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

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

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

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

In recent years, Canon has experienced a worldwide increase in the counterfeiting of its products. Such counterfeitCanon products has increased worldwide. Counterfeit products may diminish Canon’s brand image, particularly if purchasers of such products are unaware of their counterfeit status andmistakenly attribute the counterfeit products’ poor product quality to Canon. Canon has been taking measures to halt the spread of counterfeit products. However, there can be no assurance that such measures will be successful, and the continued productionmanufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

Per unit production costs are highest when a new product is introduced, and if such new products are not successful or if Canon fails to achieve cost reductions over time, Canon’s gross profits may be adversely affected.

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

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

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

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

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

A substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors.distributors, particularly in Europe and the United States. Canon’s product sales to these distributors constitute a

significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing power and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These and other changes in Canon’s sales environment could adversely affect Canon’s results of operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies, andas well as its margins have been and may continue to be adversely affected due toby the strongstrength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be generally favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency business transactions and the yen value of Canon’s foreign currency-denominated equity investments have fluctuated and may continue to fluctuate. These fluctuations may have unpredictable effects on Canon’s consolidated financial statements. Moreover, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign affiliates, which are denominated in various foreign currencies. Furthermore, the values of a number of foreign currencies, such as the U.S. dollar and the euro, used by Canon for its business has become have weakened

significantly weakermore than expected against the yen, in the foreign exchange market, which has lednegatively affected and may further leadcontinue to negatively affectingaffect Canon’s operating results and financial position. Although Canon has been strivingstrives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s operating results and financial position could continue to be adversely affected if the current strong yen environment persists. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

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

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

In addition, the increasingly higherincreasing levels of precision required of semiconductor productionlithography equipment such as steppers and mask alignersLCD lithography equipment and the resulting increase in the value and the size of thissuch equipment in recent years have resulted in a concurrent increase in the need for sensitive handling and transportation of these products. Due toBecause of their precise nature, even a minor shock to these products during the handling and transportation process could irreparablycan potentially cause irreparable damage the entire product.to such products. If unforeseen accidents during the handling and transportation process render a significant portion of Canon’s high-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and the trust of its customers.

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

Furthermore, earthquakes or volcanic eruptions may cause a breakdown of operations.

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

In particular outlays required to energy conservation in particular, Canon’s operating results may be adversely affected by future environmental legislation or regulations applied to energy conservation systems and international emissions trading regime,address climate change could vary widely depending on the results in 2013 and onwardscircumstances of the intergovernmental dialogue on global climate change.

In other cases, such as the Directive establishing“Directive Establishing a frameworkFramework for the settingSetting of EcoDesign requirementsRequirements for Energy-related Products across the European Union,Union”, detailed implementation standards responsive to environmental requirements have not yet been determined.remain under review. Canon intendsstrives to comply with such standards beforehand if and whento the standards are foreseen.extent possible in advance of official adoption. If, however, Canon’s current measures are deemed insufficient to satisfy such standards when released,adopted, Canon may be required to take further action and incur additional costs to comply with these regulations.

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

Environmental clean-upcleanup and remediation costs relating to Canon’s properties and associated litigation could decrease Canon’s net cash flow, adversely affect its operating results of operations and impair its financial condition.

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

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

Canon may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.

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

Canon faces the risks that:

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

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

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

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

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

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

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

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

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

Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating results and general financial position may be affected by price fluctuations in the stock and bond markets. The current volatility in financial markets and overall economic uncertainty increase the risk that the actual amounts realized

in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease due tobecause of conditions in for example, stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

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

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

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

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

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

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

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

In fiscal 2009, 2008,2011, 2010, and 2007,2009, Canon’s increases in property, plant and equipment were ¥216,128¥226,869 million, ¥361,988¥158,976 million and ¥428,549¥216,128 million, respectively. In fiscal 2009,2011, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology relatedproduction-technology-related infrastructure. In addition, Canon has been continually investing in tools and dies for business machines, in which the amount invested is generally the same each year.

For fiscal 2010,2012, Canon projects itsan increase in property, plant and equipment will beof approximately ¥220,000¥300,000 million, mainly in Japan. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.

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

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

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

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