FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

For the month of                     September                     , 2008

CANON INC.

(Translation of registrant’s name into English)

30-2, Shimomaruko 3-Chome, Ohta-ku, Tokyo 146-8501, Japan

(Address of principal executive offices)

     [Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F þ                    Form 40-F o

     [Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes o                    No þ

     [If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-__________

 

 

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

*Print the name and title of the signing officer under his signature.

The following materials are included.

1.

Semi-annual Report filed with the Japanese government pursuant to the Financial Instruments and Exchange Law of Japan For the six months ended June 30, 2008

[English summary with full translation of consolidated financial information]

Semi-annual Report filed with the Japanese government
pursuant to
the Financial Instruments and Exchange Law of Japan

For the six months ended
June 30, 2008

CANON INC.
Tokyo, Japan

CONTENTS

						Page.
I		Corporate Information
		(1)		Consolidated Financial Summary			3
		(2)		Number of Employees			4
II		The Business
		(1)		Operating Results			4
		(2)		Production and Sales			7
		(3)		Managerial Issues to be Addressed			7
		(4)		Crucial Business Contracts Engaged in the First Half of 2008			8
		(5)		Research and Development Expenditure			8
III		Property, Plant and Equipment
		(1)		Major Property, Plant and Equipment			8
		(2)		Prospect of Capital Investment in Fiscal 2008			9
IV		Shares
		(1)		Shares			9
		(2)		Major Shareholders			9
		(3)		Stock Price Transition			10
V		Financial Statements					11

Disclaimer Regarding Forward-Looking Statements

This semi-annual report includes forward-looking statements (within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934) concerning Canon Inc. (the “Company”) and its subsidiaries (collectively “Canon”). To the extent that statements in this semi-annual report do not relate to historical or current facts, they constitute forward-looking statements. These forward-looking statements are based on the current assumptions and beliefs of Canon in light of the information currently available to them, and involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause Canon’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. Canon undertakes no obligation to publicly update any forward-looking statements after the date of this semiannual report. Investors are advised to consult any further disclosures by Canon in its subsequent filings with the U.S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and its other filings.

The risks, uncertainties and other factors referred to above include, but are not limited to, foreign exchange rate fluctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of foreign exchange rate fluctuations; uncertainty of economic conditions in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; uncertainty to the recovery of computer and related markets; uncertainty of recovery in demand for Canon’s semiconductor production equipment; Canon’s ability to continue to develop and market products that incorporate new technology on a timely basis, are competitively priced and achieve market acceptance; the possibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign exchange rates; and inventory risk due to shifts in market demand.

I . Corporate Information

(1)

Consolidated Financial Summary

		Millions of Yen (except per share amounts)
		Six months ended June 30												Year ended December 31
		2008				2007				2006				2007				2006
Net sales			2,113,432				2,166,724				1,952,255				4,481,346				4,156,759
Income before income taxes and minority interests			339,245				406,141				341,045				768,388				719,143
Net income			214,485				255,183				214,174				488,332				455,325
Stockholders’ equity			3,007,929				3,074,367				2,762,380				2,922,336				2,986,606
Total assets			4,458,196				4,608,514				4,107,366				4,512,625				4,521,915
Stockholders’ equity per share (Yen)			2,385.13				2,363.82				2,074.49				2,317.39				2,242.78
Net income per share: basic (Yen)			170.08				194.38				160.85				377.59				341.95
Net income per share: diluted (Yen)			170.07				194.33				160.79				377.53				341.84
Stockholders’ equity to total assets (%)			67.5				66.7				67.3				64.8				66.0
Cash flows from operating activities			335,598				440,324				323,878				839,269				695,241
Cash flows from investing activities			(289,541	)			(209,353	)			(210,297	)			(432,485	)			(460,805	)
Cash flows from financing activities			(84,970	)			(279,770	)			(57,832	)			(604,383	)			(107,487	)
Cash and cash equivalents at end of period			866,395				1,108,728				1,055,163				944,463				1,155,626
Number of employees			142,491				127,338				121,588				131,352				118,499
[Average number of temporary employees]			[43,363]				[39,848]				[25,544]				[41,984]				[30,394]

(2)		Number of Employees
		Canon’s number of employees by product group is summarized as follows:

			As of June 30, 2008
	Business Machines			95,106
	Cameras			20,753
	Optical and other products			20,258
	Corporate			6,374
	Total			142,491

II . The Business
(1)		Operating Results
		Looking back at the global economy in the first half of 2008, in the United States, housing investment remained lackluster during the period due to the subprime loan crisis while escalating crude oil prices led to slack consumer spending. In Europe, growth of consumer spending was sluggish due to a rise in prices, and exports suffered a slowdown due to the appreciation of the euro. Within Asia, although the effects of the U.S. and European economies resulted in a slight slowdown, the Asian economy, led by China, continued to realize a high rate of growth. In Japan, consumer spending floundered amid uncertainty over the future while export growth was limited due to the slowdown in the global economy and the appreciation of the yen.
		As for the markets in which Canon operates, within the office imaging product market, amid the shift toward color models and advanced functionality, demand for network digital multifunction devices (MFDs) remained low primarily in the U.S. market due to the deterioration of the business climate. As for computer peripherals, including printers, demand for laser beam printers continued to display growth, mainly for color models. With regard to inkjet printers, demand continued to shift from single-function to multifunction models amid fierce price competition within the market. Within the digital camera segment, demand for digital single-lens reflex (SLR) cameras and digital compact cameras grew steadily during the term. In the optical equipment segment, while demand for steppers, utilized in the production of semiconductors, remained low due to restrained facility investment by device manufacturers, the market for aligners, used to produce liquid crystal display (LCD) panels, improved dramatically thanks to a recovery in capital spending by LCD panel manufacturers. The average value of the yen for the first half was ¥104.69 to the U.S. dollar, a year-on-year appreciation of about 13%, and ¥160.69 to the euro, approximately the same level as the year-ago period.
		Amid these conditions, Canon has been working steadily to strengthen the Company’s management foundation by bolstering competitiveness in each business field through management innovations. During the first six months of the year, sales volumes of digital cameras, color network MFDs and other products increased supported by the enhancement of market share and recording sales increases on a local-currency basis. The negative effect, however, of the sharp and sudden appreciation of the yen against the U.S. dollar resulted in consolidated net sales for the first half of ¥2,113.4 billion, a year-on-year decrease of 2.5%. Despite the continued launch of new products and ongoing cost-cutting efforts, the gross profit ratio for the first half was 49.3%, a decline of 1.8 points due to such factors as the rapid appreciation of the yen against the U.S. dollar and escalating resource and materials costs. As such, first-half gross profit declined by 6.0% to ¥1,041.5 billion from the year-ago period.

		While R&D expenditures grew by 3.1% compared with the same period for the previous year, group-wide expense-reduction efforts supported a decrease in operating expenses of 1.1% year on year. Consequently, operating profit in the first half totaled ¥331.0 billion, a decline of 14.9% compared with last year. Other income (deductions) decreased by ¥9.0 billion, mainly due to a reduced interest income and a drop in earnings on investments in affiliates accounted for by the equity method. As a result, while income before income taxes and minority interests for the first half totaled ¥339.2 billion, a decline of 16.5%, and first-half net income also recorded a decrease of 15.9% to ¥214.5 billion, the net income ratio, at 10.1%, remained at a double-digit level.
		Basic net income per share for the first half was ¥170.08, a year-on-year decline of ¥24.30.
		Canon’s semi-annual results by business segment are summarized as follows:
		Within the business machine segment, despite sales growth for such products as the competitively priced iR C3580 series of color network digital MFDs, the appreciation of the yen along with restrained investment in office equipment as a result of concerns regarding business performance had a negative impact on sales led by the U.S. market. Consequently, business machine sales overall declined by 5.3% year on year. In the field of computer peripherals, despite a steady increase in sales of laser beam printers on a local-currency basis, the significant impact of the yen’s appreciation against the U.S. dollar resulted in a decrease in sales of 3.9% from the year-ago period. As for inkjet printers, however, home-use multifunction models such as the PIXMA MP610, as well as business-use MFDs equipped with a facsimile function, recorded an increase in unit sales with sales of related consumables also expanding, which contributed to a sales increase of 2.8% despite the impact of the yen’s appreciation. As a result, first-half profit for computer peripherals overall declined by 2.3%. As for business information products, a drop in demand for personal computer sales in the Japanese domestic market resulted in a reduction in sales of 12.6%. Collectively, sales of business machines overall during the term totaled ¥1,389.0 billion, dropping 4.0% from the year-ago period. Operating profit for the segment totaled ¥303.0 billion, a year-on-year decrease of 9.7%, as a result of lower gross profit ratio due to the appreciation of the yen.
		Within the digital camera segment, the high-resolution, competitively priced EOS Digital Rebel XSi and advanced-amateur model EOS 40D contributed to robust sales while also boosting sales of interchangeable lenses and other accessories. Sales volume of digital compact cameras also maintained stable growth, bolstered by the launch of 7 new models, including 4 new stylish ELPH (IXUS)-series models and 3 new PowerShot-series models that cater to a range of photographic demands. As a result, while year-on-year sales volume for digital cameras rose by 16%, overall camera sales for the first half grew by only 1.9% from the year-ago period to ¥529.4 billion due to the dramatic appreciation of the yen against the U.S. dollar along with fierce price competition. Additionally, operating profit for the camera segment decreased by 18.0% year on year to ¥112.6 billion as a result of the significant decline in the gross profit ratio for the sector.
		In the optical and other products segment, while sales of aligners, used to produce LCD panels, gained momentum owing to a recovery in demand by LCD panel manufacturers, sales of steppers, used in the production of semiconductors, remained stagnant throughout the period due to market shrinkage. As a result, sales for the segment totaled ¥195.0 billion, a year-on-year decrease of 2.8%, while operating profit for the segment fell by 74.2% to ¥5.5 billion.
		Semi-annual results in the domestic and overseas regions are summarized as follows:
		Japan
		Sales in Japan decreased by 1.6% from the year-ago period to ¥501.9 billion as the market for steppers, used in the production of semiconductors, remained stagnant. Operating profit generated in the region dropped 12.6% year-on-year to ¥364.8 billion.
		In the regions outside Japan, while sales on a local-currency basis sustained growth, the foreign currency exchange impact due to the appreciation of the yen against the U.S. dollar led to decline in sales compared with the previous year.

		Americas
		Sales decreased by 8.9% from the year-ago period to ¥581.3 billion, due to restrained investment in office equipment. Operating profit in the region fell by 47.7% to ¥12.5 billion year-on-year.
		Europe
		Sales dipped by 0.8% from the same period of the previous year to ¥715.7 billion, mainly due to price decline although sales volume of mainstay products displayed growth. Operating profit in the region also declined by 42.1% to ¥17.2 billion compared with the previous year.
		Asia and others
		Sales increased by 6.0% to ¥314.5 billion, due to expansion in sales of products such as digital cameras and printers. As a result, operating profit in the region rose by 10.6% to ¥26.6 billion.
		Cash Flows
		Cash and cash equivalents for the period decreased by ¥78.1 billion from the end of the previous year to ¥866.4 billion, including the ¥39.2 billion negative impact of currency translation due to the appreciation of the yen against the U.S. dollar.
		Cash flows from operating activities
		In the first half of 2008, Canon generated cash flow from operating activities of ¥335.6 billion, a year-on-year decrease of ¥104.7 billion, reflecting the decrease in net income.
		Cash flows from investing activities
		Cash flow from investing activities totaled ¥289.5 billion, a year-on-year increase of ¥80.2 billion, as facility investment to reinforce production capabilities was maintained at a high level and the payment to acquire shares of Hitachi Displays, Ltd. toward the launch of the Company’s display business was executed.
		Cash flows from financing activities
		Cash flow from financing activities recorded an outlay of ¥85.0 billion, mainly resulting from the dividend payout of a total of ¥75.7 billion, based on the year-end dividend of ¥60.00 per share from the previous fiscal year.
		As a result, free cash flow, calculated by deducting the cash flows from investing activities from the counterpart of operating activities, totaled ¥46.1 billion, a deterioration of ¥184.9 billion from the year-ago period.

(2)		Production and Sales
		Production
		Canon’s production by product group are summarized as follows:

		Millions of yen
		Six months ended June 30, 2008
						Change from
		Production				June 30, 2007(%)
Business Machines			1,149,143				-4.5
Cameras			628,752				+7.9
Optical and other products			153,051				-1.2
Total			1,930,946				-0.5

		Sales
		Canon’s sales by product group are summarized as follows:

		Millions of yen
		Six months ended June 30, 2008
						Change from
		Sales				June 30, 2007(%)
Business Machines			1,388,994				-4.0
Camera			529,411				+1.9
Optical and other products			195,027				-2.8
Total			2,113,432				-2.5

Millions of yen

Six months ended June 30, 2008

Six months ended June 30, 2007

Sales

Proportion (%)

Sales

Proportion (%)

Hewlett-Packard Company

484,705

22.9

509,703

23.5

(3)		Managerial Issues to be Addressed
		There were no significant changes or new developments in Canon’s managerial and financial issues to be addressed during the first half of 2008.

(4)		Crucial Business Contracts Engaged in the First Half of 2008
		Crucial business contracts engaged during the six months ended June 30, 2008 are as follows:
		Patents and Licenses
		Canon has been granted licenses with respect to patents of electrophotography and facsimile by Brother Industries, Ltd.
		Stock Purchase Agreement
		Canon entered into a stock purchase agreement with Hitachi, Ltd. (“Hitachi”) to acquire shares of Hitachi Displays, Ltd. (“Hitachi Displays”), a wholly-owned subsidiary of Hitachi, in February 2008. The Company subsequently acquired a 24.9% stake in Hitachi Displays in March 2008 based on the agreement.
		Canon has plans to purchase additional proportion of outstanding stocks issued by Hitachi Displays, to consequently acquire Hitachi Displays as the Company’s subsidiary, provided the discussion with Hitachi be coordinated and held in advance.
(5)		Research and Development Expenditure
		Canon is facing the third year of its “Excellent Global Corporation Plan — Phase III,” pursuing sound growth by maintaining a high profit margin structure and further expanding the Company’s corporate scale. While targeting “medical sector,” “intelligent robot industry” and “safety technology” as next-generation business domains, Canon is also strengthening relationships and collaborating with universities and other research institutes to reinforce fundamental research and develop cutting-edge technologies. Canon’s research and development expenditures for the six months ended June 30, 2008 totaled ¥175,463 million.
		Research and development expenditures by product group are summarized as follows:

		Millions of yen
		Six months ended June 30
		2008				2007
Business Machines			60,838				57,496
Cameras			23,628				22,184
Optical and other products			19,585				20,219
Corporate			71,412				70,368
Total			175,463				170,267

III . Property, Plant and Equipment

(1)		Major Property, Plant and Equipment
		There were no significant changes to the status of existing major property, plant and equipment during the first half of 2008.

(2)		Prospect of Capital Investment in Fiscal 2008
		There were no significant changes in the capital investment plans, which was originally decided at the end of the previous year, with regard to new construction or retirement of property, plant and equipment during the first half of 2008. There were no significant additional plans for new construction or retirement of these assets, during the first half of 2008.

IV . Shares

(1)		Shares
		Total number of authorized shares is 3,000,000,000 shares. The common stock of Canon is listed on the Tokyo, Osaka, Nagoya, Fukuoka, Sapporo and New York Stock Exchanges. Total issued shares are as follows:

			As of				As of
			June 30, 2008				December 31, 2007
	Total issued shares			1,333,711,360				1,333,636,210

(2)

Major Shareholders

			As of June 30, 2008
			Number of shares held				Number of shares held /
			(Number of shares)				Number of shares issued
	The Dai-Ichi Mutual Life Insurance Co.			93,312,600				7.00	%
	Moxley & Co. (Note 1)			67,300,984				5.04	%
	Japan Trustee Services Bank, Ltd. (Trust Account)			62,050,800				4.65	%
	The Master Trust Bank of Japan, Ltd. (Trust Account)			60,926,800				4.57	%
	Nomura Securities Co., Ltd.			41,078,233				3.08	%
	State Street Bank and Trust Company			38,904,359				2.92	%
	JPMorgan Chase Bank 380055			29,047,700				2.18	%
	Mizuho Corporate Bank, Ltd. (Notes 2 and 4)			28,419,736				2.13	%
	State Street Bank and Trust Company 505103			26,456,095				1.98	%
	Sompo Japan Insurance Inc.			22,910,347				1.72	%

	Notes:
	1.		Moxley & Co. is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts.)
	2.		Apart from the above shares, Mizuho Corporate Bank, Ltd. holds 7,704,000 shares contributed to a trust fund for its retirement and severance plans.
	3.		Apart from the above shares, Canon holds 72,594,874 shares (5.44% of total issued shares) of Treasury stock.
	4.		Mizuho Corporate Bank, Ltd. and its three affiliated companies listed below submitted a revised report on large share holdings to the Kanto Local Finance Bureau on July 23, 2007 in their joint names and reported that they owned 71,888,936 shares (5.39%) of the Company as of July 13, 2007 in total as detailed the next page. However, the Company has not confirmed the status of these holdings as of June 30, 2008.

			As of July 13, 2007
			Number of shares held				Number of shares held /
			(Number of shares)				Number of shares issued
	Mizuho Corporate Bank, Ltd.			36,123,736				2.71	%
	Mizuho Bank, Ltd.			8,853,000				0.66	%
	Mizuho Trust & Banking Co., Ltd.			24,149,600				1.81	%
	Dai-Ichi Kangyo Asset Management Co., Ltd.			2,762,600				0.21	%
	(Current Mizuho Asset Management Co., Ltd.)
	Total			71,888,936				5.39	%

(3)		Stock Price Transition
		The following table sets forth the monthly reported high and low market prices of the Company’s common stock on the Tokyo Stock Exchange for the first half of fiscal 2008:

																							(Yen)
			January				February				March				April				May				June
	High			5,040				5,100				4,800				5,450				5,750				5,820
	Low			4,190				4,230				4,100				4,560				5,150				5,290

V . Financial Statements

      Index of Consolidated Financial Statements of Canon Inc. and Subsidiaries:

			Page.
	Consolidated Balance Sheets as of June 30, 2008 and 2007, and December 31, 2007			12
	Consolidated Statements of Income for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007			14
	Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2008 and 2007, and the year ended December 31, 2007			15
	Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007			17
	Notes to Consolidated Financial Statements			18

CANON INC. AND SUBSIDIARIES
Consolidated Balance Sheets

as of June 30, 2008 and 2007, and December 31, 2007

		Millions of yen
		June 30								December 31
		2008				2007				2007
Assets
Current assets:
Cash and cash equivalents			866,395				1,108,728				944,463
Short-term investments (Notes 2 and 7)			20,931				22,460				20,499
Trade receivables, net (Note 3)			703,690				729,298				794,240
Inventories (Note 4)			614,179				575,036				563,474
Prepaid expenses and other current assets (Note 6)			278,608				282,254				286,111
Total current assets			2,483,803				2,717,776				2,608,787
Noncurrent receivables (Note 12)			14,748				14,560				15,239
Investments (Note 2)			129,084				116,471				90,086
Property, plant and equipment, net (Note 5)			1,384,775				1,336,716				1,364,702
Other assets (Note 6)			445,786				422,991				433,811
Total assets			4,458,196				4,608,514				4,512,625

CANON INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)

as of June 30, 2008 and 2007, and December 31, 2007

		Millions of yen
		June 30								December 31
		2008				2007				2007
Liabilities and stockholders’ equity
Current liabilities:
Short-term loans and current portion of long-term debt (Note 7)			16,114				5,301				18,317
Trade payables (Note 8)			511,112				506,177				514,226
Accrued income taxes			106,407				135,090				150,726
Accrued expenses (Note 12)			316,407				318,330				357,525
Other current liabilities			182,574				215,850				215,911
Total current liabilities			1,132,614				1,180,748				1,256,705
Long-term debt, excluding current installments (Note 7)			10,138				16,290				8,680
Accrued pension and severance cost			42,979				49,210				44,710
Other noncurrent liabilities			53,268				63,198				57,324
Total liabilities			1,238,999				1,309,446				1,367,419
Minority interests			211,268				224,701				222,870
Commitments and contingent liabilities (Note 12)
Stockholders’ equity:
Common stock			174,736				174,674				174,698
(Number of authorized shares)			(3,000,000,000	)			(3,000,000,000	)			(3,000,000,000	)
(Number of issued shares)			(1,333,711,360	)			(1,333,588,114	)			(1,333,636,210	)
Additional paid-in capital			402,866				403,577				402,991
Legal reserve			52,500				45,730				46,017
Retained earnings			2,852,485				2,552,314				2,720,146
Accumulated other comprehensive income (loss) (Note 9)			(18,444	)			104,169				34,670
Treasury stock, at cost			(456,214	)			(206,097	)			(456,186	)
(Number of shares)			(72,594,874	)			(32,993,191	)			(72,588,428	)
Total stockholders’ equity			3,007,929				3,074,367				2,922,336
Total liabilities and stockholders’ equity			4,458,196				4,608,514				4,512,625

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Income

for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2008				2007				2007
Net sales			2,113,432				2,166,724				4,481,346
Cost of sales			1,071,977				1,059,170				2,234,365
Gross profit			1,041,455				1,107,554				2,246,981
Operating expenses:
Selling, general and administrative expenses			535,009				548,411				1,122,047
(Notes 1 and 12)
Research and development expenses			175,463				170,267				368,261
			710,472				718,678				1,490,308
Operating profit			330,983				388,876				756,673
Other income (deductions):
Interest and dividend income			10,966				17,367				32,819
Interest expense			(663	)			(795	)			(1,471	)
Other, net (Note 1)			(2,041	)			693				(19,633	)
			8,262				17,265				11,715
Income before income taxes and minority interests			339,245				406,141				768,388
Income taxes			117,338				142,836				264,258
Income before minority interests			221,907				263,305				504,130
Minority interests			7,422				8,122				15,798
Net income			214,485				255,183				488,332
		Yen
Net income per share (Note 10):
Basic			170.08				194.38				377.59
Diluted			170.07				194.33				377.53

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity

for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007

Millions of yen
		Common Stock				Additional paid-in capital				Legal reserve				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total stockholders’ equity
Balance at December 31, 2007			174,698				402,991				46,017				2,720,146				34,670				(456,186	)			2,922,336
Conversion of convertible debt and other			38				(120	)																			(82	)
Cash dividends															(75,663	)											(75,663	)
Transfers to legal reserve											6,483				(6,483	)											—
Comprehensive income:
Net income															214,485												214,485
Other comprehensive income (loss), net of tax (Note 9)
Foreign currency translation adjustments																			(48,367	)							(48,367	)
Net unrealized gains and losses on securities																			(1,601	)							(1,601	)
Net gains and losses on derivative instruments																			(1,439	)							(1,439	)
Pension liability adjustments																			(1,707	)							(1,707	)
Total comprehensive income																											161,371
Repurchase of treasury stock, net							(5	)															(28	)			(33	)
Balance at June 30, 2008			174,736				402,866				52,500				2,852,485				(18,444	)			(456,214	)			3,007,929

Millions of yen
		Common Stock				Additional paid-in capital				Legal reserve				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total stockholders’ equity
Balance at December 31, 2006			174,603				403,510				43,600				2,368,047				2,718				(5,872	)			2,986,606
Cumulative effect of a change in accounting principle-adoption of EITF 06-2, net of tax															(2,204	)											(2,204	)
Conversion of convertible debt and other			71				63																				134
Cash dividends															(66,582	)											(66,582	)
Transfers to legal reserve											2,130				(2,130	)											—
Comprehensive income:
Net income															255,183												255,183
Other comprehensive income (loss), net of tax (Note 9)
Foreign currency translation adjustments																			49,237								49,237
Net unrealized gains and losses on securities																			1,438								1,438
Net gains and losses on derivative instruments																			(977	)							(977	)
Pension liability adjustments																			51,753								51,753
Total comprehensive income																											356,634
Repurchase of treasury stock, net							4																(200,225	)			(200,221	)
Balance at June 30, 2007			174,674				403,577				45,730				2,552,314				104,169				(206,097	)			3,074,367

CANON INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (continued)

for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007

Millions of yen
		Common Stock				Additional paid-in capital				Legal reserve				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total stockholders’ equity
Balance at December 31, 2006			174,603				403,510				43,600				2,368,047				2,718				(5,872	)			2,986,606
Cumulative effect of a change in accounting principle-adoption of EITF 06-2, net of tax															(2,204	)											(2,204	)
Conversion of convertible debt and other			95				(522	)																			(427	)
Cash dividends															(131,612	)											(131,612	)
Transfers to legal reserve											2,417				(2,417	)											—
Comprehensive income:
Net income															488,332												488,332
Other comprehensive income (loss), net of tax (Note 9)
Foreign currency translation adjustments																			(62	)							(62	)
Net unrealized gains and losses on securities																			(1,778	)							(1,778	)
Net gains and losses on derivative instruments																			814								814
Pension liability adjustments																			32,978								32,978
Total comprehensive income																											520,284
Repurchase of treasury stock, net							3																(450,314	)			(450,311	)
Balance at December 31, 2007			174,698				402,991				46,017				2,720,146				34,670				(456,186	)			2,922,336

CANON INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007

		Millions of yen
		Six months ended								Year ended
		June 30								December 31
		2008				2007				2007
Cash flows from operating activities:
Net income			214,485				255,183				488,332
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			163,690				143,244				341,694
Loss on disposal of property, plant and equipment			4,452				3,571				9,985
Deferred income taxes			2,057				(8,738	)			(35,021	)
(Increase) decrease in trade receivables			75,641				65,822				(10,722	)
Increase in inventories			(55,714	)			(28,859	)			(26,643	)
Increase in trade payables			19,430				7,919				21,136
Increase (decrease) in accrued income taxes			(43,889	)			(428	)			14,988
Increase (decrease) in accrued expenses			(33,727	)			(185	)			43,035
Decrease in accrued (prepaid) pension and severance cost			(4,811	)			(5,674	)			(15,387	)
Other, net			(6,016	)			8,469				7,872
Net cash provided by operating activities			335,598				440,324				839,269
Cash flows from investing activities:
Purchases of fixed assets			(236,641	)			(236,321	)			(474,285	)
Proceeds from sale of fixed assets			4,192				4,545				9,635
Purchases of available-for-sale securities			(7,014	)			(1,840	)			(2,281	)
Proceeds from sale and maturity of available-for-sale securities			4,062				6,787				8,614
Proceeds from maturity of held-to-maturity securities			—				10,000				10,000
(Increase) decrease in time deposits			(204	)			20,479				31,681
Acquisitions of subsidiaries, net of cash acquired			(209	)			(12,520	)			(15,675	)
Purchases of other investments			(44,509	)			(2,137	)			(2,432	)
Other, net			(9,218	)			1,654				2,258
Net cash used in investing activities			(289,541	)			(209,353	)			(432,485	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			5,866				1,541				2,635
Repayments of long-term debt			(3,646	)			(11,883	)			(13,046	)
Decrease in short-term loans			(2,670	)			(334	)			(358	)
Dividends paid			(75,663	)			(66,582	)			(131,612	)
Repurchases of treasury stock, net			(33	)			(200,221	)			(450,311	)
Other, net			(8,824	)			(2,291	)			(11,691	)
Net cash used in financing activities			(84,970	)			(279,770	)			(604,383	)
Effect of exchange rate changes on cash and cash equivalents			(39,155	)			1,901				(13,564	)
Net decrease in cash and cash equivalents			(78,068	)			(46,898	)			(211,163	)
Cash and cash equivalents at beginning of period			944,463				1,155,626				1,155,626
Cash and cash equivalents at end of period			866,395				1,108,728				944,463
Supplemental disclosure for cash flow information
Cash paid during the period for:
Interest			1,943				834				1,476
Income taxes			160,849				161,434				273,888

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies

	(a)		Description of Business
			Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such fields as office imaging products, computer peripherals, business information products, cameras, and optical and other products. Office imaging products consist mainly of network multifunction devices and copying machines. Computer peripherals consist mainly of laser beam and inkjet printers. Business information products consist mainly of computer information systems, document scanners and calculators. Cameras consist mainly of digital single-lens reflex (“SLR”) cameras, digital compact cameras, interchangeable lenses and digital video camcorders. Optical and other products include semiconductor production equipment, mirror projection mask aligners for liquid crystal display (“LCD”) panels, broadcasting equipment, medical equipment and large format printers. Canon’s consolidated net sales for the six months ended June 30, 2008 were distributed as follows: office imaging products 29%, computer peripherals 35%, business information products 2%, cameras 25%, and optical and other products 9%.
			Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographical area. Approximately 76% of consolidated net sales for the six months ended June 30, 2008 were generated outside Japan, with 27% in the Americas, 34% in Europe, and 15% in other areas.
			Canon sells laser beam printers on an OEM basis to Hewlett-Packard Company; such sales constituted approximately 23% of consolidated net sales for the six months ended June 30, 2008.
			Canon’s manufacturing operations are conducted primarily at 24 plants in Japan and 17 overseas plants which are located in countries or regions such as the United States, Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam.
	(b)		Basis of Presentation
			The Company issued convertible debentures in the United States in May 1969 and established a program in which its American Depositary Receipts (ADRs) were traded in the U.S. over-the-counter market. Since then, under the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934, the Company has prepared the consolidated financial statements in accordance with U.S. generally accepted accounting principles and filed them with the U.S. Securities and Exchange Commission on Form 20-F. The Company’s ADRs were listed on the NYSE in September 2000 after being quoted on NASDAQ from February 1972 to September 2000.
			Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. In the accompanying consolidated financial statements, the segment information is disclosed in conformity with financial accounting standards of Japan, but not with U.S. generally accepted accounting principles.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(b)		Basis of Presentation (continued)
			The number of the consolidated subsidiaries and the affiliated companies that were accounted for on the equity basis as of June 30, 2008 and 2007, and December 31, 2007 are summarized as follows:

			June 30								December 31
			2008				2007				2007
	Consolidated subsidiaries			240				230				239
	Affiliated companies			18				19				15
	Total			258				249				254

	(c)		Principles of Consolidation
			The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its consolidated subsidiaries are the primary beneficiaries under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities.” All significant intercompany balances and transactions have been eliminated.
	(d)		Use of Estimates
			The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant estimates and assumptions are reflected in valuation and disclosure of revenue recognition, allowance for doubtful receivables, valuation of inventories, environmental liabilities, valuation of deferred tax assets, uncertain tax positions and employee retirement and severance benefit plans. Actual results could differ materially from those estimates.
	(e)		Cash Equivalents
			All highly liquid investments acquired with an original maturity of three months or less are considered to be cash equivalents.
	(f)		Translation of Foreign Currencies
			Assets and liabilities of the Company’s subsidiaries located outside Japan with functional currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of financial statements are excluded from earnings and are reported in other comprehensive income (loss).
			Gains and losses resulting from foreign currency transactions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions). Foreign currency exchange losses, net were ¥5,114 million, ¥10,520 million and ¥31,943 million for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007, respectively.
	(g)		Investments
			Investments consist primarily of time deposits, debt and marketable equity securities, investments in affiliated companies and non-marketable equity securities. Canon classifies investments with original maturities of less than one year as short-term investments.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(g)		Investments (continued)
			Canon classifies investments in debt and marketable equity securities as available-for-sale or held-to-maturity securities. Canon does not hold any trading securities, which are bought and held primarily for the purpose of sale in the near term.
			Available-for-sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, are reported as a separate component of other comprehensive income (loss) until realized. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale and held-to-maturity securities are regularly reviewed for other-than-temporary declines in carrying value based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and Canon’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. When such a decline exists, Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices, projected discounted cash flows or other valuation techniques as appropriate.
			Realized gains and losses are determined on the average cost method and reflected in earnings.
			Investments in affiliated companies over which Canon has the ability to exercise significant influence, but does not hold a controlling financial interest, are accounted for by the equity method.
			Non-marketable equity securities in companies over which Canon does not have the ability to exercise significant influence are stated at cost and reviewed periodically for impairment.
	(h)		Allowance for Doubtful Receivables
			Allowance for doubtful trade and finance receivables is maintained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions, significant one-time events, and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectible and charged against the allowance.
	(i)		Inventories
			Inventories are stated at the lower of cost or market value. Cost is determined principally by the average method for domestic inventories and the first-in, first-out method for overseas inventories.
	(j)		Impairment of Long-Lived Assets
			Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(k)		Property, Plant and Equipment and Accounting change
			Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain assets which are depreciated by the straight-line method over the estimated useful lives of the assets.
			Effective April 1, 2007, the Company and its domestic subsidiaries elected to change the declining-balance method of depreciating machinery and equipment from the fixed-percentage-on-declining base application to the 250% declining-balance application. Estimated residual values were also reduced in conjunction with this change. The Company and its domestic subsidiaries believe that the 250% declining-balance application is preferable because it provides a better matching of the allocation of cost of machinery and equipment with associated revenues in light of increasingly short product life cycles.
			The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years for machinery and equipment.
			Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual value of the assets by the straight-line method over the period ranging from 2 years to 5 years.
	(l)		Goodwill and Other Intangible Assets
			Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Intangible assets with finite useful lives, consisting primarily of software and license fees, are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. These costs consist primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing internal use software are capitalized at the application development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility.
	(m)		Environmental Liabilities
			Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.
	(n)		Income Taxes
			Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(n)		Income Taxes (continued)
			Canon recognizes the financial statement effects of tax positions when they are more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Interest and penalties accrued related to unrecognized tax benefits are included in income taxes in the consolidated statements of income.
	(o)		Issuance of Stock by Subsidiaries and Equity Investees
			The change in the Company’s proportionate share of a subsidiary’s or equity investee’s equity resulting from the issuance of stock by the subsidiary or equity investee is accounted for as an equity transaction.
	(p)		Stock Based Compensation
			Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a straight-line basis over the requisite service period.
	(q)		Net Income per Share
			Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during each year. Diluted net income per share includes the effect from potential issuance of common stock based on the assumptions that all convertible debentures were converted into common stock and all stock options were exercised.
	(r)		Revenue Recognition
			Canon generates revenue principally through the sale of consumer products, equipment, supplies, and related services under separate contractual arrangements. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable.
			Revenue from sales of consumer products including office imaging products, computer peripherals, business information products and cameras is recognized upon shipment or delivery, depending upon when title and risk of loss transfer to the customer.
			Revenue from sales of optical equipment, such as steppers and aligners that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and demonstrated by Canon. Service revenue is derived primarily from separately priced product maintenance contracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided.
			Canon also offers separately priced product maintenance contracts for most office imaging products, for which the customer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(r)		Revenue Recognition (continued)
			Revenue from the sale of equipment under sales-type leases is recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated considering the relative fair value of the lease and non-lease deliverables based upon the estimated relative fair values of each element. Lease deliverables generally include equipment, financing and executory costs, while non-lease deliverables generally consist of product maintenance contracts and supplies.
			For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting as prescribed in the Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting.
			Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions in sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced.
			Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure.
			Taxes collected from customers and remitted to governmental authorities are excluded from revenues in the consolidated statements of income.
	(s)		Research and Development Costs
			Research and development costs are expensed as incurred.
	(t)		Advertising Costs
			Advertising costs are expensed as incurred. Advertising expenses were ¥58,476 million, ¥60,096 million and ¥132,429 million for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007, respectively.
	(u)		Shipping and Handling Costs
			Shipping and handling costs totaled ¥30,966 million, ¥31,060 million and ¥63,708 million for the six months ended June 30, 2008 and 2007, and year ended December 31, 2007, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(v)		Derivative Financial Instruments
			All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other current liabilities in the consolidated balance sheets. On the date the derivative contract is entered into, Canon designates the derivatives as either a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a hedge of a forecasted transaction or the variability in cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Canon formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Canon also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively.
			Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with the loss or gain on the hedged asset or liability or unrecognized firm commitment of the hedged item that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash flows of the hedged item. Gains and losses from hedging ineffectiveness are included in other income (deductions). Gains and losses excluded from the assessment of hedge effectiveness are also included in other income (deductions).
			Canon also uses certain derivative financial instruments which are not designated as hedges. Canon records these derivative financial instruments in the consolidated balance sheets at fair value. The changes in fair values are immediately recorded in earnings.
			Canon classifies cash flows from derivatives as cash flows from operating activities in the consolidated statements of cash flows.
	(w)		Guarantees
			Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees.
	(x)		New Accounting Standards
			In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement clarifies how to measure fair value as permitted or required under other accounting pronouncements, but does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and was adopted by Canon in the first quarter beginning January 1, 2008. In February 2008, the FASB issued Staff Positions No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which partially delay the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities and remove certain leasing transactions from its scope. The adoption of SFAS 157 did not have a material impact on Canon’s consolidated result of operations and financial condition. The adoption of SFAS 157 for Canon’s nonfinancial assets and liabilities as of January 1, 2009 is not expected to have a material impact on Canon’s consolidated results of operations and financial condition.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(x)		New Accounting Standards (continued)
			In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and was adopted by Canon in the first quarter beginning January 1, 2008. The adoption of SFAS 159 did not have an effect on Canon’s consolidated results of operations and financial condition, as Canon did not elect this fair value option.
			In June 2007, the FASB ratified the consensus in EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. EITF 07-3 is effective, on a prospective basis, for fiscal years beginning after December 15, 2007 and was required to be adopted by Canon in the first quarter beginning January 1, 2008. The adoption of EITF 07-3 did not have a material impact on Canon’s consolidated results of operations and financial condition.
			In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations ” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in a business combination. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008 and is required to be adopted by Canon for any business combination with an acquisition date on or after January 1, 2009. Canon is currently evaluating the potential effect, if any, that the adoption of SFAS 141R will have on Canon’s consolidated results of operations and financial condition.
			In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, except for the presentation and disclosure requirements, which will be applied retrospectively for all periods presented, and is required to be adopted by Canon in the first quarter beginning January 1, 2009. Canon is currently evaluating the potential effect that the adoption of SFAS 160 will have on its consolidated results of operations and financial condition.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(1)

Basis of Presentation and Significant Accounting Policies (continued)

	(x)		New Accounting Standards (continued)
			In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS161 amends and expands the current disclosures required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 requires entities to provide greater transparency about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and its interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, result of operations and cash flows. SFAS 161 does not change the existing standards relative to recognition and measurement of derivative instruments and hedging activities. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008 and is required to be adopted by Canon in the first quarter beginning January 1, 2009.
	(y)		Reclassification
			Time deposits and marketable securities, which had been previously disclosed separately in the consolidated balance sheets, have been reclassified to short-term investments to conform to the current year presentation.

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(2)		Investments
		The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities and held-to-maturity securities by major security type at June 30, 2008 and 2007, and December 31, 2007 were as follows:

			Millions of yen
							Gross				Gross
							Unrealized				Unrealized
							Holding				Holding
			Cost				Gains				Losses				Fair Value
	June 30, 2008:
	Current:
	Available-for-sale:
	Government bonds			2				—				—				2
	Fund trusts			207				163				—				370
	Held-to-maturity:
	Corporate debt securities			10,017				—				—				10,017
				10,226				163				—				10,389
	Noncurrent:
	Available-for-sale:
	Government bonds			498				—				25				473
	Corporate debt securities			2,890				29				7				2,912
	Fund trusts			1,364				631				5				1,990
	Equity securities			17,674				7,460				234				24,900
				22,426				8,120				271				30,275