced technologies. In particular, as semiconductor pattern sizes continue to shrink, the demand for more technologically advanced semiconductor lithography equipments are likely to increase. Canon’s existing semiconductor and LCD lithography equipments could become obsolete sooner than expected because of faster than anticipated changes in one or more of the technologies related to Canon’s products or in demand for products based on a particular technology. Any failure by Canon to develop the advanced technologies required by its customers at progressively lower cost or to supply sufficient quantities to its worldwide customer base could adversely affect Canon’s net sales and profitability.

Risks Related to Canon’s Business

     Economic trends in Canon’s major markets may adversely affect its operating results.

     Although global economic conditions have begun to improve, prospects for global economic recovery remain uncertain, reflecting concerns about the weakening effects of stimulus policies in advanced countries, deflation in Japan and inflation in emerging countries. As a result of the economic downturn in recent periods, declines in consumption and restrained investment in Canon’s major markets, including Japan, the United States, Europe and Asia, have affected both individual consumer and corporate sales, and if economic conditions do not improve, these trends may continue. Canon’s operating results for products such as office and industrial equipment are affected by the financial results of its corporate customers, and deterioration of these financial results has caused and may continue to cause customers to restrain their capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. The rise in inventory levels, rapid price declines owing to intensifying competition and the recent decline in the level of consumer spending and corporate investment driven by the economic downturn could adversely affect Canon’s operating results and financial position.

     Canon derives a significant percentage of its revenues from Hewlett-Packard.

     Canon depends on Hewlett-Packard for a significant part of its business. During fiscal 2010, approximately 20% of Canon’s net sales were to Hewlett-Packard. As a result, Canon’s business and operating results may be affected by the policies, business and operating results of Hewlett-Packard. Any decision by Hewlett-Packard management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.

     Canon depends on specific outside suppliers for certain key components.

     Canon relies on specific outside suppliers that meet Canon’s strict criteria for quality, efficiency and environmental friendliness for critical components and special materials used in its products. In some cases, Canon may be forced to discontinue production of some or all of its products if the specific outside suppliers that supply key components and special materials across Canon’s product lines experience unforeseen difficulties, or if such parts and special materials suffer from quality problems or are in short supply. Further, the prices of components and special materials purchased from specific outside suppliers may surge, triggered by the imbalance of supply and demand along with other factors. If such risks occur as an outcome of the dependency on such specific outside vendors, Canon’s operating results may be adversely affected.

     Although competition is increasing in the market for supplies and services following initial product placement, Canon maintains a high market share in such sales. As a result, Canon may be subject to antitrust-related lawsuits, investigations or proceedings, which may adversely affect its operating results or reputation.

     A portion of Canon’s net sales consists of sales of supplies and the provision of services after the initial equipment placement. As these supplies and services have become more commoditized, the number of competitors in these markets has increased. Canon’s success in maintaining these post-placement sales will depend on its ability to compete successfully with these competitors, some of which may offer lower-priced products or services. Despite the increase in competitors, Canon currently maintains a high market share in the market for supplies. Accordingly, Canon may be subject to lawsuits, investigations or proceedings under relevant antitrust laws and regulations. Any such lawsuits, investigations or proceedings may lead to substantial costs and have an adverse effect on Canon’s operating results or reputation.

     Increases in counterfeit Canon products may adversely affect Canon’s brand image and its operating results.

     In recent years, counterfeiting of Canon products has increased worldwide. Counterfeit products may diminish Canon’s brand image, particularly if purchasers of such products mistakenly attribute the counterfeit products’ poor quality to Canon. Canon has been taking measures to halt the spread of counterfeit products. However, there can be no assurance that such measures will be successful, and the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

     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.

     The unit costs of Canon’s products have historically been highest when products are newly introduced into production. The introduction of new products has at times had a negative impact on gross profit, operating results and cash flow. Cost reductions and enhancements are typically achieved over time through:

	•		engineering improvements;
	•		economies of scale;
	•		improvements in manufacturing processes;
	•		improved serviceability of products; and
	•		reduced inventories of parts and products.

     Initial shipments of new products adversely affect Canon’s profit and cash flow, and if new products do not achieve sufficient sales volumes, Canon’s gross profit, operating results and cash flow may be adversely affected.

     Cyclical patterns in sales of Canon’s products make planning and inventory management difficult and future financial results less predictable.

     Canon generally experiences seasonal trends in the sales of its consumer-oriented products. Canon has little control over the various factors that produce these seasonal trends. Accordingly, it is difficult to predict short-term demand, placing pressure on Canon’s inventory management and logistics systems. If product supply from Canon exceeds actual demand, excess inventory will put downward pressure on selling prices and raise inefficiency in cash management, potentially reducing Canon’s revenue. Alternatively, if actual demand exceeds the supply of products, Canon’s ability to fulfill orders may be limited, which could adversely affect net sales and increase the risk of unanticipated variations in its operating results.

     Canon’s business is subject to changes in the sales environment.

     A substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors, particularly in Europe and the United States. Canon’s product sales to these distributors constitute a significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing power and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These and other changes in Canon’s sales environment could adversely affect Canon’s operating results.

     Canon is subject to financial and reputational risks owing to product quality and liability issues.

     Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected.

     Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.

     Canon’s success depends in part on the value of its brand name. Any negative publicity regarding the quality of Canon’s products could have an adverse impact on operations, especially negative publicity involving consumer products. There can be no assurance that such adverse publicity will not occur or that such claims will not be made in the future. Furthermore, Canon cannot predict the impact of such adverse publicity on its business and operating results. If Canon fails to maintain its overall compliance regime, especially legal or regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

     A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to the risks of international operations.

     A substantial portion of Canon’s business activity is conducted outside Japan, including in developing and emerging markets in Asia. There are a number of risks inherent in doing business in such markets, including the following:

	•		underdeveloped technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canon’s services;
	•		difficulties in recruiting and retaining qualified personnel;
	•		potentially adverse tax consequences, including transfer pricing issues and increases in corporate tax rates;
	•		longer payment cycles;
	•		political turmoil or unfavorable economic factors; and
	•		unexpected legal or regulatory changes.

     Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results. In order to reduce costs and produce Canon’s products competitively, Canon maintains several production facilities and more than ten sales bases in Asia, including China, Thailand and Vietnam, and is vigorously conducting significant production and sales activities in Asia. Under such circumstances, unexpected events may occur, including political or legal change, labor shortages or strikes, increased personnel costs or changes in economic conditions. In particular, a large revaluation of local currencies, or a sudden significant change in the tax system or other regulatory regimes could adversely affect Canon’s overall performance. Given the importance of Canon’s research and development, production and sales activities in Asia, Canon’s business may be more acutely exposed to such risks than to the global economy in general.

     The outbreak, prevalence or spread of an epidemic disease, such as a new strain of influenza, in any region around the globe could also have a negative effect on Canon’s business operations, including its research and development, production and sales activities, along with the disruption of markets for Canon’s products.

     In addition, unexpected changes in import taxes imposed by foreign governments could adversely affect Canon’s business and operating results.

     Canon may unintentionally infringe international trade laws and regulations, and any such infringement may lead to an adverse effect on its business. The extent of the effect on Canon’s business will depend upon the nature of the infringement and the severity of fines or other sanctions potentially imposed upon Canon. A major infringement could result in a temporary or permanent suspension of Canon’s trading rights in one or more jurisdictions. In addition to any sanctions prescribed by law, adverse publicity regarding an alleged infringement of trade laws and regulations by Canon may also have a negative effect on the Canon brand and image.

     Any of the above factors regarding international operations could have an adverse effect on Canon’s operating results.

     Canon’s operating and financing activities expose it to foreign currency exchange and interest rate risks that may adversely affect its revenues and profitability.

     Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies, as well as its margins have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency business transactions and the yen value of Canon’s foreign currency-denominated equity investments have fluctuated and may continue to fluctuate. These fluctuations may have unpredictable effects on Canon’s consolidated financial statements. Moreover, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign affiliates, which are denominated in various foreign currencies. Furthermore, the values of a number of foreign currencies, such as the U.S. dollar and the euro, have weakened significantly more than expected against the yen, which has negatively affected and may continue to affect Canon’s operating results and financial position. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s operating results and financial position could continue to be adversely affected if the current strong yen environment persists. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

     Canon depends on efficient logistics services to distribute its products worldwide.

     Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon’s computerized logistics systems, an outbreak of war and strife within Canon’s operating regions or regional labor disputes, such as a dockworkers’ strike, could lead to a disruption of Canon’s operations and result not only in increased logistical costs, but also in the loss of sales opportunities owing to delays in delivery. Moreover, because demand for Canon’s consumer products may fluctuate throughout the year, transportation means, such as cargo vessels or air freight, and warehouse space must be appropriately adjusted to take such fluctuations into account. Failure to do so could result in either a loss of sales opportunities or the incurrence of unnecessary costs.

     In addition, the increasing levels of precision required of semiconductor lithography equipment and LCD lithography equipment and the resulting increase in the value and the size of such equipment in recent years have resulted in a concurrent increase in the need for sensitive handling and transportation of these products. Because of their precise nature, even a minor shock during the handling and transportation process can potentially cause irreparable damage to such products. If unforeseen accidents during the handling and transportation process render a significant portion of Canon’s high-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and the trust of its customers.

     Substantially higher crude oil prices and the supply-and-demand balance of transportation means could lead to increases in the cost of freight, which could adversely affect Canon’s operating results.

     Furthermore, earthquakes or volcanic eruptions may cause a breakdown of transportation facilities, such as ports or airports, or otherwise interrupt critical logistics services, which may have an adverse effect on production or sales activities.

Risks Related to Environmental Issues

     Canon’s business is subject to environmental laws and regulations.

     Canon is subject to certain Japanese and foreign environmental laws and regulations in areas such as energy resource conservation, reduction of hazardous substances, product recycling, clean air, clean water and waste disposal.

     The requirements of future legislation in the energy conservation area, particularly with respect to international emission trading schemes or energy conservation requirements, could have an adverse effect on Canon’s operating results.

     In other cases, such as the “Directive Establishing a Framework for the Setting of EcoDesign Requirements for Energy-related Products across the European Union”, detailed implementation standards responsive to environmental requirements remain under review. Canon strives to comply with such standards to the extent possible in advance of their official release. If, however, Canon’s current measures are deemed insufficient to satisfy such standards at the time of release, Canon may be required to take further action and incur additional compliance costs.

     Furthermore, Canon may incur rework or repair expenses if non-qualifying products are shipped in violation of the “European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment” (“RoHS Directive”) or if other legal regulations are not fully followed by parts suppliers. Such extra costs may exceed compensation from parts suppliers or coverage from insurance contracts and could have an adverse effect on Canon’s overall business and operating results.

     Environmental cleanup 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.

     Canon is subject to potential liability for the investigation and cleanup of environmental contamination at each of the properties that it owns or operates and at certain properties Canon formerly owned or operated. If Canon is held responsible for such costs in any future litigation or proceedings, such costs may not be covered by insurance and may be material.

     In addition, Canon may face liability for alleged personal injury or property damage because of exposure to chemicals or other hazardous substances from its facilities. Canon may also face liability for personal injury, property damage or natural resource damage, and cleanup costs for the alleged migration of contamination or other hazardous substances from its facilities. A significant increase in the number, success and cost of these claims could adversely affect Canon’s business and operating results.

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.

     Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. Canon relies primarily on internally developed technology, and seeks to protect such technology through a combination of patents, trademarks and other intellectual property rights.

     Canon faces risks that:

	•		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 be unsuccessful; and
	•		intellectual property laws may not adequately protect Canon’s intellectual property, particularly in certain emerging markets.

     To the extent that Canon is unaware of actual or potential infringements of, or adverse claims to, its rights in such technologies, any interference with Canon’s rights to use such technologies could adversely affect its operating results.

     In addition, Canon may need to litigate in order to enforce its patents, copyrights or other intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement, which can be expensive and time-consuming. If any government agency or third party is adjudicated to have a valid claim against Canon, Canon could be required to:

	•		refrain from selling the relevant product in certain markets;
	•		pay monetary damages;
	•		pursue development of non-infringing technologies, which may not be feasible; or
	•		attempt to acquire licenses to the infringed technology and to make royalty payments, which may not be available on commercially reasonable terms, if at all.

     Canon also licenses its patents to third parties in exchange for payment or cross-licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.

     Canon’s businesses, corporate image and operating results could be adversely affected by any of these developments.

     Disputes involving payment of remuneration for employee inventions may adversely affect Canon’s brand image as well as its business.

     Canon may face disputes involving payment of remuneration for employee inventions, the rights to which have been assigned to Canon. This risk is particularly relevant in countries such as Japan and Germany, where patent laws require companies to remunerate employees for the assignment of employee invention rights to the company. Canon maintains company rules and an evaluation system for employee inventions. Canon believes it has been making adequate payments to employees for the assignment of invention rights based on these rules. However, there can be no assurance that disputes will not arise with respect to the amount of these payments to employees. Such disputes may adversely affect Canon’s brand image as well as its business.

Other Risks

     Canon must attract and retain highly qualified professionals.

     Canon’s future operating results depend in significant part upon the continued contributions of its employees. In addition, Canon’s future operating results depend in part on its ability to attract, train and retain qualified personnel in development, production, sales and management. The competition for human resources in the high-tech industries in which Canon operates has intensified in recent years. Moreover, owing to the accelerating pace of technological change, the importance of training new personnel in a timely manner to meet product research and development requirements will increase. Failure by Canon to recruit and train qualified personnel or the loss of key employees could delay development or slow production, and adversely affect Canon’s business and operating results.

     Maintaining a high level of expertise in Canon’s manufacturing technology is critical to Canon’s business. However, it is difficult to secure the requisite expertise for specialized skill areas, such as lens processing, in a short time period. While Canon engages in advance planning to obtain the expertise needed for each skill area, Canon cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure to do so may adversely affect Canon’s business and operating results.

     Canon’s facilities, information systems and information security systems are subject to damage as a result of disasters, outages or similar events.

     Canon’s headquarters functions, information systems and research and development centers are located in or near Tokyo, Japan, where the possibility of damage from earthquakes is generally higher than in other parts of the world. In addition, Canon’s facilities or offices, including those for research and development, materials procurement, manufacturing, logistics, sales and services are located throughout the world and subject to the possibility of outage or similar disruption as a result of a variety of events, including natural disasters, computer viruses and terrorist attacks. Although Canon is working to establish appropriate backup structures for its facilities and information systems, there can be no assurance that Canon will be able to prevent or mitigate the effect of such events or developments the leakage of harmful substances, shutdowns of information systems, and leakage, falsification, and loss of internal databases. Although Canon has implemented backup plans to permit the manufacture of its products at multiple production facilities, such plans do not cover all product models. In addition, such backup arrangements may not be adequate to maintain production quantity at sufficient levels. Such factors may adversely affect Canon’s operating activities, generate expenses relating to physical or personal damage, or hurt Canon’s brand image, and its operating results may consequently be adversely affected.

     Canon’s cooperation and alliances with, strategic investments in, and acquisitions of, third parties may not produce successful results. The unexpected emergence of strong competitors through mergers and acquisitions may affect Canon’s business environment.

     Canon is engaged in alliances, joint ventures, and strategic investments with other companies. Canon also acquires other companies. These activities can help to promote Canon’s technological development process and expand its customer base. However, weak business trends or disappointing performance by partners or targets may adversely affect the success of such activities. In addition, the success of such activities may be adversely affected by the inability of Canon and its partners or targets to successfully define and reach common objectives. Even if Canon and its partners or targets succeed in designing a structure that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or targets. Integration of operations may take more time than expected. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on investment or a reduced recoverability of the investment, adversely affecting Canon’s operating results and financial position.

     In addition, the unexpected emergence of strong competitors through mergers and acquisitions or the formation of business alliances may change the competitive environment of the businesses areas in which Canon participates, thereby affecting Canon’s future operating results.

     Canon may be adversely affected by fluctuations in the stock and bond markets.

     Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating results and general financial position may be affected by price fluctuations in the stock and bond markets. The current volatility in financial markets and overall economic uncertainty increase the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease because of conditions in stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

     Confidential information may be inadvertently disclosed, which could lead to damage claims or harm Canon’s reputation, and may have an adverse effect on Canon’s business.

     In connection with certain projects, Canon may receive confidential or sensitive information (such as personal information) from its customers relating to these customers or to other affected individuals or parties. In addition, Canon uses computer systems and electronic data in managing information relating to its employees. Although Canon makes every effort to maintain the confidentiality of such information through procedures designed to prevent accidental release of confidential or sensitive information, such information may be inadvertently disclosed without Canon’s knowledge. If this occurs, Canon may be subject to claims for damages from the affected individuals or parties, suffer harm to its reputation or be subject to liabilities or penalties under applicable statutes.

     Inadvertent disclosure of confidential information regarding new technology could also have a material adverse effect on Canon’s business.

Item 4. Information on the Company

     A. History and development of the Company

     Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Corporation Law of Japan. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan. The telephone number is +81-3-3758-2111.

     The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell Japan’s first focal plane shutter 35mm still camera, which was developed by its predecessor company, Precision Optical Research Laboratories, which was organized in 1933.

     In the late 1950s, Canon entered the business machines field utilizing technology obtained through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to expand its operations to include plain paper copying machines, faxes, laser printers, bubble jet printers, computers, video camcorders and digital cameras.

     The following are important recent events in the development of Canon’s business.

	•		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 and made it into a subsidiary. By making e-System Corporation into a subsidiary, Canon strengthened its group’s information-related business and develop it into a core business.
	•		On June 21, 2007, Canon Marketing Japan Inc. acquired the shares of Argo21 Corporation (reorganized to Canon IT Solutions Inc.) through a tender offer, and made it into a subsidiary. In addition, Canon Marketing Japan Inc. made it into a wholly-owned subsidiary on November 1, 2007 by a share exchange for outstanding common stock 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, and made it into a subsidiary. With Tokki Corporation as a subsidiary, Canon aims to accelerate the development of its display business.
	•		On February 27, 2008, Canon entered into a stock purchase agreement with Hitachi, Ltd. (“Hitachi”) to acquire shares of Hitachi Displays, Ltd. (“Hitachi Displays”), a wholly-owned subsidiary of Hitachi, with the aim of accelerating ongoing development of organic light-emitting diode (“OLED”) displays, ensuring stable procurement of LCD panels and facilitating product development. Under the terms of this agreement, Canon acquired a 24.9% stake in Hitachi Displays on March 31, 2008.
	•		In July 2008, Nagasaki Canon Inc. was newly established as a wholly-owned subsidiary of Canon Inc., to boost production of digital single-lens reflex (“SLR”) cameras and compact digital cameras.
	•		On February 19, 2010, Canon acquired shares of OPTOPOL Technology S.A. (“OPTOPOL”, listed on the Warsaw Stock Exchange) through a tender offer and made it into a subsidiary. By making OPTOPOL into a subsidiary, Canon aims to achieve the world’s No. 1 position within the overall ophthalmic diagnostic equipment segment.
	•		On March 9, 2010, Canon acquired shares of Océ N.V. (“Océ”, listed on NYSE Euronext Amsterdam) through a public cash tender offer in addition to interest Canon held before the public cash tender offer and made it into a subsidiary. By making Océ into a subsidiary, Canon aims to further strengthen its business foundation in order to solidify its position as one of the global industry leaders. The combination capitalizes on an excellent complementary fit in product mix, channel mix, R&D, and business lines resulting in an outstanding customer offer spanning the entire industry.

     In fiscal 2010, 2009, and 2008, Canon’s increases in property, plant and equipment were ¥158,976 million, ¥216,128 million and ¥361,988 million, respectively. In fiscal 2010, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology-related infrastructure. In addition, Canon has been continually investing in tools and dies for business machines, in which the amount invested is generally the same each year.

     For fiscal 2011, Canon projects its increase in property, plant and equipment will be approximately ¥260,000 million, mainly in Japan. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.

     B. Business overview

     Canon is one of the world’s leading manufacturers of network digital multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipments.

     Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. Approximately 81% of consolidated net sales in fiscal 2010 were generated outside Japan, with approximately 28%, 32% and 21% generated in the Americas, Europe and Asia and Oceania, respectively.

     Canon’s strategy is to develop innovative, high value-added products incorporating advanced technologies.

     Canon’s research and development activities range from basic research to product-oriented research directed at maintaining and increasing Canon’s technological leadership in the marketplace.

     Canon manufactures the majority of its products in Japan, but in an effort to reduce currency exchange risk and production costs, Canon has increased its overseas production and the use of local components. Canon has manufacturing subsidiaries in a variety of countries, including the United States, Germany, France, Netherlands, Taiwan, China, Malaysia, Thailand and Vietnam.

     As a concerned member of the world community, Canon emphasizes recycling and has increased its use of clean energy sources and cleaner manufacturing processes. Canon has also launched programs to collect and recycle used Canon cartridges and to refurbish used Canon copying machines. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.

Products

     Canon operates its business in three segments: the “Office Business Unit,” the “Consumer Business Unit” and the “Industry and Others Business Unit”.

- Office Business Unit -

     Canon manufactures, markets and services a wide range of monochrome network digital MFDs, color network digital MFDs, office copying machines and personal-use copying machines.

     In fiscal 2010, sales of copying machines and MFDs recovered from the economic downturn that had affected the entire industry in the previous years, and Canon achieved double digit growth in the developed economies of the Americas, Europe and Japan. Emerging markets in Asia, such as China, India and Vietnam have shown exceptional robust growth. Canon is increasing its coverage of these markets, which has contributed to sales growth.

     The office-use market is subject to rapid change, and customer preferences have been shifting from monochrome to color products and from devices to services. In fiscal 2010, Canon strengthened its product lineup of digital color MFDs offered as the imageRUNNER ADVANCE series with the launch of new lower-end color devices: the imageRUNNER ADVANCE C200 series. Earlier in the year, Canon introduced two new monochrome device series: the imageRUNNER ADVANCE 6000 and imageRUNNER ADVANCE 8000 PRO series.

     Canon offers color network digital MFDs for uses ranging from standard office use to professional graphic arts. The print industry has gradually trended away from long-run printing using offset devices to short-run print-on-demand and variable data printing in recent years. In fiscal 2010, Canon introduced its high-end color network digital MFDs for the print-on-demand market: the imagePRESS C7010 series. The imageRUNNER ADVANCE C9000 PRO series, which is geared toward the light production market, has achieved considerable market acceptance.

     Canon is also marketing diverse expansion modules, software and business solutions to increase customer value. Canon’s function-expandable platform, known as the Multifunctional Embedded Application Platform (“MEAP”), enables the quick integration of fast, high quality image processing into customer’s IT infrastructure. Such integration not only boosts office and print-on-demand productivity but also allows users to take advantage of the power of MFD cloud services.

     Canon Managed Document Services (“Canon MDS”) is a unified global initiative for outsourced printing and document management services, setting a new standard for delivering managed print services to customers. The Canon MDS offering leverages innovative technologies and tools that combine the device functions, software solutions and professional service capabilities offered through Canon. With Canon MDS, Canon will help customers improve their office efficiency and reduce total cost of ownership.

     In fiscal 2010, Canon’s expanded alliance with Hewlett-Packard contributed to winning large enterprise deals. By leveraging cooperation between the two companies in terms of product lines and services structure, Canon and Hewlett-Packard seek to offer unmatched office workflow solutions that are highly responsive to customer needs.

     Canon made Océ N.V (Océ) a consolidated subsidiary in March 2010 to strengthen its printing business. Océ is engaged in research and development, manufacturing and sales of document management systems, printing systems for professionals and high-speed, wide format digital printing systems. Canon and Océ have complementary technologies and products that will bring benefits to the two companies. At the initial stage of the integration, Canon and Océ focused on cross-selling, with Canon and Océ carry and deliver their respective partner’s offerings to the customer base. This undertaking has been effective in terms of channel coverage, complementary assets and capabilities, and incremental sales growth.

     Developed and fostered by Canon, laser printers are standard output peripherals for offices. Canon’s laser printers are relatively small and have high-quality capabilities attributable to Canon’s expertise with the relevant technologies. Canon’s adoption of a user-replaceable toner cartridge system containing optical components makes its printers easy to maintain. Most of Canon’s laser printer sales are on an original equipment manufacturer (“OEM”) basis.

     On a global basis, the production and sales of monochrome and color laser printers, mainly low-end products, expanded rapidly and achieved unit growth in excess of 10% in the years through 2007. Unit growth of both monochrome and color laser printers was negative in fiscal 2008 and 2009 due to the recent economic downturn but returned to positive growth in fiscal 2010 due to improved global economic conditions.

     Canon has continued to strengthen the market position of its large format printer portfolio with the release of five new models. Unit sales in fiscal 2010 grew 15% over the previous fiscal year.

     Canon serves the needs of print professionals in the business, government and education markets through its offerings of digital production printers, including high-volume continuous feed and cutsheet printers.

     The Office Business Unit also includes the related sales of paper and chemicals, service and replacement parts.

-Consumer Business Unit -

     Canon manufactures and markets digital cameras and digital video camcorders, as well as lenses and various other camera accessories.

     The worldwide compact digital camera market grew approximately +5% year-on-year in fiscal 2010, driven by growth in emerging markets. Canon has maintained its overwhelming position at the top of the industry by bringing fourteen new models to the market. Three new models in particular have contributed to an increase in sales: Canon’s flagship PowerShot G12 model, which unites Canon’s SLR camera technologies with the “HS SYSTEM” designed for photography in dark environments; the PowerShot SD4500 IS DIGITAL ELPH (referred to as the “IXY 50S” in Japan and as the “IXUS 1000HS” in other markets), which was the slimmest 10x optical zoom model in the world as of August 2010; and the PowerShot SX30 IS, a compact DSC model whose 35x optical zoom ratio was the highest in the world as of September 2010.

     As the digital SLR market has continued to expand, Canon released two new products in 2010. In the entry-level class, Canon released the EOS Rebel T2i (“Kiss X4” in Japan and “550D” in Europe and elsewhere) in February, which was earlier than the traditional spring product launch. The achievement of a February launch has made it possible for the “new product effect” to work throughout the entire year, and has contributed to an increase in sales. The EOS Rebel T2i includes an approximately 18-megapixel, APS-C size CMOS sensor and DIGIC 4, and has full HD video shooting functions, giving it overwhelmingly powerful specifications for a model in the entry class. This model’s sales are growing in each market. In the mid-range class, Canon released the EOS 60D in September 2010, which was the first EOS product with a vari-angle LCD monitor. This model also offers an approximately 18-megapixel APS-C size CMOS sensor, DIGIC 4, full HD video shooting functions, and other features.

     In addition, the existing models EOS Rebel T1i (“Kiss X3” in Japan and “500D” in Europe and elsewhere) and EOS Rebel XS (“Kiss F” in Japan and “1000D” in Europe and elsewhere), which serve different needs depending on the market, have been effectively marketed in order to expand the Canon’s total market share of entry-level EOS models, including kit lenses. The EOS 5D Mark II and EOS 7D have also continued to sell well and have contributed to improvements in Canon’s share in monetary terms, securing Canon’s overwhelming number one position.

     Although the market for the interchangeable lenses used in SLR cameras grew only slightly year-on-year in fiscal 2009, it showed dramatic growth in fiscal 2010. Canon introduced a total of four new interchangeable lenses in fiscal 2010 and currently boasts a lineup of more than 60 interchangeable lenses. Canon’s technological capabilities (including the development of multi-layer diffractive optical elements, image stabilizers, and ultrasonic motors) have helped Canon to maintain a competitive edge over other manufacturers. These high-performance, high-quality lenses give Canon’s digital SLR cameras an excellent image quality, and contribute to Canon’s business results. Canon is releasing a variety of interchangeable lenses to satisfy user needs in the digital SLR camera market. This market is expected to keep growing in the future, and Canon aims to continue to improve its lens sales and market share.

     In fiscal 2008, Canon introduced a series of flash memory models to the digital video camcorder market ahead of its competitors. In fiscal 2009, Canon added high-end models to its lineup, successfully promoting Canon’s brand reputation for high image quality. In fiscal 2010, Canon added general-purpose models, allowing Canon to cover the full range of flash memory users. Despite the continuing slowdown in the overall digital video camcorder market, the trends toward HD and flash memory are proceeding steadily. By expanding its flash memory model lineups, Canon has been executing a strategy of sales expansion designed to take advantage of the growth of the flash memory/HD market.

     Canon began aggressively expanding its lineup of network cameras used for business surveillance video and monitoring applications, in 2008 and has achieved a reputation for high-quality images due to the strength of its optical performance and video processing technology. This market is expected to expand further through improvements in high-quality imaging and image analysis, both of which are trends that will enable Canon to apply its traditional strengths to contribute to societal safety and security.

     As the inventor of bubble jet printing technology, Canon believes that it continues to provide customers with the best performing inkjet printer models. Canon offers high-performance and high value-added multifunction and single function inkjet printers. In response to intense competition in this segment, Canon launched a new lineup of multifunction printers (“MFP”) and single function printers in fiscal 2010. The new models span the spectrum from entry-level to high-end models and expand Canon’s lineup of wireless MFPs. All of these models feature print heads based on Canon’s Full-photolithography Inkjet Nozzle Engineering (“FINE”) technology, which boosts print speed and image quality up to 9600 x 2400 dpi, and the ChromaLife100⁺ system, which provides high quality and long-lasting photographic images using a combination of genuine ink and paper. Canon PIXMA photo printers offer many advanced features, including the Intelligent Touch System, Full HD Movie Print, two-way paper feeding, auto duplex printing, Quick Start and Auto Photo Fix II, each of which makes printer operation more user friendly. With an advanced printer lineup, Canon has expanded its sales volume and expects that its consumables business will expand accordingly.

     Canon markets a wide variety of scanners geared toward a broad spectrum of user needs, including image scanners in the CanoScan LiDE series using Contact Image Sensor (“CIS”) and scanners with Charge-Coupled Devices (“CCD”) for high resolution. CIS is a close-contact method that allows for a significant reduction in scanner weight and size. Canon has applied its expertise to developing space-saving and energy-efficient scanners, as well as easy personal computer connections via universal serial bus interfaces for data and power. Although the scanner market has continued to shrink and has shifted toward MFPs, Canon has expanded its sales volume and maintained a high market share through continued introduction of new scanner models.

     Canon is the leader in the market for television lenses used by broadcast stations for live sports, news broadcasts, concerts, dramatic productions, and other applications. Canon’s television lenses are used in large numbers at major events around the world, and continue to deliver thrilling true depictions of events to television viewers, while inspiring viewers and conveying to them a realistic picture of news stories around the world. An overwhelmingly large number of Canon television lenses were used in 2010 to broadcast the Winter Olympics from Vancouver as well as for the FIFA World Cup soccer matches held in South Africa. In addition, in 2010 Canon released the world’s first portable HDTV lens that offers internal image stabilization functionality, helping Canon to maintain its position as the leader of the broadcast television lens market.

- Industry and Others Business Unit -

     The market for semiconductor lithography equipment grew by approximately 250% in fiscal 2010 from the previous year to about 250 units due to a sudden recovery in the semiconductor device market. When broken down by lighting source type, cutting-edge ArF immersion steppers now account for roughly half of the market, as memory makers, mainly in Taiwan and South Korea, have been aggressively investing in miniaturization. At the same time, manufacturers are starting to invest in semiconductor lithography equipment using i-line for small diameter wafers used in power devices and LED, as well as for niche markets such as 3D mounting for Through-silicon via(TSV).

     Canon has been dramatically revamping its business structure in order to more flexibly respond to these market changes. Canon has made progress in rationalizing production systems to better match market changes, creating new systems with overall responsibility for each semiconductor lithography equipment model, and integrating manufacturing and sales functions so that customer needs can be more quickly reflected in development. Through these activities, a “design-in” business style has been taking hold, and steady progress has been made in developing and marketing products with high added value. In particular, the FPA-5500iZ series has been winning high praise from customers in Japan, South Korea and Taiwan due to its steady performance and reliability.

     The market for LCD lithography equipment grew about 40% in fiscal 2010 as compared to the previous year, reaching a level of approximately 120 units. Makers of LCD panels have significantly increased their equipment investment in order to capture growing demand in developing countries. Total equipment investment among the top LCD panel makers grew approximately 150% in fiscal 2010 from the previous year, topping the level recorded during the boom market of fiscal 2008. By region, the Japanese market continues to shrink, but the South Korean, Taiwanese and Chinese markets are growing rapidly. In fact, the first sixth generation lines have been started in China. In terms of generation, there were substantial improvements in shipments of generation-7.5 and 8 LCD lithography equipment for televisions.

     In addition to high productivity, the MPAsp-H700 series supporting seventh and eighth generation large LCD panels have contributed to customer production plans by allowing for quick equipment installation at existing production sites. This has helped Canon to capture a substantial share of the South Korean market. Furthermore, Canon’s sales and service support systems have earned high accolades in China, and the MPAsp-E700 series for sixth generation models has captured a large market share.

     Medical imaging equipment sold by Canon includes X-ray image sensors, retinal cameras, autorefractometers and image-processing equipment for computerized systems. Canon’s pioneering digital radiography system takes X-ray photography and medical imaging into the digital age.

     Other Canon products, such as electronic components, are sold primarily to equipment manufacturers. These components include magnetic heads for audio and video tape recorders and micro-motors for printers and other components. In addition, Canon provides industrial machines such as die bonder and magnetic disk film deposition equipment. Canon also offers business information products, which primarily consist of personal computers, servers, document scanners, calculators and micrographic equipment.

     With the trend toward digitization, the demand for scanning documents into text or image data is expanding. Canon’s document scanners rapidly and efficiently digitize large volumes of printed information. Canon offers a wide range of scanner models, including color capable compact sheet-fed types and a flatbed model suitable for scanning book format documents. Canon also offers a hybrid model that can create microfilm records. Canon’s diverse lineup seeks to meet increased demand by business customers for digitizing office documents, which enables such customers to share documents across Internet or intranet platforms or to capture forms with optical character recognition.

     Canon’s calculator operations—from development to production to marketing—are centered in Hong Kong. Canon’s tradition of technological innovation began with its focus on personal information products, including calculators with built-in printers and electronic dictionaries. Canon continues to develop appealing personal information products that reflect demand trends.

     Personal computers and servers sold by Canon are manufactured by third parties under the manufacturers’ own brand names.

Marketing and distribution

     Canon sells its products primarily through subsidiaries organized under regional marketing subsidiaries. These regional marketing subsidiaries are as follows: Canon Marketing Japan Co., Inc. in Japan; Canon U.S.A. Inc. in North and South America; Canon Europe Ltd. and Canon Europa N.V. in Europe, Russia, Africa and the Middle East; Canon China Co., Ltd. in Asia outside Japan; and Canon Australia Pty. Ltd. in Oceania. Each subsidiary is responsible for its own market research and for determining its sales channels, advertising and promotional activities. Each subsidiary provides tailor-made solutions to a diverse range of unique customers and aims to advance Canon’s reputation as a highly trusted brand.

     In Japan, Canon sells its products primarily through Canon Marketing Japan Co., Inc., mainly to dealers and retail outlets.

     In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., Canon Canada, Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.

     In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, copying machines are sold directly to end-users by several subsidiaries such as Canon (U.K.) Ltd. in the United Kingdom and Canon France S.A.S. in France.

     In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, copying machines are sold directly to end-users in Australia by Canon Australia Pty. Ltd.

     Canon also sells laser printers on an OEM basis to Hewlett-Packard Company. Hewlett-Packard resells these printers under the “HP LaserJet Printers” name. During fiscal 2010, such sales constituted approximately 20% of Canon’s consolidated net sales, which was approximately the same as in the previous fiscal year.

     Canon continues to enhance its distribution system by promoting the continuing education of its sales personnel and by improving inventory management and business planning through weekly analysis of sales data.

Service

     In Japan and overseas, product service is provided in part by independent retail outlets and designated service centers that receive technical training assistance from Canon. Canon also services its products directly.

     Most of Canon’s business machines carry warranties of varying terms, depending upon the model and country of sale. Cameras and camera accessories carry warranties that vary depending upon the model and country of sale.

     Canon services its copying machines and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon provides maintenance services, replacement drums and parts in return for a stated amount of the contract plus a per copy charge. Copying machines not covered by a service contract may be serviced from time to time by Canon or local dealers for a fee.

Seasonality

     Canon’s sales for the fourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as cameras and inkjet printers, during the year-end holiday season.

     In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal years in March. Sales also tend to increase at the start of the new school year in each region.

Sources of supply

     Canon purchases materials such as glass, aluminum, plastic, steel and chemicals for use in various product components and in the manufacturing process. Canon procures raw materials from all over the world and selects suppliers based on a number of criteria, including environmental friendliness, quality, cost, supply stability and financial condition.

     Prices of some raw materials fluctuate according to market trends. In fiscal 2010, the prices of crude oil caused serious problems for certain Japanese industries. While Canon is currently focusing on improving its resource management strategies with respect to raw materials and believes that it will be able to continue procuring sufficient quantities of raw materials to meet its needs, there can be no assurance that the prices of crude oil and other raw materials will not increase significantly in the future.

NET SALES BY SEGMENT

		Years ended December 31
		2010				change				2009				change				2008
		(Millions of yen, except percentage data)
Office		¥	1,987,269				20.8	%		¥	1,645,076				-26.8	%		¥	2,246,609
Consumer			1,391,327				6.9				1,301,160				-10.6				1,456,075
Industry and Others			432,958				20.9				357,998				-31.5				522,405
Eliminations			(104,653	)			—				(95,033	)			—				(130,928	)
Total		¥	3,706,901				15.5	%		¥	3,209,201				-21.6	%		¥	4,094,161

NET SALES BY GEOGRAPHIC AREA

		Years ended December 31
		2010				change				2009				change				2008
		(Millions of yen, except percentage data)
Japan		¥	695,749				-0.9	%		¥	702,344				-19.1	%		¥	868,280
Americas			1,023,299				14.4				894,154				-22.6				1,154,571
Europe			1,172,474				17.8				995,150				-25.8				1,341,400
Asia and Oceania			815,379				32.0				617,553				-15.4				729,910
Total		¥	3,706,901				15.5	%		¥	3,209,201				-21.6	%		¥	4,094,161

Competition

     Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.

     The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful research and development activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices.

     The competitive environments in which each product group operates are described below:

- Office Business Unit -

     The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Holdings, Inc.; Hewlett-Packard Company; and Lexmark International Inc. Canon believes that it is one of the leading global manufacturers of digital network MFPs, copying machines and laser printers. In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs. In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet) is often a key to Canon’s competitive strength. In the United States, Europe and Japan, Canon is one of the market leaders in all areas of the business machine market. In China, the current market leaders for business machines are Toshiba Tec Corporation, Sharp Corporation and Konica Minolta Holdings, Inc. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels. In the color printing market, Ricoh, Xerox and Konica Minolta have been very aggressive, especially in Europe and the United States, and competition in this market has become fierce.

- Consumer Business Unit -

     In addition to the traditional camera manufacturers, other electrical manufacturers have also started aggressively launching digital single lens cameras and related products in fiscal 2010. Nevertheless, Canon has continued to invest aggressively in competitive new products and intends to maintain its leadership position in this market.

     Canon’s primary competitors in the SLR camera market are Nikon Corporation, Sony Corporation and Panasonic Corporation. Another major competitor is Sigma Corporation, which produces lenses for use with Canon’s digital SLR products.

     The compact digital camera market is extremely competitive, and a large number of Canon’s competitors are relying on electronic manufacturing service (“EMS”) manufacturers to do their development and production work.

     Except for Japan, where competition is so fierce that expansion of market size is generally possible only by greatly reducing sales prices, average prices in the industry did not fall to a great extent in fiscal 2010 compared to the same period of the previous year. Nevertheless, prices have been rapidly declining as measured by the standard of specification price value, and the commoditization of products has been progressing. Market contraction and exchange rate fluctuation risks caused by the financial crisis are having a major impact, resulting in a severe profit profile in the digital camera market. Despite these difficulties, Canon will seek to take advantage of its status as the number one brand in the industry, along with its economies of scale, in order to maintain profitability.

     Canon’s primary competitors in the compact digital camera market are Sony Corporation; Nikon Corporation; Panasonic Corporation; Fujifilm Co., Ltd.; Samsung Electronics Co., Ltd.; Olympus Corporation; Hoya Corporation; Eastman Kodak Company; and Casio Computer Co., Ltd. Canon’s primary competitors in the digital video camcorder market are Sony Corporation; Panasonic Corporation; Victor Company of Japan, Ltd.; and Sanyo Electric Co., Ltd. Canon’s primary competitors in the inkjet printer market are Hewlett-Packard Company and Seiko Epson Corporation.

- Industry and Others Business Unit -

     Competition remains stiff in the markets for lithography equipment used in the production of semiconductor devices and LCD panels. Production of lithography equipment that can provide ultra-fine processing requires integration of advanced optical, control and system technologies, along with continuous investment in technological development. The main competitors in these markets are Nikon Corporation (in the markets for semiconductor and LCD lithography equipment) and ASML Holdings N.V. (in the market for semiconductor lithography equipment).

     Canon has helped its customers to improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, semiconductor lithography equipment using i-line has captured a large share of the global market. Canon has also been meeting the needs of image sensor manufacturers by quickly adapting to various unique specifications.

     Canon’s LCD lithography equipment, which boasts a common platform offering excellent productivity and reliability, has captured large shares of the industry-leading South Korean market and the promising Chinese market.

Patents and licenses

     Canon holds a large number of patents, design rights and trademarks in Japan and abroad to protect proprietary technologies stemming from its research and development activities. Canon utilizes these intellectual property rights as important strategic management tools. For example, Canon leverages its intellectual property rights to expand its product lines and business operations and to form alliances and exchange technologies with other companies.

     Canon has granted licenses with respect to its patents to various Japanese and foreign companies, most often with respect to electrophotography, laser printers, multifunction printers, facsimile machines and cameras.

     Companies to which Canon has granted licenses include:

Oki Electric Industry Co., Ltd.		LED printers, multifunction printers and facsimile machines
Panasonic Corporation		Electrophotography
Ricoh Company, Ltd.		Electrophotography
Sanyo Electric Co., Ltd.		Electronic cameras
Samsung Electronics Co., Ltd.		Laser printers, multifunction printers and facsimile machines
Kyocera Mita Corporation		Electrophotography
Sharp Corporation		Electrophotography
Brother Industries, Ltd.		Electrophotography and facsimile machines

     Canon has also been granted licenses with respect to patents held by other companies.

     Companies that have granted licenses to Canon include:

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
Applied Nanotech Holdings, Inc.		Field Emission Display(“FED”) technology
St. Clair Intellectual Property Consultants, Inc.		Selection of digital camera image format

     Canon has also entered into cross-licensing agreements with other major industry participants.

     Companies with which Canon has entered into cross-licensing agreements include:

International Business Machines Corporation		Information handling systems
Hewlett-Packard Company		Bubble jet printers
Xerox Corporation		Business machines
Panasonic Corporation		Video tape recorders and video cameras
Eastman Kodak Company		Electrophotography and image processing technology
Ricoh Company, Ltd.		Electrophotography products, facsimile machines and word processors
Seiko Epson Corporation		Information-related instruments

     Canon has placed a high priority on the management of its intellectual property. Some products that are material to Canon’s operating results incorporate patented technology. Patented technology is critical to the continued success of Canon’s products, which typically incorporate technology from dozens of different patents. However, Canon does not believe that its business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon any particular patent, copyright, license or intellectual property rights or group thereof.

Environmental regulations

     Canon is subject to a wide variety of laws, regulations and industry standards relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws that affect Canon’s businesses are summarized below.

1.

Kyoto Protocol to the United Nations Framework Convention on Climate Change

     Calendar year 2010 was the third year of the first commitment period (2008-2012) under the Kyoto Protocol. In order to ensure that Japan achieves the numerical target set by the Kyoto Protocol for the first commitment period (i.e., reduction of total carbon dioxide emissions by an average of 6% from the level in calendar year 1990), the Japanese government has called upon the manufacturing, transport, services and household sectors to take further action for energy conservation.

     The revised Energy Saving Law in Japan (Law Concerning the Rational Use of Energy) and the revised Act on Promotion of Global Warming Countermeasures came into full effect in April 2010. These laws require business operators to report their energy consumption and mid and long-term energy conservation plans in an effort to encourage energy efficiency The Japanese government is also implementing multifaceted measures to reduce emissions, including the granting of a “domestic credit” to any large company that helps small and medium enterprises to conserve energy. This credit is expected to provide substantial incentives, as it will be deemed an emission reduction for participating companies. Trial implementation of an emissions trading scheme was launched in October 2008. Under this scheme, it was confirmed in February 2011 that all of the year 2009 target-setting companies achieved their targets.

     Despite the economic downturn, Canon has been working to achieve its voluntary action plan target (which is consistent with the plan of the Electrics and Electronics Industrial Associations) and has been strengthening its group structure to comply with revised environmental laws. Canon has been participating in the trial emissions trading scheme and has made improvements in energy efficiency, so we expect to achieve our target in the scheme by our continuing effort, though we need to have the government authority examine the validity of our target level. However, these activities could increase Canon’s management costs and have adverse effects on its results of operations and financial condition.

2.

Post-Kyoto Initiatives

     In September 2009, the Japanese government announced its conditional commitment to a 25% reduction of CO₂ emissions from the calendar year 1990 level by 2020. The announcement was made in the interest of concluding an agreement to establish binding CO₂ emission reduction targets at the Fifteenth Conference of the Parties to the United Nations Framework Convention on Climate Change (“COP15”), which was held in December 2009. The United States, the European Union and China also indicated their respective targets; however, results of the COP15 negotiations were not clarified, and the agenda was postponed to the COP16 held in December 2010. The agenda of COP16 was once again postponed until the COP17 conference to be held in December 2011. Prospects for a legally binding scheme, and any eventual implementation thereof by participant countries, including Japan, remain unclear.

     Canon continues to pursue CO₂ emission reductions through energy efficient product design, logistics and factory operations on the basis of its understanding of the COP discussions. However, its efforts could increase Canon’s management costs and have adverse effects on its results of operations and financial condition.

3.

Tokyo Metropolitan Government Environmental Protection Ordinance

     The Tokyo Metropolitan Government has mandated that the owners of certain large CO₂ emitters, including office buildings, reduce CO₂ emissions from April 2010. The target for the first compliance period (April 2010 to March 2014) has been set at 8% or 6% (according to the type of the building) below base emissions, which can be determined based on the amount of emissions from the building in recent years. In order for the owners of the large buildings to fulfill the requirement, they must reduce CO₂ emissions from their respective buildings and, if such reduction is insufficient, obtain certain Tokyo Metropolitan government-sanctioned credits. We expect to fulfill the requirement during the first compliance period.

     Canon continues to pursue CO₂ emission reductions through energy efficient office operations. However, such efforts could increase Canon’s management costs and have adverse effects on its results of operations and financial condition.

4.

Soil Pollution Prevention Law of Japan

     The Soil Pollution Prevention Law of Japan, administered by the Japanese Ministry of the Environment, went into effect in February 2003 and was amended in April 2010. The pre-amendment law required certain landowners to engage designated investigative organizations to perform a soil investigation to measure the level of soil pollution when facility on the land for manufacture or use of certain hazardous substances are demised, or suspected that soil pollution will cause health hazard on human, and the amendment further requires additional investigation when soil pollution is suspected. If soil pollution exceeds allowable limits, the governor may declare as “Measure required area” when effects to human health due to soil pollution (and with exposure to pollutant) are foreseen, and the governor orders removal of pollutants. When exposures to pollutant are blocked and effects to human health are not foreseen, the area is declared “designated area for notification of changes of the land character”. A governor may publicly announce such designation and make the investigation report available upon request. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If the results of an investigation show that there is a likelihood that the soil of the investigated area may affect human health, the governor may issue an order to the landowner to take designated remedial actions and may restrict the changes of the land character. Canon has commenced a detailed survey and measurement of soil and groundwater to check for pollution at all of Canon’s operational sites in Japan. Additional costs may arise if these investigations determine that remedial measures are necessary. These factors could adversely affect Canon’s results of operations and financial condition.

     See “Risk Factors—Risks Related to Environmental Issues—Environmental cleanup 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.”

5.

Law for Promotion of Effective Utilization of Resources

     The Law for Promotion of Effective Utilization of Resources, administered by the Japanese Ministry of Economy, Trade and Industry, was enacted in April 2001 and is currently being reevaluated and may be revised. This law requires manufacturers of “specified reuse-promoted products,” including copying machines, to promote the use of recyclable resources and recovered products (designing and manufacturing products that may be easily reused or recycled). The coverage and requirements of the law may be expanded to other products such as printers and could adversely affect Canon’s results of operations.

6.

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 (“the WEEE Directive”)

     These two directives were published in the Official Journal of the European Union on February 13, 2003. Member states were required to enact laws necessary to comply with these directives by August 13, 2004. From July 1, 2006, companies have been required to ensure that electrical and electronic equipment sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers if placed on the market after that date. Pursuant to the RoHS Directive, Canon adapted its products so that they do not contain the prohibited hazardous substances.

     The WEEE Directive requires that companies selling electrical and electronic equipment bearing their trade names in the European Union after August 13, 2005 must arrange and pay for the collection, treatment, recycling, recovery and disposal of their equipment. Canon has become a member company of collective compliance schemes in each member state of the European Union and has achieved the required recycling levels for electrical and electronic equipment waste.

     The European Union is reviewing both the WEEE and the RoHS directives. With respect to the RoHS Directive, it has been proposed that the scope of the directive be expanded; this proposal is currently expected to be approved by the European Parliament and European Council during the second or third quarters of 2011. Further enhancements of the RoHS directive remain under consideration. With respect to the WEEE Directive, an increased collection rate has been proposed, and discussion in the European Parliament/ and European Council is expected to continued in 2011. If tighter restrictions are enforced in 2011 and beyond, Canon’s compliance costs could increase, including with costs related to the development and adoption of substitute materials or processes. Such increased costs may have an adverse effect on Canon’s results of operations.

7.

European Framework for the Management of Chemical Substances (“REACH Regulation”)

     On December 30, 2006, the REACH Regulation was published in the Official Journal of the European Union. The regulation was implemented on June 1, 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union.

     All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. Registration requires disclosure of information about usage and chemical characteristics. The registration of new chemicals commenced in June 2008. For chemical substances in use before “existing chemicals,” “pre-registration” was accepted from June 1 to December 1, 2008. Substances that were not pre-registered cannot be used until formally registered. Pre-registered substances are subject to compliance with formal registration procedures according to their quantity and hazardous properties. Canon uses some chemicals which are subject to pre-registration requirements and has completed the necessary pre-registrations.

     If certain substances are contained in an article, the substances must be communicated to the recipient or consumer of the article. This requirement has been in place since October 2008. Furthermore, starting in 2011, certain cases will require the notification of European Chemical Agency as to more specific information. Canon has been implementing these requirements under the REACH Regulation, which could increase Canon’s management costs and have adverse effects on its results of operations and financial condition.

8.

The European Framework for the Setting of Requirements for Energy-Related Products (“ErP Directive”)

     The European Union published the ErP Directive on July 22, 2005, and the directive was revised on November 20, 2009. This framework directive applies to all energy-using products, and implementation measures for specific product categories must be adopted. Until these implementation measures are issued, it is difficult to predict the potential effects of the ErP Directive. However, implementation measures with respect to off-mode, standby mode and external power supplieshave been issued and certain Canon products, including imaging, network stand-by and sound imaging equipment and beamers, will be affected from 2011 and beyond. Canon is continuing its preparations to comply with the ErP Directive, but achieving compliance is likely to increase Canon’s costs.

9.

State Legislation in the United States Concerning Recycling of Waste Electric and Electronic Products

     Electrical and electronic equipment recycling laws have been enacted or proposed in more than twenty American states. Most of such laws cover only displays or television sets. However, some states, such as Illinois, Michigan and Hawaii, and others, require manufacturers to bear the costs of collection and recycling of printers and other products made by Canon. Canon expects that compliance with such state requirements might increase its costs, such as recycling fees and product guarantees.

10.

Chinese Administrative Measures on the Control of Pollution Caused by Electronic Information Products

     The Chinese Ministry of Information Industry published Administrative Measures on the Control of Pollution Caused by Electronic Information Products on February 28, 2006. These measures are modeled on the European Union RoHS Directive described above and regulate six substances: lead, mercury, hexavalent chromium, cadmium, polybrominated biphenyls and polybrominated diphenyl ethers in electronic information products. The measures establish two stages of implementation. Stage 1 was implemented for products manufactured on or after March 1, 2007. Almost all Canon products were covered by this regulation.

     To comply with Stage 1 requirements, a China-specific label must be placed on any covered product if any of the six regulated substances are contained therein, and use of the six regulated substances must be disclosed in each product manual. In addition, each product’s environmental protection use period (“EPUP”) must be stated within its recycling mark and include the production date. Packaging material markings must be displayed on the boxes of the covered products.

     Stage 2 requires that the contents of six regulated substances in specific electronic information products (as specified by the Chinese Government in the “list for emphasized management”) to be restricted by limitations similar to the European Union RoHS Directive. A China-specific compulsory product certification system will be introduced for such products. Standards to implement these measures and the “emphasized management list” are under discussion, including with regard to printers.

     If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its results of operations and financial condition.

11.

Chinese Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products

     The Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products was issued by the Chinese government on February 25, 2009. This regulation concerns the management of recycling and disposal activities with regard to waste electrical and electronic products in the interest of promoting comprehensive utilization of resources and the development of a circular economy. Producers and importers will be required to pay a fee to a government fund. This regulation was implemented on January 1, 2011. The first list of products falling under the waste electrical and electronic products catalogue has been issued and includes four types of household appliance as well as personal computers, but the funding scheme remains under review.

     If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its results of operations and financial condition.

12.

Other Environmental Regulations

     In addition to the laws described above, various environmental laws and regulations may have been promulgated or enacted by European Union member states, states of the United States, developing countries and others. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s results of operations and financial condition.

     C. Organizational structure

     Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent company. As of December 31, 2010, Canon had 294 consolidated subsidiaries and 14 affiliated companies accounted for by the equity method.

     The following table lists the significant subsidiaries owned by Canon Inc., all of which are consolidated as of December 31, 2010.

						Proportion of				Proportion of
						ownership interest				voting power
Name of company		Head office location				owned				held
Canon Marketing Japan Inc.		Tokyo, Japan					50.1	%			55.3	%
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	%

     D. Property, plants and equipment

     Canon’s manufacturing is conducted primarily at 26 plants in Japan and 19 plants in other countries. Canon owns all of the buildings and the land on which its plants are located, with the exception of certain leases of land and floor space of certain of its subsidiaries. The names and locations of Canon’s plants and other facilities, their approximate floor space and the principal activities and products manufactured therein as at December 31, 2010 are as follows:

		Floor space
		(including
Name and location		leased space)				Principal activities and products manufactured
Domestic		(Thousands of
		square feet)
Headquarters, Tokyo			2,557			R&D, corporate administration and other functions
Canon Global Management Institute, Tokyo			164			Training & administration
Kawasaki Office, Kanagawa			1,223			R&D and manufacturing of production equipment and semiconductor devices
Kosugi Office, Kanagawa			395			Development of software for office imaging products
Fuji-Susono Research Park, Shizuoka			1,038			R&D in electrophotographic technologies
Ayase Office, Kanagawa			393			R&D and manufacturing of semiconductor devices
Hiratsuka Plant, Kanagawa			1,171			R&D and manufacturing of semiconductor devices
Tamagawa Office, Kanagawa			155			Quality Engineering
Oita Office, Oita			199			Manufacturing of semiconductor devices
Yako Development Center, Kanagawa			903			Development of inkjet printers, inkjet chemical products
Utsunomiya Plant, Tochigi			2,750			Manufacturing of lenses for cameras and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor production equipment
Toride Plant, Ibaraki			3,358			R&D in electrophotographic technologies, mass-production trials and support; manufacturing of office imaging products, chemical products; training of manufacturing
Ami Plant, Ibaraki			1,149			Manufacturing of LCD production equipment
Oita Manufacturing Training Center, Oita			71			Training for enhancing practical technologies and skills of production division
Canon Electronics Inc., Saitama and Gunma			1,311			Components, magnetic heads, document scanners and laser printers
Canon Finetech Inc., Saitama, Ibaraki, and Fukui			967			Large format inkjet printers, business-use printers, business machines peripherals and chemical products
Canon Precision Inc., Aomori			1,634			Toner cartridges, sensors and micromotors
Canon Optron Inc., Ibaraki			143			Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials

		Floor space
		(including
Name and location		leased space)				Principal activities and products manufactured
Domestic		(Thousands of
		square feet)
Canon Chemicals Inc., Ibaraki			2,095			Toner cartridges and rubber functional components
Canon Components Inc., Saitama			577			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,219			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,092			Laser printers, toner cartridges and A-Si drums
Oita Canon Materials Inc., Oita			3,045			Chemical products for copying machines and printers, and inkjet cartridges
Ueno Canon Materials Inc., Mie			638			Chemical products for copying machines and printers
Fukushima Canon Inc., Fukushima			971			Inkjet printers and inkjet cartridges
Canon Semiconductor Equipment Inc., Ibaraki			488			Development and production of semiconductor production-related equipment
Canon Ecology Industry Inc., Ibaraki			476			Recycling of toner cartridges, repair and recycling of business machines
Nisca Corporation, Yamanashi			412			Copying machine peripherals, scanner units and optical equipment
Miyazaki Daishin Canon Inc., Miyazaki			154			Digital cameras
Canon Mold Co., Ltd., Ibaraki			107			Molds
Canon ANELVA Corporation, Kanagawa and Yamanashi			735			Production equipment for electron devices, Flat Panel Display and semiconductors
Canon Machinery Inc., Shiga			615			Automated production equipment and semiconductor production-related equipment
Tokki Corporation, Niigata			192			Vacuum technology-related equipment
Nagasaki Canon Inc., Nagasaki			411			Digital cameras

		Floor space
		(including
Name and location		leased space)				Principal activities and products manufactured
Overseas		(Thousands of
		square feet)
[Europe]
Canon Giessen GmbH, Giessen, Germany			336			Remanufacturing of copying machines and semiconductor production equipment
Canon Bretagne S.A.S., Liffre, France			506			Manufacturing and recycling of toner cartridges
Océ-Technologies B.V.			2,793			R&D, manufacturing copying machines, corporate administration, and other functions
Océ-Printing Systems GmbH			1,278			R&D, manufacturing copying machines, corporate administration, and other functions
[Americas]
Canon Virginia, Inc., Virginia, U.S.			1,952			Toner cartridges, molds and remanufacturing of copying machines
Industrial Resource Technologies, Inc., Virginia, U.S.			185			Recycling of toner cartridges
[Asia]
Canon Inc., Taiwan, Taiwan			718			Lenses, digital cameras
Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia			584			Digital cameras, lenses and optical lens parts
Canon Dalian Business Machines, Inc., Dalian, China			1,741			Production and recycling of toner cartridges, production of laser printers
Canon Zhuhai, Inc., Zhuhai, China			752			Laser printers, MFPs, digital cameras, and contact image sensors
Tianjin Canon Inc., Tianjin, China			148			Copying machines
Canon Hi-Tech Thailand Ltd., Ayutthaya, Thailand			1,700			Inkjet printers, MFPs and scanners
Canon Engineering Thailand Ltd., Ayutthaya, Thailand			129			Molds and plastic injection mold parts
Canon Zhongshan Business Machines Co., Ltd., Zhogshan, China			496			Laser printers
Canon Vietnam Co., Ltd., Hanoi, Vietnam			3,232			Inkjet printers, laser printers, MFPs, scanners and contact image sensors
Canon (Suzhou) Inc., Suzhou, China			1,105			Copying machines
Canon Finetech (Suzhou) Business Machines Inc., Suzhou, China			383			Copying machines
Canon Finetech Nisca (Shenzhen) Inc., Shenzhen, China			715			Copying machines and laser printer peripherals
Canon Electronics Vietnam Cc., Ltd., Hung Yen Province, Vietnam			182			Components

     Canon considers its manufacturing and other facilities to be well maintained and believes that its plant capacity is adequate for its current requirements.

Main facilities under construction for establishment/expansion

Name and location		Principal activities and products manufactured
Domestic
Canon Inc., Kawasaki Office, Kanagawa		New R&D building
Oita Canon Materials Inc., Oita		New production base* (Office business unit)
		*To be leased to Oita Canon Materials Inc. by the Company
Hita Canon Materials Inc., Oita		New production base* (Office business unit)
		*To be leased to Hita Canon Materials Inc. by the Company
Canon Chemicals Inc., Ibaraki		New production base* (Office business unit)
		*To be leased to Canon Chemicals Inc. by the Company
Canon Zhuhai, Inc., Zhuhai, China		New production base* (Consumer business unit)
Canon Hi-Tech Thailand Ltd., Nakohon Ratchasima, Thailand		New production base* (Consumer business unit)

Item 4A. Unresolved Staff Comments

     Not applicable.

20

Item 5. Operating and Financial Review and Prospects

     A. Operating Results

     The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of operations.

Overview

     Canon is one of the world’s leading manufacturers of plain paper copying machines, digital multifunction devices (MFDs), laser printers, cameras, inkjet printers, semiconductor lithography equipment and liquid crystal display (LCD) lithography equipment. Canon earns revenues primarily from the manufacture and sale of these products domestically and internationally. Canon’s basic management policy is to contribute to the prosperity and well-being of the world while endeavoring to become a truly excellent global corporate group targeting continued growth and development.

     Canon divides its businesses into three segments: the Office Business Unit, the Consumer Business Unit, and the Industry and Others Business Unit.

Economic environment

     Looking back at the global economy in 2010, economic conditions continued to improve broadly throughout the world, led by the economic growth of such emerging markets as China and India. In the United States, despite the unemployment rate remaining at a relatively high level and other concerns, economic conditions continued to recover gradually thanks in part to economic measures by the government. As for Europe, in spite of lingering financial and employment concerns along with the emergence of financial crises in some countries, the region overall managed to realize a recovery. China, which quickly recovered its growth pace through major economic stimulus measures, and the rest of Asia, along with other emerging nations, continued to achieve economic expansion. And in Japan, although signs began to appear indicating a turnaround, the recovery came to a standstill at the end of 2010 due to prolonged deflation and other factors.

Market environment

     As for the markets in which Canon operates amid these conditions, within the office equipment market, demand for network digital MFDs recovered, mainly for color models, while laser printers also realized a steady rebound compared with the previous year. As for the consumer products market, demand for digital single-lens reflex (SLR) cameras maintained healthy growth across global markets. As for compact digital cameras, although sales were sluggish in developed countries, demand in emerging markets grew favorably resulting in a slight increase overall. With regard to inkjet printers, demand continued on a track to recovery. In the industry and others market, demand for semiconductor lithography equipment and LCD lithography equipment grew steadily, owing to improved investment by semiconductor device and LCD panel manufacturers. The average value of the yen during the year was ¥87.40 to the U.S. dollar, a year-on-year appreciation of approximately ¥6 or 6%, and ¥114.97 to the euro, a year-on-year appreciation of approximately ¥15 or 12%.

Summary of operations

     Amid the impact of the sharp appreciation of the yen, net sales for the year totaled ¥3,706.9 billion, an increase of 15.5% from the previous year, owing to a substantial recovery in sales of laser printers among office products, continued robust sales of such consumer products as digital SLR cameras, the increase in sales within the Industry and Others Business Unit, and the effects of consolidation arising from corporate acquisitions, such as Océ N.V. Income before income taxes totaled ¥392.9 billion, a year-on-year increase of 79.1%, while net income attributable to Canon Inc. also increased by 87.3% to ¥246.6 billion.

Key performance indicators

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

KEY PERFORMANCE INDICATORS

		2010				2009				2008				2007				2006
Net sales (Millions of yen)		¥	3,706,901			¥	3,209,201			¥	4,094,161			¥	4,481,346			¥	4,156,759
Gross profit to net sales ratio			48.1	%			44.5	%			47.3	%			50.1	%			49.6	%
R&D expense to net sales ratio			8.5	%			9.5	%			9.1	%			8.2	%			7.4	%
Operating profit to net sales ratio			10.5	%			6.8	%			12.1	%			16.9	%			17.0	%
Inventory turnover measured in days		35 days				39 days				47 days				44 days				45 days
Debt to total assets ratio			0.3	%			0.3	%			0.4	%			0.6	%			0.7	%
Canon Inc. stockholders’ equity to total assets ratio			66.4	%			69.9	%			67.0	%			64.8	%			66.0	%

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

-Revenues-

     As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important.

     Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, taking into account recent market trends.

     Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production. Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product development lead times and reductions in production costs.

     Operating profit ratio (ratio of operating profit to net sales) and research and development (“R&D”) expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain a certain level of spending in core technology to sustain Canon’s leading position in its current business areas and to seek possibilities in other markets. Canon believes such investments will create the basis for future success in its business and operations.

-Cash flow management-

     Canon also places significant emphasis on cash flow management. The following are the KPIs with regard to cash flow management that Canon’s management believes to be important.

     Inventory turnover measured in days is a KPI because it measures the adequacy of supply chain management. Inventories have inherent risks of becoming obsolete, physically damaged or otherwise decreasing significantly in value, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducing inventories and decrease production lead times in order to promptly recover related product expenses by strengthening supply chain management.

     Canon’s management seeks to meet its liquidity and capital requirements primarily with cash flow from operations. Management also seeks debt-free operations. For a manufacturing company like Canon, it generally takes considerable time to realize profit from a business as the process of R&D, manufacturing and sales has to be followed for success. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds. Canon has continued to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.

     Canon Inc. stockholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising stockholders’ equity ratio indicates that Canon has maintained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon will be able to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a stable financial base and, accordingly, a high level of its stockholders’ equity to total assets ratio.

Critical accounting policies and estimates

     The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions. Canon believes that the following are the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations.

Revenue recognition

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

     Revenue from sales of office products, such as office network digital multifunction devices and laser printers, and consumer products, such as digital cameras and inkjet multifunction peripherals, 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 semiconductor lithography equipment and LCD lithography equipment 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 the 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. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting.

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

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

Allowance for doubtful receivables

     Allowance for doubtful receivables is determined using a combination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibility. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions and historical experience. Also, Canon records specific reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its financial obligations to Canon, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted.

Valuation of inventories

     Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inventories and principally the first-in, first-out method for overseas inventories. Market value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written-down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the market value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories.

Impairment of long-lived assets

     Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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. Determining the fair value of the asset involves the use of estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions.

Property, plant and equipment

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

Goodwill and other intangible assets

     Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Intangible assets with finite useful lives consist primarily of software, license fees, patented technologies and customer relationships. 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. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years.

Income taxes

     Canon considers many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements.

Valuation of deferred tax assets

     Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judgments regarding future profitability may change due to future market conditions, its ability to continue to successfully execute its operating restructuring activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income.

Employee retirement and severance benefit plans

     Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Management must consider current market conditions, including changes in interest rates, in selecting these assumptions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in these assumptions inherent in the valuation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect future pension expenses. While management believes that the assumptions used are appropriate, the differences may affect employee retirement and severance benefit costs in the future.

     In preparing its financial statements for fiscal 2010, Canon estimated a weighted-average discount rate of 2.3% for Japanese plans and 4.9% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.6% for Japanese plans and 6.1% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income governmental and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long-term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns.

     Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amortization of actuarial gain or loss, a decrease in interest cost, and vice versa. A decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately 9%. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods.

     Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For fiscal 2010, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥3,290 million in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets, to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense.

     Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax.

Consolidated results of operations

Fiscal 2010 compared with fiscal 2009

     Summarized results of operations for fiscal 2010 and fiscal 2009 are as follows:

		2010				Change				2009
		(Millions of yen, except per share
		amounts and percentage data)
Net sales		¥	3,706,901				15.5	%		¥	3,209,201
Operating profit			387,552				78.6				217,055
Income before income taxes			392,863				79.1				219,355
Net income attributable to Canon Inc.			246,603				87.3				131,647
Net income attributable to Canon Inc. stockholders per share:
Basic			199.71				87.3				106.64
Diluted			199.70				87.3				106.64

Note: See notes to Item 3A “Selected Financial Data”.

Sales

     Canon’s consolidated net sales in fiscal 2010 totaled ¥3,706,901 million, representing a 15.5% increase from the previous fiscal year. This increase of sales was due to a substantial recovery in sales of laser printers among office products, continued robust sales of such consumer products as digital SLR cameras, the increase in sales within the Industry and Other Business Unit, and the effects of consolidation arising from corporate acquisitions, such as Océ N.V (“Océ”). Canon made Océ into a consolidated subsidiary in March 2010 to strengthen the printing business. Océ is engaged in research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide-format digital printing systems. The amounts of net sales of Océ included in the Canon’s consolidated statement of income from the acquisition date to the year ended December 31, 2010 was ¥ 246,518 million.

     Overseas operations are significant to Canon’s operating results and generated approximately 81% of total net sales in fiscal 2010. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

     The average value of the yen in fiscal 2010 was ¥87.40 to the U.S. dollar, and ¥114.97 to the euro, representing an appreciation of about ¥6 or 6% to the U.S. dollar, and a significant appreciation of approximately ¥15 or 12% against the euro, compared with the previous year. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥193,900 million in 2010. This unfavorable impact consisted of approximately ¥86,700 million for U.S. dollar denominated sales, ¥101,100 million for euro denominated sales and ¥6,100 million for other foreign currency denominated sales.

Cost of sales

     Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses from plants, maintenance expenses, light and fuel expenses along with rent expenses. The ratio of cost of sales to net sales for fiscal 2010 and 2009 was 51.9% and 55.5%, respectively.

Gross profit

     Canon’s gross profit in fiscal 2010 increased by 24.9% to ¥1,783,088 million from fiscal 2009. The gross profit ratio rose by 3.6 points year on year to 48.1%. Despite the significant impact of the strong yen, this improvement was achieved due to the launch of new products and ongoing cost-reduction efforts, along with heightened production turnover accompanying ramped-up production.

Operating expenses

     The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Despite the negative impact of consolidation of ¥172,800 million, continued Group-wide efforts to significantly reduce spending contributed to a decline in total operating expenses to sales ratio of 37.6% for fiscal 2010, a 0.1 point improvement compared with fiscal 2009.

Operating profit

     Operating profit in fiscal 2010 increased 78.6% to a total of ¥387,552 million from fiscal 2009, constituting 10.5% of net sales.

Other income (deductions)

     Other income (deductions) for fiscal 2010 improved by ¥3,011 million, mainly due to earnings and losses on investments in affiliated companies.

Income before income taxes

     Income before income taxes in fiscal 2010 was ¥392,863 million, an increase of 79.1% from fiscal 2009, and constituted 10.6% of net sales.

Income taxes

     Provision for income taxes in fiscal 2010 increased by ¥56,038 million from fiscal 2009, primarily as a result of the increase in income before income taxes. The effective tax rate during fiscal 2010 dropped by 2.6% compared with fiscal 2009. This was due mainly to an increase in tax deduction for R&D expenses in fiscal 2010.

Net income attributable to Canon Inc.

     As a result, net income attributable to Canon Inc. in fiscal 2010 increased by 87.3% to ¥246,603 million, which represents a 6.7% return on net sales.

Segment information

     Canon divides its businesses into three segments: the Office Business Unit, the Consumer Business Unit and the Industry and Others Business Unit.

	•		The Office Business Unit mainly includes office network digital multifunction devices(MFDs), color network digital MFDs, personal-use network digital MFDs, office copying machines, full-color copying machines, personal-use copying machines, laser printers, large format inkjet printers and digital production printers.
	•		The Consumer Business Unit mainly includes digital SLR cameras, compact digital cameras, interchangeable lenses, digital video camcorders, inkjet multifunction peripheral, single function inkjet printers, image scanners and broadcast lenses.
	•		The Industry and Others Business Unit mainly includes semiconductor lithography equipment, LCD lithography equipment, medical image recording equipment, ophthalmic devices, magnetic heads, micromotors, computers, handy terminals, document scanners and calculators.

Sales by segment

     Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements.

     Canon’s sales by segment are summarized as follows:

		2010				Change				2009
		(Millions of yen, except percentage data)
Office		¥	1,987,269				20.8	%		¥	1,645,076
Consumer			1,391,327				6.9				1,301,160
Industry and Others			432,958				20.9				357,998
Eliminations			(104,653	)			—				(95,033	)
Total		¥	3,706,901				15.5	%		¥	3,209,201

     Sales of the Office Business Unit constituting 53.6% of consolidated net sales, increased by 20.8% to ¥1,987,269 million in fiscal 2010. Sales volume of both color and monochrome network digital MFDs increased, boosted by the recovery in demand for office equipment along with the introduction of new imageRUNNER ADVANCE-series products. Laser printers recorded a substantial increase in sales volume. The consolidation of Océ also contributed to the sales increase.

     Sales of the Consumer Business Unit constituting 37.5% of consolidated net sales, increased by 6.9% to ¥1,391,327 million in fiscal 2010. Sales volumes increased significantly for such digital SLR cameras as EOS Digital Rebel T1i (EOS 500D) and new EOS Digital Rebel T2i (EOS 550D), the competitively priced model, along with the EOS 5D Mark II, EOS 7D and new 60D, the advanced-amateur models. As for compact digital cameras, the Company launched five new ELPH (IXUS)-series models and seven new PowerShot-series models, boosting sales volumes particularly in emerging markets. As for inkjet printers, sales volume increased from year-ago level particularly in Asia.

     Sales of the Industry and Others Business Unit increased by 20.9% in fiscal 2010, to ¥432,958 million. Within this segment, sales volume of LCD lithography equipment, semiconductor lithography and semiconductor-related independent business sales by Group subsidiaries increased. Sales of the Industry and Others Business Unit constituted 11.7% of consolidated net sales in fiscal 2010.

     Intersegment sales of ¥104,653 million, representing 2.8% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations”.

Sales by geographic area

     Please refer to the table of sales by geographic area in Note 23 of the Notes to Consolidated Financial Statements.

     A summary of net sales by geographic area in fiscal 2010 and fiscal 2009 is provided below:

		2010				Change				2009
		(Millions of yen, except percentage data)
Japan		¥	695,749				- 0.9	%		¥	702,344
Americas			1,023,299				14.4				894,154
Europe			1,172,474				17.8				995,150
Asia and Oceania			815,379				32.0				617,553
Total		¥	3,706,901				15.5	%		¥	3,209,201

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.

     A geographical analysis indicates that net sales in fiscal 2010 increased in the major geographic areas.

     In Japan, sales decreased by 0.9% in fiscal 2010.

     In the Americas, net sales increased by 14.4% on yen basis in fiscal 2010, due to an increase in sales volume of digital SLR cameras and laser printers.

     In Europe, net sales increased by 17.8% on yen basis in fiscal 2010, mainly due to rebounded sales of laser printers

     Sales in Asia and Oceania increased by 32.0% on a yen basis in fiscal 2010, largely due to the increased sales of digital SLR cameras.

Operating profit by segment

     Please refer to the table of segment information in Note 23 of the Notes to Consolidated Financial Statements.

     Operating profit for the Office Business Unit in fiscal 2010 increased by ¥63,926 million to ¥293,322 million. This increase resulted primarily from the increase in sales.

     Operating profit for the Consumer Business Unit in fiscal 2010 increased by ¥54,573 million to ¥238,065 million. This increase resulted primarily from the increase in sales

     Operating profit for the Industry and Others Business Unit in fiscal 2010 was a loss of ¥9,831 million. Significant recovery of sales volume contributed to reduction of loss amount by ¥66,125 million.

Fiscal 2009 compared with fiscal 2008

     Summarized results of operations for fiscal 2009 and fiscal 2008 are as follows:

		2009				Change				2008
		(Millions of yen, except per share
		amounts and percentage data)
Net sales		¥	3,209,201				-21.6	%		¥	4,094,161
Operating profit			217,055				-56.2				496,074
Income before income taxes			219,355				-54.4				481,147
Net income attributable to Canon Inc.			131,647				-57.4				309,148
Net income attributable to Canon Inc. stockholders per share:
Basic			106.64				-56.7				246.21
Diluted			106.64				-56.7				246.20

Note: See notes to Item 3A “Selected Financial Data”.

Sales

     Canon’s consolidated net sales in fiscal 2009 totaled ¥3,209,201 million, representing a 21.6% decrease from the previous fiscal year. Although the markets for such consumer products as cameras and inkjet printers are clearly bottoming out amid the significantly stronger yen, which has had an impact on all of the Company’s businesses, the decrease in sales mainly reflected the effects of reduced sales volumes of office products throughout the year.

     Overseas operations are significant to Canon’s operating results and generated approximately 78% of total net sales in fiscal 2009. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

     The average value of the yen in fiscal 2009 was ¥93.21 to the U.S. dollar, and ¥130.46 to the euro, representing an appreciation of about ¥10 or 10% to the U.S. dollar, and a significant appreciation of approximately ¥21 or 14% against the euro, compared with the previous year. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥249,500 million in 2009. This unfavorable impact consisted of approximately ¥116,800 million for U.S. dollar denominated sales, ¥114,800 million for euro denominated sales and ¥17,900 million for other foreign currency denominated sales.

Cost of sales

     Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses from plants, maintenance expenses, light and fuel expenses along with rent expenses. The ratio of cost of sales to net sales for fiscal 2009 and 2008 was 55.5% and 52.7%, respectively.

Gross profit

     Canon’s gross profit in fiscal 2009 decreased by 26.3% to ¥1,427,393 million from fiscal 2008. The gross profit ratio deteriorated by 2.8 points year on year to 44.5%. Despite the launch of new products and ongoing cost-reduction efforts aimed at an improved gross profit ratio, the impact of such factors as the substantial appreciation of the yen and the drop in sales value led to the decline in the ratio.

Operating expenses

     The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Continued Group-wide efforts to thoroughly cut spending contributed to a decline in total operating expenses of 16.1% for fiscal 2009.

Operating profit

     Operating profit in fiscal 2009 dropped 56.2% to a total of ¥217,055 million from fiscal 2008, recording 6.8% to net sales.

Other income (deductions)

Other income (deductions) for fiscal 2009 improved by ¥17,227 million. Although net interest and dividends decreased, foreign currency exchange gains and losses improved by ¥13,054 million.

Income before income taxes

     Income before income taxes in fiscal 2009 was ¥219,355 million, a decline of 54.4% from fiscal 2008, and constituted 6.8% of net sales.

Income taxes

     Provision for income taxes in fiscal 2009 decreased by ¥76,666 million from fiscal 2008, primarily as a result of the decline in income before income taxes. The effective tax rate during fiscal 2009 rose by 4.9% compared with fiscal 2008. This was mainly due to an increase in valuation allowances on deferred tax assets.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in fiscal 2009 decreased by 57.4% to ¥131,647 million, which represents a 4.1% return on net sales.

Segment information

     Canon divides its businesses into three segments: the Office Business Unit, the Consumer Business Unit and the Industry and Others Business Unit.

•

The Office Business Unit mainly includes office network digital MFDs, color network digital MFDs, office copying machines, personal-use copying machines, full-color copying machines, laser printers and large format inkjet printers.

	•		The Consumer Business Unit mainly includes digital SLR cameras, compact digital cameras, interchangeable lenses, digital video camcorders, inkjet multifunction peripherals, single function inkjet printers, image scanners and broadcasting equipment.
	•		The Industry and Others Business Unit mainly includes semiconductor lithography equipment, mirror projection LCD lithography equipment, medical equipment, components, computer information systems, document scanners and personal information products.

Sales by segment

     Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements.

     Canon’s sales by segment are summarized as follows:

		2009				Change				2008
		(Millions of yen, except percentage data)
Office		¥	1,645,076				-26.8	%		¥	2,246,609
Consumer			1,301,160				-10.6				1,456,075
Industry and Others			357,998				-31.5				522,405
Eliminations			(95,033	)			—				(130,928	)
Total		¥	3,209,201				-21.6	%		¥	4,094,161

     Sales of the Office Business Unit, constituting 51.3% of consolidated net sales, decreased by 26.8% to ¥1,645,076 million in fiscal 2009, due to the decreased demand for office equipment overall amid the deterioration of economic conditions, along with the impact of the strong yen. Sales of network digital MFDs remained low in all regions while demand for laser printers decreased substantially compared with the previous year despite the optimization of inventory levels being in sight.

     Sales of the Consumer Business Unit declined by 10.6% in fiscal 2009, totaling ¥1,301,160 million, due to the significant impact of the yen’s appreciation. Sales volumes, however, of such new products as the competitively priced EOS Rebel T1i (EOS 500D) and advanced-amateur model EOS 7D digital SLR cameras recorded solid growth. As for compact digital cameras, although stagnant market conditions led to a contraction in sales volume, the Company reinforced its product lineup through the launch of six new ELPH (IXUS)-series models and nine new PowerShot-series models. As for inkjet printers, although the market overall remained sluggish, sales in the Americas and Asia displayed healthy growth, contributing to a year-on-year increase in sales volume. Sales of the Consumer Business Unit constituted 40.5% of consolidated net sales in fiscal 2009.

     Sales of the Industry and Others Business Unit decreased by 31.5% in fiscal 2009, to ¥357,998 million. Within this segment, sales of steppers remained sluggish amid worsening market conditions for memory chips, while sales of semiconductor lithography equipment dropped due to restrained capital investment by LCD panel manufacturers. Sales of the Industry and Others Business Unit constituted 11.2% of consolidated net sales in fiscal 2009.

     Intersegment sales of ¥95,033 million, representing 3.0% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations”.

Sales by geographic area

     Please refer to the table of sales by geographic area in Note 23 of the Notes to Consolidated Financial Statements.

     A summary of net sales by geographic area in fiscal 2009 and fiscal 2008 is provided below:

		2009				Change				2008
		(Millions of yen, except percentage data)
Japan		¥	702,344				- 19.1	%		¥	868,280
Americas			894,154				-22.6				1,154,571
Europe			995,150				-25.8				1,341,400
Asia and Oceania			617,553				-15.4				729,910
Total		¥	3,209,201				-21.6	%		¥	4,094,161

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.

     A geographical analysis indicates that net sales in fiscal 2009 decreased in each of the major geographic areas.

     In Japan, sales decreased by 19.1% in fiscal 2009 mainly due to weakened sales of monochrome and color models of network digital MFDs within the Office Business Unit, along with steppers.

     In the Americas, net sales declined by 14.9% on a local currency basis in fiscal 2009, mainly due to reduced sales of such products as monochrome network MFDs and laser printers. On a yen basis, net sales in the Americas declined by 22.6% in fiscal 2009 as the yen strengthened to the U.S. dollar.

     In Europe, net sales fell by 15.4% on a local currency basis in fiscal 2009, mainly due to reduced sales of such products as laser printers and monochrome network MFDs. On a yen basis, net sales in Europe dropped by 25.8% in fiscal 2009 resulting from the impact of the substantial appreciation of the yen to the euro.

Sales in other areas decreased by 15.4% on a yen basis in fiscal 2009, largely due to the stagnant sales of semiconductor lithography equipment.

Operating profit by segment

     Please refer to the table of segment information in Note 23 of the Notes to Consolidated Financial Statements.

     Operating profit for the Office Business Unit in fiscal 2009 decreased by ¥227,950 million to ¥229,396 million. This decline resulted primarily from the decrease in gross profit led by the significant reduction in sales.

     Operating profit for the Consumer Business Unit in fiscal 2009 declined by ¥39,632 million to ¥183,492 million as a result of the decrease in gross profit arising from the reduction in sales.

     Operating profit for the Industry and Others Business Unit in fiscal 2009 decreased by ¥28,080 million to an operating loss of ¥75,956 million as a result of a significant drop in sales along with impairment losses related to semiconductor production equipment totaling ¥15,390 million, arising from a fundamental reassessment of the business structure for semiconductor lithography equipment.

     Foreign operations and foreign currency transactions

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

     The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 23 of the Notes to Consolidated Financial Statements.

     Recent development

     On March 11, 2011, Japan experienced a massive earthquake and tsunami off the Pacific coast of Northeastern Japan. The earthquake caused damage to inventories and buildings at manufacturing facilities primarily in the Company’s Utsunomiya Plant, and Fukushima Canon Inc., a manufacturing subsidiary. In addition, certain distribution warehouses of the Company and Canon Marketing Japan Inc., a sales subsidiary, located in Northeastern Japan sustained damage to inventories. As a result, production operations have been suspended at certain plants of the Company and its manufacturing subsidiaries. The Company has organized a special taskforce, “Earthquake Disaster Recovery Task Force”, in order to rapidly respond to these events and is currently making effort to resume operations immediately.

     Canon cannot estimate the effect of the earthquake on its consolidated results of operations and financial condition as of the issuance date of the consolidated financial statements. However, in the short term, the costs for recovery may occur along with the decrease of revenues, which may adversely affect on Canon to a certain degree.

     B. Liquidity and capital resources

     Cash and cash equivalents in fiscal 2010 increased by ¥45,545 million to ¥840,579 million, compared with ¥795,034 million in fiscal 2009 and ¥679,196 million in fiscal 2008. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollar, with the remainder denominated in foreign currencies.

     Net cash provided by operating activities in fiscal 2010 increased by ¥133,178 million from the previous year to ¥744,413 million, as a result of significant increase of profit. Cash flow from operating activities consisted of the following key components: the major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, and income taxes.

     For fiscal 2010, cash inflow from cash received from customers increased, due to the significant increase of sales. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials also increased, as a result of an increase in net sales, however this increase remained within a range of net sales increase due to cost reductions activities. Cost reductions reflect a decline in unit prices of parts and raw materials, as well as a streamlining of the process of using these parts and materials through promoting efficiency in operations. Cash outflow for payments for selling, general and administrative expenses increased however, also remained within the range of sales increase due to cost-cutting efforts.

     Net cash used in investing activities in fiscal 2010 was ¥342,133 million, compared with ¥ 370,244 million in fiscal 2009 and ¥472,480 million in fiscal 2008, consisting primarily of purchases of fixed assets and acquisition of shares of Océ. The purchases of fixed assets, which totaled ¥199,152 million in fiscal 2010, were focused on items relevant to raising production capacity and reducing production cost.

     Canon defines “free cash flow” by deducting the cash flows from investing activities from the cash flows from operating activities. For fiscal 2010, free cash flow totaled ¥402,280 million as compared with ¥240,991 million for fiscal 2009. Canon’s management recognizes that constant and intensive investment in facilities and R&D is required to maintain and strengthen the competitiveness of its products. Canon’s management seeks to meet its capital requirements with cash flow principally earned from its operations, therefore, its capital resources are primarily sourced from internally generated funds. Accordingly, Canon has included the information with regard to free cash flow as its management frequently monitors this indicator, and believes that such indicator is beneficial to the understanding of investors. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and consolidated balance sheets for cash availability analysis.

     Net cash used in financing activities totaled ¥279,897 million in fiscal 2010, mainly resulting from the dividend payout of ¥136,103 million, repurchase of treasury stock and repayment of borrowings of Océ N.V. The Company paid dividends in fiscal 2010 of ¥110.00 per share.

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

     Short-term loans (including the current portion of long-term debt) amounted to ¥7,200 million at December 31, 2010 compared with ¥4,869 million at December 31, 2009. Long-term debt (excluding the current portion) amounted to ¥4,131 million at December 31, 2010 compared with ¥4,912 million at December 31, 2009.

     Canon’s long-term debt (excluding the current portion) mainly consists of lease obligations.

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

     As of March 15, 2011, Canon’s debt ratings are: Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term); and R&I: AA+ (long-term). Canon does not have any rating downgrade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings.

     Increase in property, plant and equipment on an accrual basis in fiscal 2010 amounted to ¥158,976 million compared with ¥216,128 million in fiscal 2009 and ¥361,988 million in fiscal 2008. In fiscal 2010, decrease in property, plant and equipment was due to limiting investment to necessary facilities. For fiscal 2011, Canon projects its increase in property, plant and equipment will be approximately ¥260,000 million.

     Employer contributions to Canon’s worldwide defined benefit pension plans were ¥21,435 million in fiscal 2010, ¥18,232 million in fiscal 2009, ¥23,033 million in fiscal 2008. In addition, employer contributions to Canon’s worldwide defined contribution pension plans were ¥11,780 million in fiscal 2010, ¥9,148 million in fiscal 2009, and ¥10,840 million in fiscal 2008.

     Working capital in fiscal 2010 decreased by ¥601 million, to ¥1,233,488 million, compared with ¥1,234,089 million in fiscal 2009 and ¥1,120,848 million in fiscal 2008. Canon believes its working capital will be sufficient for its requirements for the foreseeable future. Canon’s capital requirements are primarily dependent on management’s business plans regarding the levels and timing of purchases of fixed assets and investments. The working capital ratio (ratio of current assets to current liabilities) for fiscal 2010 was 2.38 compared to 2.57 for fiscal 2009 and to 2.19 for fiscal 2008.

     Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 6.3% in fiscal 2010, compared to 3.4% in fiscal 2009 and 7.3% in fiscal 2008.

     Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 9.2% in fiscal 2010 compared with 4.9% in fiscal 2009 and 11.1% in fiscal 2008.

     Debt to total assets ratio was 0.3%, 0.3% and 0.4% as of December 31, 2010, 2009 and 2008, respectively. Canon had short-term loans and long-term debt of ¥11,331 million as of December 31, 2010, ¥9,781 million as of December 31, 2009 and ¥13,963 million as of December 31, 2008.

     C. Research and development, patents and licenses

     Year 2010 marks the final year of the Excellent Global Corporation Plan, which started in 2006. The slogan of the third phase (“Phase III”) is “Innovation & Sound Growth” and there are four core strategies:

	•		Realize an overwhelming No.1 position worldwide in all current core businesses;
	•		Expand operations through diversification;
	•		Identify new business domains and accumulate necessary technological capabilities; and
	•		Establish new production system to sustain global competitiveness.

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

	•		Realize an overwhelming No.1 position worldwide in all current core businesses: Pursue development of new products which enable “cross-media imaging” by sophisticated functional synergy among the variety of Canon’s image handling products, benefiting from the proliferation of broad band communication environment.
	•		Expand operations through diversification: Focus on developing various types of display, including Organic Light-Emitting Diode displays (“OLED”).
	•		Identify new business domains and accumulate necessary technological capabilities: Accumulate technological capability to create innovative products and systems in the focused three domains of the medical imaging sector, intelligent robot industry and safety technology domain.

     Canon has developed and strengthened relationships with universities and other research institutes, such as Kyoto University, Tokyo Institute of Technology, Stanford University, The University of Arizona, the New Energy and Industrial Technology Development Organization and the National Institute of Advanced Industrial Science and Technology to assist with fundamental research and to develop cutting-edge technologies.

     Canon has fully introduced 3D-CAD systems across the Canon group, boosting R&D efficiency to curtail product development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and analysis technologies by establishing leading-edge facilities, including one of Japan’s highest-performance cluster computers. As such, Canon has succeeded in further reducing the need for prototypes, dramatically lowering costs and shortening product development lead times.

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

     Canon’s consolidated R&D expenses were ¥315,817 million in fiscal 2010, ¥304,600 million in fiscal 2009 and ¥374,025 million in fiscal 2008. The ratios of R&D expenses to the consolidated total net sales for fiscal 2010, 2009 and 2008 were 8.5%, 9.5% and 9.1%, respectively.

     Canon believes that new products protected by patents will not easily allow competitors to compete with it, and will give it an advantage in establishing standards in the market and industry.

     D. Trend information

     As for the global economy, in the U.S., despite the risk of a slowdown due to the ongoing credit crisis and high unemployment, we expect the trend toward gradual recovery to continue. In Europe, while concerns remain regarding financial instability, we believe the economy will make steady progress toward recovery. In Asia, the overall trend toward economic recovery is expected to continue, fueled by such factors as continued strong economic expansion in such countries as China and India. As for Japan, while the economy will likely continue to realize a gradual economic rebound against the backdrop of a global economic recovery, we expect the current trend of economic deflation to continue due to weak domestic consumption.

     Amid this climate, Canon has launched its latest five-year plan: Phase IV of the Global Excellent Corporation Plan (2011-2015). Our ultimate aim is to realize our goal of joining the ranks of the world’s top 100 companies in terms of all major management indicators.

     In order to achieve our targets, we aim to expand our scale and business operations, further strengthening our imaging-related businesses and working to expand business domains by cultivating such areas as medical and industrial equipment. At the same time, we will make efforts to transform our manufacturing operations in keeping with the changing times through the reinforcement of such basic functions as research and development, production, and sales and marketing. Specifically, we will strive to change to a situation where products developed in each region are sold globally, accelerating transition to a three regional headquarters management system, which includes R&D centers in Japan, the U.S. and Europe, as we solicit the world’s great minds and innovative power.

     Targeting this kind of change and transformation, we will also make active use of M&As. For this, we set up a special organization in charge of further promoting M&As, effective January 1, 2011.

     At the same time, we will work to solidify our foundation as a leading environmental company that aims for both growth and environmental conservation, by further raising the environmental performance of our products and reducing the impact of all corporate activities on the environment.

     In 2011, the first year of Phase IV, under the theme “Launching a Full-Scale Offensive with the Courage to Change,” Canon will seek to ensure that financial results in 2012 exceed those of its record-high performance of 2007.

     One important measure addresses the continuous introduction of innovative products and services. Through the timely launch of products displayed at last year’s Canon EXPO, we will work to comprehensively strengthen our existing core businesses. In the office equipment segment, we aim to expand our lineup by accelerating joint product development efforts with Océ. In the consumer products segment, we aim to strengthen, among other areas, our digital SLR movie capabilities. In addition, in our display business, we will swiftly restructure our strategy with respect to high-resolution medical imaging and high-image-quality displays as a new way to enter this area.

     Next, we will work to reinforce our global sales capabilities. In order to further improve our performance in Asia, where an increasing proportion of Group sales each year is generated, in addition to further strengthening our sales organization in China, we will also further our reach into the markets of Southeast Asia and India. In developed countries, in addition to accelerating our integration with Océ and leveraging Océ’s sales network to expand product sales, we will also work to strengthen our solutions business.

     Additionally, we will pursue thorough cost reductions to further lower our cost of sales ratio. In this regard, we will accelerate activities to establish an optimized global production system, taking into account such aspects as logistics, procurement, labor and country-specific risks. In addition to accelerating new product development through computer simulation and thorough cost reductions, we will also promote the further automation of production and the in-house production of manufacturing equipment. We will establish a highly efficient and advanced manufacturing business model, promoting “man-machine cells” that allow for further productivity improvements. Man-machine cells can be found in our domestic production, where automation and testing equipment have been incorporated into the cell production system.

     We also aim to accelerate the establishment of new core businesses through globalized diversification, based on a three regional headquarters approach. In the medical field, we will expand our product lineup with a focus on digital radiography, expand our industrial equipment business, and swiftly draw up plans to actively establish research and development functions in the U.S. and Europe.

     In addition, we will thoroughly leverage the integrated systems we have in place that facilitate the sharing and utilization of product design information on a company-wide basis as we work for efficiencies in product development and further improvements in product quality.

     Furthermore, with the understanding that product quality represents the lifeblood of a manufacturer, we will recommit ourselves to our “quality first” philosophy.

     In order to realize further advancements and become a truly excellent global corporation, we will strive to foster global human resources that can exercise their abilities around the world. We will also devote more effort towards the execution of environmental protection and corporate social responsibility activities.

     Office Business Unit

     In 2010, Canon’s copying machine and MFD businesses rebounded substantially from the economic downturn, which had affected the entire industry in 2009. Emerging markets, such as in Asia, were particularly notable for their growth.

     The importance of providing added value in the form of networking, integration, color printing, multifunction and solutions has grown in the office imaging products business. Canon seeks to maintain its leading position in both the printing and in the office products markets.

     Canon has matched its business strategy to market trends by strengthening its lineup of digital color network MFDs and print-on-demand machines. In 2010, Canon further expanded the imageRUNNER ADVANCE series with the introduction of a monochrome lineup and a low-end color device. We also launched the imagePRESS C7010VP series, designed to meet the needs of print professionals in commercial print shops with advanced function. To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon will continue reinforcing its hardware and software product lineups and solutions capability.

     Canon’s laser printer business has a strong market position. The market declined rapidly in the wake of the global economic downturn but slowly recovered in 2010.

     In the monochrome laser printer market, sales to the micro-office/ home office segment expanded.

     The color laser printer market is expected to grow over the long term, although demand slowed recently due to the economic downturn. Competition has intensified as competitors have pursued aggressive pricing strategies to establish market share.

     Canon is promoting technological development in order to provide competitive products in all segments with a focus on bringing new and improved offerings to market in a well-timed manner.

     The large format printer market shrank in 2009. However, the trend was toward recovery in 2010. Total business growth in 2010 increased slightly, with particularly strong growth in Asia.

     In 2010, we launched three new 12-color printer models (iPF6300/6350/8300), designed to meet the needs of the graphic art market (exceptional color reproduction, high print quality, and furthermore, high usability).

     We also released two new CAD models (iPF815/825), for a market that demands high productivity. These models have achieved a strong reputation, resulting in double-digit unit sales growth in 2010 as compared to 2009. Market share of our CAD models also increased steadily during 2010.

     Consumer Business Unit

     The digital SLR market continued to grow steadily in 2010. Additional manufacturers entered the market this year, expanding the market with mirrorless digital cameras, and solid growth in digital SLR cameras continued. These trends show that there is still a strong market need for high-quality digital photography.

     With respect to digital SLR cameras, the market shows demand for increased numbers of pixels. Higher sensitivity, miniaturization, reduced weight and video functions have become standard specifications as well, including the support by each company of full HD image quality in this market. By offering new products based on cutting-edge technology, Canon seeks to continue its growth into the foreseeable future.

     In addition, sales volume in emerging markets appears ready to expand dramatically. For this reason, there is an urgent need to upgrade sales structures and other systems in order to handle this expansion.

     During fiscal year 2010, the compact digital camera market was driven by growth in China, Russia, and other emerging economic regions. Although markets in some developed economic regions have expanded due to a reduction in average prices across the industry, overall, such regions have remained stable or have declined as compared to the previous year. Total global growth increased slightly, while Canon has maintained a high share at the same level as during the previous consolidated fiscal year.

     Developed markets are expected to remain stable in 2011, and emerging markets are expected to remain on a positive growth track, resulting in a projected slight increase worldwide as compared to consolidated fiscal 2010.

     A fierce price war and the strong yen have been drastically squeezing profit margins in the digital camera market. Although the industry as a whole is relying more and more on electronic manufacturing service (“EMS”) companies and cost competition is expected to intensify in the future, we plan to take advantage of our industry-leading economies of scale and its 100% internal manufacturing system in order to maintain and solidify our profitability.

     We expect continued growth in the interchangeable lens market due to the rapid spread of digital SLR cameras and mirrorless digital cameras. Canon aims to continue expanding its sales and market share by introducing products with features that satisfy customer needs, such as lenses with image stabilizer functionality.

     The global digital video camcorder market has diversified due to the introduction of new recording media, such as flash memory. During this consolidated fiscal year, however, trends toward flash memory and HD as the future mainstream medium became clear. Despite the worldwide economic downturn that started in the second half of 2008, the flash memory and HD market segments have continued to grow year-on-year. The new, lowest-priced webcam product category (under $200) has proven strong, particularly in North America. Webcams appeal to a user segment that wants to enjoy convenient video capabilities, and they have been selling in increasing numbers. Canon is working to expand sales of its powerful lineup of products to meet a wide range of user needs with even greater added value and seeks to differentiate itself from the competition based on its high-quality HD image technology concept.

     The business application projector market experienced the effects of the continuing economic downturn during this consolidated fiscal year as well, resulting in a slowdown as compared to previous forecasts. In particular, this downturn affected products with high added value. However, system integrators and other video professionals continue to require these high added value products, and therefore Canon plans to continue working to maintain and expand sales.

     In 2010, although expansion in the market for network cameras used for surveillance video and monitoring applications softened somewhat, this market has been recording solid growth up until the present. We expect that the trends toward larger numbers of pixels, advancements in video analysis technology and the industry standardization of operational commands will lead to future growth in this market. In order to avoid missing these trends, Canon is working to increase sales with an expanded competitive lineup.

     The broadcast television lens market experienced a temporary decline in the wake of the economic downturn. However, the market has been on course for a gradual overall recovery during consolidated fiscal year 2010, partially thanks to an expansion of the market in countries where the industry is still emerging. Nevertheless, due to the progressive reduction in prices caused by equipment downsizing as well as the influence of the strong yen, while revenue growth was achieved, profits declined. We expect this downsizing trend to continue, and starting next year, Canon will work to expand profits by reinforcing its family of products aimed at responding to this change in the industry. In the medium term, we expect that this industry will be revitalized by increased demand for equipment upgrades due to the industry switch to digital broadcasting as well as demand from emerging markets. Canon already has a large market share worldwide, and plans to increase sales and expand its share further as the market recovers by releasing highly competitive products to the market in a timely fashion, further solidifying its position in the industry.

     The Inkjet printer market recovered in 2010. While emerging countries have contributed to the growth of market volume, in advanced countries there are increasing demands of small and home office for high-value added products including MFPs with fax and ADF function and also wireless models. Along with basic performance, such as image quality and print speed, each vendor began to enhance the product design, ease of use and applications to increase user satisfaction. To manage these trends, Canon has introduced new models with variety of new features, such as an Intelligent Touch System, which provides light-guided direction, and Full HD Movie Print. Thereby strengthening its lineup from entry-level to high-end models, Canon intends further sales expansion.

     Industry and Others Business Unit

     In fiscal 2010, the semiconductor device market recovered strongly from the economic downturn starting in the second half of fiscal 2008. There were noteworthy improvements for semiconductor device market categories such as DRAM and NAND-flash memory, due to strong sales of PCs and smart phones, as well as the so-called “green” products such as LED and power devices.

     As a result, shipments of semiconductor lithography equipment in fiscal 2010 recovered sharply over fiscal 2009. By market, sales in Korea have been strong, thanks to increased investment by major memory manufacturers, while in Japan demand has been steadily improving for lithography equipment for sensors and image devices.

     The market for LCD lithography equipment in fiscal 2010 grew dramatically from the previous year. Makers of LCD panels have significantly increased their equipment investment in order to capture growing demand in developing countries. Total equipment investment among the top LCD panel makers grew strongly in fiscal 2010 from the previous year, topping the level recorded during the boom market of fiscal 2008.

     Against this background, shipments of LCD lithography equipment markedly improved rapidly compared to fiscal 2009. By region, shipments in Japan declined, but those to Korea, Taiwan and China improved significantly. Shipments of generation-7.5 and 8 LCD lithography equipment for televisions improved noticeably.

     The medical equipment market in Europe and the United States was adversely influenced by the economic downturn. However, the market for static digital X-ray equipment has been expanding, although competition has become more severe through the entry of computed radiography manufacturers into the market. The medical equipment market in Asia (mainly China) is expanding rapidly, and the static digital X-ray equipment market has followed this trend.

     Thin and lightweight CXDI-55C/55G portable digital radiography system, which was released in 2009, contributed to an increase of sales in Europe, the United States and Japan. In 2010, Canon’s overall sales increased steadily compared to the previous fiscal year. We also focused on emerging markets and particularly, we set the low-end market in China, which is supported by the Chinese government, as a main target. As a result, we have been successful in increasing sales to China, and orders from Central and South America have also contributed to our U.S. sales figures. During 2010, Canon released dynamic digital radiography CXDI-50RF in Europe and the United States, and Virtual Imaging, which Canon acquired in 2009, contributed to our increase in sales with its DR system. A strategic new product, the CXDI-70C Wireless, was launched in November 2010.

     The ophthalmic products market shrank in 2010, especially in Europe and the United States, due to the economic downturn. However, the optical coherence tomography (“OCT”) market expanded steadily compared to 2009. Therefore, many of Canon’s competitors released new strategic OCT products. In order to keep pace with these trends, Canon is striving to increase sales by expanding competitive lineup of products to gain the market acceptance.

     Canon acquired Optopol Technology in 2010 and plans to use Optopol Technology as a development and production center. In 2010, sales of Optopol’s OCT technology in Japan, Europe and the United States contributed to our net sales. Sales of hybrid retinal cameras, first released in 2009, contributed to sales in 2010, while sales of non-mydriatic retinal cameras declined slightly due to the economic downturn in Japan, Europe and the United States. Canon released the extremely compact non-mydriatic retinal camera CR2 in November 2010 and aims to increase sales in this market.

     Among the “imageFORMULA series” document scanners handled by Canon Electronics Inc., the high-durability, high-speed “DR-9050C/6050C,” compact “DR-2010C/2510C” and new “ScanFront 300P,” with network functionality, all met with strong market receptions, chalking up increases in units sold and revenues in every region where they are marketed. Sales have been particularly strong in China, India, and other parts of Asia, with significant increases in terms of both units and revenues. Meanwhile, in the Japanese market, strong sales of the extremely compact and portable document scanner “DR-150” have led a major increase in unit sales.

     Sales of the FA system-related devices handled by Canon Machinery Inc. ended the term with a year-on-year increase as solid first-half results outweighed sales declines in the second half. Die bonders had promising orders for the LED (light-emitting diode) compatible “BESTEM-D01 series,” helped in particular by vigorous first-half capital investments by LED manufacturers. It enjoyed significantly higher sales for the term, despite lower orders in the second half.

     The magnetic disk manufacturing equipment handled by Canon ANELVA Corporation saw sales revenues more than double from the previous term as demand for hard disk drives to be used in servers and personal computers rose and customers increased capital investments. Sales of magnetic head manufacturing equipment and semiconductor film deposition equipment also rose significantly.

     E. Off-balance sheet arrangements

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

     Canon provides guarantees for bank loans of its employees, affiliates and other companies. Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years in the case of employees with housing loans, and 1 year to 10 years in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default by all borrowers was ¥16,746 million at December 31, 2010. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees were insignificant.

     F. Contractual obligations

The following summarizes Canon’s contractual obligations at December 31, 2010.

						Payments Due By Period
						Less than												More than
		Total				1 year				1-3 years				3-5 years				5 years
		(Millions of yen)
Contractual obligations:
Long-Term Debt:
Capital Lease Obligations		¥	8,247			¥	4,268			¥	2,806			¥	1,105			¥	68
Other Long-Term Debt			1,013				861				55				50				47
Operating Lease Obligations			83,800				23,413				32,344				13,941				14,102
Purchase commitments for :
Property, Plant and Equipment			29,383				29,383				—				—				—
Parts and Raw Materials			86,434				86,434				—				—				—
Other long-term liabilities
Contribution to Defined Benefit Pension Plans			30,071				30,071				—				—				—
Total		¥	238,948			¥	174,430			¥	35,205			¥	15,096			¥	14,217

Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements for further details.

Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership.

     Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue are recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are primarily based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2010, accrued product warranty costs amounted to ¥13,343 million.

     At December 31, 2010, commitments outstanding for the purchase of property, plant and equipment were approximately ¥29,383 million, and commitments outstanding for the purchase of parts and raw materials were approximately ¥86,434 million, both for use in the ordinary course of its business. Canon anticipates that funds needed to fulfill these commitments will be generated internally through operations.

     During fiscal 2011, Canon expects to contribute ¥22,055 million to its Japanese defined benefit pension plans and ¥8,016 million to its foreign defined benefit pension plans.

     Canon’s management believes that current financial resources, cash generated from operations and Canon’s potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements.

Item 6. Directors, Senior Management and Employees

     A. Directors and senior management

     Directors and corporate auditors of the Company as of March 30, 2011 and their respective business experience are listed below.

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		Director
				3/1985		Managing Director
				1/1989		In charge of HQ administration
				3/1989		Senior Managing Director
				3/1993		Executive Vice President
				9/1995		President & CEO
				3/2006		Chairman of the Board & President & CEO
				5/2006		Chairman & CEO*
Tsuneji Uchida		President & COO		4/1965		Entered the Company
(Oct. 30, 1941)				4/1995		Group Executive of Lens Products Group
				3/1997		Director
				4/1997		Deputy Chief Executive of Camera Operations HQ
						Group Executive of Photo Products Group
				4/1999		Chief Executive of Camera Operations HQ
				7/1999		In charge of promotion of digital photo business
				1/2000		In charge of promotion of digital photo home business
				1/2001		Chief Executive of Image Communications Products HQ
				3/2001		Managing Director
				3/2003		Senior Managing Director
				3/2006		Executive Vice President
				5/2006		President & COO*
Toshizo Tanaka		Executive Vice President & CFO		4/1964		Entered the Company
(Oct. 8, 1940)				1/1992		Deputy Group Executive of Finance & Accounting HQ
				3/1995		Director
				4/1995		Group Executive of Finance & Accounting HQ
				3/1997		Managing Director
				3/2001		Senior Managing Director
				1/2007		Group Executive of Policy and Economy Research HQ
				3/2007		Executive Vice President & Director
				3/2008		Executive Vice President & CFO*
				1/2010		Group Executive of General Affairs HQ
				3/2010		Group Executive of External Relations HQ
Toshiaki Ikoma (Mar. 5, 1941)		Executive Vice President & CTO (Group Executive of Corporate R&D HQ)		4/1982		Professor of Institute of Industrial Science, the University of Tokyo
				2/1997		President of Texas Instruments Japan Limited
				2/2002		Chairman of the Board of Texas Instruments Japan Limited
				11/2002		Adviser of Texas Instruments Japan Limited
				4/2003		Corporate Auditor of Industrial Revitalization Corporation of Japan(IRCJ)
				6/2003		Auditor (Outside) of Hitachi Metals, Ltd.*
				7/2003		Senior Fellow of Japan Science and Technology Agency (JST)
				4/2004		Auditor (Outside) of Center for National University Finance and Management*
				10/2004		Director-General of Center for Research and Development Strategy (CRDS), Japan Science and Technology Agency (JST)
				4/2005		Entered the Company Adviser of the Company
				7/2007		Adviser of Research and Development
				1/2008		Chief Technology Adviser
				4/2008		Group Executive of Frontier Research HQ and Core Technology Development HQ
				12/2008		President of Canon Foundation*
				1/2009		Group Executive of Corporate R&D HQ*
				3/2009		Executive Vice President*
				7/2009		Chief Executive of Optical Products Operations