EX-I.2

Matters to be reported:

Details regarding business, the consolidated financial statements, and audit results of the consolidated financial statements by the public accounting firm and the Board of Corporate Auditors for the 60th business term (January 1, 2009 - December 31, 2009); and

Details regarding the non-consolidated financial statements for the 60th business term (from January 1, 2009 - December 31, 2009).

Exhibit I-2

(English Language Translation)

This share exchange is made for the securities of a Japanese company. The share exchange is subject to disclosure requirements of Japan that are different from those of the United States. Financial statements included in the document, if any, might have been prepared in accordance with foreign accounting standards that may not be comparable to the financial statements of United States companies. It may be difficult for you to enforce your rights and any claim you may have arising under U.S. federal securities laws, since the issuer is located in Japan, and some or all of its officers and directors are residents of Japan. You may not be able to sue a Japanese company or its officers or directors in a Japanese court for violations of the U.S. securities laws. Furthermore, it may be difficult to compel a Japanese company and its affiliates to subject themselves to a U.S. court’s judgment. You should be aware that the issuer may purchase securities otherwise than under the share exchange, such as in open market or privately negotiated purchases.

March 9, 2010

Canon Finetech Inc.
717 Yaguchi, Misato-shi, Saitama, Japan

Ikuo Soma
President and Representative Director

Notice of Convocation of the 60th Business Term Annual General Meeting of Shareholders

Dear fellow shareholder:

We are pleased to invite you to the 60th Business Term Annual General Meeting of Shareholders to be held as described below.

If you are unable to attend the meeting in person, you will be entitled to vote in writing. Please read the reference statement and its supplementary statement, vote for or against the proposals in the voting card and return the completed voting card on or prior to Tuesday, March 23, 2010.

Particulars:


1.	Date and time:	Wednesday, March 24, 2010 from 10:00 a.m.
2.	Place:	Headquarters, R&D Center, 5th Floor Hall
		5th Floor, 717 Yaguchi, Misato-shi, Saitama
		(See attached map)
3.	Purposes of the meeting:

I-2-1

(Materials delivered pursuant to Article 437 and Article 444 of the Corporation Law)

Business Report (from January 1, 2009 to December 31, 2009)

Current Conditions of the Canon Finetech Group

(1) Business Progress and Results

■ General Business Conditions

In 2009, the pace of economic decline stemming from the global financial crisis started to moderate in the United States and Europe. However, prospects for an economic recovery remain uncertain due to sluggish consumer spending reflecting such factors as deterioration in employment- and income-related conditions and issues with non-performing loans. By contrast, in China, the economy was on track for a recovery owing to growing domestic demand driven by the government’s large-scale measures to boost the economy. In Japan, although the economy showed signs of improving, thanks to the government’s economic measures, the recovery was limited due to deflationary pressures, sluggish capital spending, and the appreciation of yen.

Within this environment, as an independent enterprise with development- and production-related businesses, the Canon Finetech Group, in a year viewed as “a year to prepare for a leap forward towards the next period of expansion,” reinforced its structure of high profitability to address the severe business environment. Among others, the Canon Finetech Group took various actions to shorten its development cycles and reduce all business operating costs in an effort to improve efficiencies.

For its core business of office machine-related products, the Company introduced finishers and other peripherals for Canon Inc.’s new imageRUNNER ADVANCE brand of office multifunction printers, thereby enhancing its lineup of independently developed products.

As for measures regarding Group management, the Company reinforced collaboration with Nisca Corporation and reorganized the subsidiaries of Nisca Corporation, making the management base more efficient.

In order to strengthen our base as an independent enterprise, the Company positioned the current fiscal year as the first year of new human resources development initiatives, and started various human resources development programs.

Additionally, the Canon Finetech Group endeavored to enhance the awareness of compliance and corporate ethics, and maintain and improve its sound and efficient internal control systems by proactively exploiting and publicizing its compliance promotion activity under the “Canon Group Code of Conduct.”

As a result, the Company recorded consolidated net sales of 108,148 million yen (down 27.2% from the previous fiscal year), consolidated ordinary income of 3,813 million yen (down 44.1% from the previous fiscal year), and consolidated net income of 2,226 million yen (down 63.8% from the previous fiscal year). The Company recorded non-consolidated net sales of 84,664 million yen (down 25.8% from the previous fiscal year), non-consolidated ordinary income of 3,654 million yen (down 32.8% from the previous fiscal year), and non-consolidated net income of 2,589 million yen (down 52.3% from the previous fiscal year).

I-2-3

■ Business Conditions by Segments

(i) Office Machines

[Office Machines]

This segment worked to improve the efficiencies of all operations, including development, production and quality assurance, and reinforce cost competitiveness in order to build up a business structure through which it could respond to the current never-before-experienced severe business environment.

On the development side, we developed products with a high level of cost consciousness from the early stages of development by improving the environment in which we could identify the man-hours and costs in real time in all development processes, including prototypes.

On the quality side, we improved evaluation efficiencies, among others, by reviewing our quality evaluation flow, and introduced a quality engineering methodology. Thus, we endeavored to further strengthen the super-concurrent-development system that enables us to carry out development, prototype and quality evaluation concurrently.

On the production side, we pursued total cost management and control and further reinforced our low-cost production system by optimizing production allocation at each production site, working with Chinese production sites, and promoting the global procurement of parts and components.

On the sales side, we expanded our product lineup and sales channels by introducing the A3-model iR2320 series of monochrome digital multifunction printers mainly for emerging markets, and the A3-model iR2318 series of monochrome digital multifunction printers targeting the Chinese market in particular. In order to secure our advantage in the SOHO (Small Office/Home Office) market, we expanded contract production with the start up of Canon Inc.’s A4-model imageCLASS D1100 series of monochrome digital multifunction printers, and the A4-model MF8000/MF8300 series of color multifunction printers.

However, reflecting the effects of a reduction in the corporate motivation for capital expenditure, the Office Machines segment recorded consolidated net sales of 45,160 million yen (down 26.9% from the previous fiscal year) and non-consolidated net sales of 42,887 million yen (down 27.4% from the previous fiscal year).

[Office Machine Peripherals]

This segment reinforced the Canon Finetech Group’s business management foundation to build up a business structure through which we could respond to uncertain and harsh business conditions.

Working in collaboration with Nisca Corporation, we efficiently utilized our management resources to create a synergy effect by defining the mutual business domains and division of roles, and endeavored to build up a broad collaborative relationship spanning the areas of development, production and quality assurance.

I-2-4

On the production side, we boosted productivity at our new plant in southern China and expanded the range of products it produces, thereby achieving progress with the creation of a cost-competitive production system that could withstand a challenging economic environment. On the other hand, at Japanese production sites, we pursued optimal and efficient production by re-examining our production allocation.

On the sales side, with regard to the Canon imagePRESS series of digital presses, we further expanded the product lineup by introducing finishers and saddle finishers equipped with trimming and puncher functions that would meet the advanced demands of the POD market. During the latter half of the current fiscal year, we improved the environment in which we are able to respond in terms of market demand regarding color multifunction printers, as well as monochrome multifunction printers, by introducing a wide variety of items such as staple finishers and half-fold finishers for color multifunction printers, including the Canon imageRUNNER ADVANCE C5000/C7000 series, designed to address increasing demands within IT environments.

However, this segment recorded consolidated net sales of 39,941 million yen (down 29.9% from the previous fiscal year), and non-consolidated net sales of 22,806 million yen (down 26.3% from the previous fiscal year), reflecting the impact of reduced corporate motivation for capital spending.

(ii) Industrial Application Devices and others

[Industrial Printers]

This segment worked to produce, sale and develop new products utilizing our advantage in industrial inkjet print head technology.

For card label printers, we endeavored to develop sales expansion activities for the domestic demand-based industries that had been relatively less affected by the deterioration in economic conditions, and sales activities including proposals for the in-house production of business cards and other types of cards. However, these efforts were not able to make up for the slump in demand in existing sales channels, resulting in lower sales.

For print modules, although we implemented sales activities for QR code printing, sales remained weak.

For large format printers, while the Company started production of four types of printers, including the iPF755 and the iPF655 for CAD output, sales remained weak.

The Company also launched three new types of products for mailing systems, which charge fees by printing out postage charges on envelopes and postcards in place of stamps. However, sales decreased reflecting the impact of inventory adjustments at OEMs, although sales from consumable supplies remained steady.

For mark printers produced and sold by Nisca Corporation, we expanded our product lineup with the introduction of the new Mk2100 and Mk1100 cable ID printers. However, sales decreased, reflecting the impact of the economic recession.

As a result, this segment recorded consolidated net sales of 18,746 million yen (down 19.0% from the previous fiscal year), and non-consolidated net sales of 16,972 million yen (down 20.0% from the previous fiscal year).

I-2-5

[Components]

This segment is the only segment in the Canon Group that owns an organic synthesis and purification plant and, taking advantage of this strength, develops the chemicals business. Additionally, Nisca Corporation develops its optical measurement equipment business.

In the areas of development and production, we worked on improvements, in consideration of the environment and cost reductions, in producing raw materials for organic photo conductors (OPC) used for photoconductive drums, an important component of Canon laser beam printers and digital multifunction printers. We also continued to work on the development of raw materials for next-generation chemicals with the aim of expanding the OPC business.

On the sales side, sales declined due to the decrease in sales volumes of laser beam printers and other products, reflecting the economic recession, which substantially affected the level of orders we received for OPC raw materials, the core product for this segment.

Our Media Research Center smoothly added to our experience in media inspection and evaluation, with one example being the launch of suitability study services for production multifunction printers (such as the Canon imagePRESS C7000VP) and various media.

With respect to Nisca Corporation’s optical measurement equipment business, sales volumes of auto irises for video camcorders and diaphragm units for replacement lenses for digital single-lens reflex cameras fell, and sales decreased.

As a result, this segment recorded consolidated net sales of 4,301 million yen (down 35.4% from the previous fiscal year), and non-consolidated net sales of 2,000 million yen (down 28.3% from the previous fiscal year).

* The optical measurement equipment business (auto irises for video camcorders and shutter units for digital cameras) of Nisca Corporation, which was categorized under “Industrial Application Devices” in the previous fiscal year, and the Chemicals business have been reclassified under the “Components” segment.

(2)		Facilities Investment

		The aggregate of investments in new molds, machinery, equipment, tools and other facilities made by the Canon Finetech Group during the current fiscal year was 3,841 million yen.

(3)		Management Challenges to Be Addressed

		It is expected that the future economic environment surrounding the Canon Finetech Group will continue to be challenging due to lower demand and the appreciation of the yen, although the economic recession stemming from the global financial crisis appears to have moderated, in part, thanks to the economic measures introduced by national governments.

		Especially in the market for the Canon Finetech Group’s core office machines-related products, companies continue to limit capital spending and future prospects remain uncertain.

I-2-6

		Within such a severe economic environment, the Canon Finetech Group will seek to create corporate value as development and production companies, and aim for sustainable growth and development through Group management based on the uniqueness of, and alliances among, the member companies within the Group, including Nisca Corporation.

		To this end, we will endeavor to build up a structure of high profitability that enables us to earn profits even amid challenging economic conditions by improving the efficiencies of all operations including development, production and quality assurance, as well as by strengthening our cost competitiveness through the optimal utilization of our Group’s management resources and concentration of those resources into our specialized technology areas.

		In our plants in Japan and abroad, we will conduct production reform activities reflecting a high level of cost- and quality-consciousness, and reinforce our cost-competitive, low-cost production system.

		We will also build up a development and production system that enables us to commercialize what is needed in the market quickly, and establish a secure quality assurance system spanning from development to the after-market through the precise forecasting of market changes, thereby providing competitive, high-quality products on a timely basis.

		In addressing the above-mentioned management challenges, we will focus on the development of creative human resources with leadership skills who can play pivotal roles in an independent enterprise. In addition, we will aim at growth based on a high level of corporate ethics by recognizing the importance of corporate social responsibilities, promoting compliance-focused management while maintaining and constructing sound and efficient internal control systems.

		Toward this aim, we request your continued support and encouragement.

I-2-7

(4) Status of Assets and Earnings

■ Consolidated



	56th		57th		58th		59th		60th
	Business		Business		Business		Business		Business
	Term		Term		Term		Term		Term
	(Jan. 1, 2005 –		(Jan. 1, 2006 –		(Jan. 1, 2007 –		(Jan. 1, 2008 –		(current)
	Dec. 31, 2005)		Dec. 31, 2006)		Dec. 31, 2007)		Dec. 31, 2008)		(Jan. 1, 2009 –
									Dec. 31, 2009)
Net sales (millions of yen)		170,870		176,147		171,577		148,561		108,148
Ordinary income (millions of yen)		11,196		12,119		11,348		6,819		3,813
Net income (millions of yen)		5,652		6,612		5,728		6,153		2,226
Net income per share (yen)		132.92		156.57		135.63		145.24		52.35
Total assets (millions of yen)		110,720		119,858		117,650		98,324		95,955
Net assets (millions of yen)		58,734		75,454		79,444		71,478		73,184

Notes:

1.		Net income per share is calculated based on the weighted average number of issued shares during the business term; provided, however, that the number of treasury shares is deducted from the total number of issued shares. Net income per share for the 56th Business Term is calculated by deducting the amount of bonus paid to the Directors as per the proposed appropriation of retained surplus from net income for the 56th Business Term.
2.		The Company adopted the “Accounting Standards for Presentation of Net Assets Section in the Balance Sheet” (Corporate Accounting Standards No. 5 of December 9, 2005) and “Guideline for Administration of the Accounting Standards for Presentation of Net Assets Section in the Balance Sheet” (Guidelines Governed by the Corporate Accounting Standards No. 8 of December 9, 2005) for the 57th and subsequent Business Terms.

I-2-8

■ Non-consolidated



	56th		57th		58th		59th		60th
	Business		Business		Business		Business		Business
	Term		Term		Term		Term		Term
	(Jan. 1, 2005 –		(Jan. 1, 2006 –		(Jan. 1, 2007 –		(Jan. 1, 2008 –		(current)
	Dec. 31, 2005)		Dec. 31, 2006)		Dec. 31, 2007)		Dec. 31, 2008)		(Jan. 1, 2009 –
									Dec. 31, 2009)
Net sales (millions of yen)		120,246		126,800		126,159		114,040		84,664
Ordinary income (millions of yen)		6,577		7,311		9,344		5,441		3,654
Net income (millions of yen)		4,404		4,608		6,289		5,428		2,589
Net income per share (yen)		103.86		109.10		148.92		128.12		60.88
Total assets (millions of yen)		77,370		84,949		84,349		81,894		80,169
Net assets (millions of yen)		51,545		55,274		59,979		64,468		65,884

Notes:

1.		Net income per share is calculated based on the weighted average number of issued shares during the business term; provided, however, that the number of treasury shares is deducted from the total number of issued shares. Net income per share for the 56th Business Term is calculated by deducting the amount of bonus paid to the Directors as per the proposed appropriation of retained surplus from net income for the 56th Business Term.
2.		The Company adopted the “Accounting Standards for Presentation of Net Assets Section in the Balance Sheet” (Corporate Accounting Standards No. 5 of December 9, 2005) and “Guideline for Administration of the Accounting Standards for Presentation of Net Assets Section in the Balance Sheet” (Guidelines Governed by the Corporate Accounting Standards No. 8 of December 9, 2005) for the 57th and subsequent Business Terms.

I-2-9

(5) Main Business Activities

The Group engages in the manufacture and sale of the following products:



Segments		Main Products

Office Machines	Office machines	Digital multifunction printers, laser beam printers, office machine component units

	Office machine peripherals	(Document handling) Automatic document feeder (Output handling) Finishers, staple sorters, perfect binders, staple finishers, etc. (Paper feeding) Paper decks, pedestals with paper decks, pedestals with cassettes, etc.

Industrial Printers and others	Industrial printers	Full-color card printers, full-color label printers, large format printers, mark printers, printer units (including print modules), ID card printers, inks ink cartridges, consumables

	Components	OPC (organic photo conductors), auto iris lenses for video camcorders, shutter units for digital cameras

(6) Principal Locations



Name		Location

Canon Finetech Inc.	Head Office Development Center	Misato-shi, Saitama

	Ibaraki Plant	Joso-shi, Ibaraki

	Fukui Office	Fukui-shi, Fukui

Nisca Corporation	Head Office	Minami-Koma-gun, Yamanashi

Canon Finetech (Suzhou) Business Machines Inc.	Head Office	Juangsu, People’s Republic of China

Canon Finetech Nisca (Shenzhen) Inc.	Head Office	Guangdong, People’s Republic of China

I-2-10

(7) Employees

■

Consolidated



	Number of employees		Increase/decrease from the end of the previous business term

	7,429 persons		Decrease of 319 persons

■

Non-consolidated



	Number of employees		Increase/decrease from the end of the previous business term

	1,682 persons		Increase of 45 persons

(8) Material Parent Company and Subsidiaries

Relationship with the Parent Company

Name of the parent
company

Location

Nature of business

No. of voting
rights held by
the parent
company in the
Company
(ratio of the
voting rights)

Details

Canon Inc.

Ota-ku, Tokyo

Manufacture and sale of business machines, cameras, optical and other products

246,506
(58.1%)

The Company produces office machines, office machine peripherals, business machine component units, and chemicals for products of its parent company.


Note:		The above-mentioned number and ratio of the voting rights include 1,538 voting rights (voting rights ratio of 0.3%) indirectly held by the parent company.

Subsidiaries



Name of company	Capital	Ratio of the voting rights held by the Company			Nature of main business

Nisca Corporation	¥2,102 million		100.0	%	Development, manufacture and sale of office automation systems, optical measurement equipment and other products

Canon Finetech (Suzhou) Business Machines Inc.	US$12,000 thousand		90.0	%	Manufacture and sale of office machines, office machine peripherals and other products

Canon Finetech Nisca (Shenzhen) Inc.	US$11,600 thousand		90.0	%	Manufacture and sale of office machine peripherals and other products


Note:		The ratio of the voting rights held by the Company in Canon Finetech Nisca (Shenzhen) Inc. is calculated by including the number of the voting rights held by Nisca Corporation.

I-2-11

Progress and Results of Corporate Consolidation

The Company has 8 consolidated subsidiaries, and the consolidated financial results are summarized in the Consolidated Balance Sheets and the Consolidated Statement of Income.

Shares of the Company

	■		Total number of shares authorized to be issued: 80,000,000 shares

	■		Total number of issued shares, amount of capital and number of shareholders



	At the end of the	Increase/decrease from	At the end of the
Classification	previous business	the current business	current business
	term	term	term

Total number of issued shares	42,533,243 shares	—	42,533,243 shares

Amount of capital	3,451,396,000 yen	—	3,451,396,000 yen

Number of shareholders	6,523 persons	Decrease of 365 persons	6,158 persons

■

Shareholding by holder



Classification	Number of shareholders		Number of shares held

Financial institutions		37		6,070,033

Securities companies		33		72,524

Other domestic companies/entities		134		26,057,748

Foreign companies/entities		127		4,406,492

Individuals and others		5,826		5,919,482

Treasury shares		1		6,964

Total		6,158		42,533,243


Note:		For “Other domestic companies/entities,” the number of shareholders includes Japan Securities Depository Center, Inc., and the number of shares held includes the shares held in its name.

■

Shareholding ratio by category

Financial
institutions
14.3%

Securities
companies
0.2%

Other domestic companies/entities
61.3%

Treasury
shares
0.0%

Individuals
and others
13.9%

Foreign companies/entities 10.3%

I-2-12

Directors and Corporate Auditors

(1)

Directors and Corporate Auditors



Title	Name	Responsibilities or significant concurrent service

President and Representative Director	Ikuo Soma

Senior Managing Director	Yuji Inoue	In charge of Planning and Accounting Chairman of the Board of Canon Finetech Nisca Industrial Hong Kong Co., Limited

Managing Director	Hiroshi Sugitani	In charge of IP and Human Resources and Education

Managing Director	Hisashi Kurachi	General Manager, Chemical Products Division

Director	Shinji Kanemitsu	General Manager, Quality Division

Director	Masakazu Sano	President and Representative Director, Top Business Machines Co., Ltd.

Director	Toshihisa Sakai	General Manager, Industrial Products Division Manager, Ibaraki Plant

Director	Kazuaki Morozumi	Chairman of the Board and President, Canon Finetech (Suzhou) Business Machines Inc.

Director	Nobuyoshi Ueda	General Manager, Development Division

Director	Shinichi Yano	Chairman of the Board, Canon Finetech Nisca (Shenzhen) Inc. President, Canon Finetech Nisca Industrial Hong Kong Co., Limited

Director	Toshio Shirai	General Manager, General Administration Division

Director	Osamu Asukai	In charge of Production General Manager, Office Machines Division

Director	Mamoru Tanaka*	President and Representative Director, Nisca Corporation

Full-time Corporate Auditor	Kozo Yamamoto

Full-time Corporate Auditor	Tsutomu Toyono

Corporate Auditor	Keijiro Yamazaki	Full-time Corporate Auditor, Canon Inc.

Corporate Auditor	Minoru Shishikura	Corporate Auditor, Canon Inc. Corporate Auditor, Canon Marketing Japan Inc.

Notes:

1.		The Director with an asterisk (*) was newly elected at the 59th Business Term General Meeting of Shareholders held on March 25, 2009 and assumed the office as such.

2.		Keijiro Yamazaki and Minoru Shishikura, both Corporate Auditors, are outside Corporate Auditors prescribed in Article 2, Item 16 of the Companies Act.

3.		Minoru Shishikura, Corporate Auditor, has for many years engaged in the business operations of financial institutions and has a considerable level of knowledge of financial affairs.

4.		“Canon Finetech Industrial Hong Kong Co., Limited” was renamed “Canon Finetech Nisca Industrial Hong Kong Co., Limited on June 1, 2009.

I-2-14

(2)

Aggregate Amount of Remuneration and Other Amounts to the Directors and Corporate Auditors



Classification	Number of	Amounts of remuneration and other amounts
Classification	persons	Amounts of remuneration and other amounts

Directors	13 persons	227 million yen

Corporate Auditors	4 persons	46 million yen (of which, 6 million yen for outside Corporate Auditors)

Notes:

1.		The amount of remuneration and other amounts to the Directors excludes the amount of employee salary paid to the Directors who are also employees of the Company.

2.		The amount of remuneration and other amounts to the Directors includes 7 million yen in the allowance for bonus to the Directors for the current fiscal year.

3.		The above-mentioned amount of remuneration and other amounts include the incremental amount of the allowance for directors and corporate auditors retirement benefit awards recognized in the current fiscal year (36 million yen for Directors and 5 million yen for Corporate Auditors (of which, 500,000 yen for outside Corporate Auditors)).

4.		The table above includes one Director serving without compensation.

(3)

Outside Directors and Outside Corporate Auditors

■

Significant concurrent service by outside Corporate Auditors



Name	Name of company for	Position	Relationship with the company for which he concurrently serves and the Company
	which he concurrently	concurrently
	serves	served

Minoru Shishikura	Canon Inc.	Outside Corporate Auditor	The Company produces office machines, office machine peripherals, office machine component units, chemicals and other products for products of Canon Inc.

	Canon Marketing Japan Inc.	Outside Corporate Auditor	The Company sells its products to Canon Marketing Japan Inc.

I-2-15

■

Major activities by outside Corporate Auditors



Classification	Name	Major activities

Corporate Auditor	Keijiro Yamazaki	He attended 8 of 9 meetings of the Board of Directors, and 9 of 10 meetings of the Board of Corporate Auditors held during the current fiscal year. He presented his opinions based on his management experience and knowledge under the directorship, as appropriate, at the meetings of the Board of Directors and the Board of Corporate Auditors.

Corporate Auditor	Minoru Shishikura	He attended 8 of 9 meetings of the Board of Directors, and all of 10 meetings of the Board of Corporate Auditors held during the current fiscal year. He presented his opinions based on his experience and knowledge about the financial business, as appropriate, at the meetings of the Board of Directors and the Board of Corporate Auditors.

■		Aggregate amount of remuneration and other amounts received in the capacity of the Directors and Corporate Auditors from the parent company of the Company or subsidiaries of such parent company during the current fiscal year

		The aggregate amount of remuneration and other amounts received in the capacity of the Directors and Corporate Auditors was 49 million yen.

Accounting Auditor

(1)		Name of Accounting Auditor

		Ernst & Young ShinNihon LLC

(2)		Remuneration and Other Amounts to the Accounting Auditor for the Current Fiscal Year



	Classification	Amount paid

(i)	Amount of remuneration and other amounts for the services as prescribed in Article 2, Paragraph 1 of the Certified Public Accountant Act:	48 million yen

(ii)	Total amount of cash and other financial benefits payable by the Company and its subsidiaries to the Accounting Auditor:	62 million yen

Notes:

1.		In the audit agreement between the Company and the Accounting Auditor, remuneration amounts are determined on a lump-sum basis without breakdown into separate remuneration amounts for auditing in accordance with the Companies Act and those for the audit under the Financial Instruments and Exchange Act. Accordingly, the amount shown in (i) above represents the total amount of remuneration and other amounts for both of these activities.

2.		Of the important subsidiaries, the financial statements of Canon Finetech (Suzhou) Business Machines Inc. have been audited by the firm of Earnst & Young Da Hua.

I-2-16

(3)

Policy on Decision to Dismiss or not Reappoint the Accounting Auditor

The Board of Corporate Auditors, by unanimous agreement, will dismiss the Accounting Auditor when confirmed that the Accounting Auditor falls under any Item of Paragraph 1, Article 340 of the Corporation Law.

In addition to the above, should anything occur to negatively impact the qualifications or independence of the Accounting Auditor, making it unlikely that the Accounting Auditor will be able to properly perform an audit, the Directors will propose, with the agreement of the Board of Corporate Auditors, or as requested by the Board of Corporate Auditors, not to reappoint the Accounting Auditor at a general meeting of shareholders.

Systems for Ensuring the Appropriate Operations

The resolutions adopted at the meetings of the Board of Directors for the Company to establish the systems for ensuring the appropriate operations are as follows:

(1)

System for ensuring the performance of duties by Directors and employees to comply with laws and Articles of Incorporation

	(i)		Based on the spirit of the “Three Selfs” (self-motivation, self-management and self-awareness), the universal code of conduct of the Canon Group, the Company shall adopt the “Canon Group Code of Conduct” as the standards to be complied with by its Directors and employees in performing their duties, under which the Company should conduct compliance promotion activities to develop law-abiding, independent, and strong-minded individuals with a high sense of ethics.

	(ii)		The Company shall establish the Compliance Audit Office, an internal audit division reporting to the President directly, which will play the pivotal roles of auditing compliance, risk management and other internal controls systems, and giving appraisals and recommendations.

	(iii)		The Company shall establish the Compliance Management Committee chaired by the President, under which the following five groups will promote a wide variety of compliance activities: Internal Controls Promotion Group, Product Legal Promotion Group, Security Promotion Group, Private Information Protection Promotion Group, and Disclosure Promotion Group.

	(iv)		The Company shall ensure that it will keep its Directors and employees well informed of the basic policy that the Company will never have any relations with antisocial forces, and establish an organization that is responsible for responses to antisocial forces, thereby maintaining and reinforcing the cooperative relations with police and other external authorities.

I-2-17

(v)

The Company shall utilize the hotline system to improve its internal self-checks to prevent illegal or unethical activities, thereby preventing improprieties.

(2)

Matters for maintaining and managing information relating to the performance of duties by Directors

The Company shall describe or record information on the execution by its Directors of their duties in documents or electromagnetic media, and retain and manage them, all in accordance with applicable laws, ordinances and regulations, as well as with the Company’s internal regulations and rules. The Directors, Corporate Auditors and Compliance Audit can inspect these documents and media at any time.

(3)

Rules and other systems regarding management of risk of loss

	(i)		The Company shall establish various deliberative organs, such as the Management Committee and the Compliance Management Committee, in which members should carefully deliberate concrete action plans for important issues, thereby eliminating and reducing business risks.

	(ii)		Business processes are specified and risks are evaluated to ensure the accuracy and reliability of financial reporting. This must be documented in writing, and the status of control activity is regularly confirmed to make risk management effectively work.

	(iii)		A risk management system is created through the formulation and observance of various in-house rules to protect the Company from diverse risks (quality, environmental, disaster, information, export management, etc.) and maintain public faith. In particular, for product safety-related risk, Basic Policies Regarding Product Safety shall be established, which govern efforts in supplying customers with safe products that will allow comfortable and satisfactory use.

	(iv)		The Company shall conduct various audits and examinations through its Compliance Audit Office, and promote the hotline system in order to detect and resolve risks in early stages.

(4)

System for assuring the efficient performance by Directors of their duties

(i)

The Company shall define its management policy by formulating medium-term management plans, and publicize them throughout the Company. Additionally, the Company shall manage how the Directors are performing their duties through the short-term (annual, semiannual and quarterly) plans and monthly budget management, thereby setting the system for assuring the optimal utilization of management resources.

I-2-18

	(ii)		The Company shall establish internal regulations and rules stipulating the functional authorities (such as the functional responsibilities rules) in order to define the authorities and responsibilities of each organization in conducting the business of the Company.

	(iii)		The Company shall hold the Operating Committee consisting of all officers, and senior members of key organizations to confirm the management policies, and discuss and examine important management issues.

(5)

System for ensuring the appropriate operations of the corporate group consisting of the Company and its parent company and subsidiaries

	(i)		Based on the “Canon Group Code of Conduct,” the Company shall promote compliance as a member of the Canon Group and infuses an awareness of compliance and corporate ethics to share as a set of common values for the Canon Group.

	(ii)		The Company shall work with internal audit, legal and other relevant departments of the parent company to ensure the observance of laws in carrying out its business activities, and strengthen compliance through monitoring.

	(iii)		The Company shall dispatch directors and/or corporate auditors to its subsidiaries, and establish the rules and regulations governing the Canon Finetech Group, thereby ensuring the appropriate and efficient management of the Canon Finetech Group.

(6)

Matters regarding employees who assist the duties of Corporate Auditors when Corporate Auditors request assignment of such employees and matters regarding the independence of those employees from the Directors

	(i)		If the Corporate Auditors request to designate certain employees to assist with their duties, the Directors shall designate those employees to assist the Corporate Auditors after discussion with the Corporate Auditors.

	(ii)		The employees designated as employees to assist the Corporate Auditors will receive no supervision or orders from any Director in connection with the duties of the Corporate Auditors that each will assist.

	(iii)		Personnel change involving any of those employees is subject to the prior consent of the Board of Corporate Auditors.

I-2-19

(7)

System for Directors and employees to report to Corporate Auditors, and system for other types of reporting to Corporate Auditors, as well as other systems for securing the effective audit by Corporate Auditors

	(i)		If any factual event that may cause the Company material damage occurs or is threatened to occur, the Directors shall immediately inform the Corporate Auditors thereof.

	(ii)		The Corporate Auditors shall be kept updated of the material decision-making process, and the status of the execution of the material duties, by attending important meetings and conferences.

	(iii)		The Company shall adopt the hotline system so that the Corporate Auditors may receive reports from employees.

	(iv)		The Corporate Auditors shall receive reports from the Accounting Auditor on a periodical basis.

	(v)		The Company shall provide cooperation so that the Corporate Auditors may efficiently conduct onsite audits of each division and department, and affiliate.

Decision Making Policy for Dividends from Surplus

The Company views as one of its key management themes the return of profits to shareholders, and maintains a basic policy to maintain and continue stable dividends payouts to shareholders.

The Company also intends to maintain an appropriate internal reserve for investments, mainly in research and development and production facilities, with the goal of reinforcing profitability and a competitive edge, and starting up new businesses.

The Company already paid an interim dividend of ¥12 per share during the current fiscal year, and has decided to pay a year-end dividend of ¥12 per share, resulting in an annual dividend totaling ¥24 per share.

Notes:

For the amounts shown in this report, any fraction of less than the specified unit has been rounded off to the nearest unit, except in cases where net income per share has been rounded to the nearest hundredth.
For numbers of shares, any fraction of less than the specified unit has been rounded off.

I-2-20

CONSOLIDATED BALANCE SHEETS


			As of
	As of		December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)
Assets
Current assets:
Cash and deposits		13,695		12,041
Notes and accounts receivable		28,002		27,778
Marketable securities		13,500		13,071
Inventories		--		6,315
Merchandise and finished goods		2,262		--
Work in process		2,334		--
Raw materials and supplies		830		--
Deferred tax assets		652		384
Other current assets		2,232		2,713
Allowance for doubtful receivables		(2)		(51)
Total current assets		63,505		62,251

Fixed assets:
Property, plant and equipment, net:
Buildings and structures		12,109		13,330
Machinery and vehicles		1,059		1,441
Tools and equipment		3,744		5,528
Land		12,256		12,352
Lease assets		19		--
Construction in progress		34		68
Total property, plant and equipment		29,221		32,719

Intangible fixed assets:
Goodwill		124		143
Other intangibles		386		399
Total intangible fixed assets		510		542

Investments and other assets:
Marketable securities — noncurrent		1,029		1,116
Long-term loans receivable		--		0
Long-term prepaid expenses		3		6
Deferred tax assets — noncurrent		1,248		1,101
Other noncurrent assets		591		778
Allowance for doubtful receivables- noncurrent		(152)		(189)
Total investments and other assets		2,719		2,812
Total fixed assets		32,450		36,073
Total Assets		95,955		98,324

I-2-21


			As of
	As of		December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)
Liabilities
Current liabilities:
Notes and accounts payable		15,566		16,532
Lease obligations		7		--
Other payables		955		1,992
Accrued expenses		1,619		1,907
Accrued income taxes		148		699
Accrued bonuses for employees		410		424
Accrued directors’ bonuses		7		40
Accrued warranty expenses		24		105
Notes payable — facilities		13		71
Other current liabilities		492		787
Total current liabilities		19,241		22,557

Noncurrent liabilities:
Lease obligations		12		--
Deferred tax liabilities — noncurrent		254		1,406
Accrued pension and severance cost		2,777		2,307
Accrued directors’ retirement benefits		280		328
Accrued long service rewards for employees		83		84
Other noncurrent liabilities		124		164
Total noncurrent liabilities		3,530		4,289
Total Liabilities		22,771		26,846

Net Assets
Stockholders’ equity:
Common stock		3,451		3,451
Capital surplus		14,248		14,248
Retained earnings		56,996		55,579
Treasury stock		(28)		(23)
Total stockholders’ equity		74,667		73,255

Valuation and translation adjustments:
Net unrealized gains (losses) on securities		(96)		(70)
Foreign currency translation adjustments		(2,141)		(2,269)
Total valuation and translation adjustments		(2,237)		(2,339)

Minority interests		754		562

Total Net Assets		73,184		71,478
Total Liabilities and Net Assets		95,955		98,324

(Note) All amounts have been rounded to the nearest one million yen.

I-2-22

CONSOLIDATED STATEMENTS OF INCOME


			Year ended
	Year ended		December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)

Net sales		108,148		148,561
Cost of sales		90,740		125,489
Gross profit		17,408		23,072
Selling, general and administrative expenses		13,811		16,413
Operating profit		3,597		6,659

Other income:
Interest income		96		317
Dividend income		20		23
Rental income		46		55
Amortization of negative goodwill		87		87
Subsidy income		--		115
Miscellaneous income		192		152
Total other income		441		749
Other expenses:
Loss on retirement of inventories		--		194
Loss on write-off of inventories		--		9
Foreign exchange loss		114		242
Depreciation of rental assets		16		18
Expenses on import		--		84
Compensation expenses		39		--
Miscellaneous loss		56		42
Total other expenses		225		589
Ordinary profit		3,813		6,819

Non-ordinary income:
Gain on sales of fixed assets		3		3,040
Reversal of allowance for doubtful receivables		88		74
Gain on sales of marketable securities - noncurrent		1		--
Total non-ordinary income		92		3,114
Non-ordinary loss:
Loss on retirement of fixed assets		168		222
Loss on sales of fixed assets		--		22
Loss on sales of marketable securities - noncurrent		4		--
Loss on write-off of marketable securities - noncurrent		8		--
Loss on sales of membership		13		--

I-2-23

(Millions of yen)



	Valuation and translation adjustments						Minority interests		Total net assets
	Net unrealized gains (losses) on securities		Foreign currency translation adjustments		Total valuation and translation adjustments		Minority interests		Total net assets
Balance as of December 31, 2008		(70)		(2,269)		(2,339)		562		71,478
Effect of changes in accounting policies applied to foreign subsidiaries		--		--		--		--		340
Changes in the term
Dividends paid		--		--		--		--		(1,148)
Net income		--		--		--		--		2,226
Purchase of treasury stock		--		--		--		--		(8)
Disposal of treasury stock		--		--		--		--		2
Net changes in items other than stockholders’ equity		(26)		128		102		192		294
Total changes in the term		(26)		128		102		192		1,367
Balance as of December 31, 2009		(96)		(2,141)		(2,237)		754		73,184

(Note) All amounts have been rounded to the nearest one million yen.

I-2-26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.		Group position

(1)		The consolidated subsidiaries are the following eight companies:

		Canon Finetech Nisca Industrial Hong Kong Co., Limited

		Canon Finetech (Suzhou) Business Machines Inc.

		Top Business Machines Co., Ltd.

		Nisca Corporation

		Nisca Kosan Co., Ltd.

		Canon Finetech Nisca (Shenzhen) Inc.

		Thai Nisca Co., Ltd.

		Nisca (HK) Limited

		(Notes)

	1.		Canon Finetech Nisca Industrial Hong Kong Co., Limited changed its corporate name from Canon Finetech Industrial Hong Kong Co., Limited, effective June 1, 2009.

	2.		Nisca Seiko Co., Ltd., which had been a consolidated subsidiary until the previous consolidated fiscal year, was excluded from the scope of consolidation as a result of its dissolution due to merger with Nisca Corporation, a consolidated subsidiary of the Company, effective July 1, 2009.

(2)		There are no non-consolidated subsidiaries.

2.		Application of Equity Method

		There are no affiliated companies accounted for by the equity method.

3.		Fiscal Years of Consolidated Subsidiaries

The fiscal year-end date of all consolidated subsidiaries is the same as the date of the consolidated balance sheet.

4.		Basis of Accounting Policies

(1)		Valuation of significant assets

	(i)		Marketable securities

			Other securities:

Securities with market value are stated at fair value, based on quoted market price, etc. as of the date of the balance sheet. (Unrealized holding gains and losses on such

I-2-27

securities are reported as a component of net assets, while the cost of securities sold is calculated based on the moving average method.)

Securities without market value are stated at cost based on the moving average method.

(ii)

Net receivables and payables arising from derivative transactions

Net receivables and payables arising from derivative transactions are stated at fair value.

(iii)

Inventories

Inventories of the Company and certain subsidiaries:

Finished goods and work in process are stated at cost based on the periodic average method. (Amount on the balance sheet is subject to write-down of the carrying value due to decreased profitability.)

Supplies are stated at last purchase cost. (Amount on the balance sheet is subject to write-down of carrying value due to decreased profitability.)

Inventories of other subsidiaries:

Inventories of other subsidiaries are stated at the lower of cost or market value. Cost is determined principally by the first-in, first-out method.

(Changes in Accounting Policies)

The Company and its domestic consolidated subsidiaries have applied the “Accounting Standard for Measurement of Inventories” (Accounting Standards Board of Japan (“ASBJ”) Statement No. 9, issued on July 5, 2006) from the current consolidated fiscal year and changed the basis for valuation of inventories from the previously used cost method, to the cost method which writes down the carrying value due to decreased profitability.

Such change did not have a material impact on net income.

(2)

Depreciation method of significant depreciable assets

(i)

Property, plant and equipment

Depreciation of property, plant and equipment is calculated principally by the declining-balance method; provided, however, that depreciation of buildings (excluding fixtures) acquired by the Company or its domestic consolidated subsidiaries on or after April 1, 1998 is calculated by the straight-line method.

I-2-28

The range of useful lives is principally as follows:

Buildings: 7 to 38 years
Machinery: 4 to 10 years
Tools and equipment: 2 to 11 years

(Additional Information)

With the revision of the Corporation Tax Act (as included in the Act on Partial Revision of the Income Tax Act, etc., Law No. 23 of April 30, 2008), the Company and its domestic consolidated subsidiaries have reviewed the useful lives of the assets, and as a result thereof, changed the useful lives of machinery (which previously ranged from 4 to 12 years) to 4 to 9 years, effective from the current consolidated fiscal year.

Such change did not have a material impact on net income.

(ii)

Intangible fixed assets

Amortization of intangible fixed assets is calculated by the straight-line method.

Internal use software is amortized using the straight-line method over the estimated useful period within the Company (5 years). Software for sale is amortized based on the larger amount of (a) the amortization amount based on the expected sales volume or (b) the amount allocated by the straight-line method over the remaining effective period (within 3 years).

(iii)

Lease assets

Lease assets of finance lease transactions that do not transfer ownership:

Depreciation of leased assets is calculated by the straight-line method over their lease term as their useful lives, with no residual value.

Finance lease transactions that do not transfer ownership to the lessee and which were initiated on or before December 31, 2008 are accounted in a manner similar to the accounting for ordinary operating lease transactions.

(Changes in Accounting Policies)

“Accounting Standard for Lease Transactions” (ASBJ Statement No. 13) and “Guidance on Accounting Standard for Lease Transactions” (ASBJ Guidance No. 16), revised on March 30, 2007, were applied from the current consolidated fiscal year, and thus, accounting for finance lease transactions that do not transfer ownership to the lessee, formerly accounted in a manner similar to the accounting for ordinary operating lease transactions, has been changed to accounting in a manner similar to the accounting for ordinary sale and purchase transactions.

I-2-29

Depreciation of lease assets is calculated by the straight-line method over their lease term as their useful lives, with no residual value.

This had no impact on net income.

(3)

Basis for recording significant allowances

(i)

Allowance for doubtful receivables

Allowance for doubtful receivables is provided for possible losses on uncollectable receivables, based on the historical ratio of actual losses for general receivables, and on individually estimated amounts collectable for receivables from debtors at risk.

(ii)

Accrued warranty expenses

Accrued warranty expenses are provided for no charge repair cost after sale of products on an estimated amount based on the historical performance.

(iii)

Accrued bonuses for employees

Accrued bonuses for employees are provided for payment of bonuses to employees based on the estimated amount payable by the Company.

(iv)

Accrued directors’ bonuses

Accrued directors’ bonuses are provided for payment of bonuses to directors based on the estimated amount payable by the Company.

(v)

Accrued pension and severance cost

Accrued pension and severance cost are provided for employee retirement and severance benefits based on projected benefit obligations and expected plan assets at the end of the consolidated fiscal year.

Actuarial gain or loss is amortized from the following year of the year in which such gain or loss is accrued, in equal amounts over a certain period (10 years with respect to the parent company and 14 years with respect to the subsidiaries) within the average remaining service periods.

Prior service cost is amortized in equal amounts over a certain period (10 years with respect to the parent company and 14 years with respect to the subsidiaries) within the average remaining years of service of the employees.

I-2-30

(vi)

Accrued directors’ retirement benefits

Accrued directors’ retirement benefits are provided for payment of directors’ retirement benefits based on the amount payable at the end of the consolidated fiscal year pursuant to the Company’s rules on directors’ retirement benefits.

(vii)

Accrued long service rewards for employees

Accrued long service rewards for employees are provided for payment of long service rewards for employees pursuant to the Company’s internal rules, based on the estimated amount payable by the Company.

(4)

Basis for translation of significant foreign currency-denominated assets and liabilities

Foreign currency-denominated receivables and payables are translated into Japanese yen at the spot exchange rate in effect on the date of the consolidated balance sheet and any gains or losses resulting from translation are charged or credited to income. Assets and liabilities of foreign subsidiaries are translated into Japanese yen at the spot exchange rate in effect on the consolidated balance sheet date; income and expense items are translated into Japanese yen at the average exchange rate for the fiscal year; and any gains or losses resulting from translation are reported as “foreign currency translation adjustments” and “minority interests” under net assets.

(5)

Other significant matters regarding preparation of consolidated financial statements

Accounting of consumption tax, etc.

Transactions subject to consumption tax and local consumption tax are recorded at amounts exclusive of the relevant taxes.

Valuation of Assets and Liabilities of Consolidated Subsidiaries

Assets and liabilities of consolidated subsidiaries are measured at full fair value.

Amortization of Goodwill and Negative Goodwill

Goodwill and negative goodwill are amortized in equal amounts over 10 years.

Application of “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements”

“Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements” (ASBJ Practical Issues Task Force

I-2-31

No. 18, issued on May 17, 2006) has been applied from the current consolidated fiscal year and necessary changes for consolidated accounting have been made.

Such change did not have a material impact on net income.

Retained earnings increased by 340 million yen, with the same amount added to the balance of retained earnings as of January 1, 2009.

Accumulated depreciation of property, plant and equipment: 54,901 million yen

1.		Total Number of Issued Shares as of December 31, 2009

		Shares of Common Stock: 42,533,243 shares

2.		Dividends Paid from Surplus for the Fiscal Year Ended December 31, 2009

Decision

Classes
of Stock

Cash
Dividend

Dividend
per Share

Base Date

Effective Date

March 25, 2009
General Meeting of
Stockholders

Common
Stock

638 million yen

15 yen

December 31, 2008

March 26, 2009

July 24, 2009
Meeting of the
Board of Directors

Common
Stock

510 million yen

12 yen

June 30, 2009

August 28, 2009

Dividends to be Paid from Surplus after December 31, 2009

Scheduled

Classes of
Stock

Dividend
Resource

Cash
Dividend

Dividend
per Share

Base Date

Effective Date

March 24, 2010
General Meeting of
Stockholders

Common
Stock

Retained
Earnings

510 million yen

12 yen

December 31, 2009

March 25, 2010

I-2-32

Report of Independent Auditors

February 4, 2010

The Board of Directors
Canon Finetech Inc.

Ernst & Young ShinNihon LLC

Hideo Doi
Certified Public Accountant
Designated and Engagement Partner

Ryo Kayama
Certified Public Accountant
Designated and Engagement Partner

Koji Fujima
Certified Public Accountant
Designated and Engagement Partner

Pursuant to Paragraph 4, Article 444 of the Corporation Law, we have audited the consolidated balance sheet, the consolidated statement of income, the consolidated statement of changes in net assets and the notes to the consolidated financial statements of Canon Finetech Inc., Ltd. (the “Company”) applicable to the fiscal year from January 1, 2009 through December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.

We have no interest in the Company which should be disclosed in compliance with the Certified Public Accountants Act.

I-2-34

AUDIT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

We, the Board of Corporate Auditors, have prepared this Audit Report upon deliberation, based on the audit report prepared by each Corporate Auditor concerning the consolidated financial statements (the consolidated balance sheet, consolidated statement of income, consolidated statement of changes in net assets, and notes to the consolidated financial statements) for the 60th business term from January 1, 2009 to December 31, 2009, and hereby report as follows:

1.		Auditing Methods Employed by the Corporate Auditors and the Board of Corporate Auditors and Details of Such Methods

		The Board of Corporate Auditors has established auditing policies and allocation of duties and other relevant matters, received reports on the status of performance of duties from the Directors and the Accounting Auditor, as well as receiving reports on the status of execution of audits and results thereof from each Corporate Auditor, and sought explanations as necessary.

		Each Corporate Auditor has, pursuant to the auditing policies and allocation of duties and other relevant matters established by the Board of Corporate Auditors, received reports, and sought explanation as necessary, regarding the consolidated financial statements from the Directors and other employees, etc. Moreover, we have observed and examined whether the Accounting Auditor is maintaining an independent position and is conducting a fair audit, and received reports regarding the status of performance of duties from the Accounting Auditor and sought explanations as necessary. Furthermore, we have received a notice from the Accounting Auditor that “Systems for ensuring that duties are performed properly” (particulars set forth in each item of Article 131 of the Company Accounting Regulations) have been organized in accordance with the “Quality Management Standards Regarding Audits” (Business Accounting Council, October 28, 2005) and other relevant standards, and sought explanations as necessary. Based on the methods mentioned above, we have examined the consolidated financial statements (the consolidated balance sheet, consolidated statement of income, consolidated statement of changes in net assets, and notes to the consolidated financial statements) for the relevant business term.

I-2-35

NON-CONSOLIDATED BALANCE SHEETS


	As of		As of December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)

Assets
Current assets:
Cash and deposits		1,044		717
Notes receivable		27		38
Accounts receivable		21,628		19,909
Marketable securities		11,000		13,000
Finished goods		--		1,167
Merchandise and finished goods		781		--
Work in process		1,053		1,137
Supplies		--		53
Raw materials and supplies		69		--
Prepaid expenses		33		34
Short-term loans receivable		1,566		910
Other receivables		2,439		1,868
Deferred tax assets		131		244
Other current assets		1,209		329
Allowance for doubtful receivables		--		(3)
Total current assets		40,980		39,403

Fixed assets:
Property, plant and equipment, net:
Buildings		8,688		9,484
Structures		266		307
Machinery		639		834
Vehicles		7		14
Tools and equipment		1,874		4,054
Land		9,461		9,462
Lease assets		19		--
Construction in progress		27		56
Total property, plant and equipment		20,981		24,211

Intangible fixed assets:
Goodwill		--		0
Software		264		289
Other intangibles		26		27
Total intangible fixed assets		290		316

Investments and other assets:
Marketable securities - noncurrent		239		270
Stocks in affiliated companies		15,729		15,729
Investments in affiliated companies		1,790		1,790
Long-term prepaid expenses		2		5
Guarantees		56		69
Other noncurrent assets		225		257
Allowance for doubtful receivables- noncurrent		(123)		(156)
Total investments and other assets		17,918		17,964
Total fixed assets		39,189		42,491
Total Assets		80,169		81,894

I-2-37


			As of
	As of		December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)
Liabilities
Current liabilities:
Notes payable		313		436
Accounts payable		11,130		11,069
Short-term loans payable		50		100
Lease obligations		7		--
Other payables		663		2,833
Accrued expenses		403		419
Accrued income taxes		--		646
Advance received		5		30
Deposits		248		241
Accrued bonuses for employees		219		209
Accrued directors’ bonuses		7		21
Notes payable - facilities		4		17
Accrued warranty expenses		20		105
Other current liabilities		68		65
Total current liabilities		13,137		16,191

Noncurrent liabilities:
Lease obligations		12		--
Deferred tax liabilities - noncurrent		123		93
Accrued pension and severance cost		638		768
Accrued directors’ retirement benefits		167		127
Accrued long service rewards for employees		83		84
Other noncurrent liabilities		125		163
Total noncurrent liabilities		1,148		1,235
Total Liabilities		14,285		17,426

Net Assets
Stockholders’ equity:
Common stock		3,451		3,451
Capital surplus
Additional paid-in capital		14,233		14,233
Other capital surplus		15		15
Total capital surplus		14,248		14,248
Retained earnings
Legal reserve		661		661
Other retained earnings
Reserve for deferral of capital gain on
property		1,601		1,603
Reserve for special depreciation		--		4
Special reserves		31,809		31,809
Retained earnings brought forward		14,095		12,648
Total other retained earnings		47,505		46,064
Total retained earnings		48,166		46,725
Treasury stock		(8)		(2)

I-2-38

NON-CONSOLIDATED STATEMENTS OF INCOME


			Year ended
	Year ended		December 31, 2008
	December 31, 2009		(Reference)
	(Millions of yen)

Net sales		84,664		114,040
Cost of sales		73,331		98,773
Gross profit		11,333		15,267
Selling, general and administrative expenses		9,070		12,216
Operating profit		2,263		3,051

Other income:
Interest income		93		74
Interest on marketable securities		14		17
Dividend income		1,281		1,755
Rental income		44		49
Foreign exchange gain		--		568
Miscellaneous income		58		181
Total other income		1,490		2,644
Other expenses:
Foreign exchange loss		15		--
Loss on retirement of inventories		--		204
Depreciation of rental assets		16		18
Compensation expenses		39		--
Miscellaneous loss		29		32
Total other expenses		99		254
Ordinary profit		3,654		5,441

Non-ordinary income:
Gain on sales of fixed assets		0		3,038
Reversal of allowance for doubtful receivables		36		37
Total non-ordinary income		36		3,075
Non-ordinary loss:
Loss on retirement of fixed assets		89		136
Loss on sales of fixed assets		--		0
Loss on impairment of fixed assets		--		321
Expenses for base restructuring		--		91
Expenses for restructuring of affiliated companies		--		28
Provision for accrued long service rewards for employees for prior periods		--		114
Total non-ordinary loss		89		690
Income before income taxes		3,601		7,826
Income taxes - Current		857		1,642
Income taxes - Deferred		155		756

I-2-40

NON-CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS


(Millions of yen)
		Stockholders’ equity
				Capital surplus						Retained earnings
												Other retained earnings
		Common stock		Additional paid-in capital		Other capital surplus		Total capital surplus		Legal reserve			Reserve for deferral of capital gain on property		Reserve for special depreciation		Special reserves		Retained earnings brought forward		Total retained earnings
	Balance as of December 31, 2008		3,451		14,233		15		14,248		661			1,603		4		31,809		12,648		46,725
	Changes in the term
	Dividends paid								--											(1,148)		(1,148)
	Reversal of reserve for deferral of capital gain on property								--					(2)						2		--
	Reversal of reserve for special depreciation								--							(4)				4		--
	Net income								--											2,589		2,589
	Purchase of treasury stock								--													--
	Disposal of treasury stock						(0)		(0)													--
	Net changes in items other than stockholders’ equity								--													--
	Total changes in the term		--		--		(0)		(0)		--			(2)		(4)		--		1,447		1,441
	Balance as of December 31, 2009		3,451		14,233		15		14,248		661			1,601		--		31,809		14,095		48,166

I-2-42

NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS

1. Valuation of Assets

(1) Marketable securities

(i)

Shares in subsidiaries

Shares in subsidiaries are stated at cost based on moving average method.

(ii)

Other securities

Securities with market value are stated at fair value, based on quoted market price, etc. as of the date of the balance sheet. (Unrealized holding gains and losses on such securities are reported as a component of net assets, while the cost of securities sold is calculated based on the moving average method.)

Securities without market value are stated at cost based on the moving average method.

(2) Net receivables and payables arising from derivative transactions

Net receivables and payables arising from derivative transactions are stated at fair value.

(3) Inventories

(i)

Finished goods and work in process

(ii)

Supplies

Supplies are stated at last purchase cost. (Amount on the balance sheet is subject to write-down of carrying value due to decreased profitability.)

(Changes in Accounting Policies)

The Company has applied the “Accounting Standard for Measurement of Inventories” (Accounting Standards Board of Japan (“ASBJ”) Statement No. 9, issued on July 5, 2006) from the current consolidated fiscal year and changed the basis for valuation of inventories from the previously used cost method, to the cost method which writes down the carrying value due to decreased profitability.

Such change did not have a material impact on net income.

I-2-44

2. Depreciation Method of Fixed Assets

(1) Property, plant and equipment

Depreciation of property, plant and equipment is calculated by the declining-balance method; provided, however, that depreciation of buildings (excluding fixtures) acquired by the Company on or after April 1, 1998 is calculated by the straight-line method.

The range of useful lives is principally as follows:

Buildings: 7 to 38 years
Machinery: 4 to 9 years
Tools and equipment: 2 to 11 years

(Additional Information)

With the revision of the Corporation Tax Act (as included in the Act on Partial Revision of the Income Tax Act, etc., Law No. 23 of April 30, 2008), the Company reviewed the useful lives of the assets, and as a result thereof, changed the useful lives of machinery (which previously ranged from 4 to 12 years) to 4 to 9 years, effective from the current fiscal year.

Such change did not have a material impact on net income.

(2) Intangible fixed assets

Amortization of intangible fixed assets is calculated by the straight-line method.

(3) Lease assets

Lease assets of finance lease transactions that do not transfer ownership:

Depreciation of lease assets is calculated by the straight-line method over their lease term as their useful lives, with no residual value.

(Changes in Accounting Policies)

I-2-45

“Accounting Standard for Lease Transactions” (ASBJ Statement No. 13) and “Guidance on Accounting Standard for Lease Transactions” (ASBJ Guidance No. 16), revised on March 30, 2007, were applied from the current fiscal year, and thus, accounting for finance lease transactions that do not transfer ownership to the lessee, formerly accounted in a manner similar to the accounting for ordinary operating lease transactions, has been changed to accounting in a manner similar to the accounting for ordinary sale and purchase transactions.

Depreciation of lease assets is calculated by the straight-line method over their lease term as their useful lives, with no residual value.

This had no impact on net income.

3. Basis for Recording Allowances

(1) Allowance for doubtful receivables

(2) Accrued warranty expenses

Accrued warranty expenses are provided for no charge repair cost after sale of products on an estimated amount based on the historical performance.

(3) Accrued bonuses for employees

Accrued bonuses for employees are provided for payment of bonuses to employees based on the estimated amount payable by the Company.

(4) Accrued directors’ bonuses

Accrued directors’ bonuses are provided for payment of bonuses to directors based on the estimated amount payable by the Company.

(5) Accrued pension and severance cost

Accrued pension and severance cost are provided for employee retirement and severance benefits based on projected benefit obligations and expected plan assets at the end of the fiscal year.

I-2-46

Actuarial gain or loss is amortized from the following year of the year in which such gain or loss is accrued, in equal amounts over a certain period (10 years) within the average remaining service periods.

Prior service cost is amortized in equal amounts over a certain period (10 years) within the average remaining years of service of the employees.

(6) Accrued directors’ retirement benefits

Accrued directors’ retirement benefits are provided for payment of directors’ retirement benefits based on the amount payable at the end of the fiscal year pursuant to the Company’s rules on directors’ retirement benefits.

(7) Accrued long service rewards for employees

4. Basis for Translation of Foreign Currency-Denominated Assets and Liabilities

Foreign currency-denominated receivables and payables are translated into Japanese yen at the spot exchange rate in effect on the date of the balance sheet and any gains or losses resulting from translation are charged or credited to income.

5. Other Significant Matters Regarding Preparation of Financial Statements

Accounting of consumption tax, etc.

Transactions subject to consumption tax and local consumption tax are recorded at amounts exclusive of the relevant taxes.

1. Accumulated depreciation of property, plant and equipment: 41,523 million yen

2. Receivables from and payables to affiliated companies:


Receivables		23,361 million yen
Payables		5,176 million yen

Transactions with affiliated companies


Sales		79,581 million yen
Purchase		50,008 million yen
Other transactions		1,395 million yen

I-2-47

Number of treasury stock as of December 31, 2009: 6,964 shares of common stock

1. Significant components of deferred tax assets


Accrued bonuses for employees		87 million yen
Petty sum depreciable assets		19 million yen
Accrued pension and severance cost		255 million yen
Depreciation of fixed assets		20 million yen
Impairment loss		122 million yen
Allowance for doubtful receivables		41 million yen
Expenses for commission of research and development		326 million yen
Other		247 million yen

Sub-total deferred tax assets		1,117 million yen

Valuation reserve		(24) million yen

Total deferred tax assets		1,093 million yen

2. Significant components of deferred tax liabilities


Reserve for deferral of capital gain on property		(1,067) million yen
Net unrealized gains on securities		(18) million yen

Total deferred tax liabilities		(1,085) million yen


Net deferred tax assets		8 million yen

<Notes to Finance Lease Transactions> (As of December 31, 2009)


1.	Acquisition costs:	232 million yen
2.	Accumulated depreciation:	160 million yen
3.	Future minimum lease payments:	72 million yen

I-2-48

1. Parent Company and Major Corporate Shareholders

Status

Company
Name

Ratio of
voting rights
(held by the
related party
or Company)

Relationship with
the related party

Description
of
transaction

Transaction
amount

Item

Balance
as of
December
31, 2009

Interlocking

Business

directors

relationship

Parent
company

Canon Inc.

Held by the
related party

Direct:
57.8%
Indirect:
0.3%

Sales of
products
and
purchase of
parts;
Loan of
funds

Sales of products

78,077
million yen

Accounts receivable

19,329
million yen

Loan of
funds

7,759
million yen

Short-term
loans
receivable

Conditions of transactions and policy regarding determination of conditions of transaction



	(1)		Conditions regarding sales of products are determined upon offer of the Company’s desirable price and negotiation in the same manner as general transaction conditions.

	(2)		Interests on loan of funds are reasonably determined taking into consideration the interest rate prevailing in the market. There is no collateral for the loan. Transaction amount represents the average balance for the fiscal year.

I-2-49

2. Subsidiaries

Status

Company
Name

Ratio of

Relationship with
the related party

Description
of
transaction

Transaction
amount

Item

Balance
as of
December
31, 2009

voting rights

(held by the

related party

Interlocking

Business

or Company)

directorate

relationship

Subsidiary

Canon
Finetech
Nisca
Industrial
Hong Kong
Co.,
Limited

Held by the
Company

Direct:
100.0%

Purchase of
products
and parts;
Purchase of
molds

Purchase of
molds

934
million yen

Other
payables

26
million yen

Subsidiary

Canon
Finetech
(Suzhou)
Business
Machines
Inc.

Held by the
Company

Direct:
90.0%

Purchase of
products
and parts;
Paid supply
of parts

Purchase of
products
and parts

34,474
million yen

Accounts
payable

2,375
million yen

Paid supply
of parts

5,405
million yen

Other
receivables

958
million yen

Subsidiary

Nisca
Corporation

Held by the
Company

Direct:
100.0%

Purchase of
products
and parts;
Purchase of
molds

Purchase of
molds

1,047
million yen

Other
payables

10
million yen

Purchase of
products
and parts

3,186
million yen

Accounts
payable

925
million yen

Subsidiary

Canon
Finetech
Nisca
(Shenzhen)
Inc.

Held by the
Company

Direct:
39.0%

Indirect:
51.0%

Purchase of
products
and parts;
Paid supply
of parts;
Loan of
funds

Purchase of
products
and parts

8,026
million yen

Accounts
payable

1,052
million yen

Paid supply
of parts

2,191
million yen

Other
receivables

948
million yen

Loan of
funds

706
million yen

Short-term
loans
receivable

1,566
million yen

Conditions of transactions and policy regarding determination of conditions of transaction

	(1)		Conditions regarding purchase of products and parts as well as purchase of molds are determined taking into consideration the market price, in the same manner as general transaction conditions.

	(2)		Conditions regarding paid supply of parts are determined based on the Company’s predetermined cost.

	(3)		Interests on loan of funds are reasonably determined taking into consideration the interest rate prevailing in the market. There is no collateral for the loan.

I-2-50

Report of Independent Auditors

February 4, 2010

The Board of Directors
Canon Finetech Inc.

Ernst & Young ShinNihon LLC

Hideo Doi
Certified Public Accountant
Designated and Engagement Partner

Ryo Kayama
Certified Public Accountant
Designated and Engagement Partner

Koji Fujima
Certified Public Accountant
Designated and Engagement Partner

Pursuant to Item 1, Paragraph 2 of Article 436 of the Corporation Law, we have audited the non-consolidated balance sheet, the non-consolidated statement of income, the non-consolidated statement of changes in net assets, the notes to the non-consolidated financial statements and the related supplementary schedules of Canon Finetech Inc. (the “Company”) applicable to the 60th fiscal year from January 1, 2009 through December 31, 2009. These non-consolidated financial statements and the related supplementary schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these non-consolidated financial statements and the related supplementary schedules based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the non-consolidated financial statements and the related supplementary schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the non-consolidated financial statements and the related supplementary schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the non-consolidated financial statements and the related supplementary schedules. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the non-consolidated financial statements and the related supplementary schedules referred to above present fairly, in all material respects, the financial position and results of operations of Canon Finetech Inc.

I-2-52

AUDIT REPORT

We, the Board of Corporate Auditors, have prepared this Audit Report upon deliberation, based on the audit report prepared by each Corporate Auditor concerning the performance of duties of the Directors during the 60th business term from January 1, 2009 to December 31, 2009, and hereby report as follows:

1.		Auditing Methods Employed by the Corporate Auditors and the Board of Corporate Auditors and the Details of Such Methods

		The Board of Corporate Auditors has established auditing policies and allocation of duties and other relevant matters, received reports on the status of performance of duties from the Directors and the Accounting Auditor, as well as receiving reports on the status of execution of audits and results thereof from each Corporate Auditor, and sought explanations as necessary.

		Each Corporate Auditor has, in accordance with the Corporate Auditor auditing standards established by the Board of Corporate Auditors and pursuant to the auditing policies and allocation of duties and other relevant matters, communicated with the Directors, Compliance Auditing Department and other employees, etc. and made efforts to collect information and improve the auditing environment, regularly attended meetings of the Board of Directors and other important meetings, received reports, and sought explanation as necessary, from the Directors and other employees, etc. regarding performance of their duties, examined important authorized documents and associated information, and studied the status of the Company’s operations and assets at the head office and principal offices. In addition, we have monitored and examined the systems to ensure that the performance of duties by the Directors is in compliance with related laws and regulations and the Articles of Incorporation of the Company, as well as the resolution of the Board of Directors concerning the organization of the systems as set forth in Article 100, Paragraphs 1 and 3 of the Enforcement Regulation of the Companies Act, and the status of the systems (Internal Control System) based on such resolution, which are necessary to ensure propriety of a company’s operations. With respect to the subsidiaries, we have communicated and exchanged information with the Directors and Corporate Auditors and other relevant people of the subsidiaries and received reports on operations from the subsidiaries as necessary. Based on the methods mentioned above, we have examined the business report and the supplementary schedules for the relevant business term.

		Furthermore, we have monitored and examined whether the Accounting Auditor is maintaining an independent position and is conducting a fair audit, and received reports regarding the status of performance of duties from the Accounting Auditor and sought explanations as necessary. In addition, we have received a notice from the Accounting Auditor that “Systems for ensuring that duties are performed properly” (particulars set forth in each item of Article 131 of the Company Accounting Regulations) have been organized in accordance with the “Quality Management Standards Regarding Audits”

I-2-54

(Business Accounting Council, October 28, 2005) and other relevant standards, and sought explanations as necessary. Based on the methods mentioned above, we have examined the non-consolidated financial statements (the non-consolidated balance sheet, non-consolidated statement of income, non-consolidated statement of changes in net assets and notes to the non-consolidated financial statements) and the supplementary schedules for the relevant business term.

Results of Audit

(1)

Results of Audit on Business Report and Other Relevant Documents

	(i)		We confirm that the business report and the supplementary schedules represent fairly the condition of the Company in accordance with related laws and regulations and the Articles of Incorporation of the Company.

	(ii)		We have found no evidence of wrongful act or material breach of related laws and regulations and Articles of Incorporation of the Company in connection with the performance of duties by the Directors.

	(iii)		We confirm that the resolution of the Board of Directors regarding Internal Control System is due and proper. In addition, we have found no matters to be pointed out in relation to the performance of duties by the Directors regarding the Internal Control System.

(2)		Results of Audit on Non-Consolidated Financial Statements and Supplementary Schedules

		We confirm that the methods and results of the audit employed by the Accounting Auditor, Ernst & Young ShinNihon LLC, are due and proper.

February 5, 2010

Board of Corporate Auditors
Canon Finetech Inc.

Kozo Yamamoto
Full-time Corporate Auditor

Tsutomu Toyono
Full-time Corporate Auditor

Keijiro Yamazaki
Corporate Auditor

Minoru Shishikura
Corporate Auditor

I-2-55

Reference Statement

Proposals and Referential Matters

Proposal 1: Dividends from Surplus

One of key management themes of Canon Finetech Inc. (the “Company”) is to return its profits to shareholders, and the Company maintains a basic policy to maintain and continue stable dividends payouts.

Considering the above policy, its business performance for the current business term etc., the Company has decided to pay year-end dividends of ¥12 per share upon the terms and conditions set forth below.

The Company has already paid interim dividends of ¥12 per share, resulting in annual dividends totaling ¥24 per share.

Particulars:

	(1)		Kind of assets available for dividends: Cash

	(2)		Matters regarding allotment of assets available for dividends and aggregate amount:

			¥12 per share of the Company’s common stock

			Aggregate amount of dividends ¥510,315,348

(3)

Effective date of dividends from surplus March 25, 2010

Proposal 2: Election of 12 Directors

The term of office of all of 13 Directors currently in office will expire at the closing of the meeting.

The Company recommends that shareholders vote for ratification of the election of 12 Directors.

The nominees for Director are as follows:

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

Ikuo Soma
(August 4, 1946)

April 1970
January 1997

March 1999
April 1999

March 2003
March 2005

Joined Canon Inc.
Manager, Office Imaging Products I
Division, Canon Inc.
Director, Canon Inc.
General Manager, Office Imaging Products
Division, Canon Inc.
Managing Director, Canon Inc.
President and Representative Director,
Canon Finetech Inc. (currently in office)

11,700
shares

I-2-57

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

Yuji Inoue
(July 5, 1948)

April 1971
January 2002

November 2003

February 2004

March 2004
March 2005
January 2007

March 2007

January 2009

June 2009

Joined Canon Inc.
Manager in charge of Office of General
Manger, Peripheral Products Operations
Division, Canon Inc.
Joined Canon Finetech Inc.
Manager in charge of Finance &
Accounting Division
Manager, Finance & Accounting Division,
Canon Finetech Inc.
Director, Canon Finetech Inc.
Managing Director, Canon Finetech Inc.
Chairman of the Board, Canon Finetech
Industrial Hong Kong Co., Limited
Senior Managing Director, Canon Finetech
Inc. (currently in office)
Manager, Finance & Accounting Division,
Canon Finetech Inc.
Chairman of the Board, Canon Finetech
Nisca Industrial Hong Kong Co., Limited
(currently in office)

<Significant concurrent service>
Chairman of the Board, Canon Finetech
Nisca Industrial Hong Kong Co., Limited

4,000
shares

Osamu Asukai
(March 14, 1949)

April 1972
April 2006

January 2008

March 2008

July 2008

Joined Canon Inc.
Manager, Office Imaging Products
Business Support Division, Canon Inc.
Joined Canon Finetech Inc.
Senior Executive reporting to President
Deputy General Manager, Business
Machines Operations Division, Canon
Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
General Manager, Business Machines
Operations Division, Canon Finetech Inc.
(currently in office)

4,100
shares

I-2-58

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

Toshihisa Sakai
(January 9, 1950)

November 1973
April 2004

April 2005

July 2005

January 2006

March 2006

January 2008

Joined Canon Sales Co., Inc.
Manager, Office Imaging Products
Business Support Division, Canon Inc.
Joined Canon Finetech Inc.
Advisory Director
General Manager, Quality Division, Canon
Finetech Inc.
General Manager, Industrial Machines
Division, Canon Finetech Inc. (currently in
office)
Director, Canon Finetech Inc. (currently in
office)
Manager, Ibaraki Plant, Canon Finetech
Inc.

3,300
shares

Shinji Kanemitsu
(April 8, 1954)

April 1980
February 2001

April 2001

January 2003
March 2004

January 2005

January 2006

January 2010

Joined Canon Inc.
Deputy Manager, B Products Planning
Center, Canon Inc.
Joined Copyer Co., Ltd.
Chief of Business Machines Development
Center
Advisory Director, Canon Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
Manager, Printer Business Division, Canon
Finetech Inc.
General Manager, Quality Division, Canon
Finetech Inc.
General Manager, Production Division,
Canon Finetech Inc. (currently in office)
Manager, Ibaraki Plant, Canon Finetech
Inc. (currently in office)

2,900
shares

I-2-59

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

Masakazu Sano
(February 22,
1951)

April 1974
July 1997

March 2001
January 2003

March 2005

January 2007

January 2010

Joined Canon Inc.
Joined Canon Finetech Inc.
Manager, General Administration Division
Executive Officer, Canon Finetech Inc.
Advisory Director, Canon Finetech Inc.
Manager, Personnel Affairs Division,
Canon Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
President and Representative Director, Top
Business Machines Co., Ltd. (currently in
office)
Deputy Manager, Fukui Plant, Canon
Finetech Inc. (currently in office)

<Significant concurrent service>
President and Representative Director, Top
Business Machines Co., Ltd.

5,000
shares

Kazuaki
Morozumi
(March 6, 1951)

January 1979
August 2002

July 2003

February 2005

March 2005
March 2006

January 2007

January 2008

Joined Canon Inc.
Manager, Production Structure Planning
Division, Production Planning Center,
Canon Inc.
Joined Canon Finetech Inc.
Deputy General Manager, Production
Division, Canon Finetech Inc.
General Manager, Production Division,
Canon Finetech Inc.
Advisory Director, Canon Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
Manager, Ibaraki Plant, Canon Finetech
Inc.
Deputy General Manager, Business
Machines Division, Canon Finetech Inc.
Chairman of the Board and President,
Canon Finetech (Suzhou) Business
Machines Inc. (currently in office)

<Significant concurrent service>
Chairman of the Board and President,
Canon Finetech (Suzhou) Business
Machines Inc.

2,200
shares

I-2-60

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

Yoshinori Ueda
(July 11, 1956)

April 1979
April 2003

April 2005

January 2006

March 2006

July 2008

Joined Canon Inc.
Chief, Office Imaging Products Device
Development Center, Canon Inc.
Joined Canon Finetech Inc.
Advisory Director
General Manager, PHD Business Division,
Canon Finetech Inc.
General Manager, Business Machines
Operations Division, Canon Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
General Manager, Development Division,
Canon Finetech Inc. (currently in office)

2,500
shares

Toshio Shirai
(October 22,
1954)

March 1978
October 1999

January 2003

March 2004
March 2007

January 2008

Joined Copyer Co., Ltd.
Manager, General Administration Division,
Copyer Co., Ltd.
Manager, General Administration Division,
Canon Finetech Inc. (currently in office)
Advisory Director, Canon Finetech Inc.
Director, Canon Finetech Inc. (currently in
office)
General Manager, General Administration
Division, Canon Finetech Inc. (currently in
office)

2,600
shares

Mamoru Tanaka
(January 25, 1949)

April 1971
April 1990

June 1990
April 2001
January 2003

March 2006

March 2009

Joined Nisca Corporation
General Manager, Technology Division,
Nisca Corporation
Director, Nisca Corporation
Managing Director, Nisca Corporation
General Manager, Production Management
Division, Nisca Corporation
President and Representative Director,
Nisca Corporation (currently in office)
Director, Canon Finetech Inc. (currently in
office)

<Significant current service>
President and Representative Director,
Nisca Corporation

2,000
shares

Hajime Miyazaki
(January 8, 1955)

April 1983
April 1998

January 2001

July 2004

Joined Canon Inc.
Manager, Material Process 2nd
Development Division, Canon Inc.
Manager, Material Technology I Division,
Canon Inc.
Deputy General Manager, Material
Technology Research Center, Canon Inc.

1,000
shares

I-2-61

No.

Name

Biography, title, responsibilities and

No. of
shares held

(Date of birth)

significant concurrent services

in the

Company

April 2006

January 2008

April 2009

Deputy General Manager, Material Process
Development Center, Canon Inc.
Joined Canon Finetech Inc.
Deputy General Manager, Chemical
Products Operations (currently in office)
Corporate Executive, Canon Finetech Inc.
(currently in office)

Hiromitsu
Hirabayashi
(August 4, 1957)

April 1982
April 2004

January 2005

July 2005

March 2008

January 2010

Joined Canon Inc.
Manager, Inkjet System 3rd Development
Division, Canon Inc.
Joined Canon Finetech Inc.
Deputy Chief, POD Development Center,
Canon Finetech Inc.
Chief, POD Development Center, Canon
Finetech Inc.
Advisory Director, Canon Finetech Inc.
(currently in office)
General Manager, Quality and Environment
Division, Canon Finetech Inc. (currently in
office)

2,000
shares

Note:

There is no special interest between each of the nominees and the Company.

I-2-62

Proposal 3: Election of 4 Corporate Auditors

The term of office of all of 4 Corporate Auditors currently in office will expire at the closing of the meeting. The Company recommends that shareholders vote for ratification of the election of 4 Corporate Auditors.

The nominees for Corporate Auditor are as follows.

Prior to bringing this proposal before the meeting, we have obtained the prior consent of the Board of Corporate Auditors.

No. of

No.

Name

Biography, title, responsibilities and

shares held

(Date of birth)

significant concurrent services

in the

Company

April 1971

Joined Canon Sales Co,. Inc.

January 1995

Deputy General Manger, Office Imaging

Products Hokkaido Business Division,

Canon Inc.

April 1996

Seconded to Canon Europe N.V.

Kozo Yamamoto

January 2003

Joined Canon Finetech Inc.

5,200

(April 24, 1948)

Manager, Management Planning Division

Deputy General Manager, POD Business

Division

March 2004

Director, Canon Finetech Inc.

March 2006

Full-time Corporate Auditor, Canon

Finetech Inc. (currently in office)

April 1973

Joined Canon Inc.

January 1996

Joined Copyer Co., Ltd.

Deputy Chief, Copy Machine Development

Center

April 2001

General Manager, Quality Assurance

Division, Copyer Co., Ltd.

Tsutomu Toyono

January 2003

General Manager, Quality Assurance

2,500

(December 15,

Division, Canon Finetech Inc.

1949

)

March 2004

Advisory Director, Canon Finetech Inc.

April 2005

Deputy General Manager, Chemical

Products Business Division, Canon

March 2006

Finetech Inc.

Full-time Corporate Auditor, Canon

Finetech Inc. (currently in office)

I-2-63

No. of

No.

Name

Biography, title, responsibilities and

shares held

(Date of birth)

significant concurrent services

in the

Company

April 1972

Joined Canon Sales Co., Inc.

April 2004

Chief, Optical Products Business

Operations Management Center, Canon

Inc.

Shunji Onda

March 2006

Director, Canon Inc. (currently in office)

—

(March 13, 1950)

April 2006

Deputy General Manger, Finance &

Accounting Division, Canon Inc.

April 2007

General Manger, Global Procurement

Division, Canon Inc. (currently in office)

April 1981

Joined The Daiichi Mutual Life Insurance

Company

April 2002

Manager, Network Promotion Department

April 2004

Manager, Corporate Relations 2nd

Kuniyoshi

Department

Kitamura

April 2006

Manager, Research Department

—

(April 8, 1956)

November 2007

Manager, Corporate Planning 2nd Department

April 2009

Manager, Institution Relations 8th

Department (currently in office)

(Notes)

	1.		There is no special interest between each of the nominees and the Company.

	2.		Messrs. Shunji Onda and Kuniyoshi Kitamura are the nominees for outside Corporate Auditors.

	3.		As Mr. Shunji Onda has a wide range of experiences and abundant knowledge resulting from the directorship at the Company’s parent company Canon Inc., the Company has determined that he is qualified for serving as an outside Corporate Auditor of the Company.

	4.		As Mr. Kuniyoshi Kitamara has never involved directly with corporate management; however, he has engaged in a broad range of operations in the life insurance company for long years and has a considerable level of knowledge of corporate management, the Company has determined that he will be able to properly perform the responsibilities as an outside Corporate Auditor.


Proposal 4: Payment of retirement benefit awards to the retiring Directors and retiring Corporate Auditors

The Company has decided to pay certain amounts of retirement benefit awards to Messrs. Hiroshi Sugitani, Hisashi Kurachi and Shinichi Yano who will retire from the office of the Director and Messrs. Keijiro Yamazaki and Minoru Shishikura who will retire from the office of the Corporate Auditor, both at the closing of the meeting, in recognition of their services as such in accordance with certain standards as adopted by the Company. The specific amounts of the retirement benefit awards, time and method of payments and other relevant matters will be left up to the Board of Directors with respect to the retiring Directors, and up to discussion of the Corporate Auditors with respect to the retiring Corporate Auditors.

The biography of the retiring Directors and retiring Corporate Auditors are as follows:



Name	Biography

Hiroshi Sugitani	March 2004 March 2005	Director, Canon Finetech Inc. Managing Director, Canon Finetech Inc. (currently in office)

I-2-64



Hisashi Kurachi	March 2005 March 2007	Director, Canon Finetech Inc. Managing Director, Canon Finetech Inc. (currently in office)

Shinichi Yano	March 2007	Director, Canon Finetech Inc. (currently in office)

Keijiro Yamazaki	March 2008	Corporate Auditor, Canon Finetech Inc. (currently in office)

Minoru Shishikura	March 2007	Corporate Auditor, Canon Finetech Inc. (currently in office)


Proposal 5: Payment of bonus to the Directors

In consideration of the business performance and other relevant factors for the current business term, the Company has determined to pay the bonus in the aggregate amount of ¥6,900,000 to 12 Directors who were in office as at the end of the current business term.


Proposal 6: Approval to the share exchange agreement between the Company and Canon Inc.

The Boards of Directors of the Company and Canon Inc. (“Canon”) adopted the resolutions for the share exchange under which Canon would become a wholly owning parent company of the Company and make the Company its wholly owned subsidiary (the “Share Exchange”) at their meetings both held on February 8, 2010, and the Company and Canon entered into the share exchange agreement (the “Share Exchange Agreement”).

The Share Exchange will become effective on May 1, 2010, and Canon will effect the Share Exchange without approval of its general meeting of shareholders pursuant to Article 796, Paragraph 3 of the Companies Act.

Subject to approval of shareholders, Canon will become a wholly owning parent company of the Company effective May 1, 2010, the effective date of the Share Exchange. Additionally, the Company will become a wholly owned subsidiary of Canon and the Company’s shares will be delisted on April 27, 2010 (the last trading day will be April 26, 2010).

	1.		Reasons for effecting the Share Exchange

			As the core development and production entity of the Canon Group, the Company has contributed to the development of the Canon Group mainly through the development, design and production of multifunction printers (“MFPs”) and paper handling equipments. Additionally, the Company has contributed to the consolidated earnings of the Canon Group by making full use of its original technologies and know-how to reinforce its independent businesses and expand its business domains. In 2008, the Company made Nisca Corporation its wholly owned subsidiary to boost the strength of the Canon Group and promote quick and efficient business deployment. Thus, as a listed company, the Company has carried out continuous management efforts.

			On the other hand, the Canon Group expects the surrounding business environment, such as the current global economy, will continue to prove difficult. Faced with these circumstances, in the area of business machines, the Canon Group has steadily carried out measures, such as launching strategic products and reinforcing direct distribution channels in the United States, entering into an alliance with Hewlett-Packard, entering a marketing collaboration with Adobe Systems, and reaching an agreement with Océ N.V. to make it a wholly owned subsidiary of Canon. However,

I-2-65

			in order to further enhance the effects of these measures, the Canon Group recognizes that it is the most important theme toward achieving the “overwhelming No. 1 position” in the area of office machine operations to further accelerate its management speed, based on the financial strength it has built up to date, to strengthen the fundamental and production technologies for MFPs and related areas, the core of the office machines segment, and promptly introduce attractive new products and services.

			In its machines operations which is a core business of the Company, the Company shares many of business methodologies, such as development, design, production and quality assurance, and has its development centers and main overseas manufacture plants that are geographically close to those of Canon. Thus, the Company is in a position to share many of management resources with Canon. In light of these situations, the Company and Canon have reached a shared understanding that it is the urgent and pressing task of the Canon Group to further enhance the synergy effect throughout the Canon Group through the organic integration of these resources, build up a framework that will enables the Canon Group to execute their important management strategies flexibly and promptly, further develop their speed management, and make a group-wide commitment so that the Canon Group can achieve the “overwhelming No. 1 position” in the area of office machines operations, and have reached agreement on the Company becoming a wholly owned subsidiary of Canon through the Share Exchange.

	2.		Brief Description of the Share Exchange Agreement

			The following presents the text of the Share Exchange Agreement entered into by and between the Company and Canon, dated February 8, 2010:

Share Exchange Agreement (Duplicate)

THIS SHARE EXCHANGE AGREEMENT (“this Agreement”) is made and entered into, as of February 8, 2010, by and between Canon Inc. (having its address at 30-2, Shimomaruko 3-chome, Ota-ku, Tokyo; “Canon”) and Canon Finetech Inc. (having its address at 717 Yaguchi, Misato-shi, Saitama; “Canon Finetech”) upon the terms and conditions set forth hereinbelow:

Article 1. (Share Exchange)

In accordance with and subject to the provisions of this Agreement, Canon and Canon Finetech shall effect a share exchange under which Canon would become a wholly owning parent company of Canon Finetech and make Canon Finetech its wholly owned subsidiary (the “Share Exchange”), and Canon shall acquire all of Canon Finetech’s issued shares (other than those shares held by Canon).

Article 2. (Shares to Be Delivered upon the Share Exchange, and Allotment)

Upon the Share Exchange, Canon shall deliver the number of shares of its common stock representing the total number of shares of common stock held by it in Canon Finetech multiplied by 0.38, in exchange for the shares of Canon Finetech’s common stock, to Canon Finetech’s shareholders (other than Canon; hereinafter the same) as of the point of time immediately prior to Canon’s acquisition of shares of Canon Finetech’s issued shares (other than those shares held by Canon) by way of the Share Exchange (the “Base Time”).

I-2-66

Upon the Share Exchange, Canon shall allot to each of Canon Finetech’s shareholders as of the Base Time 0.38 shares of its common shares for one share of common stock held by each of them in Canon Finetech.

Any fraction of less than one share resulting from the allotment of shares of Canon’s common stock to the shareholders referred to in the immediately preceding Paragraph shall be treated by Canon pursuant to Article 234 of the Companies Act (Act No. 86 of 2005, as amended; hereinafter the same).

Canon shall issue no new share for shares of its common stock to be delivered upon the Share Exchange, and deliver shares held by it in treasury.

Article 3. (Amounts of Capital and Reserves)

Canon shall not increase the amounts of its capital and reserves upon the Share Exchange.

Article 4. (Effective Date of the Share Exchange)

The date on which the Share Exchange will become effective (the “Effective Date”) shall be May 1, 2010; provided, however, that this date may be changed by reason of the necessity for proceeding with the Share Exchange or other cause, as agreed upon between Canon and Canon Finetech after discussion.

Article 5. (General Meetings of Shareholders for Approval to the Share Exchange)

Canon shall effect the Share Exchange without approval of the general meeting of shareholders to this Agreement pursuant to Article 796, Paragraph 3 of the Companies Act.

Canon Finetech shall ask its shareholders to adopt a resolution for approval to this Agreement, as well as other matters necessary for the Share Exchange at the annual general meeting of shareholders to be held on March 24, 2010 (the “General Meeting for Approval of the Share Exchange”).

The procedures set forth in the preceding two (2) Paragraphs (including the date on which the General Meeting for Approval of the Share Exchange is to be held) may be changed by reason of the necessity for proceeding with the Share Exchange or other cause, as agreed upon between Canon and Canon Finetech after discussion.

Article 6. (Cancellation of Treasury Shares)

Canon Finetech shall cancel all of shares held by it in treasury as of the Base Time (including those shares to be repurchased by Canon Finetech in response to shareholders’ request for repurchase under Article 785 of the Companies Act) as of the Base Time pursuant to a resolution adopted at the meeting of Canon Finetech’s Board of Directors to be held prior to the Effective Date.

Article 7. (Restrictions on Distribution of Retained Earnings and Repurchase of Treasury Shares)

If either Canon or Canon Finetech elects to pay out dividends from surplus by designating any day which will occur prior to the Effective Date as the base date or to repurchase its treasury shares on any day prior to the Effective Date (excluding a repurchase of its treasury shares in the cases where it is required to repurchase its treasury shares in response to the exercise of right by its

I-2-67

shareholders pursuant to the applicable law or ordinance), both after the execution of this Agreement, such party shall obtain the written consent of the other party.

Article 8. (Management of Company Assets)

Canon and Canon Finetech shall conduct their respective business operations and manage and operate their respective assets and properties with the duty of care of a prudent manager for the period from the date of the execution of this Agreement up to the Effective Date, and dividends from surplus and other activities that may have any material effect on their respective assets, properties, rights and obligations shall be effected as agreed in advance between Canon and Canon Finetech after discussion.

Article 9. (Revision of the Share Exchange Terms; and Termination of This Agreement)

If there arises any material change in the financial condition or operating results of Canon or Canon Finetech due to an act of God or other cause for the period from the date of the execution of this Agreement up to the Effective Date, or if Canon receives notice of objection from the shareholders holding such number of shares as prescribed in Article 796, Paragraph 4 of the Companies Act and Article 197 of the Ordinance for Enforcement of the Companies Act or Canon or Canon Finetech is exposed to any circumstance that might have a material adverse effect on the closing of the Share Exchange due to the statutory requirements for permission, authorization or clearance or notification (including those under any foreign law) or other reason, Canon and Canon Finetech shall amend the Share Exchange terms and other provisions of this Agreement or terminate this Agreement, in either case as agreed upon after discussion.

Article 10. (Effect of This Agreement)

This Agreement shall cease to be effective either when Canon receives notice of objection from the shareholders holding such number of shares as prescribed in Article 796, Paragraph 4 of the Companies Act and Article 197 of the Ordinance for Enforcement of the Companies Act, provided that Canon’s general meeting of shareholders fails to adopt a resolution for approval to this Agreement and other matters necessary for the Share Exchange prior to the Effective Date or when the General Meeting for Approval of the Share Exchange fail to adopt a resolution for approval of this Agreement and other matters necessary for the Share Exchange.

Article 11. (Governing Law)

	1.		This Agreement shall be governed by, and be interpreted in accordance with, the laws of Japan.

	2.		It is agreed upon that the Tokyo District Court shall be the court of first instance having the exclusive jurisdiction over any dispute arising in relation to the performance and interpretation of this Agreement.

Article 12. (Matters to Be Discussed)

Any matters not expressly stipulated in this Agreement and other matters necessary for the Share Exchange shall be determined in accordance with the purport of this Agreement as agreed upon between Canon and Canon Finetech after discussion.

I-2-68

Brief Description of the Matters Prescribed in Article 184 of the Ordinance for Enforcement of the Companies Act

(1)

Matters regarding the reasonableness of the consideration for the exchange

	(i)		Matters regarding the reasonableness of the total number or total amount of the consideration for the exchange

			In order to secure the fairness of the share exchange ratio under the Share Exchange, Canon and the Company determined that each company would separately request an independent third-party appraisal agency to calculate the share exchange ratio, and designated Nomura Securities Co., Ltd. (“Nomura Securities”) and Daiwa Securities Capital Markets Co., Ltd. (“Daiwa Securities CM”), respectively, as the third-party appraisal agencies to calculate the share exchange ratio.

			Nomura Securities calculated the share exchange ratios by performing the average market price analysis for Canon, and the average market price analysis, comparable companies analysis and discounted cash flow analysis (“DCF analysis”) for the Company. The results of analysis under each of these analyses are as follows. The ranges of the share exchange ratios shown below represent the ranges of the number of shares of Canon common stock to be allotted for each share of the Company common stock.

			For the average market price analysis, Nomura Securities designated February 5, 2010 as the base date, and adopted the closing stock prices on the base date, and the average closing stock prices for the periods of one month, three months and six months prior to the base date, all on the Tokyo Stock Exchange, and also adopted, for Canon, the average closing price for the period from January 28, 2010, the day immediately following the date on which the “earnings briefing (kessan-tanshin) for the fiscal year ended December 31, 2009” was released, to the base date, and for the Company, the average closing price for the period from January 25, 2010, the date on which the “earnings briefing for the fiscal year ended December 31, 2009” was released, to the base date.


	Method Adopted	Ranges of Share Exchange Ratio
(i)	Average Market Price Analysis:	0.32 to 0.35
(ii)	Comparable Companies Analysis:	0.36 to 0.37
(iii)	DCF Analysis:	0.37 to 0.41

In calculating the share exchange ratio, Nomura Securities principally used the information provided by Canon and the Company, as well as publicly available information. Nomura Securities assumed that all of those materials and information were accurate and complete and has not independently verified their accurateness and completeness. Additionally, Nomura Securities has not conducted any independent evaluation, appraisal or assessment of the assets and liabilities (including contingent liabilities) of Canon, the Company and their affiliates, including analysis and evaluation of individual assets and liabilities, and has not

I-2-70

requested any third-party institution to evaluate, appraise or assess them. The calculations of share exchange ratios by Nomura Securities reflect the information and economic conditions as of February 5, 2010. Nomura Securities also assumed that the Company’s financial forecast (including its profit plan and other information) had been reasonably reviewed and prepared by the management of Canon and the Company based on the best forecast and judgment currently available to and possible for them.

Based on the assumptions set forth above and certain other conditions, Nomura Securities rendered to Canon its opinion dated February 5, 2010 that the agreed upon number of shares of Canon common stock to be allotted for each share of the Company common stock is fair to Canon from a financial point of view.

Given that the shares of Canon common stock are listed on stock exchanges and the market prices are available, Daiwa Securities CM made the calculation of Canon common stock by the market price analysis (Daiwa Securities CM designated February 5, 2010 as the base date, and adopted the volume weighted average prices for the period from January 26, 2010, the business day immediately following the date on which the “earnings briefing for the fiscal year ended December 31, 2009” was released by the Company, to the base date, and the volume weighted average prices for the periods of one month, three months and six months prior to the base date). Given that the shares of the Company common stock are listed on the stock exchange and the market prices are available, Daiwa Securities CM made the calculation of the Company common stock by the average market price analysis (Daiwa Securities CM designated February 5, 2010 as the base date, and adopted the volume weighted average prices for the period from January 26, 2010, the business day immediately following the date on which the “earnings briefing for the fiscal year ended December 31, 2009” was released by the Company, to the base date, and the volume weighted average prices for the periods of one month, three months and six months prior to the base date), the comparable companies analysis given that there exist multiple analogous listed companies comparable to the Company, and the analogy of the stock valuation based on comparable companies analysis is feasible, and DCF Analysis to reflect the future business activities in its appraisal. The appraisal range with the value of one share of Canon common stock being 1 is as shown below:


	Method Adopted	Appraisal Ranges of Share Exchange Ratio
(i)	Market Price Analysis:	0.316 to 0.345
(ii)	Comparable Companies Analysis:	0.343 to 0.450
(iii)	DCF Analysis:	0.363 to 0.526

In calculating the share exchange ratio, Daiwa Securities CM used the information provided by Canon and the Company, as well as publicly available information and data, and assumed that all of those materials, data and information were accurate and complete. Daiwa Securities CM has never independently verified the accurateness, credibility, completeness and reasonableness of those materials, data and information. Additionally, Daiwa Securities CM has not independently evaluated, appraised or assessed the assets and liabilities

I-2-71

(including off-balance-sheet assets and liabilities, and other contingent liabilities) of Canon, the Company and their affiliates, including analysis and evaluation of individual assets and liabilities, and has never requested any third-party agency to evaluate, appraise or assess them. It is also assumed that the Company’s business plan and financial forecast has been reasonably prepared by the management of the Company pursuant to appropriate procedures and based on their current best forecast and judgment.

Based on the assumptions set forth above and other assumptions and qualifications, Daiwa Securities CM delivered to the board of directors of the Company its opinion dated February 8, 2010 that the agreed number of shares of Canon common stock to be allotted for one share of the Company common stock is fair to common shareholders of the Company (excluding Canon) from a financial point of view.

Canon and the Company diligently examined the results of professional analysis and advice on the calculation of the proposed share exchange ratios submitted by the above-mentioned third-party appraisal agencies designated by each company, and each company considered the capital relationship between Canon and the Company, the share exchange ratios in similar share exchange transactions in the past, the financial conditions, business performance trends, stock price trends, dividend trends and other relevant aspects of both companies. After repeated negotiations and discussions based on these aspects, it was determined that the share exchange ratio described below is reasonable and would contribute to shareholder interests of both companies. As a result, the Boards of Directors of Canon and the Company determined the share exchange ratio under the Share Exchange at their meetings held on February 8, 2010, and Canon and the Company entered into the share exchange agreement.



	Canon Inc.	Canon Finetech Inc. (the Company)
Share exchange ratio	1	0.38

The share exchange ratio may be changed after discussion between Canon and the Company, in case of a material change in the assumptions based on which the ratio was calculated.

	(ii)		Reasons for selecting Canon’s shares of common stock as the consideration for the exchange

			The Company selected Canon’s shares of common stock as the consideration for the exchange in consideration of protection of interest of the Company’s shareholders, the group-wide capital policy after the Share Exchange, and other relevant aspects.

	(iii)		Matters noted so that the Share Exchange would not impair the interest of the Company’s shareholders

			Canon already holds 57.59% of the total number of issued shares of the Company. In examining the Share Exchange, Canon and the Company requested the different third-party appraisal agencies to calculate the share exchange ratio in order to secure the fairness of the share exchange ratio under the Share Exchange. Based on the results of that calculation,

I-2-72

Canon and the Company held negotiations and discussions, and their respective Boards of Directors adopted the resolutions for the Share Exchange at the agreed-upon share exchange ratio.

The Company received an opinion (fairness opinion) dated February 8, 2010 from Daiwa Securities CM that the share exchange ratio is fair to the common shareholders of the Company (excluding Canon) from a financial point of view.

The Company also designated Oh-Ebashi LPC & Partners as its legal adviser, and received advice on appropriate steps and other actions for the Share Exchange from a legal point of view.

The Board of Directors of the Company has no director who concurrently serves as an officer or employee of Canon. Of the outside Corporate Auditors of the Company, two individuals who concurrently serve as Corporate Auditors of Canon did not participate in the meeting of the Board of Directors of the Company to approve the Share Exchange in order to avoid a conflict of interest.

	(iv)		Matters regarding the reasonableness of the amounts of capital and reserve of Canon

			There will be no increase in the amounts of Canon’s capital and reserve, as Canon will allot its treasury shares for the purpose of the Share Exchange, in lieu of issuing new shares.

			Canon believes that the above-mentioned amounts of capital and reserve are reasonable from the standpoint of securing a flexible capital policy.

(2)

Referential matters on the consideration for the exchange

	(i)		Provisions of Canon’s Articles of Incorporation

			As described in Attachment 1 “Articles of Incorporation of Canon Inc.”

	(ii)		Matters regarding the method of realization of the consideration for the exchange

			The shares of Canon’s common stock are traded on the First Section of Tokyo Stock Exchange, Inc., the First Section of Osaka Securities Exchange Co., Ltd., the First Section of Nagoya Stock Exchange, Inc., Fukuoka Stock Exchange, and Sapporo Securities Exchange.

			Additionally, the financial instruments business operators (kinyu-shohin-torihiki-gyosha) (securities companies) throughout Japan act as intermediary, broker or otherwise for trading in the shares of Canon’s common stock.

(iii)

Matters on the market price of the consideration for the exchange

I-2-73

Average closing share price for Canon’s common stock on Tokyo Stock Exchange, Inc. for the three (3) months ending on the business day immediately preceding the date of the execution of the Share Exchange Agreement (i.e., February 8, 2010) was ¥3,657, while the closing price on the business day immediately preceding the date of the execution of the Share Exchange Agreement was ¥3,550.

The market price of the consideration for the exchange and other relevant information are available from the stock price data published by Tokyo Stock Exchange, Inc. at URL (http://www.tse.or.jp/).

	(3)		Canon’s financial statements for the most recent fiscal year

			As described in Attachment 2 “Canon’s Financial Statements for the Fiscal Year Ended December 31, 2009.”

	(4)		Matters regarding disposition and the like of material assets that has occurred at Canon and the Company after the end of the most recent fiscal year

(i)

The Company

The Company will cancel all of shares held by it in treasury as of the point of time immediately preceding the time when the Share Exchange becomes effective (the “Base Time”) (including those shares to be repurchased by the Company in response to shareholders’ request for repurchase under Article 785 of the Companies Act) as of the Base Time pursuant to a resolution adopted at the meeting of its Board of Directors to be held prior to the Effective Date.

	(ii)		Canon

			Not applicable.

I-2-74

Guide Map to the General Meeting Place


Place:		Canon Finetech Inc. Headquarters, R&D Center, 5th Floor Hall 5th Floor, 717 Yaguchi, Misato-shi, Saitama
Nearest station:		Misato Chuo Station, Tsukuba Express 3-minutes walk from Misato Chuo Station

Attention:		There is no parking space available in the Head Office Development Center. So please refrain from coming by car.

H1N1 influenza is prevalent. If you plan to attend the general meeting of shareholders in person, you should check the epidemic situation on the date of the meeting, as well as your own physical condition. When you actually come to the place of meeting, you are strongly encouraged to take measures to prevent infection by wearing a mask or otherwise.

The Company may take any measures to prevent infection at the place of the meeting. Your cooperation would be appreciated.

I-2-75

Attachment 1: Canon’s Articles of Incorporation

ARTICLES OF INCORPORATION
OF
CANON INC.
(as amended March 27, 2009)

Chapter I. General Provisions

Trade Name

Article 1. The Company shall be called CANON KABUSHIKI KAISHA, which shall be indicated in English as CANON INC.

Objects

Article 2.

The objects of the Company shall be to engage in the following business:

	(1)		Manufacture and sale of optical machineries and instruments of various kinds.

	(2)		Manufacture and sale of acoustic, electrical and electronic machineries and instruments of various kinds.

	(3)		Manufacture and sale of precision machineries and instruments of various kinds.

	(4)		Manufacture and sale of medical machineries and instruments of various kinds.

	(5)		Manufacture and sale of general machineries, instruments and equipments of various kinds.

	(6)		Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of the preceding items.

	(7)		Production and sale of software products.

	(8)		Manufacture and sale of pharmaceutical products.

	(9)		Telecommunications business, and information service business such as information processing service business, information providing service business etc.

	(10)		Contracting for telecommunications works, electrical works and machinery and equipment installation works.

	(11)		Sale, purchase, leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.

	(12)		Manpower providing business, property leasing business and travel business.

	(13)		Business relative to investigation, analysis of the environment and purification process of soil, water, etc.

	(14)		Any and all business relative to each of the preceding items.

Location of Head Office

Article 3.

The Company shall have its head office in Ohta-ku, Tokyo.

I-2-77

Corporate Organizations

Article 4. The Company shall have the following corporate organizations as well as a general meeting of shareholders and Directors:

	(1)		Board of Directors;

	(2)		Corporate Auditors;

	(3)		Board of Corporate Auditors; and

	(4)		Accounting Auditors.

Method of Giving Public Notice

Article 5. Public notices of the Company shall be given in the Nihon Keizai Shimbun.

Chapter II. Shares

Number of Shares Issuable

Article 6. The number of shares issuable by the Company shall be 3,000,000,000 shares.

Number of Shares Constituting One Unit

Article 7. Number of shares constituting one unit of the Company shall be one hundred (100) shares.

2. Shareholders who own Less-than-one-unit Shares of the Company may request that the Company sell a number of shares which, when added to the Less-than-one-unit Shares, would equal the number of shares constituting one unit; provided, however, that the Company is not obliged to do so if the Company does not own its own shares in the number which it is requested to sell.

Rights Regarding Less-than-one-unit Shares

Article 8. Shareholders of the Company are not entitled to exercise any rights regarding their Less-than-one-unit Shares other than the rights described below:

	(1)		The rights provided in each item of paragraph 2, Article 189 of the Corporation Law; and

	(2)		The rights to request the sale of Less-than-one-unit Shares as provided in paragraph 2 of the preceding article.

Manager of the Register of Shareholders

Article 9. The Company shall have a manager of the register of shareholders.

2. The manager of the register of shareholders and its place of handling business shall be designated by resolution of the Board of Directors and a public notice shall be given of such matters.

3. The preparation and keeping of the register of shareholders and the register of stock acquisition rights of the Company, and other operations relating to the register of shareholders and the register of stock acquisition rights shall be delegated to the manager of the register of shareholders and shall not be handled by the Company.

Regulations for Handling of Shares

Article 10. Handling business relating to shares of the Company shall be governed by the regulations for the handling of shares to be established by the Board of Directors.

I-2-78

Acquisition of the Company’s Own Shares

Article 11. Pursuant to the provision of paragraph 2, Article 165 of the Corporation Law, the Company may acquire the Company’s own shares by means of market transaction, etc. by resolution of the Board of Directors.

Chapter III. General Meeting of Shareholders

Convocation

Article 12. The ordinary general meeting of shareholders shall be convened in March each year and the extraordinary general meeting of shareholders shall be convened whenever necessary.

2. Unless otherwise provided by laws or ordinances, a general meeting of shareholders shall be convened by the Chairman-and-Director or the President-and-Director in accordance with a resolution of the Board of Directors.

3. If the Chairman-and-Director and the President-and-Director are unable to act, such meeting shall be convened by another Director in accordance with the order prescribed in advance by the Board of Directors.

Record Date for Ordinary General Meeting of Shareholders

Article 13. The Company shall regard the shareholders entitled to vote and written or recorded in the final register of shareholders as of the last day of each business year as the shareholders who are entitled to exercise their rights as shareholders at the ordinary general meeting of shareholders for such business year.

Chairmanship

Article 14. The chairmanship of a general meeting of shareholders shall be assumed by the Chairman-and-Director or the President-and-Director.

2. If the Chairman-and-Director and the President-and-Director are unable to act, such chairmanship shall be assumed by another Director in accordance with the order prescribed in advance by the Board of Directors.

Method of Adopting Resolutions

Article 15. Unless otherwise provided by laws or ordinances or by these Articles of Incorporation, resolutions at a general meeting of shareholders shall be adopted by a majority of the votes of the shareholders entitled to exercise voting rights who are present at the meeting.

2. As to the resolutions under paragraph 2, Article 309 of the Corporation Law, they shall be adopted by a vote of two-thirds or more of the voting rights at a general meeting of shareholders where the shareholders holding one-third or more of the voting rights of shareholders entitled to exercise voting rights at the general meeting of shareholders are present.

Exercise of Voting Rights by Proxy

Article 16. Shareholders may exercise their votes by proxy. Provided, however, that such proxy shall be a single shareholder of the Company entitled to vote.

I-2-79

Chapter IV. Director and Board of Directors

Number

Article 17. The Company shall have thirty (30) Directors or less.

Method of Election

Article 18. The Directors shall be elected by resolution of a general meeting of shareholders where the shareholders holding one-third or more of the voting rights of shareholders entitled to exercise voting rights are present.

2. The election of Directors shall not be made by cumulative voting.

Term of Office

Article 19. The term of office of Directors shall expire at the end of the ordinary general meeting of shareholders for the business year ending within one (1) year after their election.

Representative Directors

Article 20. Directors to represent the Company shall be selected by resolution of the Board of Directors.

Directors with Specific Titles

Article 21. By resolution of the Board of Directors, the Company shall select a Chairman-and-Director, a President-and-Director and other Directors with specific titles.

Convening and Presiding of the Board of Directors

Article 22. Unless otherwise provided by laws or ordinances, a meeting of the Board of Directors shall be convened and presided over by the Chairman-and-Director or the President-and-Director.

2. If the Chairman-and-Director and the President-and-Director are unable to act, such meeting shall be convened and presided over by another Director in accordance with the order prescribed in advance by the Board of Directors.

3. Notice of convocation of a meeting of the Board of Directors shall be dispatched to each Director and each Corporate Auditor at least three (3) days before the date of such meeting; provided, however that such period may be shortened in case of urgency.

Board of Directors

Article 23. The Board of Directors shall be organized by all the Directors and, in addition to the matters provided by laws or ordinances or by these Articles of Incorporation, shall make decisions on the execution of important business of the Company.

2. The Corporate Auditors of the Company are required to attend the Board meetings and express their opinions when they deem it necessary.

I-2-80

Omission of Resolution of Board of Directors

Article 24. The Company shall deem that a resolution of the Board of Directors is adopted when it meets the requirements provided in Article 370 of the Corporation Law.

Regulations of the Board of Directors

Article 25. The procedure for convening a meeting of the Board of Directors, method of adopting resolutions, etc. shall be governed, in addition to the matters provided by laws or ordinances or by these Articles of Incorporation, by the Regulations of the Board of Directors to be established by the Board of Directors.

Remuneration, etc.

Article 26. The remuneration, bonuses and other financial benefits given by the Company in consideration of the performance of the duties (hereinafter “Remuneration, etc.”) of the Directors shall be determined by resolution of a general meeting of shareholders.

Chapter V. Corporate Auditor and Board of Corporate Auditors

Number

Article 27. The Company shall have five (5) Corporate Auditors or less.

Method of Election

Article 28. The Corporate Auditors shall be elected by resolution of a general meeting of shareholders where shareholders holding one-third or more of the voting rights of shareholders entitled to exercise voting rights are present.

Term of Office

Article 29. The term of office of Corporate Auditors shall expire at the end of the ordinary general meeting of shareholders for the last business year ending within four (4) years after their election.

2. The term of office of a Corporate Auditor elected to fill a vacancy shall expire with the expiration of the remaining term of office of the retired Corporate Auditor.

Full-Time Corporate Auditors

Article 30. The Board of Corporate Auditors shall select from among the Corporate Auditors a full-time Corporate Auditor or Auditors.

Convening of the Board of Corporate Auditors

Article 31. Notice of convocation of a meeting of the Board of Corporate Auditors shall be dispatched to each Corporate Auditor at least three (3) days before the date of such meeting; provided, however that such period may be shortened in case of urgency.

I-2-81

Board of Corporate Auditors

Article 32. The Board of Corporate Auditors shall be organized by all the Corporate Auditors and, in addition to the matters provided by laws, shall make decisions on matters relating to the execution of the duties of the Corporate Auditors except to the extent that such decisions might impair any of the power of the Corporate Auditors.

Regulations of the Board of Corporate Auditors

Article 33. The procedure for convening a meeting of the Board of Corporate Auditors, method of adopting resolutions, etc. shall be governed, in addition to the matters provided by laws or ordinances or by these Articles of Incorporation, by the Regulations of the Board of Corporate Auditors to be established by the Board of Corporate Auditors.

Remuneration, etc.

Article 34. The Remuneration, etc. of Corporate Auditors shall be determined by resolution of a general meeting of shareholders.

Chapter VI. Accounting

Business Year

Article 35. The business year of the Company shall be from January 1 to December 31 each year.

Dividends from Surplus

Article 36. The Company shall pay year-end dividends to the shareholders or registered pledgees written or recorded in the final register of shareholders as of the last day of each business year.

2. By resolution of the Board of Directors, the Company may distribute interim dividends to the shareholders or registered pledgees written or recorded in the final register of shareholders as of June 30 each year.

I-2-82

Attachment 2: Canon’s Financial Statements for the Fiscal Year Ended December 31, 2010

(Materials delivered pursuant to Article 437 and Article 444 of the Corporation Law)

BUSINESS REPORT

(From January 1, 2009 to December 31, 2009)

1. Current Conditions of the Canon Group

(1) Business Progress and Results

■ General Business Conditions

Reviewing economic conditions in both Japan and overseas during the current term, the worst of the deep global recession seen at its onset ended, however, dire circumstances remained as a whole.

The U.S. and European economies stopped their recession as stimulus measures began to take effect in the second half of the term, but remained precarious generally, facing problems such as a rising unemployment rate.

Asian economies, on the other hand, began to recover aided primarily on the strength of Chinese domestic demand which started in the spring.

The Japanese economy suffered a severe downturn through the first half as an ongoing decline in exports added to the effects of weak consumer spending and capital investment. The second half, though, saw an upturn mostly in exports to Asian countries and other signs of improvement. That said, however, poor conditions with regard to employment and corporate earnings kept a full-scale recovery out of reach.

In foreign exchange markets, rapid yen appreciation took hold in the aftermath of the “Lehman shock” and the yen marked significant gains against both the U.S. dollar and the euro compared with the 108th business term.

As to the situation of the markets in which the Canon Group operates, conditions for office-use products such as copying machines and multifunctional devices were generally weak in Japan and overseas, while demand for consumer products such as cameras and inkjet printers declined overall except for single lens reflex (SLR) cameras. The demand for both semiconductor production equipment and mirror projection mask aligners for LCDs also weakened due to further ongoing capital investment restraint by semiconductor and LCD panel manufacturers.

Under such business conditions, the Canon Group set the current term, the fourth year of Phase III (2006 to 2010) of our “Excellent Global Corporation Plan,” as a “year for responding swiftly to the present difficult business conditions and preparing to take advantage of the future.” We are focusing on “improving management quality” and embarking on various measures to restructure ourselves as a lean organization.

First, we succeeded in drastically reducing inventories by scaling down capacity at production bases, strengthening our supply chain management and other efforts.

I-2-83

In product development, we made efforts to timely introduce competitive new products which excel in terms of functionality and performance, ease of use, reliability, design and cost performance, even during the recession.

Particularly, we promoted development based on the “Cross-media Imaging” strategy which aims to deliver new value by linking various products in a sophisticated manner over an IT network, and we released “imageRUNNER ADVANCE series” networked multifunctional devices for office use, serving as the core of this strategy.

Furthermore, to continuously create new business themes, we also embarked on structural improvements for our Headquarters R&D Operations.

In the area of production, the entire Group worked to accelerate automation and in-house production. Reliability improvements of automated production facilities resulted in greater productivity and steady progress was also achieved in increasing in-house production.

We worked on improving cost rate to firmly maintain adequate investment and solid cash flow management. Therefore, we achieved further progress with production and procurement reform activities and made efforts to thoroughly improve design quality by utilizing simulations and, thereby, boost development efficiency. As a result, we were able to minimalize the decrease in profits due to lower production volumes and product prices.

In addition, as for product quality, which is critical for manufacturers, we took to heart the “supremacy of quality,” improved product quality thoroughly and worked to increase customer satisfaction.

In the area of sales, we decided to establish a far-reaching system for cooperating with the U.S. companies Hewlett-Packard Development Company LP and Adobe Systems Incorporated, mainly to strengthen our solutions business in the office sector, and also accelerated the restructuring of our domestic Group sales subsidiaries. Other measures to steadily enhance the Group structure were taken by strengthening the U.S. direct sales network and centralizing European headquarter functions in London to more strongly tie them to sales functions.

As described above, we took various actions under severe business conditions and, as a result, we recorded net sales of 3,209.2 billion yen (down 21.6% from the previous term), income before income taxes of 219.4 billion yen (down 54.4%), and net income attributable to Canon Inc. of 131.6 billion yen (down 57.4%), all on a consolidated basis. On a non-consolidated basis, we recorded net sales of 2,025.5 billion yen (down 25.6%), ordinary profit of 142.7 billion yen (down 60.3%), and net income of 80.8 billion yen (down 64.0%).

I-2-84

Constitution of Sales by Region

100 MILLIONS OF YEN



Consolidated		Non-Consolidated

■ Business Conditions by Operations

Sales by Operations

Consolidated


Operations	Sales			Change from Previous Term
	(100 millions of yen)			(%)

Office Business Unit		16,451			(26.8	)


Consumer Business Unit		13,012			(10.6	)



Industry and Others Business Unit		3,580			(31.5	)



Eliminations		(951	)		—



Total		32,092			(21.6	)

Non-Consolidated


Operations	Sales		Change from Previous Term
	(100 millions of yen)		(%)

Office Business Unit		10,213		(30.4	)


Consumer Business Unit		9,505		(14.0	)


Industry and Others Business Unit		537		(64.0	)


Total		20,255		(25.6	)


Notes:	1.	Although “Business Conditions by Operations” was previously classified into “Business Machines (Office Imaging Products, Computer Peripherals, Business Information Products),” “Cameras” and “Optical and Other Products” according to product function and type, from this report, we have changed to classify into three business units, namely the “Office Business Unit,” “Consumer Business Unit,” and “Industry and Others Business Unit,” following business operation organization of Canon Inc.

	2.	The consolidated sales of each business unit includes the amount of intersegment sales.

I-2-86

● Office Business Unit

For our office-use digital networked multifunctional devices, we took various measures amid a lack of corporate motivation toward capital investment. These included measures to boost sales of the “iR C3580” color machine and “iR 3245” black-and-white machine introduced in the previous term, and efforts to restructure the U.S. direct sales network. In the fall, we announced a new generation of multifunctional devices called the “imageRUNNER ADVANCE series,” and introduced 12 models, including the “C9075PRO/9065PRO,” “C7065/7055” and the “C5051/5051F.” This series has become the focus of attention as a line of products that not only offer more basic functions as multifunctional devices but also respond to the full range of user document needs via robust connections to IT environments and compatibility to a variety of system application software. Our solutions business aims to generate profits from both hardware and software by constantly developing and providing users with Internet services as well as with the latest in software offering the most advanced functions. All necessary resources were applied to selling “imageRUNNER ADVANCE series” products, which were deemed as strategic for this new business.

For our “imagePRESS series” of printers for digital commercial printing, we worked to expand sales of color machines such as the “imagePRESS C7000VP” with strong results in this term particularly in Asia and Oceania. Additionally, to mark our full-scale entry into the market for black-and-white commercial printers, we introduced and made a good start of the high-speed “imagePRESS 1135” which offers both high-quality printing reproducing the beauty of true black and an output of up to 135 pages per minute.

Regarding multifunctional devices for small mid-sized business owners, we launched products such as the “Satera MF8350Cdn” A4 color laser multifunctional device which offers four functions of copying, printing, faxing and scanning together with the high image quality technology we developed for our “imagePRESS series ” in a compact body.

In laser beam printers, orders for OEM-brand products declined as the recession weighed heavily on customers. As for Canon-brand products in color machines, we expanded our lineup by introducing the A3-size compatible “Satera LBP9600C” and A4-size compatible “Satera LBP7700C,” both offering greater ease-of-use through the addition of features like a wide LCD panel, which can display onscreen animation, and the ability to print 30 pages per minute. We also worked to expand our solutions business, utilizing the “MEAP-Lite” function expansion system.

In our “imagePROGRAF series” of large-format inkjet printers, we introduced four new products including “iPF755/750” whose high productivity and user friendliness rivals that of high-end models, and took steps to strengthen our solutions business by marketing the “PosterArtist 2009” poster auto design application which features powerful design and support functions and advanced design-editing capabilities well suited for CAD drawings, posters, signboards and a wide variety of other applications. As a result, we managed to increase our market share well above the previous term results amid recessionary conditions.

Sales for this business unit fell by 26.8% on a consolidated basis and by 30.4% on a non-consolidated basis, both in comparison to the previous term.

I-2-87

l Consumer Business Unit

In digital cameras, demand for SLRs remained relatively solid amid the global recession. Under such conditions, we launched some models including the “EOS Kiss X3” equipped with a 15.1 megapixel CMOS sensor, the high-performance “DIGIC 4” image processor for high image quality shooting and full HD video functionality, despite it being an entry-level model. We also launched an advanced amateur model, the “EOS 7D” with an 18.0 megapixel CMOS sensor, “Dual DIGIC 4” image processor for high-resolution and rich gradation expression, capable of a maximum continuous shooting speed of about 8 frames per second and the maximum burst capacity of about 94 frames. Furthermore, with solid sales results for the “EOS 5D Mark II” which was awarded “Camera of the Year” in the Camera Grand Prix 2009 and the “EOS Kiss X2,” SLR unit sales grew. As for interchangeable lenses for SLRs, the “EF 100mm F2.8L Macro IS USM” employing a new image stabilization system met with favorable reviews and cumulative production of our EF lens series reached the 50 million unit milestone in December.

In the area of compact digital cameras, we launched six new models in our “IXY DIGITAL series.” One of these, the “IXY DIGITAL 930 IS” features the “DIGIC 4” image processor, a 12.1 megapixel CCD, wide-angle 24mm 5x zoom lens and 3.0-inch “Clear Live LCD T” monitor with touch-panel interface. We also added nine new products to our “PowerShot series.” One of them, the “PowerShot S90” is equipped with the “Dual Clear System” combining an ultra high-resolution CCD sensor and “DIGIC 4” image processor, which allows beautiful low-noise pictures and a wide-angle 28mm f/2.0 large-aperture 3.8x zoom lens.

In digital video cameras, we secured a large share of the HD flash memory video camera market, which is expected to grow, by introducing products such as the “iVIS HF S11” and “iVIS HF21.” Both feature a double memory system comprised of a large 64GB internal flash memory and an SD/SDHC card, along with a “Canon Full HD CMOS” sensor, “DIGIC DV III” image processor and “Canon HD Video Lens” for recording high-quality, high-definition images.

For our line of LCD projectors, we mounted sales promotion efforts focusing on the “WUX10 Mark II,” “SX80 Mark II” and other high-resolution and high image quality models especially well-suited for the production of images such as medical imagery and high resolution digital photo.

Regarding broadcasting equipment, we secured a large share of the market by introducing portable HDTV camera lenses. These included the “HJ14eX4.3B” super-wide-angle lens offering optical performance of the highest level, and the compact and lightweight “KJ17eX7.7B” 17.0x zoom lens responding to the growing consumers’ demand for low-price products.

As for inkjet printer, in the face of declining global demand, we took steps that included expanding sales channels among volume retailers in the U.S., recording strong sales of middle and top range multifunctional devices and implementing sales-boosting measures in China. This resulted in pushing unit sales beyond the result of the previous term. In the first half, we introduced the “PIXUS MX860” targeting home office users and the “PIXUS Pro9500 Mark II” for advanced amateurs. In the second half, we completely renewed our lineup for home users with new introductions of models featuring wireless LAN functionality, which has seen a particularly strong increase in demand. Examples included the “PIXUS MP990” multifunctional device which adds grey ink for a total of six ink colors and the “PIXUS MP640.” Meanwhile, sales of consumables suffered minimal losses as printing demand among end users remained solid despite the recession.

In image scanners, the “CanoScan LiDE 200” and other products released in the previous term were well received allowing us to maintain our No. 1 share position in this market, even as market contraction reduced unit sales.

Sales for this business unit fell by 10.6% on a consolidated basis and by 14.0% on a non-consolidated basis, both in comparison to the previous term.

I-2-89

l Industry and Others Business Unit

Mirror projection mask aligners for LCDs fell substantially in terms of both units and sales in the current term. These declines became inevitable as forecasts of negative market growth for LCD panels as of the end of the previous term led panel manufacturers to postpone or freeze capital investments.

Similarly, severe market conditions also prevailed for semiconductor production equipment, demand for which plummeted as semiconductor manufacturers kept investments in new capital equipment low.

In response to these circumstances, we moved to implement a dramatic structural improvement of our semiconductor equipment business. One of the steps was to integrate the relevant operations of Canon Marketing Japan Inc. into Canon Inc. as of January 1, 2010. This change was undertaken to establish a system integrating everything from development and design, to production, sales and service and support and to include reflecting market trends and customer desires into products more rapidly and strengthening the technical capabilities of sales units.

On the medical equipment front, we launched five new digital radiography systems, including the lightweight and thin “CXDI-55C” which offers a wide effective imaging area. Strong sales of these products in China and other parts of Asia helped to keep unit sales on a par with the previous term’s result.

For sales of ophthalmic devices, we made efforts to expand sales by introducing products such as “CR-1 Mark II,” a non-mydriatic digital retinal camera capable of producing high-quality images with low flash intensity and the “CX-1,” Canon’s first mydriatic/non-mydriatic hybrid digital retinal camera, which is a compact, lightweight and easy-to-use model that employs a newly developed specialized digital camera unit enabling high-resolution 15.1 megapixel images.

Document scanners handled by Canon Electronics Inc. met with lower sales, despite efforts to expand sales including the introduction of products such as the highly durable, highly speedy “DR-9050C/7550C/6050C” and the extremely compact and portable “DR-150.”

Regarding calculators handled by Canon Electronic Business Machines (H.K.) Co., Ltd., the “X-Mark I” with its refined design and other products utilizing recycled materials drew attention, however, sales of its mainstay commercial printing calculators faltered on a marked decline in corporate demand. On another front, we released, to rave reviews, the “wordtank V823,” with substantial content for Chinese language learners, and four models of the compact “wordtank S500 series” offering a color LCD screen and carefully selected content.

Die bonders handled by Canon Machinery Inc. and magnetic head film deposition equipment handled by Canon ANELVA Corporation were low due to the effect of capital investment restraint by customers.

Sales for this business unit fell by 31.5% on a consolidated basis and by 64.0% on a non-consolidated basis, both in comparison to the previous term.

I-2-91

(2) Facilities Investment

The investment in facilities during this term totaled 216.1 billion yen (128.2 billion yen by the Company), which are mainly as follows:

Main facilities completed during this term

• Canon Virginia, Inc.: Land and New Production Base
(Office Business Unit)

Location: Virginia, U.S.A.

Date of Completion: May, 2009

• Hita Canon Materials Inc.: Land
(Office Business Unit)

Location: Hita-shi, Oita Pref.

Date of Completion: June, 2009

*To be leased to Hita Canon Materials Inc. by the Company

• Nagasaki Canon Inc.: Land
(Consumer Business Unit)

Location: Hasami-cho, Higashisonogi-gun, Nagasaki Pref.

Date of Completion: July, 2009

*To be leased to Nagasaki Canon Inc. by the Company

• Canon Dalian Business Machines, Inc.: New Production Base
(Office Business Unit)

Location: Liaoning Province, China

Date of Completion: November, 2009

• Canon Electronics Inc.: Land and New Tokyo Headquarters
(Office Business Unit, Industry and Others Business Unit)

Location: Minato-ku, Tokyo

Date of Completion: December, 2009

Main facilities under construction for establishment/expansion as of the end of this term

• Nagasaki Canon Inc.: New Administration and Welfare Building / New Production Base
(Consumer Business Unit)

Location: Hasami-cho, Higashisonogi-gun, Nagasaki Pref.

*To be leased to Nagasaki Canon Inc. by the Company

• Kawasaki Office of the Company: New R&D Building
(Headquarters Operations)

Location: Kawasaki-shi, Kanagawa Pref.

• Oita Canon Materials Inc.: New Production Base
(Office Business Unit)

Location: Oita-shi, Oita Pref.

*To be leased to Oita Canon Materials Inc. by the Company

• Toride Office of the Company: New Production Base
(Office Business Unit)

Location: Toride-shi, Ibaraki Pref.

• Canon Chemicals Inc.: New Production Base
(Office Business Unit)

Location: Kasama-shi, Ibaraki Pref.

*To be leased to Canon Chemicals Inc. by the Company

I-2-93

(3) Management Perspectives

Although the global economy has generally entered a recovery trend, there are still various risk factors such as weakened effects of stimulus measures in various countries, worsening employment conditions and consequent weakness in consumer spending, and it is necessary to maintain a close watch on what is a very uncertain future. It is expected that the global economy will continue to be trapped in a slow, L-shaped recovery, with business conditions facing the Canon Group remaining severe for the foreseeable future.

The Canon Group has, however, successfully managed to further strengthen its financial condition, by implementing various management reforms undertaken until this term. Therefore, we have designated 2010, the final year of Phase III (2006-2010) of our “Excellent Global Corporation Plan,” as our “First Year of Growth,” a turning point to the growth mode. We will make full efforts to improve business performance at a speed that exceeds that of the economic recovery under a new growth strategy.

We will begin by focusing on the introduction of innovative products and services that take markets by storm. For example, we strive to utilize the most of technologies and personnel resources we have developed throughout our history to identify market trends early on and create novel products and services like the “imageRUNNER ADVANCE series” which has the potential to become the core of the promising solutions business.

Next, we will also focus on capturing significant portions of markets in China and other parts of Asia, where significant growth beyond that of the industrialized nations can be expected. Our approach will be to maximize our competitiveness by thoroughly considering the characteristics of individual regions and revising our sales strategies from the ground up.

In addition, we will make Océ N.V., a Dutch printer manufacturer with strengths in printers for commercial use and large-format printers for business use, into a consolidated subsidiary and by doing so, we will enhance our direct-sales and direct-service systems, mainly in Europe and the U.S., and apply its technologies and products to overwhelmingly achieve the No.1 position in the printing industry. With the addition of Océ to the Canon Group serving as a foothold, we will also accelerate efforts to achieve our long-held objective of constructing a global tri-polar (Japan, U.S., and Europe) business creation organization.

To nurture the development of new businesses, we plan to search for and develop existing businesses and peripheral businesses, enhance Group company sales to non-Group members and swiftly establish positions in next-generation businesses such as medical imaging and industrial robots.

As we move ahead with the measures mentioned above, we will remain steadfast in our efforts to achieve further improvements in management quality. To strengthen profit structure, we will work on restructuring our semiconductor business, strengthening our office equipment business and creating an optimal production system.

We will also continue to promote inventory reductions as we further strive for “supremacy of quality.”

I-2-94

(4) Status of Assets and Earnings

Consolidated



	105th Business Term		106th Business Term
	(Jan. 1, 2005-Dec. 31, 2005)		(Jan. 1, 2006-Dec. 31, 2006)


Net Sales (100 millions of yen)		37,542		41,568



Income before Income Taxes (100 millions of yen)		6,120		7,191



Net Income Attributable to Canon Inc. (100 millions of yen)		3,841		4,553



Basic Net Income Attributable to Canon Inc. Stockholders Per Share (yen)		288.63		341.95



Total Assets (100 millions of yen)		40,436		45,219



Total Canon Inc. Stockholders’ Equity (100 millions of yen)		26,047		29,866


Notes: 1.	Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.

2.	Basic net income attributable to Canon Inc. stockholders per share is calculated based on the weighted average number of outstanding shares during the term.

Non-Consolidated



	105th Business Term		106th Business Term
	(Jan. 1, 2005-Dec. 31, 2005)		(Jan. 1, 2006-Dec. 31, 2006)


Net Sales (100 millions of yen)		24,815		27,297



Ordinary Profit (100 millions of yen)		4,407		5,240



Net Income (100 millions of yen)		2,893		3,375



Net Income Per Share (yen)		325.83		253.48



Total Assets (100 millions of yen)		26,528		29,381



Net Assets (100 millions of yen)		18,754		21,093


Notes: 1.	Net income per share is calculated based on the weighted average number of outstanding shares during the term.

2.	The Company implemented a three-for-two stock split on July 1, 2006. The net income per share for the 106th business term has been calculated on the basis that the stock split was made at the beginning of the term.

I-2-95



107th Business Term		108th Business Term		109th Business Term
(Jan. 1, 2007-Dec. 31, 2007)		(Jan. 1, 2008-Dec. 31, 2008)		(Jan. 1, 2009-Dec. 31, 2009)


	44,813		40,942		32,092


	7,684		4,811		2,194


	4,883		3,091		1,316


	377.59		246.21		106.64


	45,126		39,699		38,476


	29,223		26,598		26,881

Canon has made a three-for-two stock split on July 1, 2006. Basic net income attributable to Canon Inc. stockholders per share for the 105th business term has been calculated based on the number of issued shares following the implementation of the stock split. The basic net income attributable to Canon Inc. stockholders per share for the 106th business term has been calculated on the basis that the stock split was made at the beginning of the term.



107th Business Term		108th Business Term		109th Business Term
(Jan. 1, 2007-Dec. 31, 2007)		(Jan. 1, 2008-Dec. 31, 2008)		(Jan. 1, 2009-Dec. 31, 2009)


	28,879		27,211		20,255


	5,528		3,591		1,427


	3,670		2,241		808


	283.75		178.50		65.44


	27,909		26,190		25,511


	18,906		18,650		18,127

Effective from 106th business term, the Company adopted Accounting Standards Board Statement No. 5 “Accounting Standard for Presentation of Net Assets in the Balance Sheet” issued by the Accounting Standards Board of Japan on December 9, 2005 and Accounting Standards Board Guidance No. 8 “Guidance on Accounting Standards for Presentation of Net Assets in the Balance Sheet” issued by the Accounting Standards Board of Japan on December 9, 2005.

I-2-96

(5) Main Activities

Canon Group is engaged in the development, manufacture and sales of the following products.




Operations		Main Products



Office Business Unit		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



Consumer Business Unit		Digital SLR Cameras,

		Compact Digital Cameras,

		Interchangeable Lenses,

		Digital Video Cameras,

		Inkjet Multifunction Printers,

		Single Function Inkjet Printers,

		Image Scanners,

		Broadcast-use Television Lenses



Industry and Others Business Unit		Semiconductor Production Equipment,

		Mirror Projection Mask Aligners for LCD Panels,

		Medical Image Recording Equipment,

		Magnetic Heads,

		Micromotors

		Computers,

		Handy Terminals,

		Document Scanners,

		Calculators

I-2-97

(6) Canon Group Global Network

n Major Domestic Bases

Name [Location]

Canon Inc.

Headquarters [Tokyo]

Kawasaki Office [Kanagawa Pref.]

Ayase Plant [Kanagawa Pref.]

Hiratsuka Plant [Kanagawa Pref.]

Oita Plant [Oita Pref.]

Tamagawa Office [Kanagawa Pref.]

Kosugi Office [Kanagawa Pref.]

Toride Plant [Ibaraki Pref.]

Fuji-Susono Research Park [Shizuoka Pref.]

Yako Office [Kanagawa Pref.]

Utsunomiya Plant [Tochigi Pref.]

Ami Plant [Ibaraki Pref.]

Manufacturing

Oita Canon Inc. [Oita Pref.]

Canon Chemicals Inc. [Ibaraki Pref.]

Nagahama Canon Inc. [Shiga Pref.]

Fukushima Canon Inc. [Fukushima Pref.]

Oita Canon Materials Inc. [Oita Pref.]

Marketing

Canon Marketing Japan Inc. [Tokyo]

Canon Software Inc. [Tokyo]

Canon System & Support Inc. [Tokyo]

Canon IT Solutions Inc. [Tokyo]

R&D, Manufacturing and Marketing

Canon Electronics Inc. [Saitama Pref.]

Canon Finetech Inc. [Saitama Pref.]

Canon Machinery Inc. [Shiga Pref.]

Canon Precision Inc. [Aomori Pref.]

Canon ANELVA Corporation [Kanagawa Pref.]

I-2-98

n Major Overseas Bases

Name [Location]

R&D

Canon Development Americas, Inc. [U.S.A.]

Canon Technology Europe Ltd. [U.K.]

Canon Research Centre France S.A.S. [France]

Canon Information Systems Research Australia Pty. Ltd. [Australia]

Manufacturing

Canon Virginia, Inc. [U.S.A.]

Canon Giessen GmbH [Germany]

Canon Bretagne S.A.S. [France]

Canon Dalian Business Machines, Inc. [China]

Canon Zhuhai, Inc. [China]

Canon Zhongshan Business Machines Co., Ltd. [China]

Canon (Suzhou) Inc. [China]

Canon Inc., Taiwan [Taiwan]

Canon Hi-Tech (Thailand) Ltd. [Thailand]

Canon Vietnam Co., Ltd. [Vietnam]

Canon Opto (Malaysia) Sdn. Bhd. [Malaysia]

Marketing

Canon U.S.A., Inc. [U.S.A.]

Canon Canada Inc. [Canada]

Canon Latin America, Inc. [U.S.A.]

Canon Europa N.V. [Netherlands]

Canon Europe Ltd. [U.K.]

Canon (UK) Ltd. [U.K.]

Canon France S.A.S. [France]

Canon Deutschland GmbH [Germany]

Canon Ru LLC [Russia]

Canon Middle East FZ-LLC [U.A.E.]

Canon (China) Co., Ltd. [China]

Canon Hongkong Co., Ltd. [Hong Kong]

Canon Korea Consumer Imaging Inc. [Korea]

Canon Singapore Pte. Ltd. [Singapore]

Canon Australia Pty. Ltd. [Australia]

Canon do Brasil Indústria e Comércio Limitada [Brazil]

Canon Chile, S.A. [Chile]

Canon South Africa Pty. Ltd. [South Africa]

R&D, Manufacturing and Marketing

Canon Electronic Business Machines (H.K.) Co., Ltd. [Hong Kong]

I-2-99

(8) Principal Subsidiaries

n Subsidiaries


Company Name	Capital Stock (millions of yen)		Ratio of Voting
			Rights of the		Main Activities
			Company (%)



Canon Marketing Japan Inc.		73,303		55.2	Domestic sale of business machines, cameras, etc.

Canon Electronics Inc.		4,969		55.1	Manufacture and sale of information related equipment and precision machinery units for cameras

Canon Finetech Inc.		3,451		58.1	Manufacture and sale of printers, peripheral devices for business machines and chemicals, etc.

Canon Software Inc.		1,348		57.6	Development and sale of computer software

Canon Machinery Inc.		2,712		64.6	Manufacture and sale of semiconductor production equipment and automation/laborsaving equipment

Tokki Corporation		6,573		66.5	Development, manufacture and sale of equipment for manufacturing organic EL display panels, etc.

Asia Pacific System Research Co., Ltd.		2,400		87.9	Design, development, operation and maintenance of software and systems

e-System Corporation		5,005		62.1	Introduction of Customer Relationship Management System, etc.

Oita Canon Inc.		80		100.0	Manufacture of cameras

Canon U.S.A., Inc.		204,355 thousands of U.S.$		100.0	Sale of business machines, cameras, etc. in the Americas

Canon Europa N.V.		290,600 thousands of Euro		100.0	Sale of business machines, cameras, etc. in Europe


Notes:	1.	The ratio of the Company’s voting rights in Canon Marketing Japan Inc. and Canon Finetech Inc. are calculated together with the number of voting rights held by subsidiaries.

	2.	The ratio of the Company’s voting rights in Canon Software Inc., Asia Pacific System Research Co., Ltd. and e-System Corporation are based on the number of voting rights held by subsidiaries.

	3.	The ratio of the Company’s voting rights in Asia Pacific System Research Co., Ltd. is calculated based on the number of voting rights as of September 30, 2009.

n Consolidated Status

The number of consolidated subsidiaries was 241, and the number of affiliated companies accounted for by the equity method was 15.

I-2-101

(9) Other Important Items Regarding Current Conditions of the Canon Group

(i)		On January 1, 2010, Canon Inc. received sales, service and support functions for semiconductor production equipment and mirror projection mask aligners for LCD panels from Canon Marketing Japan Inc. This was in an effort to fortify our industry equipment business by establishing a completely integrated system from development to production, sales and servicing.

(ii)		On February 1, 2010, Asia Pacific System Research Co., Ltd. exercised a share exchange with Canon Electronics Inc. and became a wholly owned subsidiary of Canon Electronics Inc. This was in an effort to further accelerate business decision-making by integrating the two companies.

(iii)		On January 26, 2010, Canon Marketing Japan Inc. concluded a share exchange agreement with Canon Software Inc. (“Canon Software”), making Canon Software a wholly owned subsidiary effective May 1, 2010. This was in an effort to further fortify and streamline our consolidated business base and accelerate the making of IT solutions business of Canon Marketing Japan Group into a core business.

(iv)		On February 8, 2010, Canon Inc. concluded a share exchange agreement with Canon Finetech Inc. (“Canon Finetech”), making Canon Finetech a wholly owned subsidiary effective May 1, 2010. This was in an effort to facilitate the organic integration of management resources between both companies and further enhance the synergies throughout the Canon Group to promote speed of management and solidify our position in the office equipment segment.

2. Shares of the Company

Number of Shares Issuable 3,000,000,000 shares

Issued Shares, Capital Stock and Number of Shareholders


	As of the end of		Change during		As of the end of
	the Previous Term		This Term		This Term



Issued Shares (share)		1,333,763,464		0		1,333,763,464



Capital Stock (yen)		174,761,797,475		0		174,761,797,475



Number of		184,789	Decrease of			169,172
Shareholders (person)		184,789		15,617		169,172

I-2-102

Major Shareholders (Ten shareholders)



	Number of		Share-
	Shares Held		holding
Name of Shareholders	(thousands of		Ratio (%)
	shares)



The Dai-Ichi Mutual Life Insurance Company		74,649		6.0

Japan Trustee Services Bank, Ltd. (Trust Account)		67,840		5.5

The Master Trust Bank of Japan, Ltd. (Trust Account)		51,665		4.2

Moxley and Co.		50,458		4.1

JP Morgan Chase Bank 380055		39,866		3.2

Mizuho Corporate Bank, Ltd.		25,919		2.1

Sompo Japan Insurance Inc.		22,910		1.9

The Chase Manhattan Bank, N.A. London S.L. Omnibus Account		21,863		1.8

State Street Bank and Trust Company 505225		20,850		1.7

State Street Bank and Trust Company		19,681		1.6


Notes:	1.	Shareholding ratio is calculated by deducting number of treasury shares (99,288 thousand shares) from total shares issued.

	2.	With respect to The Dai-Ichi Mutual Life Insurance Company, in addition to the above, there are 6,180 thousand shares of the Company’s stock, in the form of trust property relating to retirement allowance trust.

	3.	With respect to Mizuho Corporate Bank, Ltd., in addition to the above, there are 7,704 thousand shares of the Company’s stock, in the form of trust property relating to retirement allowance trust.

Shareholding Ratio by Category

I-2-103

3. Share Options of the Company

Share Options Issued as Stock Options

(i)

Share Options Held by the Directors and Corporate Auditors of the Company as of the end of this term


	Number of share	Class and
	options	number of shares	Exercise period	Number of
	(Exercise price	to be acquired		holders
	per share)



1st Share	3,400 options	Common stock	May 1, 2010 to	Directors
Options	(5,502 yen)	340,000 shares	April 30, 2014	24 persons



2nd Share	5,500 options	Common stock	May 1, 2011 to	Directors
Options	(3,287 yen)	550,000 shares	April 30, 2015	25 persons

(ii)

Share Options Issued to the Employees of the Company during this term



	Number of share	Class and
	options	number of shares	Exercise period	Number of
	(Exercise price	to be acquired		holders
	per share)



2nd Share	4,040 options	Common stock	May 1, 2011 to	Employees of
Options	(3,287 yen)	404,000 shares	April 30, 2015	the Company
				39 persons

(iii)

Issue Price of Share Options

No cash payment is required.

(iv)

Other Conditions for Exercise of Share Options

a.		One (1) share option may not be exercised partially.
b.		Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s Ordinary General Meeting of Shareholders regarding the final business term within two (2) years from the end of the Ordinary General Meeting of Shareholders which the issuance of such share options was resolved.
c.		Holders of share options will be entitled to exercise their share options for two (2) years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.
d.		No succession by inheritance is authorized for the share options.
e.		Besides the above, other conditions shall be stipulated in an agreement to be executed between the Company and grantee of share options, based on the resolution of the Board of Directors’ meeting.

I-2-104

4. Directors and Corporate Auditors

(1) Directors and Corporate Auditors




Position	Name	Business in Charge or
		Important Concurrent Posts



Chairman & CEO	Fujio Mitarai	Chairman of Nippon Keidanren

President & COO	Tsuneji Uchida

Executive Vice President & CFO	Toshizo Tanaka	Senior General Manager of Policy & Economy Research Center

Executive Vice President & CTO	*Toshiaki Ikoma	Group Executive of Corporate R&D Headquarters, Chief Executive of Optical Products Operations, President of The Canon Foundation and Director of Hitachi Metals, Ltd.

Senior Managing Director	Nobuyoshi Tanaka	Group Executive of Corporate Intellectual Property and Legal Headquarters

Senior Managing Director	Junji Ichikawa	Chairman and Representative Director and President of Canon ANELVA Corporation

Senior Managing Director	Akiyoshi Moroe	Group Executive of External Relations Headquarters and Group Executive of Human Recources Management & Organization Headquarters

Senior Managing Director	Kunio Watanabe	Group Executive of Corporate Planning Development Headquarters

Senior Managing Director	Yoroku Adachi	President & CEO of Canon U.S.A., Inc.

Senior Managing Director	Yasuo Mitsuhashi	Chief Executive of Peripheral Products Operations and Chief Executive of Chemical Products Operations

Managing Director	Tomonori Iwashita	Group Executive of Environment Headquarters and Group Executive of Quality Management Headquarters

Managing Director	Masahiro Osawa	Group Executive of Finance & Accounting Headquarters

Managing Director	Shigeyuki Matsumoto	Group Executive of Device Technology Development Headquarters

Managing Director	Katsuichi Shimizu	Chief Executive of Inkjet Products Operations

Managing Director	Ryoichi Bamba	President of Canon Europa N.V. and President of Canon Europe Ltd.

Managing Director	Toshio Homma	Chief Executive of L Printer Products Operations

Managing Director	Masaki Nakaoka	Chief Executive of Office Imaging Products Operations

Managing Director	Haruhisa Honda	Group Executive of Production Engineering Headquarters

Director	Toshiyuki Komatsu	Deputy Group Executive of Corporate Planning Development Headquarters

Director	Tetsuro Tahara	Group Executive of Global Manufacturing & Logistics Headquarters

Director	Seijiro Sekine	Deputy President and Representative Executive Officer of Japan Post Holdings Co., Ltd.

Director	Shunji Onda	Group Executive of Global Procurement Headquarters

Director	Kazunori Fukuma	President & Representative Director of SED Inc.

Director	Hideki Ozawa	President of Canon (China) Co., Ltd.

Director	Masaya Maeda	Group Executive of Image Communication Products Operations

I-2-105




		Business in Charge or
Position	Name	Important Concurrent Posts


Corporate Auditor	Keijiro Yamazaki	Auditor of Canon Finetech Inc.

Corporate Auditor	Kunihiro Nagata	Auditor of Canon Marketing Japan Inc. and Auditor of Canon Electronics Inc.

Corporate Auditor	Tadashi Ohe	Attorney, Auditor of Marui Group Co., Ltd. and Auditor of Kao Corporation

Corporate Auditor	Yoshinobu Shimizu	Certified Public Accountant, Auditor of Mitsubishi UFJ Trust and Banking Corporation and Auditor of Canon Electronics Inc.

Corporate Auditor	Minoru Shishikura	Auditor of Canon Marketing Japan Inc. and Auditor of Canon Finetech Inc.


Notes:	1.	Mr. Fujio Mitarai, Mr. Tsuneji Uchida and Mr. Toshizo Tanaka are Representative Directors.
	2.	Director with asterisk was newly elected at the Ordinary General Meeting of Shareholders for the 108th Business Term held on March 27, 2009, and assumed his office.
	3.	Corporate Auditors Mr. Tadashi Ohe, Mr. Yoshinobu Shimizu and Mr. Minoru Shishikura are Outside Corporate Auditors defined by Item 16, Article 2 of the Corporation Law.
	4.	Corporate Auditor Mr. Kunihiro Nagata had experienced accounting operation at the Company for many years and has a wealth of expertise in finance and accounting.
	5.	Corporate Auditor Mr. Yoshinobu Shimizu is a Certified Public Accountant and has a wealth of expertise in finance and accounting.
	6.	Corporate Auditor Mr. Minoru Shishikura had experienced financial operation at an insurance company for many years and has a wealth of expertise in finance.
	7.	“Business in Charge or Important Concurrent Posts” of Directors Mr. Toshizo Tanaka and Mr. Yasuo Mitsuhashi, as of January 1, 2010, have been changed as follows.
		Toshizo Tanaka	Senior General Manager of Policy & Economy Research Center and Group Executive of General Affairs Headquarters
		Yasuo Mitsuhashi	Chief Executive of Peripheral Products Operations

(2) Remuneration and Other Amounts to Directors and Corporate Auditors


Directors	26 persons	1,654 million yen
Corporate Auditors	5 persons	105 million yen

(including 53 million yen for 3 Outside Corporate Auditors)


Notes:	1.	The above persons include 1 Director who has retired at the conclusion of the Ordinary General Meeting of Shareholders for the 108th Business Term held on March 27, 2009.
	2.	Directors’ remuneration and other amounts do not include amount paid as salary for employees to those Directors who are also employees.
	3.	Directors’ remuneration and other amounts include provisions for directors’ bonuses for this term in the amount of 127 million yen.
	4.	Directors’ remuneration and other amounts include expenses related to the share options issued pursuant to the resolution of the 107th Ordinary General Meeting of Shareholders, held on March 28, 2008, and the share options issued pursuant to the resolution of the 108th Ordinary General Meeting of Shareholders, held on March 27, 2009, in the amount of 341 million yen.
	5.	The above remuneration and other amounts include an increased amount of accrued directors’ retirement benefits for this term (Directors 225 million yen, Corporate Auditors 11 million yen (including 5 million yen for Outside Corporate Auditors)).
	6.	In addition to the above, Directors and Corporate Auditors received the following remuneration and other amounts.

Directors’ allowance paid pursuant to the resolution of the Ordinary General Meeting of Shareholders for the 108th Business Term held on March 27, 2009


Director		1 person		26 million yen

The amount includes increased amount of accrued directors’ retirement benefits, disclosed in the business report for this business term and in prior business terms.

I-2-106

(3) Outside Directors and Outside Corporate Auditors

Relation Between Important Organization of Concurrent Post and Canon Inc.



Name	Concurrent Post	Organization of	Relation with
		Concurrent Post	Canon Inc.



Tadashi Ohe	Outside Corporate Auditor	Marui Group Co., Ltd.	No special relation



	Outside Corporate Auditor	Kao Corporation	No special relation



Yoshinobu Shimizu	Outside Corporate Auditor	Mitsubishi UFJ Trust and Banking Corporation	No special relation



	Outside Corporate Auditor	Canon Electronics Inc.	Subsidiary



Minoru Shishikura	Outside Corporate Auditor	Canon Marketing Japan Inc.	Subsidiary



	Outside Corporate Auditor	Canon Finetech Inc.	Subsidiary

Principal Activities




Name		Principal Activities



Tadashi Ohe		Attended 12 out of 19 Board of Directors meetings and 18 out of 19 Board of Corporate Auditors meetings held during this term, and provided expert input as an attorney when necessary.



Yoshinobu Shimizu		Attended 18 out of 19 Board of Directors meetings and all 19 of the Board of Corporate Auditors meetings held during this term, and provided expert input as a Certified Public Accountant when necessary.



Minoru Shishikura		Attended all 19 of the Board of Directors meetings and 18 out of 19 Board of Corporate Auditors meetings held during this term, and provided input based on his insight in financial operation when necessary.

Remuneration and Other Amounts Received by Outside Directors and Outside Corporate Auditors from the Company’s Subsidiaries

Remuneration and other amounts received during this term by Outside Corporate Auditors from the Company’s subsidiaries for their services as Outside Corporate Auditors amounted to 11 million yen.

I-2-107

5. Accounting Auditor

(1) Name of Accounting Auditor

Ernst & Young ShinNihon LLC

(2) Remuneration and Other Amounts to Accounting Auditor for This Term




		Amount



(i)	Remuneration and other amounts payable by the Company for the services defined in Paragraph 1, Article 2 of the Certified Public Accountants Act	522 million yen



(ii)	Total amount of cash and other financial benefits payable by the Company and its subsidiaries to the Accounting Auditor	1,050 million yen

Notes:	1.	In the audit agreement between the Company and the Accounting Auditor, remuneration amounts are determined on a lump-sum without breakdown into a separate remuneration amount for auditing in accordance with the Corporation Law and in accordance with the Financial Instruments and Exchange Law. Accordingly, the amounts shown in (i) above represent total amounts of remuneration and other amounts for both of these auditing services.

	2.	The Company pays remuneration to the Accounting Auditor for their advisory services in addition to the services defined in Paragraph 1, Article 2 of the Certified Public Accountants Act.

	3.	Among the Company’s principal subsidiaries, Asia Pacific System Research Co., Ltd. is audited by KPMG AZSA & Co., Canon U.S.A., Inc. is audited by Ernst & Young LLP and Canon Europa N.V. is audited by Ernst & Young Accountants LLP.

(3)

Policy Regarding Decision to Either Dismiss or Not Reappoint Accounting Auditor

I-2-108

Systems for Ensuring Propriety of Operations

As systems for ensuring the propriety of the Company’s operations, the Board of Directors has adopted a resolution as follows:

(1)

System for Ensuring the Performance of Duties by Directors and Employees to Comply with Laws and Articles of Incorporation

	(i)		Based on the spirit of the “Three Selfs” (self-motivation, self-management, and self-awareness)—a Canon universal principle dating back to the Company’s founding—the Company established the Canon Group Code of Conduct as a standard to which Directors, Executive Officers and employees must adhere when performing their work. A Committee that manages and oversees this initiative promotes compliance activities to develop law-abiding, independent and strong individuals with a high sense of ethics.

	(ii)		Policies and measures set forth by the Committee above are implemented throughout the Company with the assistance of compliance staff assigned to each division.

	(iii)		Each division establishes internal rules and guidelines to help ensure that all Directors, Executive Officers and employees thoroughly understand the laws and regulations of Japan and other countries.

	(iv)		The Company ensures Directors, Executive Officers and employees the implementation of the basic policy that provides not to have any relation with antisocial forces under any circumstances, and also maintains and improves the cooperation structure with external institutions such as police by establishing a department in charge.

	(v)		The Company’s internal auditing, legal, and other divisions work to strengthen compliance through law-abidance guidance and monitoring on its business activities.

	(vi)		An in-house hotline system is employed to promote internal self-checks to prevent illegal or unethical activities and help prevent improprieties.

(2)

System for Maintaining and Managing Information Relating to the Performance of Duties by Directors

	(i)		Information relating to the performance of duties by Directors is maintained and managed in accordance with the Company’s basic rules for document management addressing the creation, sending and receiving, storage, retention, and destruction of documents, and other in-house rules.

	(ii)		A system is established that enables Directors, Corporate Auditors, and internal auditing to access this information anytime.

I-2-109

(3)

Rules and Other Systems Regarding Management of Risk of Loss

	(i)		Important matters are carefully deliberated at the Executive Committee and in other Management Committees on specific action plans to eliminate or reduce business risks.

	(ii)		Business processes are specified and risks are evaluated based on guidelines set forth by a committee that oversees financial risk management to ensure the accuracy and reliability of financial reporting. This must be documented in writing, and the status of control activity is regularly confirmed to make risk management effectively work.

	(iii)		A risk management system is created through the formulation and observance of various in-house rules to protect the Company from diversifying risks (quality, environmental, disaster, information-related, export management, etc.) and maintain public faith. In particular, Basic Policies Regarding Product Safety have been established, which govern efforts in supplying customers with safe products that will allow comfortable and satisfactory use.

	(iv)		Wide-ranging audits of various types and promotion of the in-house hotline system by internal auditing are carried out for the early detection and resolution of risks.

(4)

System for Assuring Directors’ Efficient Execution of Duties

	(i)		The Executive Committee and Management Committees are established and important matters are carefully deliberated in advance by Directors, Executive Officers and relevant managers to promote prompt and appropriate decision making by Directors.

	(ii)		Based on explanation of management policies in long-term management plans, the Company goals are given concrete shape in medium-term plans, and each division is thoroughly informed of the content of these plans. Furthermore, annual and quarterly short-term plans and monthly budgetary control are used to monitor performance progress, through which the Company makes optimum use of management resources.

I-2-110

(5)

System for Ensuring Appropriate Operations of the Corporate Group Comprised of Corporation, its Parent Companies and Subsidiaries

	(i)		Based on the “Canon Group Code of Conduct,” the Company promotes Groupwide compliance and infuses an awareness of compliance and corporate ethics to share as a set of common values for the Group.

	(ii)		Policies and measures set forth by the Committee managing and overseeing the “Canon Group Code of Conduct” are implemented at each Group company by compliance staff assigned to it.

	(iii)		The internal auditing, legal, and other divisions enhance compliance by providing guidance and monitoring with regard to the observance of laws in the business activities of all Group companies.

	(iv)		The soundness and efficiency of the Group’s business activities are ensured through the formulation of Groupwide medium-term plans and deliberations in the Management Committee.

(6)

Matters Regarding Employees Who Assist the Duties of Corporate Auditors When Corporate Auditors Request Assignment of Such Employees

	(i)		A division is established specifically to assist Corporate Auditors with their duties.

	(ii)		Full-time employees of a requisite number are assigned to the division.

(7)

Matters Regarding Independence of the Employees in (6) Above From Directors

	(i)		The division is an organization independent of the Board of Directors.

	(ii)		Changes in the division’s personnel require the prior consent of the Board of Corporate Auditors.

I-2-111

(8)

System for Directors and Employees to Report to Corporate Auditors and System for Other Types of Reporting to Corporate Auditors

	(i)		Directors promptly report to Corporate Auditors matters that may have a significant impact on the Company when such matters emerge or are likely to emerge.

	(ii)		Directors, Executive Officers and employees deliver reports periodically to Corporate Auditors regarding matters Directors and the Corporate Auditors have previously agreed upon in consultations.

	(iii)		Corporate Auditors attend the Executive Committee and other important meetings.

	(iv)		An in-house hotline system is adopted to allow Corporate Auditors to receive information from employees.

(9)

Other Systems for Securing the Effectiveness of Auditing by Corporate Auditors

	(i)		Corporate Auditors periodically receive reports from accounting auditors.

	(ii)		The Company establishes the systems for providing cooperation and allowing field audits of internal divisions and affiliates to be performed efficiently by Corporate Auditors.

I-2-112

Consolidated Financial Statements

Consolidated Balance Sheets



ASSETS		Millions of yen



	As of Dec. 31,			As of Dec. 31,
	2009			2008


Current assets:
Cash and cash equivalents		795,034			679,196
Short-term investments		19,089			7,651
Trade receivables, net		556,572			595,422
Inventories		373,241			506,919
Prepaid expenses and other current assets		273,843			275,660

Total current assets		2,017,779			2,064,848

Noncurrent receivables		14,936			14,752
Investments		114,066			88,825
Property, plant and equipment, net		1,269,785			1,357,186
Intangible assets, net		117,396			119,140
Other assets		313,595			325,183

Total assets		3,847,557			3,969,934


LIABILITIES AND EQUITY				Millions of yen

	As of Dec. 31,			As of Dec. 31,
	2009			2008


Current liabilities:
Short-term loans and current portion of long-term debt		4,869			5,540
Trade payables		339,113			406,746
Accrued income taxes		50,105			69,961
Accrued expenses		274,300			277,117
Other current liabilities		115,303			184,636

Total current liabilities		783,690			944,000

Long-term debt, excluding current installments		4,912			8,423
Accrued pension and severance cost		115,904			110,784
Other noncurrent liabilities		63,651			55,745

Total liabilities		968,157			1,118,952


Commitments and contingent liabilities
Equity:
Canon Inc. stockholders’ equity:
Common stock		174,762			174,762
[Authorized shares] (share)		[3,000,000,000	]		[3,000,000,000	]
[Issued shares] (share)		[1,333,763,464	]		[1,333,763,464	]
Additional paid-in capital		404,293			403,790
Legal reserve		54,687			53,706
Retained earnings		2,871,437			2,876,576
Accumulated other comprehensive income (loss)		(260,818	)		(292,820	)
Treasury stock, at cost		(556,252	)		(556,222	)
[Treasury shares] (share)		[99,288,001	]		[99,275,245	]

Total Canon Inc. stockholders’ equity		2,688,109			2,659,792

Noncontrolling interests		191,291			191,190

Total equity		2,879,400			2,850,982

Total liabilities and equity		3,847,557			3,969,934


<Notes to Consolidated Balance Sheets as of December 31, 2009>
1. Allowance for doubtful receivables:		11,343 million yen
2. Accumulated depreciation:		1,815,982 million yen
3. Accumulated other comprehensive income (loss) includes foreign currency translation adjustments, net unrealized gains and losses on securities, net gains and losses on derivative financial instruments and pension liability adjustments.
4. Guarantee obligations for bank loans taken out by employees:		18,526 million yen

<Note to Per Share Information as of December 31, 2009>
Canon Inc. stockholders’ equity per share		2,177.53 yen

I-2-113

Consolidated Statements of Income


Millions of yen

	Year ended			Year ended
	Dec. 31, 2009			Dec. 31, 2008



Net sales		3,209,201			4,094,161

Cost of sales		1,781,808			2,156,153



Gross profit		1,427,393			1,938,008

Operating expenses:

Selling, general and administrative expenses		905,738			1,067,909

Research and development expenses		304,600			374,025



		1,210,338			1,441,934



Operating profit		217,055			496,074

Other income (deductions):

Interest and dividend income		5,202			19,442

Interest expense		(336	)		(837	)

Other, net		(2,566	)		(33,532	)



		2,300			(14,927	)



Income before income taxes		219,355			481,147

Income taxes		84,122			160,788



Consolidated net income		135,233			320,359



Less: Net income attributable to noncontrolling interests		3,586			11,211



Net income attributable to Canon Inc.		131,647			309,148


<Note to Per Share Information for the year ended December 31, 2009>
Net income attributable to Canon Inc. stockholders per share
Basic		106.64 yen
Diluted		106.64 yen

I-2-114

Consolidated Statement of Equity


Millions of yen
			Additional							Accumulated						Total
	Common		paid-in		Legal		Retained			other			Treasury			Canon Inc.
	stock		capital		reserve		earnings			comprehensive			stock			stockholders’
										income (loss)						equity


Balance at December 31, 2008		174,762		403,790		53,706		2,876,576			(292,820	)		(556,222	)		2,659,792


Equity transactions with noncontrolling interests and other				503													503
Dividends paid to Canon Inc. stockholders								(135,793	)								(135,793	)
Dividends paid to noncontrolling interests
Transfers to legal reserve						981		(981	)								-
Comprehensive income:
Net income								131,647									131,647
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments											33,340						33,340
Net unrealized gains and losses on securities											2,150						2,150
Net gains and losses on derivative instruments											(1,422	)					(1,422	)
Pension liability adjustments											(2,066	)					(2,066	)

Total comprehensive income																	163,649

Repurchase of treasury stock, net								(12	)					(30	)		(42	)


Balance at December 31, 2009		174,762		404,293		54,687		2,871,437			(260,818	)		(556,252	)		2,688,109


Millions of yen

	Noncontrolling			Total
	interests			equity



Balance at December 31, 2008		191,190			2,850,982


Equity transactions with noncontrolling interests and other		(1,376	)		(873	)
Dividends paid to Canon Inc. stockholders					(135,793	)
Dividends paid to noncontrolling interests		(3,326	)		(3,326	)
Transfers to legal reserve					-
Comprehensive income:
Net income		3,586			135,233
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		30			33,370
Net unrealized gains and losses on securities		67			2,217
Net gains and losses on derivative instruments		(1	)		(1,423	)
Pension liability adjustments		1,121			(945	)

Total comprehensive income		4,803			168,452

Repurchase of treasury stock, net					(42	)


Balance at December 31, 2009		191,291			2,879,400

<Note to Consolidated Statement of Equity>
Pension liability adjustments include actuarial loss, prior service credit and net transition obligation.

I-2-115

Notes to Consolidated Financial Statements

Significant Accounting Policies

1. Group Position

The number of consolidated subsidiaries was 241, and the number of affiliated companies accounted for by the equity method was 15.

2. Basis of Presentation

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) pursuant to the provision of Paragraph 1, Article 120 of the previous Company Accounting Regulations based on Article 2 of supplementary provision (Act of Justice Ministry No. 46 issued and effective in 2009) of current Company Accounting Regulations. However, certain disclosures required under US GAAP are omitted pursuant to the same provision.

3. Cash Equivalents

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

4. Translation of Foreign Currencies

Assets and liabilities denominated in foreign currencies are translated at the rate of exchange in effect at the balance sheet date. Exchange differences are charged or credited to income. Assets and liabilities of subsidiaries located outside Japan are translated into Japanese yen at the rates of exchange in effect at the balance sheet date and income and expense items are translated at the average exchange rates prevailing during the year. The resulting translation adjustments are reported in other comprehensive income (loss).

5. 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.

6. Investments

Canon accounts for its debt and marketable equity securities as follows. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for-sale securities are excluded from earnings and are reported in other comprehensive income (loss) until realized. Realized gain and losses are determined on the average cost method.

7. Property, Plant and Equipment

Property, plant and equipment are depreciated principally by the declining-balance method.

I-2-116

8. Goodwill and Other Intangible Assets

Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment at least annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Intangible assets with finite useful lives are amortized over the respective estimated useful lives. Software is amortized on a straight-line basis over the period of three to five years.

9. 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 change is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset.

10. Basis of Recording Allowances

(Allowance for doubtful accounts)

An allowance for doubtful accounts is provided based on credit loss history and an evaluation of any specific doubtful accounts.

(Accrued pension and severance cost)

Pension and severance cost is accrued based on the projected benefit obligations and the fair value of plan assets at the balance sheet date. Unrecognized actuarial loss is recognized by amortizing a portion in excess of a corridor (i.e., 10% of the greater of the projected benefit obligations or the fair value of plan assets) using the straight-line method over the average remaining service period of employees. Unrecognized prior service cost or credit is amortized using the straight-line method over the average remaining service period of employees.

11.	Taxes collected from customers and remitted to governmental authorities are excluded from revenues, cost and expenses in consolidated statements of income.

12. Stock-Based Compensation

Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a straight-line basis over the requisite service period.

13. Net Income Attributable to Canon Inc. Stockholders Per Share

Basic net income attributable to Canon Inc. stockholders per share is computed by dividing net income by the weighted-average number of common shares outstanding during each year. Diluted net income attributable to Canon Inc. stockholders per share includes the effect from potential issuance of common stock based on the assumption that all stock options were exercised.

14. Recently Issued Accounting Guidance

Canon adopted the Accounting Standards Codification issued by the Financial Accounting Standards Board in the third quarter beginning July 1,

I-2-117

2009. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. As a result of the adoption of this guidance, throughout the notes to the consolidated financial statements, references to specific accounting guidance are not used.

Canon adopted new guidance for noncontrolling interests in consolidated financial statements in the first quarter beginning January 1, 2009. Upon the adoption of this guidance, noncontrolling interests, which were previously referred to as minority interests and classified between total liabilities and stockholders’ equity on the consolidated balance sheets, are now included as a separate component of total equity. In addition, consolidated net income on the consolidated statements of income now includes the net income (loss) attributable to noncontrolling interests. The financial statement presentation requirements have been adopted retrospectively and prior year amounts have been reclassified or adjusted to conform to this guidance.

(Recommended Cash Offer by Canon for All the Issued and Outstanding Ordinary Shares of Océ N.V.)

Canon and Océ N.V. (“Océ”) have reached conditional agreement on November 16, 2009 that Canon intends to make a fully self-funded, public cash offer for all the issued and outstanding shares of Océ, which is listed on NYSE Euronext Amsterdam. In accordance with this agreement, Canon has been proceeding to acquire all the issued and outstanding ordinary shares of Océ.

1. Strategic Rationale

Amid the increasingly competitive printing industry, Canon aims to further strengthen its business foundation in order to solidify the position as the global leader. The combination of Canon and Océ will render strong synergies in areas such as creating benefits from complementary technologies and products, reinforcing research and development on a global basis and acquiring strong sales and distribution networks, along with serving excellent clients.

2. Trade Name and Business Operation of Océ

	(1)		Trade Name: Océ N.V.

	(2)		Business Operation: Research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide format digital printing systems

3. Offer Period

From January 29, 2010 to March 1, 2010

(In the event that tender offer conditions are not fulfilled, Canon can extend the Offer Period)

I-2-118

(Share Exchange Agreement to Make Canon Finetech Inc. a Wholly Owned Subsidiary of Canon Inc.)

On February 8, 2010, the Board of Directors of Canon Inc. approved a share exchange under which Canon Inc. would make Canon Finetech Inc. (“Canon Finetech”) its wholly owned subsidiary, and on the same date, has entered into the share exchange agreement with Canon Finetech. As of February 8, 2010, Canon Inc. owned 57.59% of the outstanding shares issued by Canon Finetech.

1. Strategic Rationale of the Share Exchange

Canon Inc. aims to facilitate the organic integration of management resources between Canon Inc. and Canon Finetech, further enhance the synergies throughout the Canon Group, and promote the flexibility and speed of its management, through the share exchange with Canon Finetech.

2. Overview of the Share Exchange Agreement

	(1)		Method and Procedures

			In accordance with the share exchange agreement reached on February 8, 2010, Canon Inc. will allot 0.38 shares of Canon Inc. for one share of Canon Finetech to the shareholders of Canon Finetech (excluding itself), who will hold the shares of Canon Finetech just before the planned acquisition date of all the outstanding shares (excluding shares already held by Canon Inc.)

			Canon Inc. will execute the share exchange without obtaining the approval at the Meeting of Shareholders of Canon Inc., pursuant to the provision of Paragraph 3, Article 796 stated in the Corporation Law, which specifies the simplified share exchange procedure. Canon Inc. will not issue new shares for this transaction, and will allot its treasury stocks instead.

	(2)		Share Exchange Ratio

			The share exchange ratio is 0.38 shares of Canon Inc. for one share of Canon Finetech. As for the 24,496,816 shares of Canon Finetech held by Canon Inc., no shares will be allotted.

	(3)		Measurement Rationale of the Share Exchange Ratio

			In order to ensure fairness of calculating the share exchange ratio, both companies have separately requested an independent third party appraisal agency to calculate the share exchange ratio. Taking into account the results of the professional analyses and advice of the proposed share exchange ratio, the Board of Directors of the two companies have decided the announced share exchange ratio.

	(4)		Common Stock Account

			Common stock account will not increase as a result of this share exchange.

	(5)		Schedule


March 24, 2010		Annual general meeting of shareholders to be held at Canon Finetech
		(share exchange agreement to be approved)
May 1, 2010		Execution of the planned share exchange (effective date)

I-2-119

Accounting Audit Report of Accounting Auditor on
Consolidated Financial Statements

Report of Independent Auditors

February 9, 2010
The Board of Directors
Canon Inc.

Ernst & Young ShinNihon LLC

Noriharu Fujita
Certified Public Accountant
Designated and Engagement
Partner

Norimitsu Yanai
Certified Public Accountant
Designated and Engagement
Partner

Yuichiro Munakata
Certified Public Accountant
Designated and Engagement
Partner

Hiroki Suzuki
Certified Public Accountant
Designated and Engagement
Partner

Pursuant to Paragraph 4, Article 444 of the Corporation Law, we have audited the consolidated balance sheet, the consolidated statement of income, the consolidated statement of equity and the notes to consolidated financial statements of Canon Inc. (the “Company”) applicable to the fiscal year from January 1, 2009 through December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

I-2-120

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position and results of operations of the Canon Group, which consisted of the Company and consolidated subsidiaries, applicable to the fiscal year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States under Paragraph 1, Article 120 of the previous Company Accounting Regulations based on Article 2 of supplementary provision (Act of Juctice Ministry No. 46 issued and effective in 2009) of current Company Accounting Regulations (refer to Note 2 of notes to basic significant matters regarding preparation of consolidated financial statements in the notes to consolidated financial statements).

Additional Information

As mentioned in “14. Notes to Basic Significant Matters Regarding Preparation of Consolidated Financial Statements” of “Notes to Consolidated Financial Statements,” Canon Inc. adopted the new accounting guidance that was issued by the Financial Accounting Standards Board and was codified in Accounting Standards Codification 810, “Consolidations” (the provisions of which were previously included in Statement of Financial Accounting Standards 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No.51”) in the fiscal year beginning January 1, 2009, and prepared the consolidated financial statements in accordance with the said accounting standard.

We have no interest in the Company which should be disclosed in compliance with the Certified Public Accountants Act.

I-2-121

Audit Report of Board of Corporate Auditors on
Consolidated Financial Statements

Audit Report on Consolidated Financial Statements

Regarding the consolidated financial statements (consolidated balance sheet, consolidated statement of income, consolidated statements of equity, and notes to consolidated financial statements) for the 109th business term from January 1, 2009, to December 31, 2009, we have prepared this Audit Report upon deliberation based on the audit reports prepared by each Corporate Auditor and hereby report as follows:

Auditing Methods Employed by the Corporate Auditors and Board of Corporate Auditors and Details of Such Methods

We established auditing policies, allocation of duties, and other relevant matters, and received reports from each Corporate Auditor regarding their execution of audits and results thereof, as well as reports from the Directors and the Accounting Auditor regarding performance of their duties, and sought explanations as necessary.

Following the auditing policies and allocation of duties established by the Board of Corporate Auditors, each Corporate Auditor received reports from such as the Directors and employees regarding consolidated financial statements and sought explanations as necessary. Furthermore, we monitored and verified whether the Accounting Auditor maintained their independence and implemented appropriate audits, and received reports from the Accounting Auditor regarding the performance of their duties and sought explanations as necessary. In addition, we received notice from the Accounting Auditor that “System for ensuring that duties are performed properly” (matters set forth in each Item of Article 131 of the Company Accounting Regulations) is organized in accordance with the “Quality Management Standards Regarding Audits” (Business Accounting Council, October 28, 2005) and other relevant standards, and sought explanations as necessary. Based on the above methods, we examined the consolidated financial statements for this business term.

I-2-122

Non-Consolidated Financial Statements

Non-Consolidated Balance Sheets


ASSETS			Millions of yen


	As of Dec. 31,			As of Dec. 31,
	2009			2008



Current assets	1,112,783			1,138,932

Cash and deposits	6,855			10,674

Notes receivable	190,667			176,449

Accounts receivable	458,927			431,598

Marketable securities	92,740			93,899

Finished goods	60,868			107,375

Work in process	83,073			109,933

Raw materials and supplies	3,997			4,360

Deferred tax assets	57,312			68,123

Short-term loans receivable	59,241			51,512

Other current assets	99,104			85,010

Allowance for doubtful receivables	(1	)		(1	)



Fixed assets	1,438,317			1,480,066

Property, plant and equipment, net	862,901			929,217

Buildings	469,571			510,730

Machinery	135,263			185,710

Vehicles	204			696

Tools and equipment	32,095			47,548

Land	148,217			137,987

Construction in progress	77,551			46,546

Intangible fixed assets	32,444			40,431

Software	29,922			37,469

Other intangibles	2,522			2,962

Investments and other assets	542,972			510,418

Marketable securities-noncurrent	40,970			15,427

Investments in affiliated companies	422,421			411,247

Long-term loans receivable	2,328			3,911

Long-term pre-paid expenses	12,518			12,529

Deferred tax assets-noncurrent	60,440			62,402

Guarantees	1,498			1,535

Other noncurrent assets	2,852			3,425

Allowance for doubtful receivables-noncurrent	(55	)		(58	)



Total assets	2,551,100			2,618,998


<Notes to Non-Consolidated Balance Sheets as of December 31, 2009>
1.	Accumulated depreciation of property, plant and equipment	1,122,921 million yen
	Accumulated impairment losses of property, plant and equipment	21,606 million yen
2.	Guarantees
	Mortgage bank loans for employees	16,256 million yen
3.	Receivables and Payables for affiliated companies
	Receivables	763,132 million yen
	Payables	530,826 million yen

<Note to Per Share Information as of December 31, 2009>
Net assets per share		1,467.76 yen

I-2-124


LIABILITIES AND NET ASSETS			Millions of yen



	As of Dec. 31,			As of Dec. 31,
	2009			2008



Current liabilities	699,680			715,501

Notes payable	1,456			1,871

Accounts payable	330,763			322,109

Short-term loans payable	226,749			156,148

Other payables	37,717			99,325

Accrued expenses	51,667			64,610

Accrued income taxes	27,639			47,825

Deposits	8,644			9,690

Accrued warranty expenses	3,043			6,077

Accrued bonuses for employees	4,129			4,972

Accrued directors’ bonuses	127			244

Other current liabilities	7,746			2,630

Noncurrent liabilities	38,702			38,492

Accrued pension and severance cost	34,524			34,456

Accrued directors’ retirement benefits	1,786			1,576

Reserve for environmental provision	1,170			1,300

Accrued long service rewards for employees	1,176			1,160

Other noncurrent liabilities	46			-



Total liabilities	738,382			753,993



Stockholders’ equity	1,810,900			1,865,955

Common stock	174,762			174,762

Capital surplus	306,288			306,288

Additional paid-in capital	306,288			306,288

Other capital surplus	-			-

Retained earnings	1,886,102			1,941,127

Legal reserve	22,114			22,114

Other retained earnings	1,863,988			1,919,013

Reserve for special depreciation	1,566			4,664

Reserve for deferral of capital gain on property	2,701			2,578

Special reserves	1,249,928			1,249,928

Retained earnings brought forward	609,793			661,843

Treasury stock	(556,252	)		(556,222	)

Valuation and translation adjustments	1,008			(1,196	)

Net unrealized gains (losses) on securities	1,384			(1,048	)

Net deferred gains (losses) on hedges	(376	)		(148	)

Subscription rights to shares	810			246



Total net assets	1,812,718			1,865,005



Total liabilities and net assets	2,551,100			2,618,998

I-2-125

Non-Consolidated Statements of Income


		Millions of yen


	Year ended		Year ended
	Dec. 31, 2009		Dec. 31, 2008



Net sales	2,025,546		2,721,094

Cost of sales	1,471,056		1,801,801




Gross profit	554,490		919,293




Selling, general and administrative expenses	456,713		560,587



Operating profit	97,777		358,706



Other income	118,847		117,797

Interest income	792		1,419

Dividend income	15,522		13,512

Rental income	63,564		66,150

Royalty income	30,344		25,180

Miscellaneous income	8,625		11,536

Other expense	73,940		117,417

Interest expense	3,916		3,844

Depreciation of rental assets	57,040		59,121

Loss on disposal and write-off of inventories	-		38,873

Foreign exchange loss	681		5,678

Miscellaneous loss	12,303		9,901



Ordinary profit	142,684		359,086



Non-ordinary income	292		71

Gain on sales of fixed assets	204		39

Gain on sales of marketable securities-noncurrent	66		32

Gain on sales of investments in affiliated companies	22		-

Non-ordinary loss	20,688		26,155

Loss on sales and disposal of fixed assets	4,060		4,969

Loss on impairment of fixed assets	15,745		12,508

Loss on sales of marketable securities-noncurrent	72		-

Write-off of marketable securities-noncurrent	811		8,678



Income before income taxes	122,288		333,002

Income taxes —— Current	30,206		125,704

—— Deferred	11,304		(16,837	)



Net income	80,778		224,135


<Notes to Non-Consolidated Statements of Income for the year ended December 31, 2009>
Transactions with affiliated companies
Sales		1,976,307 million yen
Purchase		1,331,599 million yen
Other transactions		116,625 million yen

<Note to Per Share Information for the year ended December 31, 2009>
Net income per share		65.44 yen

I-2-126

Non-Consolidated Statement of Changes in Net Assets

Stockholders’ equity

Capital surplus

Retained earnings

Common

Additional

Other

Legal

Reserve for

stock

paid-in

capital

reserve

special

capital

surplus

depreciation

Balance as of December 31, 2008

174,762

306,288

22,114

4,664

Changes in the term

Transfer to reserve for special depreciation

146

Reversal of reserve for special depreciation

(3,244

)

Transfer to reserve for deferral of capital gain on property

Reversal of reserve for deferral of capital gain on property

Dividends paid

Net income

Purchase of treasury stock

Disposal of treasury stock

Net change of items other than stockholders’ equity

Total changes in the term

(3,098

)

Balance as of December 31, 2009

174,762

306,288

22,114

1,566


1. Number of issued shares as of December 31, 2009		1,333,763,464 shares
2. Classes and number of treasury stock
		(Shares)



Classes of stock	Balance as of	Increase	Decrease	Balance as of
Classes of stock	December 31, 2008	Increase	Decrease	December 31, 2009


Common stock	99,275,245	16,518	3,762	99,288,001

(Reason for change)

The increase reflects the purchase of 16,518 shares based on the shareholders’ request for purchase of shares less-than-one-unit.

The decrease reflests the sale of 3,762 shares based on the shareholders’ request for the sale of shares less-than-one-unit.

I-2-127


																						Millions of yen
Stockholders’ equity														Valuation and translation
														adjustments
Retained earnings
Other retained earnings								Treasury			Total			Net unrealized			Net deferred			Subscription rights to		Total net assets
Reserve for								stock			stockholders’			gains (losses)			gains (losses)			shares
deferral of			Special		Retained						equity			on securities			on hedges
capital gain			reserves		earnings
on property


	2,578			1,249,928		661,843			(556,222	)		1,865,955			(1,048	)		(148	)		246		1,865,005







						(146	)					–											–



						3,244						–											–



	199					(199	)					–											–



	(76	)				76						–											–



						(135,793	)					(135,793	)										(135,793	)



						80,778						80,778											80,778


									(51	)		(51	)										(51	)



						(10	)		21			11											11



												–			2,432			(228	)		564		2,768



	123			–		(52,050	)		(30	)		(55,055	)		2,432			(228	)		564		(52,287	)



	2,701			1,249,928		609,793			(556,252	)		1,810,900			1,384			(376	)		810		1,812,718


3.		Payment for dividends

		(1) Amount of dividends paid



Decision	Classes of stock	Cash dividend (Millions of yen)	Dividend per share (yen)	Base date	Effective date

March 27, 2009 Ordinary general meeting of shareholders	common stock	67,897	55.00	December 31, 2008	March 30, 2009

July 28, 2009 Board of directors’meeting	common stock	67,896	55.00	June 30, 2009	August 28, 2009


	(2)		Dividends whose record date is included in the current fiscal year-end and effective date is after the current fiscal year-end.

Scheduled

Classes of
stock

Cash dividend
(Millions of yen)

A source of
dividend

Dividend per
share (yen)

Base date

Effective date

March 30, 2010
Ordinary general meeting of shareholders

common
stock

67,896

Retained
earnings

55.00

December 31,
2009

March 31,
2010

I-2-128

Notes to Non-Consolidated Financial Statements

Valuation of Securities

	(1)		Securities of subsidiaries and affiliates ---- stated at cost based on the moving average method.

	(2)		Other securities: Securities with quotation ---- stated at fair value (unrealized holdings gains and losses are reported in net assets, when sold, the cost is based on the moving average method.)

			Securities without quotation ---- stated at cost based on the moving average method.

Valuation of Inventories

	(1)		Finished goods; work in process ---- valued at cost based on the periodic average method (amount shown in the balance sheet is devaluated due to decline in profitability).

	(2)		Raw materials and supplies ---- valued at cost based on the moving average method (amount shown in the balance sheet is devaluated due to decline in profitability).

Depreciation Method of Fixed Assets

	(1)		Property, plant and equipment (excluding lease assets) ---- calculated by declining-balance method. For buildings (excluding fixtures) acquired after April 1, 1998, depreciation is calculated by straight-line method.

			<Additional information>

			Useful lives of machinery and equipment have been revised from fiscal 2009, based on a fundamental review, triggered by an amendment to the Corporate Tax Law in Japan.

			The effect of this change, depreciation costs increased by 5,531 million yen and operating profit, ordinary profit and income before taxes decreased by 3,229 million yen for the fiscal year ended December 31, 2009.

(2)

Intangible fixed assets ---- calculated by straight-line method. With regard to software for sale, calculated based on the estimated marketable period in consideration of marketing plan etc. of the relevant products (3 years), and with regard to internal-use software, calculated based on the estimated useful period in the Company (5 years).

I-2-129

(3)

Lease assets ---- calculated by straight-line method. The engaged lease period is determined as the useful life of each lease asset.

Deferred Charges ---- The items which can be deferred under the Corporation Law charged to operations as incurred.

Basis of Recording Allowances

	(1)		Allowance for doubtful accounts ---- provided as a general provision for uncollectible receivables ---- General accounts Allowances are provided using a rate determined by past debt experience.

			---- Allowance for accounts considered to be uncollectible and accounts in bankruptcy filing are provided for individual estimated uncollectible amount, primarily determined based on the respective customer’s financial conditions.

	(2)		Accrued warranty expenses ---- provides as general provision for product after-sales service expenses and no charge repair cost on an estimated amount based on the historical performance.

	(3)		Accrued bonuses for employees ---- provided as a general provision for bonus to employees for this term based on an amount expected to pay.
	(4)		Accrued directors’ bonuses ---- provided as general provision for bonus to directors for this term based on an amount expected to pay.

	(5)		Accrued pension and severance cost ---- provided as general provision for employee retirement and severance benefits based on projected benefits obligation and expected plan asset. Prior service cost and actuarial variance are amortized by straight-line method with average remaining service periods.

	(6)		Accrued directors’ retirement benefits ---- provision for directors’ retirement benefits based on the necessary amount at the fiscal year-end in accordance with management policy.

	(7)		Reserve for environmental provision ---- provided as general provision for the future environmental-related cost, such as construction costs to prevent the proliferation of soil pollution, and also clean up costs of hazardous substances based on the related regulations.

	(8)		Accrued long service rewards for employees ---- provided as general provision for reward for employees in accordance with management policy for long service employees for this term based on an amount expected to pay.

I-2-130

Hedge accounting

	(1)		Hedge accounting ---- deferral hedge accounting has been applied.
	(2)		Hedging instrument and hedged assets / liabilities

			Hedging instrument ---- derivative transaction (foreign exchange contract) Hedged assets / liabilities ---- accounts receivables denominated in foreign currency for forecasted transaction.

	(3)		Hedge policy ---- derivative financial instruments are comprised principally of foreign exchange contracts to manage currency risk. The Company does not hold derivative financial instrument for trading purpose.

	(4)		Assessment of hedge effectiveness ---- foreign exchange forward contracts due to the same currency of the same underlying at the same period are concluded to cover foreign currency fluctuation risk in the market based on the hedging policy, and thus is effective.

Consumption Taxes ---- excluded from the statements of income and are accumulated in other receivables or other payables.

(Measurement standard and valuation method of inventories)

Previously, the inventories held by the Company were primarily valued at cost, determined by periodic average method. Effective from the current fiscal year, the Company has applied “Accounting Standard for Measurement of Inventories” (Accounting standards Board of Japan (ASBJ) Statement No.9, issued July 5, 2006). Accordingly, from the current fiscal year, such inventories are mainly valued at cost, determined by periodic average method (amount shown in the balance sheet is devaluated due to decline in profitability).

The effect of this change, operating profit, ordinary profit and income before taxes decreased by 2,034 million yen for the fiscal year ended December 31, 2009.

Further, devaluation loss and disposal loss of inventories were previously recorded as “Other, net,” whereas currently recorded as “Cost of sales”.
The effect of this change, operating profit decreased by 19,382 million yen for the fiscal year ended December 31, 2009.

I-2-131

(Lease transactions)

Previously, finance lease transactions that do not transfer ownership were accounted for in a manner of operating lease. Effective from the current fiscal year, the Company has applied “Accounting Standard for Lease Transactions” (ASBJ Statement No.13, issued March 30, 2007, revised from original standard issued by Corporate Accounting Council on June 17, 1993) and “Guidance on Accounting Standards for Lease Transactions” (ASBJ Guidance No.16, issued March 30, 2007, revised from original guidance issued by The Japanese Institute of Certified Public Accountants on January 18, 1994). Accordingly, from the current fiscal year, such lease transactions are accounted for in a similar manner with ordinary sale and purchase transactions.

The change of this accounting standard has no impact on the statements of income for the fiscal year ended December 31, 2009.


1. Significant components of deferred tax assets
Accrued pension and severance cost	24,229		million yen
Devaluation loss on inventories	31,067		million yen
Loss on disposal and write-off of inventories	13,018		million yen
Outstanding enterprise tax	2,827		million yen
Depreciation of fixed assets in excess of limit	6,635		million yen
Loss on impairment of fixed assets	9,474		million yen
Excess in amortization of software	13,143		million yen
Amortization of deferred charges in excess of limit	9,127		million yen
Other	18,936		million yen



Subtotal deferred tax assets	128,456		million yen
Valuation reserve	(6,937	)	million yen



Total deferred tax assets	121,519		million yen
2. Significant components of deferred tax liabilities
Reserve for special depreciation	(1,044	)	million yen
Reserve for deferral of capital gain on property	(1,801	)	million yen
Other	(922	)	million yen



Total deferred tax liabilities	(3,767	)	million yen



Net deferred tax assets	117,752		million yen

I-2-132

Status

Company
name

Ratio of
voting rights
held by the
company

Relationship
with the
Company

Transaction
details

Transaction
amount
(millions of yen)

Item

Balance at
December
31, 2009

Subsidiary

Canon Marketing Japan Inc.

(Possession) Direct: 55.2%

Sales of the Company’s products

268,464

Accounts receivable

79,566

Indirect: 0.0%

Interlocking directorate

Borrowings of funds

20,000

Short-term
loans payable

40,000

Subsidiary

Oita Canon
Inc.

(Possession)
Direct:
100%

Sales of the Company’s products Interlocking directorate

Purchase of products, components and others

341,395

Accounts payable

97,401

(Possession)

Sales of the

Sales of the Company’s

563,311

Notes receivable

190,607

Subsidiary

Canon
U.S.A., Inc.

Direct: 100%

Company’s products

products

Accounts receivable

9,336

Interlocking directorate

Borrowings of funds

19,383

Short-term
loans payable

101,310

Subsidiary

Canon Europa N.V.

(Possession)
Direct:
100%

Sales of the Company’s products Interlocking directorate

Sales of the Company’s products

673,929

Accounts
receivable

207,339

Subsidiary

Canon Singapore Pte. Ltd.

(Possession)
Direct:
100%

Sales of the Company’s products Interlocking directorate

Sales of the Company’s products

163,244

Accounts
receivable

58,873

Subsidiary

Canon (China) Co.,Ltd.

(Possession)
Direct:
100%

Sales of the Company’s products Interlocking directorate

Sales of the Company’s products

110,892

Account
receivable

31,372

Conditions of transactions and policy regarding determination of conditions of transaction.


(Note 1)		The transactions above are determined on a fair price basis.
(Note 2)		Consumption taxes are excluded from the transaction amount, however, included in the balance at December 31, 2009.


(Note 3)		The loans payable from Canon Marketing Japan Inc. and Canon U.S.A., Inc. are intended to make best use of the funding in the Canon Group. Transaction amount shows net loan and repayment. The interests are determined reasonably based on market interest rate.


(Note 4)		Ratio of voting rights held by the Company for “Indirect” of Canon Marketing Japan Inc. shows 0.0% because the value is a fraction amount.

I-2-133

(Recommended Cash Offer by Canon for All the Issued and Outstanding Ordinary Shares of Océ N.V.)

Strategic Rationale

Trade Name and Business Operation of Océ

	(1)		Trade Name: Océ N.V.

	(2)		Business Operation: Research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide format digital printing systems

Offer Period

From January 29, 2010 to March 1, 2010

(In the event that tender offer conditions are not fulfilled, Canon can extend the Offer Period)

(Share Exchange Agreement to Make Canon Finetech Inc. a Wholly Owned Subsidiary of Canon Inc.)

I-2-134

Strategic Rationale of the Share Exchange

Overview of the Share Exchange Agreement

	(1)		Method and Procedures

			In accordance with the share exchange agreement reached on February 8, 2010, Canon Inc. will allot 0.38 shares of Canon Inc. for one share of Canon Finetech to the shareholders of Canon Finetech (excluding itself), who will hold the shares of Canon Finetech just before the planned acquisition date of all the outstanding shares (excluding shares already held by Canon Inc.) Canon Inc. will execute the share exchange without obtaining the approval at the Meeting of Shareholders of Canon Inc., pursuant to the provision of Paragraph 3, Article 796 stated in the Corporation Law, which specifies the simplified share exchange procedure. Canon Inc. will not issue new shares for this transaction, and will allot its treasury stocks instead.

	(2)		Share Exchange Ratio

			The share exchange ratio is 0.38 shares of Canon Inc. for one share of Canon Finetech. As for the 24,496,816 shares of Canon Finetech held by Canon Inc., no shares will be allotted.

	(3)		Measurement Rationale of the Share Exchange Ratio

			In order to ensure fairness of calculating the share exchange ratio, both companies have separately requested an independent third party appraisal agency to calculate the share exchange ratio. Taking into account the results of the professional analyses and advice of the proposed share exchange ratio, the Board of Directors of the two companies have decided the announced share exchange ratio.

	(4)		Common Stock Account and Reserves

			Common stock account and reserves will not increase as a result of this share exchange.

I-2-135

(5)

Schedule


		March 24, 2010		Annual general meeting of shareholders to be held at Canon Finetech (share exchange agreement to be approved)
		May 1, 2010		Execution of the planned share exchange (effective date)

Trade Name, Business Operation, Scale and Others of the Counterparty

	(1)		Trade Name: Canon Finetech Inc.

	(2)		Business Operation: Manufacture and sale of printers, peripherals of office equipment, industrial equipment, consumables and other products

	(3)		Common Stock: 3,451 million yen (As of December 31, 2009)

	(4)		Net Assets: 73,184 million yen (consolidated) (As of December 31, 2009)

	(5)		Total Assets: 95,955 million yen (consolidated) (As of December 31, 2009)

	(6)		Sales: 108,148 million yen (consolidated) (For the year ended December 31, 2009)

	(7)		Net Income: 2,226 million yen (consolidated) (For the year ended December 31, 2009)

	(8)		Number of Employees: 7,429 persons (consolidated) (As of December 31, 2009)

I-2-136

Accounting Audit Report of Accounting Auditor

Report of Independent Auditors

February 9, 2010
The Board of Directors
Canon Inc.

Ernst & Young ShinNihon LLC

Noriharu Fujita
Certified Public Accountant
Designated and Engagement
Partner

Norimitsu Yanai
Certified Public Accountant
Designated and Engagement
Partner

Yuichiro Munakata
Certified Public Accountant
Designated and Engagement
Partner

Hiroki Suzuki
Certified Public Accountant
Designated and Engagement
Partner

Pursuant to Item 1, Paragraph 2 of Article 436 of the Corporation Law, we have audited the non-consolidated balance sheet, the non-consolidated statement of income, the non-consolidated statement of changes in net assets, the notes to non-consolidated financial statements and the related supplementary schedules of Canon Inc. (the “Company”) applicable to the 109th fiscal year from January 1, 2009 through December 31, 2009. These non-consolidated financial statements and the related supplementary schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these non-consolidated financial statements and the related supplementary schedules based on our audit.

I-2-137

Audit Report of Board of Corporate Auditors

Audit Report

Regarding the performance of duties by the Directors for the 109th business term from January 1, 2009, to December 31, 2009, we have prepared this Audit Report upon deliberation based on the audit reports prepared by each Corporate Auditor and hereby report as follows:

Auditing Methods Employed by the Corporate Auditors and Board of Corporate Auditors and Details of Such Methods

We established auditing policies, allocation of duties and other relevant matters, and received reports from each Corporate Auditor regarding their execution of audits and results thereof, as well as reports from the Directors, other relevant personnel, and the Accounting Auditor regarding performance of their duties, and sought explanations as necessary.

Each Corporate Auditor complied with the auditing standards of Corporate Auditors established by the Board of Corporate Auditors, followed the auditing policies, allocation of duties, and other relevant matters, communicated with such as the Directors, the internal auditing and other employees, and made efforts to establish the environment for collecting information and auditing, and participated in the meetings of the Board of Directors and other important meetings, received reports from such as the Directors and employees regarding performance of their duties, sought explanations as necessary, examined important authorized documents and associated information, and studied the operations and status of assets at the head office and principal offices. In addition, we monitored and verified the system for ensuring that the performance of duties by the Directors conforms to the related laws and regulations and Articles of Incorporation, as well as the resolution of the Board of Directors regarding the organization of the system stipulated in Item 1 and Item 3, Article 100, of the Enforcement Regulations of the Corporation Law and the status of the system based on such resolution (Internal Control System), which are necessary for ensuring propriety of company’s operations. With respect to subsidiaries, we communicated and exchanged information with Directors and Corporate Auditors of subsidiaries, and received business reports from subsidiaries as necessary. Based on the above methods, we examined the business report and the accompanying detailed statements for this business term.

Furthermore, we monitored and verified whether the Accounting Auditor maintained their independence and implemented appropriate audits, and we received reports from the Accounting Auditor regarding the performance of their duties and sought explanations as necessary. In addition, we received notice from

I-2-139

the Accounting Auditor that “System for ensuring that duties are performed properly” (matters set forth in each item of Article 131 of the Company Accounting Regulations) is organized in accordance with the “Quality Management Standards Regarding Audits” (Business Accounting Council, October 28, 2005) and other relevant standards, and sought explanations as necessary. Based on the above methods, we examined the non-consolidated financial statements (non-consolidated balance sheet, non-consolidated statement of income, non-consolidated statements of changes in net assets, and notes to non-consolidated financial statements) and the accompanying detailed statements for this business term.

Audit Results

(1)

Results of Audit of Business Report and Other Relevant Documents

	1.		We confirm that the business report and the accompanying detailed statements fairly represent the Company’s conditions in accordance with the related laws and regulations and Articles of Incorporation.

	2.		We have found no significant evidence of wrongful act or violation of related laws and regulations, nor the Articles of Incorporation with regard to the performance of duties by the Directors.

	3.		We confirm that the content of the resolution of the Board of Directors regarding the Internal Control System is proper. In addition, we have found no matters on which to remark in regard to the performance of duties by the Directors regarding the Internal Control System.

(2)

Results of Audit of non-consolidated financial statements and the accompanying detailed statements

We confirm that the methods and results of the audit employed by the Accounting Auditor, Ernst & Young ShinNihon LLC, are proper.

February 10, 2010

Board of Corporate Auditors, Canon Inc.


Corporate Auditor		Keijiro Yamazaki

Corporate Auditor		Kunihiro Nagata

Corporate Auditor		Tadashi Ohe

Corporate Auditor		Yoshinobu Shimizu

Corporate Auditor		Minoru Shishikura


Note:		Corporate Auditors, Tadashi Ohe, Yoshinobu Shimizu and Minoru Shishikura are Outside Corporate Auditors, as provided in Item 16, Article 2, and Paragraph 3, Article 335, of the Corporation Law.

I-2-140


Matters to be resolved:
	Proposal 1:	Dividends from Surplus
	Proposal 2:	Election of 12 Directors
	Proposal 3:	Election of 4 Corporate Auditors
	Proposal 4:	Payment of retirement benefit awards to the retiring Directors and retiring Corporate Auditors
	Proposal 5:	Payment of bonus to the Directors
	Proposal 6:	Approval of the Share Exchange Agreement with Canon Inc.



Name of shareholders	Investment in the Company
	Number of shares		Shareholding ratio (%)
	held (thousands of
	shares)

Canon Inc.		24,496		57.6

Japan Trustee Services Bank, Ltd. (trust account)		1,094		2.6

The Master Trust Bank of Japan, Ltd. (trust account)		1,029		2.4

BBH for Fidelity Low Price Stock Fund		650		1.5

Canon Finetech Employee Shareholding Plan		599		1.4

The Dai-Ichi Mutual Life Insurance Company		481		1.1

Goldman Sachs International		378		0.9

Sumitomo Mitsui Banking Corporation		373		0.9

Mizuho Bank, Ltd.		364		0.9

The Chase Manhattan Bank, N.A., London SL Omnibus Account		318		0.7


CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
(Millions of yen)

		Stockholders’ equity
		Common stock		Capital surplus		Retained earnings		Treasury stock		Total stockholders’ equity
	Balance as of December 31, 2008		3,451		14,248		55,579		(23)		73,255
	Effect of changes in accounting policies applied to foreign subsidiaries		--		--		340		--		340
	Changes in the term
	Dividends paid		--		--		(1,148)		--		(1,148)
	Net income		--		--		2,226		--		2,226
	Purchase of treasury stock		--		--		--		(8)		(8)
	Disposal of treasury stock		--		(0)		--		2		2
	Net changes in items other than stockholders’ equity		--		--		--		--		--
	Total changes in the term		--		(0)		1,078		(5)		1,073
	Balance as of December 31, 2009		3,451		14,248		56,996		(28)		74,667

1.		Net assets per share: 1,703.75 yen

2.		Net income per share: 52.35 yen


(Millions of yen)
		Stockholders’ equity				Valuation and translation adjustments		Total net assets
		Treasury stock		Total stockholders’ equity		Net unrealized gains (losses) on securities		Total net assets
	Balance as of December 31, 2008		(2)		64,422		46		64,468
	Changes in the term
	Dividends paid				(1,148)
	Reversal of reserve for deferral of capital gain on property				--
	Reversal of reserve for special depreciation				--				--
	Net income				2,589
	Purchase of treasury stock		(8)		(8)
	Disposal of treasury stock		2		2
	Net changes in items other than stockholders’ equity				--		(19)
	Total changes in the term		(6)		1,435		(19)
	Balance as of December 31, 2009		(8)		65,857		27


1.	Net assets per share:	1,549.26 yen

2.	Net income per share:	60.88 yen


		Canon:		Canon Inc. 30-2, Shimomaruko 3-chome, Ota-ku, Tokyo

				Fujio Mitarai [seal] Chairman and CEO

		Canon Finetech:		Canon Finetech Inc. 717 Yaguchi, Misato-shi, Saitama

				Ikuo Soma [seal]
				President and Representative Director


Attachment 1:	Articles of Incorporation of Canon	(pages I-2-77 to I-2-82)

Attachment 2:	Canon’s Financial Statements for the Fiscal Year Ended December 31, 2009	(pages I-2-83 to I-2-140)


Number of employees		168,879 persons

(Increase of 1,899 persons from the previous term)



Americas		11,084 persons

Europe		12,004 persons

Japan		73,635 persons

Others		72,156 persons


Number of employees		25,683 persons
(Increase of 271 persons from the previous term)