To Our Stockholders
Bolstering Management Quality in the Face of Adversity

In 2008, the world economy found itself facing an unprecedented crisis triggered primarily by the global recession following the collapse of Lehman Brothers in the United States.

In 2009, the economic environment will continue to be extremely harsh. Nevertheless, we view these drastic economic changes as an ideal opportunity to further restructure in order to bolster our overall management strength. In 2009, Canon will make a major change in course from sound growth to improved management quality while preparing to rapidly leap forward when the economic environment recovers.

Improved management quality means that Canon will make decisions swiftly as needed so that we can rapidly move to the execution stage and increase the overall strength of the Company, even when market conditions suddenly turn turbulent.

In other words, we will achieve real-time management. To that end, we will further strengthen our cash-flow management and supply chain management (SCM) as we raise product competitiveness and profi tability. Canon is boldly pushing forward its Excellent Global Corporation Plan with the aim of entering the ranks of the global top 100 companies in terms of key performance indicators.

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

Turning to each region, in the United States a grave situation has been created by the recession triggered by the subprime loan problem, with a sharp decline in new housing starts along with growing unemployment in the auto and financial industries—all leading economic indicators. In Europe, the fi nancial crisis has also affected the real economy, leading to a decline in regional trade, which had been an engine of growth.

In Japan as well, the financial crisis sent economic conditions into a rapid tailspin. Exports, a growth driver, plunged and production dropped substantially for most manufacturers.

In Asia and emerging countries in other areas, economic growth abruptly declined due to decreased exports.

Fiscal 2008 Performance Results
As a result of the above-mentioned factors, Canon’s consolidated net sales declined 8.6% to ￥4,094.2 billion and net income dropped 36.7% to ￥309.1 billion compared with the previous fiscal year. By product category, sales decreased 9.4% to ￥2,660.0 billion for business machines (includes office imaging products and computer peripherals) and 9.6% to ￥1,042.0 billion for cameras.

However, sales of optical and other products were largely in line with those of the previous fiscal year at ￥392.2 billion. By operating region, in Europe sales fell 10.5% to ￥1,341.4 billion. Sales also decreased in the Americas, declining 13.6% to ￥1,154.6 billion. In Japan sales slipped 8.4% to ￥868.3 billion, and elsewhere in Asia and Oceania sales climbed 4.5% to ￥729.9 billion.

Turning to operating expenses, Canon’s selling, general and administrative expenses declined 4.8% year on year to ￥1,067.9 billion. The Company’s R&D expenses increased 1.6% to ￥374.0 billion, or 9.1% of net sales. Even in a major economic downturn, Canon’s aggressive R&D spending was at a higher rate than in the previous fi scal year. The gross profit ratio declined 2.8 percentage points to 47.3%. Net income per share, basic and diluted, came in at ￥246.21 and ￥246.20, respectively.

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

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

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

Canon will promote a two-pronged production strategy of further developing cost-reducing technologies and building a globally optimized production system based on localized production.

With respect to the development of cost-reducing technologies, the Company will work to expand the scope of automation with the goal of establishing fully automated production systems. In addition to the assembly of toner and inkjet cartridges, We will continue to promote automation, even in the product body assembly process. We are developing intelligent robots that can carry out highly precise and sophisticated actions that will enable them to perform more complex assembly work.

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

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

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

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

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

The presence of a truly excellent global company must be welcome—even in fields outside of its direct business activities. Therefore, we will fulfi ll our social responsibilities as a good corporate citizen.

One of those responsibilities is that of striking an optimal balance between business operations and environmental conservation. While Canon reexamines its business processes and thoroughly eliminates waste that affects the environment, the Company will enhance the environmental performance of its products and continuously innovate in a wide range of fi elds, including materials and design.

In addition, as a global company, Canon established the Canon Institute for Global Studies and the Canon Foundation in 2008 with the goal of contributing to the global community. These institutions analyze important issues pertaining to the world’s future, disseminate information, and broadly support groups and individuals involved in academic research, including in science and technology areas, as well as cultural research, business and education in the areas of technology.

The economic crisis has had a major impact throughout the world and a great many uncertainties lie ahead. Nevertheless, guided by the strategies of Phase III of our Excellent Global Corporation Plan, Canon will make a shift back to achieving increased revenue and earnings, specifically, net sales of ￥3,700 billion or more and net income of ￥150 billion or more by fi scal 2010, the final year of Phase III.

Thereafter in the three-year period to fi scal 2012, the Company will work diligently toward building a corporate structure that is capable of achieving the level of sales and profits necessary to surpass its fiscal 2008 performance based on current foreign currency exchange rates. I would like to thank everyone for their continued understanding and support.

Fujio Mitarai
Chairman and CEO
Canon Inc.

Download Canon Annual Report 2008

PDF format, 7.5MB, 102Pages.

CORPORATE PROFILE
Canon is engaged in the development, manufacture and sale of a growing lineup of copying machines, printers, cameras, optical and other products that meet a diverse range of customer needs.

The Canon brand is well recognized and trusted throughout the world by the individuals, families, offi ces and industries that use Canon products. In 1996, Canon launched its Excellent Global Corporation Plan and has since delivered a series of strong performances. After this period of sustained growth, however, the Company is confronting an unprecedented downturn in worldwide financial and economic markets.

Despite the onset of harsh operating conditions, Canon remains at the forefront of an industry that continues to experience the spread of globalization and broadband networks. Leveraging its strengths in cross-media imaging through advanced synergies among digital imaging equipment and technologies, Canon will reinforce its robust position in preparation for the next economic upturn.

As a part of these endeavors, and in its efforts to fulfi ll its duties to investors and society, Canon will continue to emphasize good corporate governance and promote activities that contribute to the environment and society.

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

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

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

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