P&G 2008 Annual Report

Designed to Innovate 2008 Annual Report

Contents Letter to Shareholders Defining Innovation Investing in Innovation Managing Innovation Delivering Innovation Leading Innovation Financial Contents Corporate Officers Board of Directors Shareholder Information 11-Year Financial Summary P&G at a Glance

2 10 14 18 22 26 35 77 78 79 80 82

Financial Highlights Financial Summary (Unaudited) Amounts in millions, except per share amounts

2008

Net Sales  Operating Income  Net Earnings  Net Earnings Margin  Basic Net Earnings Per Common Share  Diluted Net Earnings Per Common Share  Dividends Per Common Share 

$83,503  17,083  12,075  14.5%  $   3.86  3.64  1.45 

 007 2 $76,476 15,450 10,340 13.5% $   3.22 3.04 1.28

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Gross margin was 52.0% in 2007, an increase of 60 basis points versus the prior year. Higher commodity and energy costs had a negative impact of approximately 60 basis points on gross margin. These were more than offset by scale leverage from organic volume growth, higher pricing and cost savings projects. The additional three months of the Gillette business in 2007, which has a higher gross margin than the base P&G business, drove additional gross margin improvement of approximately 30 basis points. Comparisons as a percentage of net sales; Years ended June 30

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The Procter & Gamble Company

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2008

Gross margin  Selling, general and administrative  Operating margin  Earnings before income taxes  Net earnings 

51.3%  30.8%  20.5%  19.3%  14.5% 

Basis Point Change

(70) (100) 30 10 100

2007

52.0% 31.8% 20.2% 19.2% 13.5%

Basis Point Change

60 (20) 80 100 80

2006

51.4% 32.0% 19.4% 18.2% 12.7%

44

Management’s Discussion and Analysis

The Procter & Gamble Company

Non-Operating Items Non-operating items primarily include interest expense, divestiture gains and interest and investment income. Interest expense increased 13% to $1.5 billion in 2008 driven by a higher interest rate on our long-term borrowings and a higher debt level to fund the Company’s previously announced share repurchase program. Under this share repurchase program, which began in July 2007, we plan to repurchase between $24 – $30 billion of P&G stock over a three-year period. In 2007, interest expense increased 17% to $1.3 billion due to the financing costs associated with the debt issued to fund the share repurchase program executed in conjunction with the acquisition of Gillette in October 2005. The repurchase program associated with Gillette was completed in July 2006. Other non-operating income in 2008 decreased $102 million versus the prior year period primarily due to lower current period interest income. Interest income declined in 2008 primarily due to lower interest rates and cash balances. Divestiture gains on the sale of minor brands in 2008 were in line with previous year levels. Other non-operating income increased $281 million in 2007 to $564 million primarily due to higher divestiture gains in 2007. Our tax rate declined in 2008 from 29.7% to 24.9%. Approximately 3 percentage points of this decline was due to discrete adjustments to reserves for previously existing uncertain tax positions in the U.S. and other countries. The balance of the decline was primarily driven by a more favorable geographic mix of earnings and a reduction in the German statutory tax rate, which reduced our deferred tax liabilities related to acquired intangible assets. Our effective tax rate in 2007 was down 30 basis points versus 2006 primarily due to a more favorable country mix impact in 2007, partially offset by higher levels of reserve releases in 2006. Net Earnings Net earnings increased 17% to $12.1 billion in 2008 behind sales growth and a 100-basis point improvement in net earnings margin. Net earnings margin increased due to lower SG&A as a percentage of net sales and a lower tax rate, which more than offset lower gross margin. Net earnings in 2007 increased 19% to $10.3 billion behind sales growth, including the additional three months of Gillette results and earnings margin expansion. Net earnings margin expanded 80 basis points primarily behind gross margin improvement. Diluted net earnings per share in 2008 were up 20% versus the prior year to $3.64 per share. Diluted net earnings per share growth exceeded net earnings growth due to share repurchase activity. We repurchased $10 billion of treasury shares in 2008 under a previously announced share buyback program that started in July 2007. Gillette was modestly accretive to our earnings per share results in 2008, compared to dilution of approximately $0.10 – $0.12 per share in 2007. The elimination of Gillette dilution on our earnings per share drove approximately 4 percentage points of earnings per share growth in 2008. Diluted net earnings per share in 2007 increased 15% to $3.04 primarily behind earnings growth, partially offset by the impact of a net increase in the weighted average shares outstanding in 2007 versus

2006 resulting from the incremental shares issued in conjunction with the Gillette acquisition on October 1, 2005. 9>AJI:9C:I:6GC>C