8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of The Securities Exchange Act Of 1934

Date of Report (Date of earliest event reported) October 31, 2007

THE PROCTER & GAMBLE COMPANY

(Exact name of registrant as specified in its charter)

Ohio	1-434	31-0411980
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

One Procter & Gamble Plaza, Cincinnati, Ohio	45202
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (513) 983-1100

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	ITEM 8.01 OTHER EVENTS
SIGNATURE
EXHIBIT INDEX
EX-99.1
EX-99.2
EX-99.3
EX-99.4

ITEM 8.01 OTHER EVENTS

As disclosed in its most recent Form 10-K for the year ended June 30, 2007, the Procter & Gamble Company (the “Company”) announced changes to its segment reporting structure that were effective July 1, 2007. Such changes are discussed below in “Fiscal Year 2008 Changes to Global Business Unit (GBU) Structure.” This Form 8-K provides revised (1) Management’s Discussion and Analysis (MD&A) and (2) Consolidated Financial Statements and accompanying footnotes that reflect the impact of this new reporting structure.

The change in the reporting structure, as reflected in the information included in this Form 8-K, only affects the manner in which segment results were previously reported. It in no way revises or restates the Company’s Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Shareholders’ Equity or Consolidated Statements of Cash Flows for any period. The only changes to the information disclosed in the Company’s original Form 10-K filing are to the segment discussion within the MD&A and to Footnotes 2, 3 and 12, as these were the only sections impacted by the change in the Company’s segment reporting structure.

Fiscal Year 2008 Changes to Global Business Unit (GBU) Structure

In May 2007, the Company announced a number of changes to our organization structure and certain of our key leadership positions that became effective on July 1, 2007. These resulted in changes to our GBU and segment structure. Specifically, our new structure is comprised of three GBUs with a total of six reportable segments:

Global Business Unit (GBU)	Reportable Segment
Beauty	•   Beauty
	•   Grooming
Health and Well-Being	•   Health Care
	•   Snacks, Coffee and Pet Care
Household Care	•   Fabric Care and Home Care
	•   Baby Care and Family Care

Prior to July 1, 2007, the Company consisted of three Global Business Units: Beauty and Health; Household Care; and Gillette GBU. The businesses that previously comprised the Gillette GBU are now included within the Beauty and Household Care GBUs. As a result of these moves, the Duracell and Braun business no longer comprise a separate reportable segment. The Braun business has been combined and is being managed with the Blades and Razors business to form the Grooming reportable segment within the Beauty GBU. The Grooming reportable segment also includes all face and shave prep products, which were previously reported within the Beauty reportable segment. The Duracell business has been moved to our Household Care GBU and is now be reported as part of our Fabric Care and Home Care reportable segment. Finally, our feminine care business, which previously was part of our Beauty GBU and reportable segment, is now being managed within our Health and Well-Being GBU and is now reported as part of the Health Care reportable segment.

These changes were effective as of July 1, 2007. All financial statements, beginning in the quarter ended September 30, 2007, reflect the new segment reporting structure. This change in segment reporting was reflected on a retrospective basis, with prior years also revised to reflect the new segment reporting structure.

The Company is issuing this Form 8-K in order to provide revised financial information that is on a basis consistent with the Company’s new segment reporting structure.

Exhibit 99-1 provides a revised Management’s Discussion and Analysis (MD&A); Exhibit 99-2 provides a revised Consolidated Financial Statements and accompanying footnotes; Exhibit 99-3 provides the updated report of the independent registered public accountant; and Exhibit 99-4 provides the Consent of Deloitte & Touche, LLP.

SIGNATURE

     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 hereunto duly authorized.

THE PROCTER & GAMBLE COMPANY
BY:	/S/ ERIC J. WUNSCH
	Eric J. Wunsch, Assistant Secretary
	Associate General Counsel  October 31, 2007

EXHIBIT INDEX

Exhibit No.
99-1	Revised Management’s Discussion and Analysis
99-2	Revised Consolidated Financial Statements and Accompanying Footnotes
99-3	Updated Report of the Independent Registered Public Accountant
99-4	Consent of Deloitte & Touche LLP

EX-99.1

Exhibit 99-1: Revised Management’s Discussion and Analysis

The purpose of this discussion is to provide an understanding of P&G’s financial results and condition by focusing on changes in certain key measures from year to year. Management’s Discussion and Analysis (MD&A) is organized in the following sections:

• Overview

• Summary of 2007 Results

• Forward-Looking Statements

• Results of Operations

• Segment Results

• Financial Condition

• Significant Accounting Policies and Estimates

• Other Information

Throughout MD&A, we refer to measures used by management to evaluate performance including unit volume growth, net outside sales and after-tax profit. We also refer to organic sales growth, free cash flow and free cash flow productivity. These financial measures are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP). The explanation of these measures at the end of MD&A provides more details on the use and the derivation of these measures. Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share information. References to market share and market consumption in MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates.

On October 1, 2005, we completed the acquisition of The Gillette Company for $53.4 billion. Our Consolidated Financial Statements for 2006 and the related discussion of the total Company results within MD&A include the results of the Gillette business for the nine-month period from October 1, 2005 (the acquisition date) through June 30, 2006. This acquisition resulted in the creation of a new Grooming reportable segment, primarily consisting of Gillette’s Blades and Razors and Braun businesses. Management’s discussion of the fiscal 2006 results of the Grooming segment relate to the nine-month post-acquisition period from October 1, 2005, to June 30, 2006. Results of Gillette’s Personal Care, Oral Care and Duracell businesses were primarily subsumed within the Beauty, Health Care and the Fabric Care and Home Care reportable segments, respectively.

OVERVIEW

P&G’s business is focused on providing branded consumer goods products. Our goal is to provide products of superior quality and value to improve the lives of the world’s consumers. We believe this will result in leadership sales, profits and value creation, allowing employees, shareholders and the communities in which we operate to prosper.

Our products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores and drug stores. We continue to expand our presence in “high frequency stores,” the neighborhood stores which serve many consumers in developing markets. We have on-the-ground operations in over 80 countries.

Our market environment is highly competitive, with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers’ private-label brands. Additionally, many of the product segments in which we compete are differentiated by price (referred to as premium, mid-tier and value-tier products). Generally speaking, we compete with premium and mid-tier products and are well positioned in the industry segments and markets in which we operate — often holding a leadership or significant share position.

Organizational Structure

Our organizational structure is comprised of three Global Business Units (GBUs) and a Global Operations group.

The Global Operations group consists of the Market Development Organization (MDO) and Global Business Services (GBS).

Global Business Units

The following GBU and reportable segment structure is the result of changes to our organizational structure that were effective July 1, 2007. This MD&A reflects this current GBU and reportable segment structure as if it had been in place for all periods presented.

Our three GBUs are Beauty, Health and Well-Being, and Household Care. The primary responsibility of the GBUs is to develop the overall strategy for our brands. They identify common consumer needs, develop new product innovations and build our brands through effective commercial innovations, marketing and sales.

Under U.S. GAAP, the business units comprising the GBUs are aggregated into six reportable segments: Beauty; Grooming; Health Care; Snacks, Coffee and Pet Care; Fabric Care and Home Care; and Baby Care and Family Care. The following provides additional detail on the reportable segments and brand composition of each of our three GBUs:

		% of
GBU	Reportable Segment	Net Sales*			% of Net Earnings*			Key Products	Billion Dollar Brands
Beauty	Beauty		23	%		23	%	Cosmetics, Deodorants, Fine Fragrances, Hair Care, Personal Cleansing, Skin Care	Head & Shoulders, Olay, Pantene, Wella
	Grooming		10	%		12	%	Blades and Razors, Electric Razors, Face & Shave Preparation Products, Small Home Appliances	Braun, Gillette, Mach 3
Health and Well-Being	Health Care		17	%		20	%	Feminine Care, Oral Care, Personal Health Care, Pharmaceuticals	Actonel, Always, Crest, Oral-B
	Snacks, Coffee and Pet Care		6	%		4	%	Coffee, Pet Food, Snacks	Folgers, Iams, Pringles
Household Care	Fabric Care and Home Care		28	%		28	%	Fabric Care, Air Care, Batteries, Dish Care, Surface Care	Ariel, Dawn, Downy, Duracell, Gain, Tide
	Baby Care and Family Care		16	%		13	%	Diapers, Baby Wipes, Bath Tissue, Facial Tissue, Paper Towels	Bounty, Charmin, Pampers

* Percent of net sales and net earnings for the year ended June 30, 2007 (excluding results held in Corporate).

Beauty

Beauty: We are a global market leader in beauty and compete in markets which comprise approximately $220 billion in global retail sales. Most of the beauty markets in which we compete are highly fragmented with a large number of global and local competitors. We are the global market leader in hair care with approximately one-fourth of the global market share. In skin care, we compete primarily with the Olay brand, which is the top retail brand in the world with roughly 10% share of the global retail skin care market. We are also the global market leader in prestige fragrances, primarily behind the Gucci, Boss and Dolce & Gabbana fragrance brands.

Grooming: This segment consists of manual and electric shavers as well as face and shave preparation products, such as shaving cream. We hold leadership market share in the manual blades and razors market on a global basis and in almost all of the geographies in which we compete. Our global manual blades and razors market share is over 70%, primarily behind Mach3, Fusion, Venus and the Gillette franchise. Our electric razors and small home appliances are sold primarily under the Braun brand in a number of markets around the world, where we compete against both global and regional competitors.

Health and Well-Being

Health Care: We compete in oral care, feminine care, pharmaceuticals and personal health. In oral care, there are several global competitors in the market and we have the number two share position. We are the global market leader in the feminine care category with over one-third of the global market share. In pharmaceuticals and personal health, we have approximately one-third of the global bisphosphonates market for the treatment of osteoporosis under the Actonel brand. We are the market leader in nonprescription heartburn medications and in respiratory treatments behind Prilosec OTC and Vicks, respectively.

Snacks, Coffee and Pet Care: In snacks, we compete against both global and local competitors and have a global market share of over 10% in the potato chips market behind our Pringles brand. Our coffee business

competes almost solely in North America, where we hold a leadership position with approximately one-third of the U.S. market, primarily behind our Folgers brand. In pet care, we compete in several markets around the globe in the premium pet care segment, behind the Iams and Eukanuba brands. The vast majority of our pet care business is in North America, where we have about a 12% share of the market.

Household Care

Fabric Care and Home Care: This segment is comprised of a variety of fabric care products including laundry products and fabric conditioners; home care products including dish care, surface cleaners and air fresheners; and batteries. In fabric care, we generally have the number one or number two share position in the markets in which we compete and are the global market leader, with over one-third of the global market share. Our global home care market share is over 20% across the categories in which we compete. In batteries, we compete primarily behind the Duracell brand and have approximately 45% of the global alkaline battery market share.

Baby Care and Family Care: In baby care, we compete primarily in diapers, training pants and baby wipes, with over one-third of the global market share. We are the number one or number two baby care competitor in most of the key markets in which we compete, primarily behind Pampers, the Company’s largest brand, with annual net sales of approximately $7 billion. Our family care business is predominantly a North American business comprised primarily of the Bounty paper towel and Charmin toilet tissue brands, with U.S. market shares of over 40% and over 25%, respectively.

Global Operations

Market Development Organization

Our MDO is responsible for developing go-to-market plans at the local level. The MDO includes dedicated retail customer, trade channel and country-specific teams. It is organized along seven geographic regions: North America, Western Europe, Northeast Asia, Central & Eastern Europe/Middle East/Africa, Latin America, ASEAN/Australia/India and Greater China. Throughout MD&A, we reference business results in developing markets, which we define as the aggregate of Central & Eastern Europe/Middle East/Africa, Latin America, ASEAN/Australia/India and Greater China, and developed markets, which are comprised of North America, Western Europe and Northeast Asia.

Global Business Services

The GBS organization is responsible for providing world-class solutions at a low cost and with minimal capital investment. GBS provides technology, processes and standard data tools to enable the GBUs and the MDO to better understand the business and better serve customers and consumers.

Strategic Focus

P&G is focused on strategies that we believe are right for the long-term health of the Company and will increase returns for our shareholders. The Company’s annual financial targets through 2010 are:

• Organic sales growth of 4% to 6%. This is comprised of:

• 3% to 5% pre-Gillette organic sales target, plus

• 1% of growth acceleration through 2010 behind revenue synergies associated with the Gillette acquisition.

• Diluted net earnings per share (EPS) growth of 10% or better, excluding the net impact of Gillette dilution.

• Free cash flow productivity of 90% or greater (defined as the ratio of operating cash flow less capital expenditures to net earnings).

In order to achieve these targets, we focus on our core strengths of consumer understanding, branding, innovation, go-to-market capability and global scale and scope against the following growth areas:

• Grow our leading brands in our biggest markets and with our winning customers.

• Shift our portfolio mix to faster-growing businesses with higher gross margins that are less asset-intensive.

• Grow disproportionately in developing markets and with lower-income consumers.

Sustainability

To sustain consistent and reliable sales and earnings growth in line with our financial targets, we have identified four key enablers:

• Building a diversified and balanced portfolio consisting of foundation businesses and higher growth businesses. Foundation businesses include many of our established product categories, such as baby care and family care. These businesses provide a base for steady growth and strong operating cash flows. We are focused on building leadership market share in these categories through innovative products, offering our brands in more parts of the world and tailoring our products to meet the needs of more consumers (including lower-income consumers). Our foundation businesses are complemented with our portfolio of higher growth businesses, such as many of our beauty and health care businesses. These higher growth businesses generally have higher gross margins and lower capital requirements than the balance of the Company’s portfolio and tend to have faster market growth rates than our foundation businesses. Over the past several years, we have increased the size of our higher growth business portfolio by growing base beauty and health care brands and through acquisitions, including Clairol in 2001, Wella in 2003 and Gillette in 2005.

• Investing in innovation and core P&G capabilities and strengths to enable us to reach more of the world’s consumers with quality, affordable products. This includes expanding our presence in markets and reaching more consumers where we are underrepresented, including lower-income and value-conscious consumers.

• Leveraging the Company’s organizational structure to drive clear focus, accountability and improved go-to-market capability. We have an organizational structure that works together to leverage our knowledge and scale at the global level with a deep understanding of the consumer and customer at the local level.

• The GBU organizations leverage their consumer understanding to develop the overall strategy for our brands. They identify common consumer needs, develop new products and build our brands through effective marketing innovations. The GBU is focused on winning the “second moment of truth” — when the consumer uses the product and evaluates how well the product meets his or her expectations.

• The MDO develops go-to-market plans at the local level, leveraging their understanding of the local consumers and customers. The MDO is focused on winning the “first moment of truth” — when a consumer stands in front of the shelf and chooses a product from among many competitive offerings.

• Global Business Services operates as the “back office” for the GBUs and the MDO, providing cost-effective world-class technology, processes and standard data tools to better understand the business and better serve consumers and customers. GBS personnel, or highly efficient and effective third-party partners, provide these services.

• Focusing relentlessly to improve costs and generate cash. Each organization is evaluated on its ability to support the Company’s financial goals and increase total shareholder return. This includes an evaluation of net sales growth, earnings growth, profit margin expansion and cash productivity. Our organizations are evaluated on their ability to generate cash, for example, by increasing capacity utilization and meeting capital spending targets or by reducing working capital required to run the business.

SUMMARY OF 2007 RESULTS

For the fiscal year ended June 30, 2007, we delivered our sixth consecutive year of sales growth and free cash flow productivity at or above our stated targets.

• Net sales increased 12% to $76.5 billion.

• Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, increased 5%, in line with our post-Gillette organic sales growth target range of 4% to 6%.

• Every reportable segment delivered year-on-year organic sales growth.

• Diluted net earnings per share increased 15% to $3.04.

• Lower Gillette dilution in 2007 contributed approximately 4% to EPS growth.

• Cash flow from operating activities was $13.4 billion.

• Free cash flow productivity was 101%, ahead of our 90% target.

FORWARD-LOOKING STATEMENTS

We discuss expectations regarding future performance, events and outcomes, such as our business outlook and objectives, in annual and quarterly reports, press releases and other written and oral communications. All such statements, except for historical and present factual information, are “forward-looking statements,” and are based on financial data and our business plans available only as of the time the statements are made, which may become out-of-date or incomplete. We assume no obligation to update any forward-looking statements as a result of new information, future events or other factors. Forward-looking statements are inherently uncertain, and investors must recognize that events could be significantly different from our expectations.

Ability to Achieve Business Plans. We are a consumer products company and rely on continued demand for our brands and products. To achieve business goals, we must develop and sell products that appeal to consumers and retail trade customers. Our continued success is dependent on leading-edge innovation with respect to both products and operations and on the continued positive reputations of our brands. This means we must be able to obtain patents and respond to technological advances and patents granted to competition. Our success is also dependent on effective sales, advertising and marketing programs in an increasingly fragmented media environment. Our ability to innovate and execute in these areas will determine the extent to which we are able to grow existing sales and volume profitably, especially with respect to the product categories and geographic markets (including developing markets) in which we have chosen to focus. There are high levels of competitive activity in the environments in which we operate. To address these challenges, we must respond to competitive factors, including pricing, promotional incentives and trade terms. We must manage each of these factors, as well as maintain mutually beneficial relationships with our key customers, in order to effectively compete and achieve our business plans. Since our goals include a growth component tied to acquisitions, we must manage and integrate key acquisitions, such as the Gillette and Wella acquisitions, including achieving the cost and growth synergies in accordance with stated goals.

Cost Pressures. Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, cost of labor, foreign exchange and interest rates. Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions. We also must manage our debt and currency exposure, especially in volatile countries. We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements. We must implement, achieve and sustain cost improvement plans, including our outsourcing projects and those related to general overhead and workforce rationalization.

Global Economic Conditions. Economic changes, terrorist activity and political unrest may result in business interruption, inflation, deflation or decreased demand for our products. Our success will depend in part on our ability to manage continued global political and/or economic uncertainty, especially in our significant geographic markets, as well as any political or economic disruption due to terrorist and other hostile activities.

Regulatory Environment. Changes in laws, regulations and the related interpretations may alter the environment

in which we do business. This includes changes in environmental, competitive and product-related laws, as well as changes in accounting standards and taxation requirements. Accordingly, our ability to manage regulatory, tax and legal matters (including product liability, patent and intellectual property matters, as well as those related to the integration of Gillette and its subsidiaries) and to resolve pending matters within current estimates may impact our results.

RESULTS OF OPERATIONS

Net Sales

Net sales increased 12% in 2007 to $76.5 billion. Sales were up behind 9% unit volume growth, including the impact of an extra three months of Gillette results in the current year. Organic volume, which excludes the impact of acquisitions and divestitures, increased 5%. Organic volume growth was broad-based, with 15 of our top 16 countries posting year-on-year growth. Developing regions continued to lead the growth with double-digit increases for the year. All reportable segments increased organic volume for the year except the Snacks, Coffee and Pet Care segment. Higher pricing, primarily in blades and razors, coffee and Health Care, contributed 1% to sales growth. Product mix had no net impact on sales as a more premium product mix driven by the additional three months of Gillette results in the current year was offset by the negative mix impact of disproportionate growth in developing markets, where the average unit sales price is lower than the Company average. Favorable foreign exchange contributed 2% to sales growth. Organic sales increased 5% versus the prior year with each reportable segment posting year-on-year growth.

Net sales in 2006 were $68.2 billion, an increase of 20% versus the prior year including the impact of adding the Gillette business on October 1, 2005. Unit volume increased 19%, while organic volume increased 6%. Growth was broad-based across our top markets and on our top brands. Each region delivered organic volume growth, led by double-digit growth in developing regions. Every reportable segment delivered organic volume growth with

all but one delivering mid-single digit or higher growth. Price increases taken across most of our business segments added 1% to sales growth. A more premium product mix, driven in part by the addition of the Gillette business, more than offset the mix impact of disproportionate growth in developing markets, resulting in a positive mix impact of 1% on sales growth. Foreign exchange had a negative 1% impact on sales growth. Organic sales increased 7% versus the prior year.

Operating Costs

Gross margin was 52.0% in 2007, an increase of 60-basis points versus the prior year. Higher commodity 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.

Gross margin was 51.4% in 2006, an increase of 50-basis points versus the prior year. Higher commodity costs had a negative impact of over 100-basis points on gross margin. These were largely offset by gross margin improvement on the base business (P&G excluding Gillette) behind organic volume growth, cost savings projects and price increases across nearly every business segment. The addition of the Gillette business drove the remaining gross margin improvement of approximately 80-basis points.

	YEARS ENDED JUNE 30
Comparisons as a percentage of net sales	2007			Basis point change			2006			Basis point change			2005
Gross margin		52.0	%		60			51.4	%		50			50.9	%
Selling, general and administrative		31.8	%		(20	)		32.0	%		(40	)		32.4	%
Operating margin		20.2	%		80			19.4	%		90			18.5	%
Earnings before income taxes		19.2	%		100			18.2	%		60			17.6	%
Net earnings		13.5	%		80			12.7	%		50			12.2	%

Total selling, general and administrative expense (SG&A) increased 11%, or $2.5 billion, in 2007. SG&A increased primarily due to the additional three months of Gillette in the current year and to support business growth, partially offset by overhead and media purchasing synergies from the Gillette integration. The additional three months of Gillette in the current year accounted for approximately $1.1 billion of the increase, including approximately $160 million of incremental acquisition-related expenses. The incremental acquisition-related

expenses were comprised of three additional months of intangible asset amortization resulting from revaluing intangible assets in the opening balance sheet of the acquired Gillette business, costs to restructure the business post-acquisition and other integration-related expenses.

SG&A as a percentage of net sales was 31.8% in 2007, an improvement of 20-basis points versus 2006. Overhead expenses as a percentage of net sales were down due to volume scale leverage, overhead cost control and synergies from the Gillette integration. Marketing spending as a percentage of net sales in 2007 was roughly in line with prior-year levels despite media purchasing synergies generated by the Gillette acquisition and a continued focus on marketing return-on-investment (ROI) programs.

SG&A in 2006 increased 19%, or $3.4 billion. The addition of Gillette drove approximately $3.1 billion of the increase, including approximately $570 million of acquisition-related expenses. The acquisition-related expenses included $352 million of intangible asset amortization resulting from revaluing intangible assets in the opening balance sheet of the acquired Gillette business. The balance of the acquisition-related expenses was due to incremental integration and overhead expenses such as legal and consulting fees, as well as costs related to the elimination of selling, general and administrative overlap between the two companies. SG&A as a percentage of net sales was 32.0% in 2006, down 40-basis points versus 2005. Overhead and marketing spending both increased on our base businesses, but were down as a percentage of net sales due to scale leverage from organic sales growth, a focus on cost control and initial synergy savings, including media purchasing synergies, generated by the Gillette acquisition.

Non-Operating Items

Non-operating items primarily include interest expense, divestiture gains and interest and investment income. Interest expense increased 17% in 2007 to $1.3 billion. In 2006, interest expense increased 34% to $1.1 billion. The increases in both 2007 and 2006 were primarily due to the financing costs associated with the debt issued to fund the publicly announced share repurchase program in conjunction with the acquisition of Gillette in October 2005. The repurchase program was completed in July 2006 with cumulative repurchases since the inception of the program of $20.1 billion. We repurchased $19.8 billion of P&G shares under the program through 2006 and the remaining $0.3 billion in 2007.

Other non-operating income increased $281 million in 2007 to $564 million primarily due to higher divestiture gains in the current year. Divestiture gains in 2007 included the gain on the sale of Pert in North America, Sure and several minor non-strategic Beauty brands. Divestiture gains in 2006 included the gain on the sale of Spinbrush. Other non-operating income in 2006 was down 18% versus 2005 to $283 million primarily due to the gain on the sale of our Juice business in 2005.

Our effective tax rate in 2007 was 29.7%, down 30-basis points versus 2006 primarily due to a more favorable country mix impact in the current period, partially offset by higher levels of reserve releases in the base period. The effective income tax rate in 2006 was down 60-basis points versus 2005 to 30.0% primarily due to an accrual

in 2005 for estimated taxes in anticipation of repatriating special dividends from the Company’s non-U.S. subsidiaries, pursuant to the American Jobs Creation Act of 2004 (see Note 10 to Consolidated Financial Statements), which increased the 2005 tax rate by 280-basis points. The year-on-year impact of this accrual was partially offset by a less favorable country mix impact in 2006 and the impact of reserve reversals related to tax uncertainties, which were lower in 2006 than in 2005. Adjustments for tax uncertainties are based on specific facts and circumstances in individual tax jurisdictions, including progress on tax audits, legal developments and closing of statutes of limitation.

Net Earnings

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. In 2006, net earnings increased 25% to $8.7 billion behind the addition of Gillette, sales growth on our base business and earnings margin expansion.

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.

The Gillette acquisition had a negative impact on our earnings per share in 2007 and 2006 as a result of the increase in P&G common shares outstanding following the acquisition. When we acquired Gillette in October 2005, we exchanged 0.975 common shares of P&G stock for each share of Gillette stock. This increased the number of P&G common shares outstanding by 962 million shares. The negative impact of the incremental shares was partially offset by the addition of Gillette’s earnings, cost and revenue synergies and by our share repurchase activity. In 2007, the dilutive impact of Gillette was approximately $0.10 — $0.12 per share versus $0.20 — $0.23 per share in 2006. This improvement, driven primarily by improved Gillette business unit results, higher Gillette synergies and the completion of our share repurchase program, contributed approximately 4% to our earnings per share growth in 2007.

Diluted net earnings per share in 2006 were $2.64, an increase of 4% versus the prior year. The impact of the Gillette acquisition reduced our earnings per share growth in 2006 by approximately 8% — 9%.

SEGMENT RESULTS

Results for the segments reflect information on the same basis we use for internal management reporting and performance evaluation. Within the Beauty GBU, we provide data for the Beauty and the Grooming reportable segments. In the Health and Well-Being GBU, we provide data for the Health Care and the Snacks, Coffee and Pet Care reportable segments. In the Household Care GBU, we provide data for the Fabric Care and Home Care and the Baby Care and Family Care reportable segments.

The results of these reportable business segments do not include certain non-business unit specific costs such as interest expense, investing activities and certain restructuring costs. These costs are reported in our Corporate segment and are discussed below as part of our Corporate segment discussion. Additionally, as described in Note 12 to the Consolidated Financial Statements, we have investments in certain companies over which we exert

significant influence, but do not control the financial and operating decisions and, therefore, do not consolidate them (“unconsolidated entities”). Since certain of these investments are managed as integral parts of the Company’s business units, they are accounted for as if they were consolidated subsidiaries for management and segment reporting purposes. This means pretax earnings in the business units include 100% of each pretax income statement component. In determining after-tax earnings in the business units, we eliminate the share of earnings applicable to other ownership interests, in a manner similar to minority interest, and apply the statutory tax rates. Eliminations to adjust each line item to U.S. GAAP are included in our Corporate segment.

	Net Sales Change Drivers vs. Year Ago (2007 vs. 2006)
	Volume with			Volume Excluding
	Acquisitions &			Acquisitions &
	Divestitures			Divestitures			Foreign Exchange			Price			Mix/Other			Net Sales Growth
Beauty
Beauty		4	%		4	%		3	%		-1	%		1	%		7	%
Grooming		36	%		2	%		4	%		2	%		3	%		45	%
Health and Well-Being
Health Care		8	%		5	%		2	%		2	%		1	%		13	%
Snacks, Coffee and Pet Care		0	%		0	%		2	%		1	%		1	%		4	%
Household Care
Fabric Care and Home Care		10	%		7	%		3	%		0	%		0	%		13	%
Baby Care and Family Care		5	%		5	%		2	%		0	%		-1	%		6	%
Total Company		9	%		5	%		2	%		1	%		0	%		12	%

Sales percentage changes are approximations based on quantitative formulas that are consistently applied.

Beauty

Beauty

			Change vs. Prior			Change vs. Prior
	2007		Year	2006		Year
Volume		n/a	+4%		n/a	+7%
Net sales ($ millions)	$	17,889	+7%	$	16,687	+5%
Net earnings ($ millions)	$	2,611	+8%	$	2,412	+10%

Beauty net sales increased 7% to $17.9 billion in 2007, behind 4% unit volume growth. Volume growth was driven by initiative activity across categories and continued expansion in developing regions, where volume increased high-single digits. Prestige fragrances volume was up double-digits behind The One, Boss Selection and Boss Femme fragrance initiatives and the addition of Dolce & Gabbana. Skin care volume was up high-single digits behind the Olay Definity and Regenerist product initiatives. Hair care volume grew mid-single digits as a result of product initiatives on Pantene, Head & Shoulders and Herbal Essences and continued expansion in developing regions. Beauty sales benefited from a 1% positive mix impact primarily due to disproportionate growth in prestige fragrances, which has a higher than segment average unit selling price. This was offset by higher levels of promotional activity, which resulted in a negative 1% pricing impact. Favorable foreign exchange contributed 3% to sales. The sales disruption in Asia resulting from the voluntary temporary suspension of SK-II shipments in China early in the fiscal year had a negative 1% impact on net sales.

Net earnings increased 8% in 2007 to $2.6 billion primarily behind sales growth. Earnings margin increased 15-basis points primarily due to lower SG&A as a percentage of net sales and divestiture gains on several minor Beauty brands, partially offset by the negative mix impact from the SK-II disruption. SG&A improved as higher marketing spending as a percentage of net sales to support initiative activity was more than offset by lower overhead expenses as a percentage of net sales resulting from volume scale leverage and Gillette-related synergy savings.

Beauty net sales in 2006 increased 5% to $16.7 billion behind 7% unit volume growth. Volume growth was driven by initiative activity and expansion of our brands in developing regions, where volume increased double-digits during the year. Skin care volume increased double-digits behind continued growth and initiative activity on the Olay brand. Hair care volume increased high-single digits behind growth on Pantene, Head & Shoulders and Rejoice. Cosmetics volume declined due to reduced Max Factor distribution and a base period on Cover Girl with significant initiative pipeline shipments. Disproportionate growth in developing regions resulted in a negative 1% mix impact on sales. Foreign exchange also had a negative 1% impact on sales growth. Net earnings increased 10% in 2006 to $2.4 billion behind sales growth and a 70-basis point net earnings margin expansion primarily driven by lower overhead expenses as a percentage of net sales. Margin improvements from scale benefits of volume growth and manufacturing cost savings initiatives offset higher commodity costs.

Grooming

			Change vs. Prior					Change vs. Prior
	2007		Year*			2006*		Year*
Volume		n/a		+36	%		n/a		n/a
Net sales ($ millions)	$	7,437		+45	%	$	5,114		n/a
Net earnings ($ millions)	$	1,383		+63	%	$	846		n/a

* Fiscal 2006 figures only include results for the nine-month period that P&G owned the Gillette business and do not have a prior-year comparison period.

Net sales in Grooming increased 45% to $7.4 billion in 2007 on 36% unit volume growth, including the impact of the extra three months of Gillette results in fiscal 2007. Organic sales increased 6% during the year, with organic volume up 2%. Blades and razors organic volume was up mid-single digits primarily behind the continued expansion of the Fusion razor system and growth on Mach3 in countries where Fusion has not yet launched. Fusion was launched in North America in fiscal 2006 and expanded into other markets including Western Europe in fiscal 2007. In Braun, organic volume was down low-single digits as the impact of the launches of 360 Complete and Contour razors in North America and Pulsonic razors in Germany and Japan were more than offset by lower volume on household appliances in Europe. Favorable product mix, primarily behind the launch of the premium Fusion razors, contributed 3% to net sales. Price increases taken across most shaving systems added an additional 2% to net sales and favorable foreign exchange added an additional 4%.

Net earnings increased 63% in 2007 to $1.4 billion. The extra three months of Gillette results in fiscal 2007 contributed 46% of the total earnings growth. The remaining growth was due to organic sales growth and integration-driven synergy savings, partially offset by higher marketing investment behind Fusion and incremental acquisition-related charges. We incurred approximately $40 million of incremental acquisition-related charges in the current fiscal year. The incremental acquisition-related charges are primarily comprised of amortization charges from revaluing intangible assets in the opening balance sheet, partially offset by base period product costs related to revaluing Gillette’s opening inventory balance. Amortization charges are higher in the current fiscal year due to the extra three months of Gillette post-acquisition results in the current period.

In 2006, Grooming net sales were $5.1 billion. This represents results for the nine-month period after the Gillette acquisition closed on October 1, 2005. Sales during this period included the impact of the launch of Fusion in North America. Global consumption in blades and razors increased 5% during the fiscal year. Net earnings were $846 million during the nine-month period, including approximately $325 million of acquisition-related charges. The acquisition-related charges included about $305 million of increased amortization expense as a result of revaluing Gillette’s intangible assets to fair market value. The balance of the charges were primarily due to higher product costs from revaluing opening inventory balances at fair value. Earnings were also impacted by high levels of marketing investment in 2006 behind the launch of Fusion in North America, offset by synergy savings from cost reductions.

Health and Well-Being

Health Care

			Change vs. Prior					Change vs. Prior
	2007		Year*			2006*		Year*
Volume		n/a		+8	%		n/a		+18	%
Net sales ($ millions)	$	13,381		+13	%	$	11,831		+20	%
Net earnings ($ millions)	$	2,233		+22	%	$	1,829		+33	%

* Fiscal 2006 figures include results of Gillette oral care for the nine months ended June 30, 2006.

Health Care net sales increased 13% in 2007 to $13.4 billion behind an 8% increase in unit volume. Sales and volume were up as a result of three additional months of Gillette oral care results in the current fiscal year and growth on the base P&G business. Health Care organic sales increased 7% behind 5% organic volume growth. Oral care organic volume grew mid-single digits behind double-digit growth in developing regions, high-single digit growth on Oral-B and the launch of Crest Pro-Health toothpaste in North America. Pharmaceuticals and personal health volume increased low-single digits behind growth on Prilosec OTC, partially offset by lower volume on Actonel due to strong competitive activity in the osteoporosis market. Our U.S. market share on Prilosec OTC increased about 1 point during the year. Feminine care volume was up high-single digits, led by double-digit growth in developing regions. Successful initiative activity in North America on the Always Clean and Fresh initiatives and product upgrades on Tampax Pearl more than offset the impact of strong competitive activity in Western Europe and Northeast Asia, resulting in a 1 point increase in our global feminine care market share. Pricing, primarily in pharmaceuticals and personal health, contributed 2% to segment sales growth. A more premium product mix added an additional 1% to sales as disproportionate growth on Crest Pro-Health in North America more than offset the negative impact from higher relative growth in developing regions. Foreign exchange had a positive 2% impact on sales.

Net earnings grew 22% to $2.2 billion in 2007 behind organic sales growth, the additional three months of Gillette oral care results and earnings margin expansion. Earnings margin increased 120-basis points behind lower product costs on our base business and lower SG&A as a percentage of net sales. SG&A improved primarily due to lower overhead expenses as a percentage of net sales resulting from volume scale leverage, Gillette synergy savings and lower research and development costs in our pharmaceuticals business driven by further leveraging external R&D networks and higher clinical milestone payments in the base period.

Health Care net sales in 2006 increased 20% to $11.8 billion. Sales were up behind 18% unit volume growth, including nine months of Gillette oral care results. Organic volume grew 7% for the year, led by double digit volume growth in developing regions. Pharmaceuticals and personal health organic volume increased high-single digits behind double-digit growth on Prilosec OTC and Actonel. Prilosec OTC volume increased as a result of market share growth and a suppressed base period which included several months of shipment allocations. Oral care organic volume grew mid-single digits as a result of market share increases across the globe, especially in the U.S. and in Central and Eastern Europe. Feminine care volume grew high-single digits behind new product innovations on Always/Whisper and double-digit developing region growth primarily behind the Naturella brand. Price increases, primarily on Actonel and Prilosec OTC, added 1% to sales growth. Favorable product mix, driven largely by the addition of the Gillette oral care business, more than offset disproportionate developing market growth and contributed 1% to sales growth. Net earnings increased 33% to $1.8 billion in 2006 behind sales growth and a 150-basis point earnings margin expansion. Net earnings margin expanded primarily due to lower overhead and marketing spending as a percentage of net sales.

Snacks, Coffee and Pet Care

			Change vs. Prior					Change vs. Prior
	2007		Year			2006		Year
Volume		n/a		+0	%		n/a		+0	%
Net sales ($ millions)	$	4,537		+4	%	$	4,383		+2	%
Net earnings ($ millions)	$	477		+24	%	$	385		-13	%

Snacks, Coffee and Pet Care net sales increased 4% in 2007 to $4.5 billion. Unit volume was in line with the prior year as growth in coffee was offset by a decline in pet care. Snacks volume was in line with the prior year. Coffee volume was up high-single digits primarily due to a low base period that included a reduction in the coffee business from Hurricane Katrina and current period volume from the launches of Folgers Simply Smooth and Gourmet Selections. Pet care volume was down mid-single digits versus the year-ago period due to strong competitive activity and the impacts of a voluntary recall. In March 2007, we voluntarily recalled certain Iams and Eukanuba wet pet foods to help ensure maximum pet safety following the discovery of contaminated materials at a pet food supplier. Price increases in coffee and favorable product mix from disproportionate coffee growth each had a positive 1% impact on sales. Foreign exchange had a positive 2% impact on sales.

Net earnings increased 24% to $477 million. Earnings increased behind sales growth and base period costs related to Hurricane Katrina, which more than offset a decline in the current year gross margin from the impacts of higher commodity costs and expenses associated with the pet food recall.

Snacks, Coffee and Pet Care net sales increased 2% to $4.4 billion in 2006. Unit volume was flat despite a high-single digit decline in our coffee volume caused by shipment disruptions following Hurricane Katrina in August 2005. Our primary coffee manufacturing and warehousing facilities, located in New Orleans, incurred significant disruption from Hurricane Katrina. We were unable to manufacture and ship at full capacity for several months in 2006, resulting in a temporary decline in our U.S. market share of approximately 2 points. Pet care volume declined slightly during the year due to strong competitive activity, particularly in North America and Western Europe. These declines were offset by mid-single digit growth in snacks behind Pringles. Price increases in coffee added 2% to sales growth. Earnings declined 13% to $385 million in 2006 as costs incurred during the fiscal year related to Hurricane Katrina, higher green coffee prices and lower pet care earnings more than offset the impact of pricing in coffee and earnings growth in snacks.

Household Care

Fabric Care and Home Care

			Change vs. Prior					Change vs. Prior
	2007*		Year*			2006*		Year*
Volume		n/a		+10	%		n/a		+17	%
Net sales ($ millions)	$	21,469		+13	%	$	18,918		+20	%
Net earnings ($ millions)	$	3,127		+20	%	$	2,609		+23	%

* Fiscal 2006 figures include results of Gillette batteries for the nine months ended June 30, 2006.

Fabric Care and Home Care net sales increased 13% in 2007 to $21.5 billion. Sales growth was driven by a 10% increase in volume and a 3% favorable foreign exchange impact. The extra three months of batteries results in fiscal 2007 contributed 3% to the segment’s sales growth and 2% to segment volume growth. Volume was up high-single digits in both fabric care and home care led by double-digit growth in developing regions. In developed regions, fabric care volume grew mid-single digits and home care volume grew high-single digits behind product initiatives such as Tide Simple Pleasures, Gain Joyful Expressions, Febreze Noticeables, upgrades on Swiffer and the launch of Fairy auto-dishwashing in Western Europe. Our market share in both fabric care and home care increased by about 1 point globally during the year. In batteries, organic volume increased mid-single digits behind high-single digit developing region growth from expanded distribution in high-frequency stores in Latin America.

Net earnings in 2007 were up 20% to $3.1 billion behind organic sales growth, the additional three months of batteries results and an 80-basis point improvement in net earnings margin. Earnings margin improved behind higher gross margin and lower SG&A as a percentage of net sales. The gross margin improvement was driven by scale benefits of volume growth and cost savings projects that more than offset higher commodity costs. SG&A improved primarily behind lower overhead expenses as a percentage of net sales resulting from volume scale leverage and Gillette synergy savings.

Fabric Care and Home Care net sales in 2006 increased 20% to $18.9 billion, including 11% attributable to the

nine months of Gillette batteries results. Total unit volume was up 17% for the year, with organic volume up 7%. Organic volume growth was broad-based, with high-single digit growth in fabric care and mid-single digit growth in home care. Market share was up approximately 1 point globally on both fabric care and home care behind product innovations such as Tide with Febreze, Gain Joyful Expressions, Bounce with Febreze, Bold Liquid Tabs, Dawn Direct Foam and Febreze Noticeables. Every region delivered mid-single digit or higher organic volume growth, led by double-digit growth in developing regions. Price increases, primarily in Latin America fabric care and North America dish care to offset rising commodity costs, added 2% to sales growth. Foreign exchange reduced sales by 1%. Net earnings increased 22% to $2.6 billion in 2006 behind organic sales growth, the addition of the batteries business and margin improvement. Earnings margin improved by 30-basis points primarily behind lower SG&A as a percentage of net sales. Overhead and marketing spending on the base business (excluding Gillette) increased year-on-year on an absolute basis, but were down slightly as a percentage of net sales. Gross margin was roughly in-line with the prior-year period as volume scale leverage, price increases and cost savings initiatives more than offset higher commodity costs.

Baby Care and Family Care

			Change vs. Prior					Change vs. Prior
	2007		Year			2006		Year
Volume		n/a		+5	%		n/a		+3	%
Net sales ($ millions)	$	12,726		+6	%	$	11,972		+3	%
Net earnings ($ millions)	$	1,440		+11	%	$	1,299		+9	%

Baby Care and Family Care net sales increased 6% in 2007 to $12.7 billion behind 5% unit volume growth. Baby care volume grew mid-single digits with developing regions up double-digits. In developed regions, baby care volume was up low-single digits as growth on Pampers Baby Stages of Development and Baby Dry Caterpillar Flex more than offset softness on Pampers in Western Europe and Luvs in North America from lower competitor pricing of both branded and private label products. Family care volume increased mid-single digits behind product performance upgrades on Bounty and continued growth on Bounty and Charmin Basic products. Disproportionate growth on baby care in developing regions and on the Basic tier products, which have a lower average selling price, led to a negative 1% mix impact. Favorable foreign exchange contributed 2% to sales growth.

Net earnings in Baby Care and Family Care increased 11% to $1.4 billion behind sales growth and a 50-basis point improvement in net earnings margin. Earnings margin increased as lower SG&A as a percentage of net sales more than offset a reduction in gross margin. Gross margin was down slightly as manufacturing cost savings and volume scale leverage were more than offset by the impact of higher pulp costs and a less profitable product mix. SG&A improved as a percentage of net sales due to lower overhead expenses from volume scale leverage and a reduction in marketing expenses as a percentage of net sales.

We have reached an agreement to sell our Western European family care business, which comprises approximately $650 million in segment net sales. The sale is subject to regulatory approval and is expected to close in the first half of fiscal 2008.

Baby Care and Family Care net sales were up 3% to $12.0 billion in 2006. Unit volume increased 3%, with organic volume up 4%. Baby care volume increased mid-single digits led by double-digit increases in developing regions. In developed regions, baby care volume declined slightly as growth on Pampers Baby Stages of Development and Kandoo was more than offset by softness on Baby Dry as well as on Luvs in North America, primarily due to pricing pressure from private label competitors. Family care organic volume grew mid-single digits, largely behind growth on the Bounty and Charmin Basic initiative. Price increases in North America baby care, coupled with a mid-year increase in North America family care, added 2% to sales growth. Disproportionate growth in mid-tier products and in developing regions, where average unit selling price is below the segment average, resulted in a negative 1% mix impact on segment sales. Foreign exchange also had a negative 1% impact on sales. Baby Care and Family Care net earnings increased 9% in 2006 to $1.3 billion behind sales growth and a 60-basis point earnings margin improvement. Scale benefits of volume growth and price increases more than offset the increase in commodity and energy costs. In addition, SG&A was down as a percentage of

net sales due to reductions in both overhead and marketing spending as a percentage of net sales.

Corporate

Corporate includes certain operating and non-operating activities not allocated to specific business units. These include: the incidental businesses managed at the corporate level, financing and investing activities, other general corporate items, the historical results of certain divested brands and categories, including certain Gillette brands that were divested as required by the regulatory authorities in relation to the Gillette acquisition, and certain restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce rationalization. Corporate also includes reconciling items to adjust the accounting policies used in the segments to U.S. GAAP. The most significant reconciling items include income taxes (to adjust from statutory rates that are reflected in the segments to the overall Company effective tax rate), adjustments for unconsolidated entities (to eliminate sales, cost of products sold and SG&A for entities that are consolidated in the segments but accounted for using the equity method for U.S. GAAP) and minority interest adjustments for subsidiaries where we do not have 100% ownership. Since both unconsolidated entities and less than 100% owned subsidiaries are managed as integral parts of the Company, they are accounted for similar to a wholly owned subsidiary for management and segment purposes. This means our segment results recognize 100% of each income statement component through before-tax earnings in the segments, with eliminations for unconsolidated entities in Corporate. In determining segment net earnings, we apply the statutory tax rates (with adjustments to arrive at the Company’s effective tax rate in Corporate) and eliminate the share of earnings applicable to other ownership interests, in a manner similar to minority interest.

Corporate net sales primarily reflect the adjustment to eliminate the sales of unconsolidated entities included in business unit results. Corporate segment net earnings declined $235 million in 2007 primarily due to higher interest expenses and higher Gillette integration costs. Interest expense was up $185 million primarily due to the financing costs associated with the debt issued to fund the share repurchase program announced in conjunction with the Gillette acquisition. We expect ongoing corporate restructuring spending to increase to approximately $300 — $400 million after-tax, versus our historical levels of $150 — $200 million after-tax.

In 2006, net earnings in the Corporate segment declined by $286 million primarily due to an increase in net interest expense for debt to fund the share repurchase program and the gain on the sale of the Juice business in 2005.

FINANCIAL CONDITION

We believe our financial condition continues to be of high quality, as evidenced by our ability to generate substantial cash from operations and ready access to capital markets at competitive rates.

Operating cash flow provides the primary source of funds to finance operating needs and capital expenditures. Excess operating cash is used first to fund shareholder dividends. Other discretionary uses include share repurchases and “tack-on” acquisitions to complement our portfolio of brands and geographies. As necessary, we may supplement operating cash flow with debt to fund these activities. The overall cash position of the Company reflects our strong business results and a global cash management strategy that takes into account liquidity management, economic factors and tax considerations.

Operating Activities
Operating cash flow in 2007 increased 18% to $13.4 billion. Operating cash flow increased as a result of higher net earnings, including the benefit of an additional three months of Gillette in 2007. Net earnings, adjusted for non-cash items (primarily depreciation and amortization, share-based compensation and deferred income taxes) was partially offset by cash used to fund working capital. Working capital increased in 2007 primarily to support business growth. Accounts receivable increased by one day largely due to disproportionate growth in our Western European prestige fragrance business, which has longer payment terms than the balance of our business. Inventory increased during the year, primarily to support business growth. Accounts payable, accrued and other liabilities was a net use of cash as higher accounts payables, resulting from increased levels of marketing investments late in the fiscal year and extended payment terms on certain types of purchases, were more than offset by reduced tax accruals driven by the timing of tax payments.

Operating cash flow in 2006 was $11.4 billion compared to $8.7 billion in 2005, an increase of 31%. Operating cash flow increased behind higher net earnings, including the benefit of adding Gillette, and lower working capital as improvements in inventory and accounts payable more than offset an increase in accounts receivable.

Free Cash Flow. We view free cash flow as an important measure because it is one factor impacting the amount of cash available for dividends and discretionary investment. It is defined as operating cash flow less capital expenditures and is one of the measures used to evaluate senior management and determine their at-risk compensation. In 2007, free cash flow was $10.5 billion, compared to $8.7 billion in 2006. Free cash flow increased primarily as a result of higher operating cash flow. Capital expenditures were in line with the prior year at 3.9% of net sales. Free cash flow productivity, defined as the ratio of free cash flow to net earnings, was 101% in 2007, ahead of the Company’s 90% target.

In 2006, free cash flow was $8.7 billion compared to $6.5 billion in 2005 as a result of higher operating cash flow. Free cash flow productivity was 100% of net earnings in 2006.

Investing Activities

Net investing activities in 2007 used $2.5 billion of cash compared to $730 million of cash in the prior year. In the base year, investing cash activities benefited from cash balances received in the Gillette acquisition, representing Gillette’s cash on hand as of the acquisition date. In addition, current year investing cash outflows increased as a result of higher capital expenditures and lower proceeds from asset sales.

Acquisitions. Acquisitions used $492 million of cash in 2007 for several minor transactions, primarily in Beauty and Health Care. Acquisitions were a net source of cash of $171 million during 2006, as $1.6 billion of cash balances received in the Gillette acquisition were partially offset by several minor acquisitions and the settlement of a major portion of the Wella Domination and Profit Transfer Agreement liability, which was initially created in June 2004 when we completed a Domination and Profit Transfer Agreement with Wella shareholders.

Capital Spending. We view capital spending efficiency as a critical component of our overall cash management strategy. Capital expenditures in 2007 were $2.9 billion, compared to $2.7 billion in 2006 and $2.2 billion in 2005. The increase in capital spending was driven by the addition of the Gillette business and to support business growth. Capital spending as a percentage of net sales was 3.9% in 2007, in line with the prior year level despite the impact of adding Gillette, which historically maintained higher levels of capital spending as a percentage of net sales than the average base P&G businesses.

Proceeds from Asset Sales. Proceeds from asset sales in 2007 were $281 million primarily due to the divestitures of Pert in North America, Sure and several nonstrategic minor Beauty brands. In 2006, proceeds from asset sales were $882 million primarily due to the divestitures of Spinbrush, Rembrandt and Right Guard, all required by regulatory authorities in relation to the Gillette acquisition, and our Korean paper businesses.

Financing Activities

Dividend Payments. Our first discretionary use of cash is dividend payments. Dividends per common share increased 11% to $1.28 per share in 2007. This increase represents the 51^st consecutive fiscal year the Company has increased its common share dividend. Total dividend payments to both common and preferred shareholders were $4.2 billion, $3.7 billion and $2.7 billion in 2007, 2006 and 2005, respectively.

Long-Term and Short-Term Debt. We maintain debt levels we consider appropriate after evaluating a number of factors, including cash flow expectations, cash requirements for ongoing operations, investment plans (including acquisitions and share repurchase activities) and the overall cost of capital. Total debt was $35.4 billion in 2007, $38.1 billion in 2006 and $24.3 billion in 2005. The decrease in debt in 2007 was primarily due to the utilization of operating cash flow to pay down existing balances. Debt increased in 2006 primarily due to additional debt used to finance the share repurchase program announced in conjunction with the Gillette acquisition.

Liquidity. Our primary source of liquidity is cash generated from operations. We believe internally generated cash flows adequately support business operations, capital expenditures and shareholder dividends, as well as a level of other discretionary cash uses (e.g., for minor acquisitions or share repurchases).

We are able to supplement our short-term liquidity, if necessary, with broad access to capital markets and three bank credit facilities. Broad access to financing includes commercial paper programs in multiple markets at favorable rates given our strong credit ratings (including separate U.S. dollar and Euro multi-currency programs).

We maintain three bank facilities: a $24 billion 3-year facility expiring in July 2008, a $1.8 billion facility expiring in August 2010 and a $1 billion facility expiring in July 2009. The credit facilities are for general corporate purposes, including refinancing needs associated with the share buyback plan announced concurrently with the Company’s acquisition of Gillette and to support our on-going commercial paper program. Beyond some

residual refinancing requirements on the debt related to acquisition of Gillette, we anticipate that these facilities will remain largely undrawn beyond June 2008. We periodically change our facility structure to take advantage of more favorable financing rates and to support our longer term financing needs. These credit facilities do not have cross-default or ratings triggers, nor do they have material adverse events clauses, except at the time of signing .While not considered material to the overall financial condition of the Company, there is a covenant in the $1 billion credit facility stating the ratio of net debt to earnings before interest expense, income taxes, depreciation and amortization cannot exceed 4.0 at the time of a draw on the facility. As of June 30, 2007, we are comfortably below this level, with a ratio of approximately 1.6.

In addition to these credit facilities, long-term borrowing available under our current shelf registration statement was $2.2 billion at June 30, 2007.

The Company’s Moody’s and Standard & Poor’s (S&P) short-term credit ratings are P-1 and A-1+, respectively. Our Moody’s and S&P long-term credit ratings are Aa3 with a negative outlook and AA- with a stable outlook, respectively.

Treasury Purchases. Total share repurchases in 2007 were $5.6 billion, of which $0.3 billion were made as part of our publicly announced share repurchase plan in connection with the Gillette acquisition. Total share repurchases in 2006 were $16.8 billion, nearly all of which were made as part of our publicly announced share repurchase plan. We completed the announced share buyback program in July 2006 and purchased a total of $20.1 billion of shares under this program. In fiscal years 2008 to 2010, we expect to repurchase $24 — $30 billion of Company shares at a rate of $8 — $10 billion per year.

Guarantees and Other Off-Balance Sheet Arrangements. We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on financial condition or liquidity.

Contractual Commitments. The table below provides information on our contractual commitments as of June 30, 2007.

	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Recorded liabilities
Total debt	$	34,854	$	11,888	$	7,555	$	1,859	$	13,552
Capital leases		628		229		116		85		198
Other
Interest payments relating to long-term debt		13,131		1,272		1,782		1,444		8,633
Operating leases1		1,446		316		446		276		408
Minimum pension funding2		1,439		468		971		—		—
Purchase obligations3		4,421		1,360		1,548		853		660
Total Contractual Commitments		55,919		15,533		12,418		4,517		23,451

(1)	Operating lease obligations are shown net of guaranteed sublease income.
(2)	Represents future pension payments to comply with local funding requirements. The projected payments beyond fiscal year 2010 are not currently determinable.
(3)	Primarily reflects future contractual payments under various take-or-pay arrangements entered into as part of the normal course of business. Commitments made under take-or-pay obligations represent future purchases in line with expected usage to obtain favorable pricing. Approximately 44% relates to service contracts for information technology, human resources management and facilities management activities that were outsourced in recent years. While the amounts listed represent contractual obligations, we do not believe it is likely that the full contractual amount would be paid if the underlying contracts were canceled prior to maturity. In such cases, we generally are able to negotiate new contracts or cancellation penalties, resulting in a reduced payment. The amounts do not include

obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

In preparing our financial statements in accordance with U.S. GAAP, there are certain accounting policies that are particularly important. These include revenue recognition, income taxes, certain employee benefits, acquisitions, and goodwill and intangible assets. We believe these accounting policies, and others set forth in Note 1 to the Consolidated Financial Statements, should be reviewed as they are integral to understanding the results of operations and financial condition of the Company. In the case of revenue recognition, these policies simply represent required accounting and there is minimal judgment or estimation involved. In other areas, they may represent a choice between acceptable accounting methods or may require substantial judgment or estimation in their application.

Due to the nature of our business, these estimates generally are not considered highly uncertain at the time of estimation, meaning they are not expected to result in changes that would materially affect our results of operations or financial condition in any given year.

The Company has discussed the selection of significant accounting policies and the effect of estimates with the Audit Committee of the Company’s Board of Directors.

Revenue Recognition

Most of our revenue transactions represent sales of inventory, and we recognize revenue when title, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer. The revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities and includes shipping and handling costs, which generally are included in the list price to the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales within the same period that the revenue is recognized. We offer sales incentives to customers and consumers through various programs, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons. The cost of these programs is recognized as incurred and recorded as a reduction of sales. Given the nature of our business, revenue recognition practices do not contain estimates that materially affect results of operations.

Income Taxes

Our annual tax rate is determined based on our income, statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. Tax law requires certain items to be included in the tax return at different times than the items are reflected in the financial statements. Some of these differences are permanent, such as expenses that are not deductible in our tax return, and some differences are temporary, reversing over time, such as depreciation expense. These temporary differences create deferred tax assets and liabilities.

Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense recognized in our financial statements for which payment has been deferred, or expenditures for which we have already taken a deduction in our tax return but have not yet been recognized in our financial statements.

Inherent in determining our annual tax rate are judgments regarding business plans, planning opportunities and expectations about future outcomes. Realization of certain deferred tax assets is dependent upon generating sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carry-forward periods. Although realization is not assured, management believes it is more likely than not that our deferred tax assets, net of valuation allowances, will be realized.

Changes in existing tax laws, tax rates and their related interpretations may also affect our ability to successfully manage the impacts on taxes of regulatory matters around the world. We establish reserves for certain tax

positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. We review these tax uncertainties in light of the changing facts and circumstances, such as the progress of tax audits, and adjust them when significant changes in risk warrant it. We have a number of audits in process in various jurisdictions. Although the resolution of these tax positions is uncertain, based on currently available information, we believe that the ultimate outcomes will not have a material adverse effect on our results of operations, financial condition or cash flows.

Our accounting represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates. Certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans could have an impact on our estimates and effective tax rate.

Employee Benefits

We sponsor various post-employment benefits throughout the world. These include pension plans, both defined contribution plans and defined benefit plans, and other post-employment benefit (OPEB) plans, consisting primarily of health care and life insurance for retirees. For accounting purposes, the defined benefit and OPEB plans require assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for these plans. Our assumptions reflect our historical experiences and management’s best judgment regarding future expectations. In accordance with U.S. GAAP, the net amount by which actual results differ from our assumptions is deferred. If this net deferred amount exceeds 10% of the greater of plan assets or liabilities, a portion of the deferred amount is included in expense for the following year. The cost or benefit of plan changes, such as increasing or decreasing benefits for prior employee service (prior service cost), is deferred and included in expense on a straight-line basis over the average remaining service period of the employees expected to receive benefits.

The expected return on plan assets assumption is important, since many of our defined benefit plans and our primary OPEB plan are funded. The process for setting the expected rates of return is described in Note 9 to the Consolidated Financial Statements. For 2007, the average return on assets assumption for pension plan assets and OPEB assets was 7.2% and 9.3%, respectively. A change in the rate of return of 0.5% for both pension and OPEB assets would impact annual benefit expense by less than $40 million after tax.

Since pension and OPEB liabilities are measured on a discounted basis, the discount rate is a significant assumption. Discount rates used for our U.S. defined benefit and OPEB plans are based on a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. For our international plans, the discount rates are set by benchmarking against investment grade corporate bonds rated AA or better. The average discount rate on the defined benefit pension plans of 5.5% represents a weighted average of local rates in countries where such plans exist. A 0.5% change in the discount rate would impact annual after-tax benefit expense by less than $45 million. The rate on the OPEB plan of 6.3% reflects the higher interest rates generally applicable in the U.S., which is where a majority of the plan participants receive benefits. A 0.5% change in the discount rate would impact annual after-tax OPEB expense by less than $10 million.

Certain defined contribution pension and OPEB benefits in the U.S. are funded by the Employee Stock Ownership Plan (ESOP), as discussed in Note 9 to the Consolidated Financial Statements.

Acquisitions

We account for acquired businesses using the purchase method of accounting. Under the purchase method, our Consolidated Financial Statements reflect the operations of an acquired business starting from the completion of the acquisition. In addition, the assets acquired and liabilities assumed must be recorded at the date of acquisition at their respective estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for significant items. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management, but are inherently uncertain.

We typically use an income method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the cash flows. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.

Determining the useful life of an intangible asset also requires judgment. Certain brand intangibles are expected to have indefinite lives based on their history and our plans to continue to support and build the acquired brands. Other acquired brands are expected to have determinable useful lives. Our assessment as to brands that have an indefinite life and those that have a determinable life is based on a number of factors including competitive environment, market share, brand history, underlying product life cycles, operating plans and the macroeconomic environment of the countries in which the brands are sold. Our estimates of the useful lives of determinable-lived intangibles, primarily including brands, technologies and customer relationships, are primarily based on these same factors. All of our acquired technology and customer-related intangibles are expected to have determinable useful lives.

Other significant estimates associated with the accounting for acquisitions include exit costs. Provided certain criteria are met, exit costs related to acquired operations are treated as assumed liabilities. If those criteria are not met, the costs are treated as operating expenses of the combined company as incurred. Exit costs, consisting primarily of severance costs, facility closure and other exit costs related to redundant manufacturing, selling, general and administrative functions, are based upon plans that have been committed to by management but which are subject to refinement. Significant estimates and assumptions inherent in the calculation of exit costs relate to the number of employees that will be terminated, future costs to operate and eventually vacate duplicate facilities and costs to terminate agreements. These estimates and assumptions may change as we execute approved plans. Decreases to the estimated costs are generally recorded as an adjustment to goodwill. Increases to the estimates are generally recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses thereafter.

Goodwill and Intangible Assets

Acquired intangible assets may represent indefinite-lived assets (e.g., certain trademarks or brands), determinable-lived intangibles (e.g., patents and technologies) or residual goodwill. Of these, only the costs of determinable-lived intangibles are amortized to expense over their estimated life. The value of indefinite-lived intangible assets and residual goodwill is not amortized, but is tested at least annually for impairment. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangibles. We test goodwill for impairment, at least annually, by reviewing the book value compared to the fair value at the reportable unit level. We test individual indefinite-lived intangibles at least annually by reviewing the individual book values compared to the fair value. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows to measure fair value. Assumptions used in the Company’s impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. We believe such assumptions and estimates are also comparable to those that would be used by other market participants. When certain events or changes in operating conditions occur, indefinite-lived intangible assets may be adjusted to a determinable life and an additional impairment assessment may be performed. We did not recognize any material impairment charges for goodwill or intangible assets during the years presented.

The recorded value of goodwill and intangible assets from recently acquired businesses are derived from more recent business operating plans and macroeconomic environmental conditions and therefore are more susceptible

to an adverse change that could require an impairment charge. Indefinite-lived intangible assets totaled $27.0 billion at June 30, 2007, of which $23.9 billion represent recently acquired Gillette intangible assets. The Gillette indefinite-lived intangible assets were recorded at estimated fair values as of the acquisition date. Total goodwill is $56.6 billion at June 30, 2007, of which $35.3 billion results from the Gillette acquisition. Such goodwill reflects the residual amount from a purchase price allocation as of the acquisition date. Because the Gillette intangible and goodwill amounts represent current values as of the relatively recent acquisition date, such amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate.

New Accounting Pronouncements

As more fully discussed in Notes 1 and 9 to the Consolidated Financial Statements, we adopted SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” at June 30, 2007. SFAS 158 requires companies to recognize the over-funded and under-funded status of defined benefit pension and other postretirement plans as assets or liabilities on their balance sheets and to recognize previously unrecognized changes in that funded status, in the year in which changes occur, through other comprehensive income in shareholders’ equity.

In July 2006, the FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the accounting and disclosure of uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We will adopt FIN 48 on July 1, 2007. We estimate that the adoption of FIN 48 will result in a net decrease to beginning retained earnings of approximately $200-$250 million, primarily related to the accrual of additional interest and penalties on unrecognized tax benefits.

No other new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the Consolidated Financial Statements.

OTHER INFORMATION

Hedging and Derivative Financial Instruments

As a multinational company with diverse product offerings, we are exposed to market risks such as changes in interest rates, currency exchange rates and commodity prices. To manage the volatility related to these exposures, we evaluate our exposures on a global basis to take advantage of the direct netting opportunities and of currency, interest rate and commodity correlations that exist within the portfolio. For the remaining exposures, we enter into various derivative transactions in accordance with the Company’s hedging policies that are designed to partially, or entirely, offset changes in the underlying exposures being hedged. We do not hold or issue derivative financial instruments for speculative trading purposes. Note 6 to the Consolidated Financial Statements includes a detailed discussion of our accounting policies for financial instruments.

Derivative positions are monitored using techniques including market valuation, sensitivity analysis and value-at-risk modeling. The tests for interest rate, currency rate and commodity price exposures discussed below are based on the CorporateManager ™ value-at-risk model using a one-year horizon and a 95% confidence level. The model incorporates the impact of correlation (the degree to which exposures move together over time) and diversification (from holding multiple currency, commodity and interest rate instruments) and assumes that financial returns are normally distributed. Estimates of volatility and correlations of market factors are drawn from the RiskMetrics™ dataset as of June 30, 2007. In cases where data is unavailable in RiskMetrics™, a reasonable proxy is included.

Our market risk exposures relative to interest rates, currency rates and commodity prices, as discussed below, have not changed materially versus the previous reporting period. In addition, we are not aware of any facts or circumstances that would significantly impact such exposures in the near term.

Interest Rate Exposure. Interest rate swaps are used to hedge exposures to interest rate movement on underlying debt obligations. Certain interest rate swaps denominated in foreign currencies are designated to hedge exposures to currency exchange rate movements on our investments in foreign operations. These currency interest rate swaps are designated as hedges of the Company’s foreign net investments.

Based on our overall interest rate exposure as of and during the year ended June 30, 2007, including derivative and other instruments sensitive to interest rates, we believe a near-term change in interest rates, at a 95% confidence level based on historical interest rate movements, would not materially affect our financial statements.

Currency Rate Exposure. Because we manufacture and sell products in a number of countries throughout the world, we are exposed to the impact on revenue and expenses of movements in currency exchange rates. The primary purpose of our currency hedging activities is to reduce the risk that our financial position will be adversely affected by short-term changes in exchange rates. Corporate policy prescribes the range of allowable hedging activity. We primarily use forward contracts and options with maturities of less than 18 months.

In addition, we enter into certain currency swaps with maturities of up to five years to hedge our exposure to exchange rate movements on intercompany financing transactions. We also use purchased currency options with maturities of generally less than 18 months and forward contracts to hedge against the effect of exchange rate fluctuations on intercompany royalties and to offset a portion of the effect of exchange rate fluctuations on income from international operations.

Based on our overall currency rate exposure as of and during the year ended June 30, 2007, we believe, at a 95% confidence level based on historical currency rate movements, the impact of a near-term change in currency rates on derivative and other instruments would not materially affect our financial statements.

Commodity Price Exposure. We use raw materials that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. In addition to fixed price contracts, we use futures, options and swap contracts to manage the volatility related to the above exposures. The impact of commodity hedging activity is not considered material to our financial statements.

Measures Not Defined By U.S. GAAP

Our discussion of financial results includes several “non-GAAP” financial measures. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight to some of the metrics used to evaluate management. When used in MD&A, we have provided the comparable GAAP measure in the discussion. These measures include:

Organic Sales Growth. Organic sales growth measures sales growth excluding the impacts of foreign exchange, acquisitions and divestitures from year-over-year comparisons. The Company believes this provides investors with a more complete understanding of underlying results and trends by providing sales growth on a consistent basis.

The following table provides a numerical reconciliation of organic sales growth to reported net sales growth for fiscal 2007:

	Total Company			Grooming			Health Care
Reported net sales growth		12	%		45	%		13	%
Less: Acquisitions & divestitures impact		-5	%		-35	%		-4	%
Less: Foreign exchange impact		-2	%		-4	%		-2	%
Organic sales growth		5	%		6	%		7	%

The following table provides a numerical reconciliation of organic sales growth to reported net sales growth for fiscal 2006:

	Total Company
Reported net sales growth		20	%
Less: Acquisitions & divestitures impact		-14	%
Less: Foreign exchange impact		1	%
Organic sales growth		7	%

Free Cash Flow. Free cash flow is defined as operating cash flow less capital spending. The Company views free cash flow as an important measure because it is one factor in determining the amount of cash available for dividends and discretionary investment. Free cash flow is also one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation.

Free Cash Flow Productivity. Free cash flow productivity is defined as the ratio of free cash flow to net earnings. The Company’s target is to generate free cash flow at or above 90% of net earnings. Free cash flow productivity is one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation.

The following table provides a numerical reconciliation of free cash flow:

										Free Cash Flow
	Operating Cash Flow		Capital Spending			Free Cash Flow		Net Earnings		Productivity
2007	$	13,435	$	(2,945	)	$	10,490	$	10,340		101	%
2006		11,375		(2,667	)		8,708		8,684		100	%

EX-99.2

Exhibit 99-2: Revised Consolidated Financial Statements and Accompanying Footnotes

Consolidated Statements of Earnings

     The Procter & Gamble Company and Subsidiaries

	Years ended June 30
Amounts in millions except per share amounts	2007		2006		2005
Net Sales	$	76,476	$	68,222	$	56,741
Cost of products sold		36,686		33,125		27,872
Selling, general and administrative expense		24,340		21,848		18,400
Operating Income		15,450		13,249		10,469
Interest expense		1,304		1,119		834
Other non-operating income, net		564		283		346
Earnings Before Income Taxes		14,710		12,413		9,981
Income taxes		4,370		3,729		3,058
Net Earnings	$	10,340	$	8,684	$	6,923
Basic Net Earnings Per Common Share	$	3.22	$	2.79	$	2.70
Diluted Net Earnings Per Common Share	$	3.04	$	2.64	$	2.53
Dividends Per Common Share	$	1.28	$	1.15	$	1.03

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

The Procter & Gamble Company and Subsidiaries

	June 30
Amounts in millions	2007			2006
ASSETS
Current Assets
Cash and cash equivalents	$	5,354		$	6,693
Investment securities		202			1,133
Accounts receivable		6,629			5,725
Inventories
Materials and supplies		1,590			1,537
Work in process		444			623
Finished goods		4,785			4,131
Total inventories		6,819			6,291
Deferred income taxes		1,727			1,611
Prepaid expenses and other current assets		3,300			2,876
Total Current Assets		24,031			24,329
Property, Plant and Equipment
Buildings		6,380			5,871
Machinery and equipment		27,492			25,140
Land		849			870
		34,721			31,881
Accumulated depreciation		(15,181	)		(13,111	)
Net Property, Plant and Equipment		19,540			18,770
Goodwill and Other Intangible Assets
Goodwill		56,552			55,306
Trademarks and other intangible assets, net		33,626			33,721
Net Goodwill and Other Intangible Assets		90,178			89,027
Other Noncurrent Assets		4,265			3,569
Total Assets	$	138,014		$	135,695

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

The Procter & Gamble Company and Subsidiaries

	June 30
Amounts in millions	2007			2006
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	5,710		$	4,910
Accrued and other liabilities		9,586			9,587
Taxes payable		3,382			3,360
Debt due within one year		12,039			2,128
Total Current Liabilities		30,717			19,985
Long-Term Debt		23,375			35,976
Deferred Income Taxes		12,015			12,354
Other Noncurrent Liabilities		5,147			4,472
Total Liabilities		71,254			72,787
Shareholders’ Equity
Convertible Class A preferred stock, stated value $1 per share (600 shares authorized)		1,406			1,451
Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized)		—			—
Common stock, stated value $1 per share (10,000 shares authorized; shares issued: 2007 — 3,989.7, 2006 — 3,975.8)		3,990			3,976
Additional paid-in capital		59,030			57,856
Reserve for ESOP debt retirement		(1,308	)		(1,288	)
Accumulated other comprehensive income		617			(518	)
Treasury stock, at cost (shares held: 2007 — 857.8, 2006 — 797.0)		(38,772	)		(34,235	)
Retained earnings		41,797			35,666
Total Shareholders’ Equity		66,760			62,908
Total Liabilities and Shareholders’ Equity	$	138,014		$	135,695

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
The Procter & Gamble Company and Subsidiaries

															Accumulated
	Common								Additional			Reserve for			Other												Total
Dollars in millions/	Shares			Common		Preferred			Paid-In			ESOP Debt			Comprehensive			Treasury			Retained						Comprehensive
Shares in thousands	Outstanding			Stock		Stock			Capital			Retirement			Income			Stock			Earnings			Total			Income
Balance June 30, 2004		2,543,838		$	2,976	$	1,526		$	2,454		$	(1,283	)	$	(1,545	)	$	(12,925	)	$	26,987		$	18,190
Net earnings																						6,923			6,923		$	6,923
Other comprehensive income:
Financial statement translation																118									118			118
Net investment hedges, net of $81 tax																135									135			135
Other, net of tax benefits																(274	)								(274	)		(274	)
Total comprehensive income																											$	6,902
Dividends to shareholders:
Common																						(2,595	)		(2,595	)
Preferred, net of tax benefits																						(136	)		(136	)
Treasury purchases		(93,308	)																(5,026	)					(5,026	)
Employee plan issuances		17,524			1					569									721			(175	)		1,116
Preferred stock conversions		4,880					(43	)		7									36						—
Change in ESOP debt reserve													24												24
Balance June 30, 2005		2,472,934			2,977		1,483			3,030			(1,259	)		(1,566	)		(17,194	)		31,004			18,475
Net earnings																						8,684			8,684		$	8,684
Other comprehensive income:
Financial statement translation																1,316									1,316			1,316
Net investment hedges, net of $472 tax																(786	)								(786	)		(786	)
Other, net of tax benefits																518									518			518
Total comprehensive income																											$	9,732
Dividends to shareholders:
Common																						(3,555	)		(3,555	)
Preferred, net of tax benefits																						(148	)		(148	)
Treasury purchases		(297,132	)							(9	)								(16,821	)					(16,830	)
Employee plan issuances		36,763			16					1,308									887			(319	)		1,892
Preferred stock conversions		3,788					(32	)		5									27						—
Gillette acquisition		962,488			983					53,522									(1,134	)					53,371
Change in ESOP debt reserve													(29	)											(29	)
Balance June 30, 2006		3,178,841			3,976		1,451			57,856			(1,288	)		(518	)		(34,235	)		35,666			62,908
Net earnings																						10,340			10,340		$	10,340
Other comprehensive income:
Financial statement translation																2,419									2,419			2,419
Net investment hedges, net of $488 tax																(835	)								(835	)		(835	)
Other, net of tax benefits																(116	)								(116	)		(116	)
Total comprehensive income																											$	11,808
Adjustment to initially apply SFAS 158, net of tax																(333	)								(333	)
Dividends to shareholders:
Common																						(4,048	)		(4,048	)
Preferred, net of tax benefits																						(161	)		(161	)
Treasury purchases		(89,829	)																(5,578	)					(5,578	)
Employee plan issuances		37,824			14					1,167									1,003						2,184
Preferred stock conversions		5,110					(45	)		7									38						—
Change in ESOP debt reserve													(20	)											(20	)
Balance June 30, 2007		3,131,946		$	3,990	$	1,406		$	59,030		$	(1,308	)	$	617		$	(38,772	)	$	41,797		$	66,760

See accompanying Notes to Consolidated Financial Statements.

Consolidated Statements of Cash Flows
The Procter & Gamble Company and Subsidiaries

Amounts in millions	Years ended June 30
	2007			2006			2005
Cash and Cash Equivalents, Beginning of Year	$	6,693		$	6,389		$	4,232
Operating Activities
Net earnings		10,340			8,684			6,923
Depreciation and amortization		3,130			2,627			1,884
Share-based compensation expense		668			585			524
Deferred income taxes		253			(112	)		564
Change in accounts receivable		(729	)		(524	)		(86	)
Change in inventories		(389	)		383			(644	)
Change in accounts payable, accrued and other liabilities		(273	)		230			(101	)
Change in other operating assets and liabilities		(157	)		(508	)		(498	)
Other		592			10			113
Total Operating Activities		13,435			11,375			8,679
Investing Activities
Capital expenditures		(2,945	)		(2,667	)		(2,181	)
Proceeds from asset sales		281			882			517
Acquisitions, net of cash acquired		(492	)		171			(572	)
Change in investment securities		673			884			(100	)
Total Investing Activities		(2,483	)		(730	)		(2,336	)
Financing Activities
Dividends to shareholders		(4,209	)		(3,703	)		(2,731	)
Change in short-term debt		8,981			(8,627	)		2,016
Additions to long-term debt		4,758			22,545			3,108
Reductions of long-term debt		(17,929	)		(5,282	)		(2,013	)
Impact of stock options and other		1,499			1,319			521
Treasury purchases		(5,578	)		(16,830	)		(5,026	)
Total Financing Activities		(12,478	)		(10,578	)		(4,125	)
Effect of Exchange Rate Changes on Cash and Cash Equivalents		187			237			(61	)
Change in Cash and Cash Equivalents		(1,339	)		304			2,157
Cash and Cash Equivalents, End of Year	$	5,354		$	6,693		$	6,389
Supplemental Disclosure
Cash payments for:
Interest	$	1,330		$	1,045		$	783
Income taxes		4,116			2,869			2,644
Assets acquired through noncash capital leases		41			363			68
Gillette acquisition funded by share issuance		—			53,371			—

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Procter & Gamble Company’s (the “Company,” “we” or “us”) business is focused on providing branded consumer goods products of superior quality and value. Our products are sold in more than 180 countries primarily through retail operations including mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores. We have on-the-ground operations in over 80 countries.

Basis of Presentation

The Consolidated Financial Statements include The Procter & Gamble Company and its controlled subsidiaries. Intercompany transactions are eliminated.

Use of Estimates

Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying disclosures. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Estimates are used in accounting for, among other items, consumer and trade promotion accruals, pensions, post-employment benefits, stock options, valuation of acquired intangible assets, useful lives for depreciation and amortization, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and long-lived assets, deferred tax assets, potential income tax assessments and contingencies. Actual results may ultimately differ from estimates, although management does not believe such differences would materially affect the financial statements in any individual year.

Revenue Recognition

Sales are recognized when revenue is realized or realizable and has been earned. Most revenue transactions represent sales of inventory. The revenue recorded is presented net of sales and other taxes we collect on behalf of governmental authorities and includes shipping and handling costs, which generally are included in the list price to the customer. Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer. A provision for payment discounts and product return allowances is recorded as a reduction of sales in the same period that the revenue is recognized.

Trade promotions, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is recognized as incurred,

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

generally at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payouts under these programs are included as accrued marketing and promotion in the accrued and other liabilities line item in the Consolidated Balance Sheets.

Cost of Products Sold

Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.

Selling, General and Administrative Expense

Selling, general and administrative (SG&A) expense is primarily comprised of marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, depreciation and amortization expense on non-manufacturing assets and other miscellaneous operating items. Research and development costs are charged to expense as incurred and were $2,112 in 2007, $2,075 in 2006, and $1,940 in 2005. Advertising costs, charged to expense as incurred, include worldwide television, print, radio, Internet and in-store advertising expenses and were $7,937 in 2007, $7,122 in 2006, and $5,929 in 2005. The composition of amounts included in advertising costs have been changed for the current and historical periods to reflect evolving advertising strategies. Non-advertising related components of the Company’s total marketing spending include costs associated with consumer promotions, product sampling and sales aids, all of which are included in SG&A expense, as well as coupons and customer trade funds, which are recorded as reductions to net sales.

Other Non-Operating Income, Net

Other non-operating income, net primarily includes divestiture gains and interest and investment income.

Currency Translation

Financial statements of operating subsidiaries outside the United States of America (U.S.) generally are measured using the local currency as the functional currency. Adjustments to translate those statements into U.S. dollars are recorded in other comprehensive income. Currency translation adjustments in accumulated other comprehensive income were gains of $2,941 and $522 at June 30, 2007 and 2006, respectively. For subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments for financial statements in highly inflationary economies and other transactional exchange gains and losses are reflected in earnings.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Cash Flow Presentation

The Statement of Cash Flows is prepared using the indirect method, which reconciles net earnings to cash flow from operating activities. These adjustments include the removal of timing differences between the occurrence of operating receipts and payments and their recognition in net earnings. The adjustments also remove cash flows from operating activities arising from investing and financing activities, which are presented separately from operating activities. Cash flows from foreign currency transactions and operations are translated at an average exchange rate for the period. Cash flows from hedging activities are included in the same category as the items being hedged. Cash flows from derivative instruments designated as net investment hedges are classified as financing activities. Cash flows from other derivative instruments used to manage interest, commodity or currency exposures are classified as operating activities.

Cash Equivalents

Highly liquid investments with remaining stated maturities of three months or less when purchased are considered cash equivalents and recorded at cost.

Investments

Investment securities consist of auction rate securities that approximate fair value, readily marketable debt and equity securities that are classified as trading with unrealized gains or losses charged to earnings, and available-for-sale securities with unrealized gains or losses charged to shareholders’ equity.

Investments in certain companies over which we exert significant influence, but do not control the financial and operating decisions, are accounted for as equity method investments. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method and are included in other noncurrent assets.

Inventory Valuation

Inventories are valued at the lower of cost or market value. Product-related inventories are primarily maintained on the first-in, first-out method. Minor amounts of product inventories, including certain cosmetics and commodities, are maintained on the last-in, first-out method. The cost of spare part inventories is maintained using the average cost method.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost reduced by accumulated depreciation. Depreciation expense is recognized over the assets’ estimated useful lives using the straight-line method. Machinery and equipment includes office furniture and fixtures (15-year life), computer equipment and capitalized software (3- to 5-year lives) and manufacturing equipment (3- to 20-year lives). Buildings are depreciated over an estimated useful life of 40 years. Estimated useful lives are periodically reviewed and, when appropriate, changes are

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

made prospectively. When certain events or changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of the carrying amounts.

Goodwill and Other Intangible Assets

We have a number of acquired brands that have been determined to have indefinite lives due to the nature of our business. We evaluate a number of factors to determine whether an indefinite life is appropriate, including the competitive environment, market share, brand history, product life cycles, operating plans and the macroeconomic environment of the countries in which the brands are sold. When certain events or changes in operating conditions occur, an impairment assessment is performed and indefinite-lived brands may be adjusted to a determinable life.

Goodwill and indefinite-lived brands are not amortized, but are evaluated annually for impairment or when indicators of a potential impairment are present. Our impairment testing of goodwill is performed separately from our impairment testing of individual indefinite-lived intangibles. The annual evaluation for impairment of goodwill and indefinite-lived intangibles is based on valuation models that incorporate internal projections of expected future cash flows and operating plans.

The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships and other noncontractual intangible assets with determinable lives are amortized over periods generally ranging from 5 to 40 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

Fair Values of Financial Instruments

Certain financial instruments are required to be recorded at fair value. The estimated fair values of such financial instruments (including certain debt instruments, investment securities and derivatives) have been determined using market information and valuation methodologies, primarily discounted cash flow analysis. Changes in assumptions or estimation methods could affect the fair value estimates. However, we do not believe any such changes would have a material impact on our financial condition or results of operations. Other financial instruments, including cash equivalents, other investments and short-term debt, are recorded at cost, which approximates fair value. The fair values of long-term debt and derivative instruments are disclosed in Note 5 and Note 6, respectively.

New Accounting Pronouncements and Policies

Other than as described below, no new accounting pronouncement issued or effective during the fiscal year has had or is expected to have a material impact on the consolidated financial statements.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

ADOPTION OF SFAS 158, “EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS, an amendment of FASB Statements No. 87, 88, 106, and 132(R)”

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS 158 requires companies to recognize the over-funded and under-funded status of defined benefit pension and other postretirement plans as assets or liabilities on their balance sheets. In addition, changes in the funded status must be recognized through other comprehensive income in shareholders’ equity in the year in which the changes occur. We adopted SFAS 158 on June 30, 2007. In accordance with the transition rules in SFAS 158, this standard is being adopted on a prospective basis. The adoption of SFAS 158 resulted in an adjustment to our balance sheet, but had no impact on our net earnings or cash flow, nor did it impact any debt covenants. SFAS 158 had no impact on our measurement date which continues to be as of our fiscal year-end. Refer to Note 9 for additional information regarding our pension and postretirement plans.

The following table reflects the effect of the adoption of SFAS 158 on our consolidated balance sheets:

	Before Application					After Application
As of June 30, 2007	of SFAS 158		SFAS 158 Adjustments			of SFAS 158
Other noncurrent assets	$	4,432	$	(167	)	$	4,265
Total assets		138,181		(167	)		138,014
Deferred income taxes		12,214		(199	)		12,015
Other noncurrent liabilities		4,782		365			5,147
Total liabilities		71,088		166			71,254
Accumulated other comprehensive income		950		(333	)		617
Total shareholders’ equity		67,093		(333	)		66,760
Total liabilities and shareholders’ equity		138,181		(167	)		138,014

FASB INTERPRETATION 48, “ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES”

In July 2006, the FASB issued FASB Interpretation (FIN) 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 addresses the accounting and disclosure of uncertain tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We will adopt FIN 48 on July 1, 2007. We estimate that the adoption of FIN 48 will result in a net decrease to beginning retained earnings of approximately $200-$250, primarily related to the accrual of additional interest and penalties on unrecognized tax benefits.

NOTE 2 ACQUISITIONS

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Gillette Acquisition

On October 1, 2005, we completed our acquisition of The Gillette Company. Pursuant to the acquisition agreement, which provided for the exchange of 0.975 shares of The Procter & Gamble Company common stock, on a tax-free basis, for each share of The Gillette Company, we issued 962 million shares of The Procter & Gamble Company common stock. The value of these shares was determined using the average Company stock prices beginning two days before and ending two days after January 28, 2005, the date the acquisition was announced. We also issued 79 million stock options in exchange for Gillette’s outstanding stock options. Under the purchase method of accounting, the total consideration was approximately $53.4 billion including common stock, the fair value of vested stock options and acquisition costs. This acquisition resulted in one new reportable segment: Grooming. The Gillette oral care, batteries and personal care businesses were subsumed within the Health Care, Fabric Care and Home Care, and Beauty reportable segments, respectively. The operating results of the Gillette businesses are reported in our financial statements beginning October 1, 2005.

The Gillette Company is a market leader in several global product categories including blades and razors, oral care and batteries. Total sales for Gillette during its most recent pre-acquisition year ended December 31, 2004, were $10.5 billion.

In order to obtain regulatory approval of the transaction, we were required to divest certain overlapping businesses. We completed the divestiture of the Spinbrush toothbrush business, Rembrandt (a Gillette oral care product line), Right Guard and other Gillette deodorant brands during the fiscal year ended June 30, 2006.

In connection with this acquisition, we also announced a share buyback plan under which we planned to acquire up to $22.0 billion of Company common shares through the open market or from private transactions. We completed this share buyback plan in July 2006 with cumulative purchases of $20.1 billion. The repurchases were financed by borrowings under a $24.0 billion three-year credit facility with a syndicate of banks (see Note 5).

The following table provides pro forma results of operations for the years ended June 30, 2006 and 2005, as if Gillette had been acquired as of the beginning of each fiscal year presented. The pro forma results include certain purchase accounting adjustments such as the changes in depreciation and amortization expense on acquired tangible and intangible assets. However, pro forma results do not include any anticipated cost savings or other effects of the integration activities of Gillette. Accordingly, such amounts are not necessarily indicative of the results if the acquisition had occurred on the date indicated or that may result in the future.

Pro forma results; Years ended June 30	2006		2005
Net sales	$	71,005	$	67,920
Net earnings		8,871		8,522
Diluted net earnings per common share	$	2.51	$	2.29

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

During the three months ended September 30, 2006, we completed the allocation of the purchase price to the individual assets acquired and liabilities assumed. To assist management in the allocation, we engaged valuation specialists to prepare independent appraisals. The following table presents the completed allocation of purchase price for the Gillette business as of the date of the acquisition.

Current assets	$	5,681
Property, plant and equipment		3,655
Goodwill		35,298
Intangible assets		29,707
Other noncurrent assets		382
Total assets acquired		74,723
Current liabilities		5,346
Noncurrent liabilities		15,951
Total liabilities assumed		21,297
Net assets acquired		53,426

The Gillette acquisition resulted in $35.3 billion in goodwill, allocated primarily to the segments which include the Gillette businesses (Grooming, Health Care, Fabric Care and Home Care, and Beauty). A portion of the goodwill has also been allocated to the other segments on the basis that certain cost synergies will benefit these businesses.

The purchase price allocation to the identifiable intangible assets included in these financial statements is as follows:

			Weighted
			average life
Intangible Assets with Determinable Lives
Brands	$	1,627		20
Patents and technology		2,716		17
Customer relationships		1,436		27
Brands with Indefinite Lives		23,928	Indefinite
Total intangible assets		29,707

The majority of the intangible asset valuation relates to brands. Our assessment as to brands that have an indefinite life and those that have a determinable life was based on a number of factors, including the competitive environment, market share, brand history, product life cycles, operating plan and macroeconomic environment of the countries in which the brands are sold. The indefinite-lived brands include Gillette, Venus, Duracell, Oral-B and Braun.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

The determinable-lived brands include certain brand sub-names, such as Mach 3 and Sensor in the blades and razors business, and other regional or local brands. The determinable-lived brands have asset lives ranging from 10 to 40 years. The patents and technology intangibles are concentrated in the blades and razors and oral care businesses and have asset lives ranging from 5 to 20 years. The customer relationship intangible asset useful lives ranging from 20 to 30 years reflect the very low historical and projected customer attrition rates among Gillette’s major retailer and distributor customers.

We also completed our analysis of integration plans, pursuant to which the Company is incurring costs primarily related to the elimination of selling, general and administrative overlap between the two companies in areas like Global Business Services, corporate staff and go-to-market support, as well as redundant manufacturing capacity. We recognized an assumed liability for Gillette exit costs of $1.2 billion, including $854 in separations related to approximately 5,500 people, $55 in employee relocation costs and $320 in other exit costs. As of June 30, 2007, the remaining liability was $608. Total integration plan charges against the assumed liability were $438 and $204 for the years ended June 30, 2007 and 2006, respectively. We expect such activities to be substantially complete by June 30, 2008.

Other minor business purchases and intangible asset acquisitions totaled $540, $395 and $572 in 2007, 2006 and 2005, respectively.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

NOTE 3 GOODWILL AND INTANGIBLE ASSETS

The change in the net carrying amount of goodwill by business was as follows:

	2007			2006
BEAUTY GBU
Beauty, beginning of year	$	14,968		$	12,699
Acquisitions and divestitures		(18	)		1,797
Translation and other		409			472
Goodwill, June 30, 2007		15,359			14,968
Grooming, beginning of year		23,586			—
Acquisitions and divestitures		289			23,197
Translation and other		336			389
Goodwill, June 30, 2007		24,211			23,586
HEALTH & WELL-BEING GBU
Health Care, beginning of year		8,387			3,564
Acquisitions and divestitures		5			4,723
Translation and other		90			100
Goodwill, June 30, 2007		8,482			8,387
Snacks, Coffee and Pet Care, beginning of year		2,396			1,954
Acquisitions and divestitures		5			437
Translation and other		6			5
Goodwill, June 30, 2007		2,407			2,396
HOUSEHOLD CARE GBU
Fabric Care and Home Care, beginning of year		4,406			644
Acquisitions and divestitures		(8	)		3,692
Translation and other		72			70
Goodwill, June 30, 2007		4,470			4,406
Baby Care and Family Care, beginning of year		1,563			955
Acquisitions and divestitures		9			672
Translation and other		51			(64	)
Goodwill, June 30, 2007		1,623			1,563
GOODWILL, NET, beginning of year		55,306			19,816
Acquisitions and divestitures		282			34,518
Translation and other		964			972
Goodwill, June 30, 2007	$	56,552		$	55,306

Acquisitions and divestitures in 2006 primarily reflect the Gillette acquisition, and in 2007 primarily reflect the finalization of the Gillette purchase price allocation. Gillette goodwill has been allocated primarily to the segments which include the Gillette businesses (Grooming, Health Care, Fabric Care and Home Care, and Beauty). A portion of the Gillette goodwill has also been allocated to the other segments on the basis that certain cost synergies will benefit these businesses.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Identifiable intangible assets were comprised of:

	2007				2006
	Gross Carrying		Accumulated		Gross Carrying		Accumulated
June 30	Amount		Amortization		Amount		Amortization
INTANGIBLE ASSETS WITH DETERMINABLE LIVES
Brands	$	3,317	$	710	$	3,135	$	540
Patents and technology		3,135		776		3,098		425
Customer relationships		1,738		237		1,695		135
Other		377		188		333		183
		8,567		1,911		8,261		1,283
BRANDS WITH INDEFINITE LIVES		26,970		—		26,743		—
		35,537		1,911		35,004		1,283

The amortization of intangible assets for the years ended June 30, 2007, 2006 and 2005, was $640, $587 and $198, respectively. Estimated amortization expense over the next five years is as follows: 2008 — $618; 2009 — $594; 2010 — $556; 2011 — $513 and 2012 — $480. Such estimates do not reflect the impact of future foreign exchange rate changes.

NOTE 4 SUPPLEMENTAL FINANCIAL INFORMATION

Selected components of current and noncurrent liabilities were as follows:

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

June 30	2007		2006
ACCRUED AND OTHER CURRENT LIABILITIES
Marketing and promotion	$	2,538	$	2,357
Liability under Wella Domination Agreement		218		207
Compensation expenses		1,390		1,471
Accrued Gillette exit costs		608		929
Other		4,832		4,623
		9,586		9,587
OTHER NONCURRENT LIABILITIES
Pension benefits (1)	$	2,898	$	2,550
Other postretirement benefits (1)		503		374
Other		1,746		1,548
		5,147		4,472

(1) 2007 amounts include adoption impact of SFAS 158. Refer to Notes 1 and 9 for additional information.

NOTE 5 SHORT-TERM AND LONG-TERM DEBT

June 30	2007		2006
SHORT-TERM DEBT
Current portion of long-term debt	$	2,544	$	1,930
USD commercial paper		9,410		—
Other		85		198
		12,039		2,128

The weighted average short-term interest rates were 5.0% and 5.3% as of June 30, 2007 and 2006, respectively, including the effects of interest rate swaps discussed in Note 6.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

June 30	2007			2006
LONG-TERM DEBT
3.50% USD note due October 2007	$	500		$	500
6.13% USD note due May 2008		500			500
Bank credit facility expires July 2008		4,537			19,555
4.30% USD note due August 2008		500			500
3.50% USD note due December 2008		650			650
6.88% USD note due September 2009		1,000			1,000
Bank credit facility expires August 2010		1,830			1,857
3.38% EUR note due December 2012		1,882			1,779
4.50% EUR note due May 2014		2,016			—
4.95% USD note due August 2014		900			900
4.85% USD note due December 2015		700			700
4.13% EUR note due December 2020		806			763
9.36% ESOP debentures due 2007-2021 (1)		968			1,000
4.88% EUR note due May 2027		1,344			—
6.25% GBP note due January 2030		1,001			917
5.50% USD note due February 2034		500			500
5.80% USD note due August 2034		600			600
5.55% USD note due March 2037		1,400			—
Capital lease obligations		628			632
All other long-term debt		3,657			5,553
Current portion of long-term debt		(2,544	)		(1,930	)
		23,375			35,976

(1) Debt issued by the ESOP is guaranteed by the Company and must be recorded as debt of the Company as discussed in Note 9.

Long-term weighted average interest rates were 3.3% and 3.6% as of June 30, 2007 and 2006, respectively, including the effects of interest rate swaps and net investment hedges discussed in Note 6.

The fair value of the long-term debt was $23,122 and $36,027 at June 30, 2007 and 2006, respectively. Long-term debt maturities during the next five years are as follows: 2008 — $2,544; 2009 — $5,751; 2010 — $1,982; 2011 — $1,877 and 2012 — $67.

The Procter & Gamble Company fully and unconditionally guarantees the debt securities

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

issued by its 100% owned finance subsidiaries.

NOTE 6 RISK MANAGEMENT ACTIVITIES

As a multinational company with diverse product offerings, we are exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage the volatility related to these exposures, we evaluate exposures on a consolidated basis to take advantage of logical exposure netting and correlation. For the remaining exposures, we enter into various financial transactions, which we account for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. The utilization of these financial transactions is governed by our policies covering acceptable counterparty exposure, instrument types and other hedging practices. We do not hold or issue derivative financial instruments for speculative trading purposes.

At inception, we formally designate and document qualifying instruments as hedges of underlying exposures. We formally assess, both at inception and at least quarterly on an ongoing basis, whether the financial instruments used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the fair value or cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. Any ineffective portion of a change in the fair value of a qualifying instrument is immediately recognized in earnings.

Credit Risk

We have established strict counterparty credit guidelines and normally enter into transactions with investment grade financial institutions. Counterparty exposures are monitored daily and downgrades in credit rating are reviewed on a timely basis. Credit risk arising from the inability of a counterparty to meet the terms of our financial instrument contracts generally is limited to the amounts, if any, by which the counterparty’s obligations exceed our obligations to the counterparty. We have not incurred and do not expect to incur material credit losses on our risk management or other financial instruments.

Interest Rate Management

Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage this risk in a cost-efficient manner, we enter into interest rate swaps in which we agree to exchange with the counterparty, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount.

Interest rate swaps that meet specific criteria under SFAS 133 are accounted for as fair value and cash flow hedges. For fair value hedges, the changes in the fair value of both the hedging instruments and the underlying debt obligations are immediately recognized in interest expense as equal and offsetting gains and losses. There were no fair value hedging instruments at June 30, 2007. The fair value of fair value hedging instruments was a liability

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

of $32 at June 30, 2006. All fair value hedges were 100% effective and as a result, there was no impact on earnings from hedge ineffectiveness. For cash flow hedges, the effective portion of the changes in fair value of the hedging instrument is reported in other comprehensive income (OCI) and reclassified into interest expense over the life of the underlying debt. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings. The fair value of these cash flow hedging instruments was an asset of $53 and $225 at June 30, 2007 and 2006, respectively. During the next 12 months, $33 of the June 30, 2007 OCI balance will be reclassified to earnings consistent with the timing of the underlying hedged transactions.

Foreign Currency Management

We manufacture and sell our products in a number of countries throughout the world and, as a result, are exposed to movements in foreign currency exchange rates. The purpose of our foreign currency hedging program is to reduce the risk caused by short-term changes in exchange rates.

To manage this exchange rate risk, we primarily utilize forward contracts and options with maturities of less than 18 months and currency swaps with maturities up to five years. These instruments are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases, intercompany royalties and intercompany loans denominated in foreign currencies and are therefore accounted for as cash flow hedges. The fair value of these instruments at June 30, 2007 and 2006, was $34 and $25 in assets and $2 and $58 in liabilities, respectively. The effective portion of the changes in fair value of these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the related hedged transactions affect earnings. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings.

Certain instruments used to manage foreign exchange exposure of intercompany financing transactions, income from international operations and other balance sheet items subject to revaluation do not meet the requirements for hedge accounting treatment. In these cases, the change in value of the instruments is designed to offset the foreign currency impact of the related exposure. The fair value of these instruments at June 30, 2007 and 2006, was $110 and $17 in assets and $78 and $19 in liabilities, respectively. The change in value of these instruments is immediately recognized in earnings. The net impact of such instruments, included in selling, general and administrative expense, was $56, $87 and $18 of gains in 2007, 2006 and 2005, respectively, which substantially offset foreign currency transaction and translation losses of the exposures being hedged.

Net Investment Hedging

We hedge certain net investment positions in major foreign subsidiaries. To accomplish this, we either borrow directly in foreign currency and designate all or a portion of foreign currency debt as a hedge of the applicable net investment position or enter into foreign currency swaps that are designated as hedges of our related foreign net investments. Under SFAS 133, changes in the fair value of these instruments are immediately recognized in OCI

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

to offset the change in the value of the net investment being hedged. Currency effects of these hedges reflected in OCI were after-tax losses of $835 and $786 in 2007 and 2006, respectively, and a $135 after-tax gain in 2005. Accumulated net balances were $2,072 and $1,237 after-tax losses as of June 30, 2007 and 2006, respectively.

Commodity Price Management

Certain raw materials utilized in our products or production processes are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility related to anticipated purchases of certain of these materials, we use futures and options with maturities generally less than one year and swap contracts with maturities up to five years. These market instruments generally are designated as cash flow hedges under SFAS 133. The effective portion of the changes in fair value for these instruments is reported in OCI and reclassified into earnings in the same financial statement line item and in the same period or periods during which the hedged transactions affect earnings. The ineffective portion, which is not material for any year presented, is immediately recognized in earnings. The fair value of these cash flow hedging instruments was an asset of $70 and $32 at June 30, 2007 and 2006, respectively. During the next 12 months, $14 of the June 30, 2007 OCI balance will be reclassified to earnings consistent with the timing of the underlying hedged transactions.

Insurance

The Company purchases limited discretionary insurance to cover catastrophic property damage, business interruption, and liability risk of loss exposures. Deductibles and loss sharing will likely increase over time, recognizing the Company’s ability to cost-effectively fund losses from internal cash flow generation and access to capital markets.

NOTE 7 EARNINGS PER SHARE

Net earnings less preferred dividends (net of related tax benefits) are divided by the weighted average number of common shares outstanding during the year to calculate basic net earnings per common share. Diluted net earnings per common share are calculated to give effect to stock options and other stock-based awards (see Note 8) and assume conversion of preferred stock (see Note 9).

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Net earnings and common shares used to calculate basic and diluted net earnings per share were as follows:

Years ended June 30	2007			2006			2005
NET EARNINGS	$	10,340		$	8,684		$	6,923
Preferred dividends, net of tax benefit		(161	)		(148	)		(136	)
NET EARNINGS AVAILABLE TO COMMON SHAREHOLDERS		10,179			8,536			6,787
Preferred dividends, net of tax benefit		161			148			136
Preferred dividend impact on funding of ESOP		—			—			(1	)
DILUTED NET EARNINGS		10,340			8,684			6,922

Shares in millions; Years ended June 30	2007		2006		2005
Basic weighted average common shares outstanding		3,159.0		3,054.9		2,515.6
Effect of dilutive securities
Conversion of preferred shares (1)		149.6		154.1		158.3
Exercise of stock options and other unvested equity awards (2)		90.0		76.9		63.2
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		3,398.6		3,285.9		2,737.1

(1)	Despite being included currently in diluted net earnings per common share, the actual conversion to common stock occurs pursuant to the repayment of the ESOPs’ obligations through 2035.
(2)	Approximately 41 million in 2007, 44 million in 2006 and 48 million in 2005 of the Company’s outstanding stock options were not included in the diluted net earnings per share calculation because to do so would have been antidilutive (i.e., the total proceeds upon exercise would have exceeded the market value of the underlying common shares).

NOTE 8 STOCK-BASED COMPENSATION

We have a primary stock-based compensation plan under which stock options are granted annually to key managers and directors with exercise prices equal to the market price of the underlying shares on the date of grant. A total of 229 million shares of common stock were authorized for issuance under plans approved by shareholders in 2001 and 2003, of which 73 million remain available for grant. An additional 20 million shares of common stock were authorized for issuance under a plan approved by Gillette shareholders in 2004 and assumed by the Company in conjunction with the acquisition of The Gillette Company in October 2005. A total of 14 million of these shares remain available for grant under this plan. There are also approximately five million shares available for grant under the Future Shares Plan

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

approved by the Board of Directors in 1997. This plan will terminate in October 2007. Grants issued under P&G shareholder approved plans since September 2002 are vested after three years and have a 10-year life. Grants issued under these plans from July 1998 through August 2002 are vested after three years and have a 15-year life, while grants issued prior to July 1998 are vested after one year and have a 10-year life. In addition to our key manager and director grants, we make other minor stock option grants to employees for which vesting terms and option lives are not substantially different.

Total stock-based compensation expense for stock option grants was $612, $526 and $459 for 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for these stock-based compensation arrangements was $163, $140 and $125 for 2007, 2006 and 2005, respectively. We also make minor grants of restricted stock, restricted stock units and other stock-based grants to certain employees. Total compensation cost for these restricted stock, restricted stock units and other stock-based grants, which are generally expensed at grant date, was $56, $59 and $65 in 2007, 2006 and 2005, respectively.

In calculating the compensation expense for options granted, we estimated the fair value of each grant issued through December 31, 2004, using the Black-Scholes option-pricing model. Effective January 1, 2005, we utilize a binomial lattice-based model for the valuation of stock option grants. The utilization of the binomial lattice-based model did not have a significant impact on the valuation of stock options as compared to the Black-Scholes model. Assumptions utilized in the model, which are evaluated and revised, as necessary, to reflect market conditions and experience, were as follows:

Years ended June 30	2007			2006			2005
Interest rate		4.3%-4.8	%		4.5%-4.7	%		3.2%-4.5	%
Weighted average interest rate		4.5	%		4.6	%		4.4	%
Dividend yield		1.9	%		1.9	%		1.9	%
Expected volatility		16%-20	%		15%-20	%		15%-20	%
Weighted average volatility		19	%		19	%		20	%
Expected life in years		9			9			9

Because lattice-based option valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed in the preceding table. Expected volatilities are based on a combination of historical volatility of our stock and implied volatilities of call options on our stock. We use historical data to estimate option exercise and employee termination patterns within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The interest rate for periods within the contractual life of the options is based on the U.S. Treasury yield curve in effect at the time of grant.

A summary of options under the plans as of June 30, 2007, and activity during the year then ended is presented below:

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

						Weighted Avg.
						Remaining
				Weighted Avg.		Contractual Life in		Aggregate Intrinsic
Options in thousands	Options			Exercise Price		Years		Value (in millions)
Outstanding, beginning of year		362,352		$	43.71
Granted		33,091			63.33
Exercised		(37,658	)		37.77
Canceled		(2,779	)		51.66
OUTSTANDING, END OF YEAR		355,006			46.10		7.5	$	5,424
EXERCISABLE		257,171			41.22		7.0		5,132

The weighted average grant-date fair value of options granted was $17.29, $16.30 and $14.34 per share in 2007, 2006 and 2005, respectively. The total intrinsic value of options exercised was $894, $815 and $526 in 2007, 2006 and 2005, respectively. The total grant-date fair value of options that vested during 2007, 2006 and 2005 was $552, $388 and $532, respectively. We have no specific policy to repurchase common shares to mitigate the dilutive impact of options; however, we have historically made adequate discretionary purchases, based on cash availability, market trends and other factors, to satisfy stock option exercise activity.

At June 30, 2007, there was $622 of compensation cost that has not yet been recognized related to nonvested stock-based awards. That cost is expected to be recognized over a remaining weighted average period of 1.9 years.

Cash received from options exercised was $1,422, $1,229 and $455 in 2007, 2006 and 2005, respectively. The actual tax benefit realized for the tax deductions from option exercises totaled $265, $242 and $149 in 2007, 2006 and 2005, respectively.

NOTE 9 POSTRETIREMENT BENEFITS AND EMPLOYEE STOCK OWNERSHIP PLAN

We offer various postretirement benefits to our employees.

Defined Contribution Retirement Plans

We have defined contribution plans which cover the majority of our U.S. employees, as well as employees in certain other countries. These plans are fully funded. We generally make contributions to participants’ accounts based on individual base salaries and years of service. The primary U.S. defined contribution plan (the U.S. DC plan) comprises the majority of the balances and expense for the Company’s defined contribution plans. For the U.S. DC plan, the contribution rate is set annually. Total contributions for this plan approximated 15% of total participants’ annual wages and salaries in 2007, 2006 and 2005.

We maintain The Procter & Gamble Profit Sharing Trust (Trust) and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the U.S. DC plan, as well as other retiree benefits. Operating details of the ESOP are provided at the end of this Note. The fair value of the ESOP Series A shares allocated to participants reduces our cash contribution

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

required to fund the U.S. DC plan. Total defined contribution expense was $273, $249 and $215 in 2007, 2006 and 2005, respectively.

Defined Benefit Retirement Plans and Other Retiree Benefits

We offer defined benefit retirement pension plans to certain employees. These benefits relate primarily to local plans outside the U.S., and to a lesser extent, plans assumed in the Gillette acquisition covering U.S. employees. These acquired Gillette plans will be frozen effective January 1, 2008.

We also provide certain other retiree benefits, primarily health care and life insurance, for the majority of our U.S. employees who become eligible for these benefits when they meet minimum age and service requirements. Generally, the health care plans require cost sharing with retirees and pay a stated percentage of expenses, reduced by deductibles and other coverages. These benefits are primarily funded by ESOP Series B shares, as well as certain other assets contributed by the Company.

As discussed in Note 1, we adopted SFAS 158 on June 30, 2007, on the required prospective basis. Our June 30, 2007 disclosure is in accordance with the new requirements.

Obligation and Funded Status. We use a June 30 measurement date for our defined benefit retirement plans and other retiree benefit plans. The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans:

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	Pension Benefits (1)						Other Retiree Benefits (2)
Years ended June 30	2007			2006			2007			2006
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year (3)	$	9,244		$	5,626		$	3,286		$	3,079
Service cost		279			265			85			97
Interest cost		476			383			206			179
Participants’ contributions		19			19			55			35
Amendments		24			65			12			—
Actuarial (gain) loss		1			(754	)		80			(466	)
Acquisitions (divestitures)		(8	)		3,744			—			506
Curtailments and settlements		(163	)		(9	)		(1	)		—
Special termination benefits		1			—			2			1
Currency translation and other		431			247			35			22
Benefit payments		(485	)		(342	)		(202	)		(167	)
BENEFIT OBLIGATION AT END OF YEAR (3)		9,819			9,244			3,558			3,286
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year	$	6,203		$	2,572		$	3,091		$	2,700
Actual return on plan assets		736			481			429			234
Acquisitions (divestitures)		(2	)		2,889			—			288
Employer contributions		565			427			30			21
Participants’ contributions		19			19			55			35
Currency translation and other		314			157			1			(1	)
ESOP debt impacts (4)		—			—			(14	)		(19	)
Benefit payments		(485	)		(342	)		(202	)		(167	)
FAIR VALUE OF PLAN ASSETS AT END OF YEAR		7,350			6,203			3,390			3,091
FUNDED STATUS		(2,469	)		(3,041	)		(168	)		(195	)

(1)	Primarily non-U.S.-based defined benefit retirement plans.
(2)	Primarily U.S.-based other postretirement benefit plans.
(3)	For the pension benefit plans, the benefit obligation is the projected benefit obligation. For other retiree benefit plans, the benefit obligation is the accumulated postretirement benefit obligation.
(4)	Represents increases in the ESOP’s debt, which is netted against plan assets for Other Retiree Benefits.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	Pension Benefits						Other Retiree Benefits
Years ended June 30	2007			2006			2007			2006
CALCULATION OF NET AMOUNT RECOGNIZED
Funded status at end of year	$	(2,469	)	$	(3,041	)	$	(168	)	$	(195	)
Unrecognized net actuarial loss		n/a			672			n/a			275
Unrecognized transition amount		n/a			7			n/a			—
Unrecognized prior service cost		n/a			146			n/a			(220	)
NET AMOUNT RECOGNIZED		(2,469	)		(2,216	)		(168	)		(140	)
CLASSIFICATION OF NET AMOUNT RECOGNIZED
Noncurrent assets — prepaid benefit cost	$	469		$	386		$	347		$	255
Current liability — accrued benefit cost		(40	)		(216	)		(12	)		(21	)
Noncurrent liability — accrued benefit cost		(2,898	)		(2,550	)		(503	)		(374	)
Intangible asset		n/a			74			n/a			—
Accumulated other comprehensive income — minimum pension liability		n/a			90			n/a			—
NET AMOUNT RECOGNIZED		(2,469	)		(2,216	)		(168	)		(140	)
AMOUNTS RECOGNIZED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI)
Net actuarial loss		379			—			337			—
Prior service cost (credit)		172			—			(185	)		—
Minimum pension liability		n/a			90			n/a			—
NET AMOUNTS RECOGNIZED IN AOCI		551			90			152			—

The underfunding of pension benefits is primarily a function of the different funding incentives that exist outside of the U.S. In certain countries where we have major operations, there are no legal requirements or financial incentives provided to companies to pre-fund pension obligations. In these instances, benefit payments are typically paid directly from the Company’s cash as they become due.

The accumulated benefit obligation for all defined benefit retirement pension plans was $8,611 and $8,013 at June 30, 2007, and June 30, 2006, respectively. Pension plans with accumulated benefit obligations in excess of plan assets and plans with projected benefit obligations in excess of plan assets consist of the following:

	Accumulated Benefit Obligation				Projected Benefit Obligation
	Exceeds the Fair Value of Plan				Exceeds the Fair Value of Plan
	Assets				Assets
Years ended June 30	2007		2006		2007		2006
Projected benefit obligation	$	4,813	$	5,597	$	6,763	$	7,695
Accumulated benefit obligation		4,294		4,912		5,792		6,544
Fair value of plan assets		1,973		2,684		3,825		4,498

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Net Periodic Benefit Cost. Components of the net periodic benefit cost were as follows:

	Pension Benefits									Other Retiree Benefits
Years ended June 30	2007			2006			2005			2007			2006			2005
Service cost	$	279		$	265		$	162		$	85		$	97		$	67
Interest cost		476			383			241			206			179			146
Expected return on plan assets		(454	)		(353	)		(185	)		(407	)		(372	)		(333	)
Amortization of deferred amounts		13			7			6			(22	)		(22	)		(22	)
Curtailment and settlement (gain) loss		(176	)		(4	)		13			(1	)		—			—
Recognized net actuarial loss		45			76			31			2			6			1
GROSS BENEFIT COST (CREDIT)		183			374			268			(137	)		(112	)		(141	)
Dividends on ESOP preferred stock		—			—			—			(85	)		(78	)		(73	)
NET PERIODIC BENEFIT COST (CREDIT)		183			374			268			(222	)		(190	)		(214	)

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Pursuant to plan revisions adopted during 2007, Gillette’s U.S. defined benefit retirement pension plans will be frozen effective January 1, 2008, at which time Gillette employees in the U.S. will move into the P&G defined contribution Profit Sharing Trust and Employee Stock Ownership Plan. This revision resulted in a $154 curtailment gain for the year ended June 30, 2007.

Amounts expected to be amortized from accumulated other comprehensive income into net period benefit cost during the year ending June 30, 2008, are as follows:

	Pension Benefits		Other Retiree Benefits
Net actuarial loss	$	25	$	6
Prior service cost (credit)		14		(21	)

Assumptions. We determine our actuarial assumptions on an annual basis. These assumptions are weighted to reflect each country that may have an impact on the cost of providing retirement benefits. The weighted average assumptions for the defined benefit and other retiree benefit calculations, as well as assumed health care trend rates, were as follows:

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	Pension Benefits						Other Retiree Benefits
Years ended June 30	2007			2006			2007			2006
ASSUMPTIONS USED TO DETERMINE BENEFIT OBLIGATIONS (1)
Discount rate		5.5	%		5.2	%		6.3	%		6.3	%
Rate of compensation increase		3.1	%		3.0	%		—			—
ASSUMPTIONS USED TO DETERMINE NET PERIODIC BENEFIT COST (2)
Discount rate		5.2	%		4.7	%		6.3	%		5.2	%
Expected return on plan assets		7.2	%		7.3	%		9.3	%		9.2	%
Rate of compensation increase		3.0	%		3.2	%		—			—
ASSUMED HEALTH CARE COST TREND RATES
Health care cost trend rates assumed for next year		—			—			9.0	%		10.0	%
Rate to which the health care cost trend rate is assumed to decline (ultimate trend rate)		—			—			5.1	%		5.1	%
Year that the rate reaches the ultimate trend rate		—			—			2013			2012

(1)	Determined as of end of year.
(2)	Determined as of beginning of year, and adjusted for acquisitions.

Several factors are considered in developing the estimate for the long-term expected rate of return on plan assets. For the defined benefit retirement plans, these include historical rates of return of broad equity and bond indices and projected long-term rates of return obtained from pension investment consultants. The expected long-term rates of return for plan assets are 8%-9% for equities and 5%-6% for bonds. For other retiree benefit plans, the expected long-term rate of return reflects the fact that the assets are comprised primarily of Company stock. The expected rate of return on Company stock is based on the long-term projected return of 9.5% and reflects the historical pattern of favorable returns on the Company’s stock.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Assumed health care cost trend rates could have a significant effect on the amounts reported for the other retiree benefit plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:

	One-Percentage		One-Percentage
	Point Increase		Point Decrease
Effect on total of service and interest cost components	$	51	$	(41	)
Effect on postretirement benefit obligation		526		(426	)

Plan Assets. Our target asset allocation for the year ending June 30, 2008, and actual asset allocation by asset category as of June 30, 2007 and 2006, are as follows:

	Target Asset Allocation
Asset Category	Pension Benefits			Other Retiree Benefits
Equity securities (1)		57	%		96	%
Debt securities		41	%		4	%
Real estate		2	%		—
TOTAL		100	%		100	%

	Asset Allocation at June 30
	Pension Benefits						Other Retireee Benefits
Asset Category	2007			2006			2007			2006
Equity securities (1)		56	%		59	%		96	%		96	%
Debt securities		39	%		39	%		4	%		4	%
Cash		3	%		0	%		—			—
Real estate		2	%		2	%		—			—
TOTAL		100	%		100	%		100	%		100	%

(1) Equity securities for other retiree plan assets include Company stock, net of Series B ESOP debt of $2,932 and $2,693 as of June 30, 2007 and 2006, respectively.

Our investment objective for defined benefit retirement plan assets is to meet the plans’ benefit obligations, while minimizing the potential for future required Company plan contributions. The investment strategies focus on asset class diversification, liquidity to meet benefit payments and an appropriate balance of long-term investment return and risk. Target ranges for asset allocations are determined by matching the actuarial projections of the plans’ future liabilities and benefit payments with expected long-term rates of return on the assets, taking into account investment return volatility and correlations across asset classes. Plan assets are diversified across several investment managers and are generally invested in liquid funds that are selected to track broad market equity and bond indices. Investment risk is carefully controlled with plan assets rebalanced to target allocations on a periodic basis and continual monitoring of investment managers’ performance relative to the investment guidelines established with each investment manager.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Cash Flows. Management’s best estimate of our cash requirements for the defined benefit retirement plans and other retiree benefit plans for the year ending June 30, 2008, is $468 and $42 , respectively. For the defined benefit retirement plans, this is comprised of $147 in expected benefit payments from the Company directly to participants of unfunded plans and $321 of expected contributions to funded plans. For other retiree benefit plans, this is comprised of expected contributions that will be used directly for benefit payments. Expected contributions are dependent on many variables, including the variability of the market value of the plan assets as compared to the benefit obligation and other market or regulatory conditions. In addition, we take into consideration our business investment opportunities and resulting cash requirements. Accordingly, actual funding may differ significantly from current estimates.

Total benefit payments expected to be paid to participants, which include payments funded from the Company’s assets, as discussed above, as well as payments paid from the plans, are as follows:

Years ended June 30	Pension Benefits		Other Retiree Benefits
EXPECTED BENEFIT PAYMENTS
2008	$	473	$	199
2009		439		216
2010		454		233
2011		468		249
2012		474		263
2013-2017		2,654		1,523

Employee Stock Ownership Plan

We maintain the ESOP to provide funding for certain employee benefits discussed in the preceding paragraphs.

The ESOP borrowed $1.0 billion in 1989 and the proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock to fund a portion of the U.S. DC plan. Principal and interest requirements of the borrowing were paid by the Trust from dividends on the preferred shares and from advances from the Company. The original borrowing of $1.0 billion has been repaid in full, and advances from the Company of $216 remain outstanding at June 30, 2007. Each share is convertible at the option of the holder into one share of the Company’s common stock. The dividend for the current year was equal to the common stock dividend of $1.28 per share. The liquidation value is $6.82 per share.

In 1991, the ESOP borrowed an additional $1.0 billion. The proceeds were used to purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of retiree health care benefits. These shares, net of the ESOP’s debt, are considered plan assets of the Other Retiree Benefits plan discussed above. Debt service requirements are funded by preferred stock dividends, cash contributions and advances from the Company, of which $123 is outstanding at June 30, 2007. Each share is convertible at the option of the holder into one share of the Company’s common stock. The dividend for the current year was equal to the

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

common stock dividend of $1.28 per share. The liquidation value is $12.96 per share.

As permitted by SOP 93-6, “Employers Accounting for Employee Stock Ownership Plans,” we have elected, where applicable, to continue our practices, which are based on SOP 76-3, “Accounting Practices for Certain Employee Stock Ownership Plans.” ESOP debt, which is guaranteed by the Company, is recorded as debt (see Note 5). Preferred shares issued to the ESOP are offset by the Reserve for ESOP Debt Retirement in the Consolidated Balance Sheets and the Consolidated Statements of Shareholders’ Equity. Advances to the ESOP are recorded as an increase in the Reserve for ESOP Debt Retirement. Interest incurred on the ESOP debt is recorded as interest expense. Dividends on all preferred shares, net of related tax benefits, are charged to retained earnings.

The series A and B preferred shares of the ESOP are allocated to employees based on debt service requirements, net of advances made by the Company to the Trust. The number of preferred shares outstanding at June 30 was as follows:

Shares in thousands	2007		2006		2005
Allocated		60,402		61,614		61,904
Unallocated		20,807		23,125		25,623
TOTAL SERIES A		81,209		84,739		87,527
Allocated		21,105		21,733		21,989
Unallocated		44,642		45,594		46,338
TOTAL SERIES B		65,747		67,327		68,327

For purposes of calculating diluted net earnings per common share, the preferred shares held by the ESOP are considered converted from inception.

In connection with the Gillette acquisition, we assumed the Gillette ESOP, which was established to assist Gillette employees in financing retiree medical costs. These ESOP accounts are held by participants and must be used to reduce the Company’s other retiree benefit obligations. Such accounts reduced our obligation by $245 at June 30, 2007.

NOTE 10 INCOME TAXES

Under SFAS 109, “Accounting for Income Taxes,” income taxes are recognized for the amount of taxes payable for the current year and for the impact of deferred tax liabilities and assets, which represent future tax consequences of events that have been recognized differently in the financial statements than for tax purposes. Deferred tax assets and liabilities are established using the enacted statutory tax rates and are adjusted for any changes in such rates in the period of change.

Management judgment is required in evaluating tax positions and other items that factor into determining tax provisions. Management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable. We establish reserves for additional income taxes related to positions that may be challenged by local authorities

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

and may not be fully sustained, despite our belief that the underlying tax positions are fully supportable. In such cases, the reserves for additional taxes are based on management’s best estimate of the ultimate outcome. These reserves are reviewed on an ongoing basis and are adjusted in light of changing facts and circumstances, including progress on tax audits, changes in interpretations of tax laws, developments in case law and closing of statutes of limitation. Our tax provision includes the impact of recording reserves and any changes thereto. We have a number of tax audits in process and have open tax years with various significant taxing jurisdictions that range primarily from 1997 to 2007. Based on currently available information, we do not believe the ultimate outcome of these tax audits and other tax positions related to open tax years, when finalized, will have a material adverse effect on our financial position, results of operations or cash flows.

Earnings before income taxes consisted of the following:

Years ended June 30	2007		2006		2005
United States	$	9,138	$	7,410	$	6,266
International		5,572		5,003		3,715
		14,710		12,413		9,981

The income tax provision consisted of the following:

Years ended June 30	2007		2006			2005
CURRENT TAX EXPENSE
U.S. federal	$	2,667	$	1,961		$	1,466
International		1,325		1,702			886
U.S. state and local		125		178			142
		4,117		3,841			2,494
DEFERRED TAX EXPENSE
U.S. federal		231		226			215
International and other		22		(338	)		349
		253		(112	)		564
TOTAL TAX EXPENSE		4,370		3,729			3,058

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

A reconciliation of the U.S. federal statutory income tax rate to our actual income tax rate is provided below:

Years ended June 30	2007			2006			2005
U.S. federal statutory income tax rate		35.0	%		35.0	%		35.0	%
Country mix impacts of foreign operations		-4.3	%		-3.6	%		-4.8	%
AJCA repatriation tax charge		—			—			2.8	%
Income tax reserve adjustments		-0.3	%		-1.5	%		-2.3	%
Other		-0.7	%		0.1	%		-0.1	%
EFFECTIVE INCOME TAX RATE		29.7	%		30.0	%		30.6	%

Income tax reserve adjustments represent changes in estimated exposures related to prior year tax positions. Tax benefits credited to shareholders’ equity totaled $1,066 and $174 for the years ended June 30, 2007 and 2006, respectively. These primarily relate to the tax effects of net investment hedges, excess tax benefits from the exercise of stock options and the impacts of certain adjustments to pension and other retiree benefit obligations recorded in shareholders’ equity, including the impact of adopting SFAS 158 in 2007.

The American Jobs Creation Act of 2004 (the AJCA) permitted U.S. corporations to repatriate earnings of foreign subsidiaries at a one-time favorable effective federal statutory tax rate of 5.25% as compared to the highest corporate tax rate of 35%. For the year ended June 30, 2006, we repatriated $7.2 billion in earnings previously considered indefinitely invested. We provided for $295 of deferred income tax expense associated with this repatriation in the year ended June 30, 2005.

We have undistributed earnings of foreign subsidiaries of approximately $17 billion at June 30, 2007, for which deferred taxes have not been provided. Such earnings are considered indefinitely invested in the foreign subsidiaries. If such earnings were repatriated, additional tax expense may result, although the calculation of such additional taxes is not practicable.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Deferred income tax assets and liabilities were comprised of the following:

June 30	2007			2006
DEFERRED TAX ASSETS
Stock-based compensation	$	1,132		$	1,063
Unrealized loss on financial and foreign exchange transactions		723			507
Pension and postretirement benefits		560			547
Loss and other carryforwards		439			615
Goodwill and other intangible assets		249			19
Advance payments		183			219
Accrued marketing and promotion expense		161			183
Accrued Gillette exit costs		138			173
Fixed assets		85			87
Other		1,076			1,025
Valuation allowances		(190	)		(398	)
		4,556			4,040
DEFERRED TAX LIABILITIES
Goodwill and other intangible assets	$	12,102		$	12,036
Fixed assets		1,884			1,861
Other		132			436
		14,118			14,333

Net operating loss carryforwards were $1,442 and $2,134 at June 30, 2007 and 2006, respectively. If unused, $663 will expire between 2008 and 2027. The remainder, totaling $779 at June 30, 2007, may be carried forward indefinitely.

NOTE 11 COMMITMENTS AND CONTINGENCIES

Guarantees

In conjunction with certain transactions, primarily divestitures, we may provide routine indemnifications (e.g., indemnification for representations and warranties, and retention of previously existing environmental, tax and employee liabilities) whose terms range in duration and in some circumstances are not explicitly defined. The maximum obligation under some such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, we have not made significant payments for these indemnifications. We believe that if we were to incur a loss on any of these matters, the loss would not have a material effect on our financial position, results of operations or cash flows.

In certain situations, we guarantee loans for suppliers and customers. The total amount of guarantees issued under such arrangements is not material.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Off-Balance Sheet Arrangements

We do not have off-balance sheet financing arrangements, including variable interest entities, under FIN 46, “Consolidation of Variable Interest Entities,” that have a material impact on our financial statements.

Purchase Commitments

We have purchase commitments for materials, supplies, services and property, plant and equipment as part of the normal course of business. Commitments made under take-or-pay obligations are as follows: 2008 — $1,360; 2009 — $914; 2010 — $634; 2011 — $459 and 2012 — $394 and $660 thereafter. Such amounts represent future purchases in line with expected usage to obtain favorable pricing. Approximately 44% of our purchase commitments relate to service contracts for information technology, human resources management and facilities management activities that were outsourced in recent years. Due to the proprietary nature of many of our materials and processes, certain supply contracts contain penalty provisions for early termination. We do not expect to incur penalty payments under these provisions that would materially affect our financial condition, cash flows or results of operations.

Operating Leases

We lease certain property and equipment for varying periods. Future minimum rental commitments under noncancelable operating leases are as follows: 2008 — $316; 2009 — $238; 2010 — $208; 2011 - $174; 2012 — $102 and $408 thereafter. Operating lease obligations are shown net of guaranteed sublease income.

Litigation

We are subject to various lawsuits and claims with respect to matters such as governmental regulations, income taxes and other actions arising out of the normal course of business. While considerable uncertainty exists, in the opinion of management and our counsel, the ultimate resolution of the various lawsuits and claims will not materially affect our financial condition, cash flows or results of operations.

We are also subject to contingencies pursuant to environmental laws and regulations that in the future may require us to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Based on currently available information, we do not believe the ultimate resolution of environmental remediation will have a material adverse effect on our financial position, cash flows or results of operations.

NOTE 12 SEGMENT INFORMATION

Through fiscal year 2007, we were organized under three Global Business Units as follows:

• The Beauty GBU includes the Beauty and the Grooming businesses. The Beauty business is comprised of retail and professional hair care, skin care, cosmetics, prestige fragrances, deodorants, and personal cleansing. The Grooming business includes blades and

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	razors, electric razors, face and shave preparation products and small home appliances.
•	The Health and Well-Being GBU includes the Health Care and the Snacks, Coffee and Pet Care businesses. The Health Care business includes oral care, feminine care and personal health and pharmaceuticals. The Snacks, Coffee and Pet Care business includes snacks, coffee and pet food.
•	The Household Care GBU includes the Fabric Care and Home Care and the Baby Care and Family Care businesses. Fabric Care and Home Care includes laundry detergents, fabric enhancers, dish care, surface care, air care, batteries and commercial products. Baby Care and Family Care includes diapers, baby wipes, bath tissue and kitchen towels.

Under U.S. GAAP, we have six reportable segments: Beauty; Grooming; Health Care; Snacks, Coffee and Pet Care; Fabric Care and Home Care; and Baby Care and Family Care. The accounting policies of the businesses are generally the same as those described in Note 1. Differences between these policies and U.S. GAAP primarily reflect: income taxes, which are reflected in the businesses using applicable blended statutory rates; the recording of fixed assets at historical exchange rates in certain high-inflation economies and the treatment of certain unconsolidated investees. Certain unconsolidated investees are managed as integral parts of our business units for management reporting purposes. Accordingly, these partially owned operations are reflected as consolidated subsidiaries in segment results, with 100% recognition of the individual income statement line items through before-tax earnings. Eliminations to adjust these line items to U.S. GAAP are included in Corporate. In determining after-tax earnings for the businesses, we eliminate the share of earnings applicable to other ownership interests, in a manner similar to minority interest, and apply statutory tax rates. Adjustments to arrive at our effective tax rate are also included in Corporate.

Corporate includes certain operating and non-operating activities that are not reflected in the operating results used internally to measure and evaluate the businesses, as well as eliminations to adjust management reporting principles to U.S. GAAP. Operating activities in Corporate include the results of incidental businesses managed at the corporate level along with the elimination of individual revenues and expenses generated by certain unconsolidated investees discussed in the preceding paragraph over which we exert significant influence, but do not control. Operating elements also comprise certain employee benefit costs, the costs of certain restructuring-type activities to maintain a competitive cost structure including manufacturing and workforce rationalization, and other general corporate items. The non-operating elements primarily include interest expense, divestiture gains and interest and investing income. In addition, Corporate includes the historical results of certain divested businesses, including certain Gillette brands that were divested in 2006 as required by the regulatory authorities in relation to the Gillette acquisition and the Juice business, which was divested in August of 2004. Corporate assets primarily include cash, investment securities and all goodwill.

We had net sales in the U.S. of $31.9, $29.5 and $25.3 billion for the years ended June 30, 2007, 2006 and 2005, respectively. Assets in the U.S. totaled $73.5 and $75.4 billion as of June 30, 2007 and 2006, respectively.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Our largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for 15% of consolidated net sales in both 2007 and 2006, and 16% of consolidated net sales in 2005.

											Depreciation
					Before-Tax						and				Capital
Global Segment Results		Net Sales			Earnings			Net Earnings			Amortization		Total Assets		Expenditures
BEAUTY GBU
BEAUTY (1)	2007	$	17,889		$	3,440		$	2,611		$	419	$	11,140	$	431
	2006		16,687			3,262			2,412			380		10,081		384
	2005		15,909			3,051			2,184			397		9,535		357
GROOMING (1)	2007		7,437			1,895			1,383			729		27,767		314
	2006		5,114			1,176			846			573		28,994		361
	2005		10			4			3			—		—		—
HEALTH AND WELL-BEING GBU
HEALTH CARE (1)	2007		13,381			3,365			2,233			439		9,512		374
	2006		11,831			2,785			1,829			374		9,636		341
	2005		9,880			2,132			1,376			299		4,495		290
SNACKS, COFFEE AND PET CARE	2007		4,537			759			477			164		2,176		141
	2006		4,383			627			385			159		2,122		150
	2005		4,314			714			444			162		2,197		142
HOUSEHOLD CARE GBU
FABRIC CARE AND HOME CARE (1)	2007		21,469			4,650			3,127			573		12,179		710
	2006		18,918			3,905			2,609			521		11,318		599
	2005		15,796			3,186			2,129			391		6,845		647
BABY CARE AND FAMILY CARE	2007		12,726			2,291			1,440			671		7,731		769
	2006		11,972			2,071			1,299			612		7,339		739
	2005		11,652			1,924			1,197			580		7,272		684
CORPORATE	2007		(963	)		(1,690	)		(931	)		135		67,509		206
	2006		(683	)		(1,413	)		(696	)		8		66,205		93
	2005		(820	)		(1,030	)		(410	)		55		31,183		61
TOTAL COMPANY	2007		76,476			14,710			10,340			3,130		138,014		2,945
	2006		68,222			12,413			8,684			2,627		135,695		2,667
	2005		56,741			9,981			6,923			1,884		61,527		2,181

(1) 2006 data includes Gillette results for the nine months ended June 30, 2006.

NOTE 13 QUARTERLY RESULTS (UNAUDITED)

Quarters Ended		Sept 30			Dec 31			Mar 31			Jun 30			Total Year
Net Sales	2006-2007	$	18,785		$	19,725		$	18,694		$	19,272		$	76,476
	2005-2006		14,793			18,337			17,250			17,842			68,222
Operating Income	2006-2007		4,054			4,350			3,646			3,400			15,450
	2005-2006		3,057			3,892			3,351			2,949			13,249
Gross Margin	2006-2007		52.8	%		52.9	%		51.6	%		50.8	%		52.0	%
	2005-2006		51.6	%		52.4	%		51.7	%		50.2	%		51.4	%
Net Earnings	2006-2007		2,698			2,862			2,512			2,268			10,340
	2005-2006		2,029			2,546			2,211			1,898			8,684
Diluted Net Earnings Per Common Share	2006-2007	$	0.79		$	0.84		$	0.74		$	0.67		$	3.04
	2005-2006		0.77			0.72			0.63			0.55			2.64

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

Financial Summary (Unaudited)

Amounts in Millions
except per share amounts	2007			2006			2005			2004			2003			2002			2001			2000			1999			1998			1997
Net Sales	$	76,476		$	68,222		$	56,741		$	51,407		$	43,377		$	40,238		$	39,244		$	39,951		$	38,125		$	37,154		$	35,764
Gross Margin		39,790			35,097			28,869			26,264			21,155			19,159			17,071			18,395			16,901			16,019			15,229
Operating Income		15,450			13,249			10,469			9,382			7,312			6,073			4,260			5,678			6,130			5,581			5,318
Net Earnings		10,340			8,684			6,923			6,156			4,788			3,910			2,612			3,363			3,683			3,472			3,305
Net Earnings Margin		13.5	%		12.7	%		12.2	%		12.0	%		11.0	%		9.7	%		6.7	%		8.4	%		9.7	%		9.3	%		9.2	%
Basic Net Earnings per Common Share	$	3.22		$	2.79		$	2.70		$	2.34		$	1.80		$	1.46		$	0.96		$	1.24		$	1.35		$	1.25		$	1.18
Diluted Net Earnings per Common Share		3.04			2.64			2.53			2.20			1.70			1.39			0.92			1.17			1.27			1.18			1.10
Dividends Per Common Share		1.28			1.15			1.03			0.93			0.82			0.76			0.70			0.64			0.57			0.51			0.45
Restructuring Program Charges (1)	$	—		$	—		$	—		$	—		$	751		$	958		$	1,850		$	814		$	481		$	—		$	—
Research and Development Expense		2,112			2,075			1,940			1,802			1,665			1,601			1,769			1,899			1,726			1,546			1,469
Advertising Expense		7,937			7,122			5,929			5,466			4,487			3,782			3,729			3,906			3,542			3,638			3,414
Total Assets		138,014			135,695			61,527			57,048			43,706			40,776			34,387			34,366			32,192			31,042			27,598
Capital Expenditures		2,945			2,667			2,181			2,024			1,482			1,679			2,486			3,018			2,828			2,559			2,129
Long-Term Debt		23,375			35,976			12,887			12,554			11,475			11,201			9,792			9,012			6,265			5,774			4,159
Shareholders’ Equity		66,760			62,908			18,475			18,190			17,025			14,415			12,560			12,673			12,352			12,493			12,139

(1) Restructuring program charges, on an after-tax basis, totaled, $538, $706, $1,475, $688 and $285 for 2003, 2002, 2001, 2000 and 1999, respectively.

Shareholder Return Performance Graphs

The following graphs compare the five-year and ten-year cumulative total return of P&G’s common stock as compared with the S&P 500 Stock Index, the Dow Jones Industrial Average Index, and a composite group comprised of the S&P Household Products Index, the S&P Paper Products Index, the S&P Personal Products Index, the S&P Health Care Index and the S&P Food Index. The composite group is weighted based on P&G’s current fiscal year revenues. The graphs assume that $100 was invested on June 30, 2002, and June 30, 1997, in each of the investment options and that all dividends were reinvested.

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	2002		2003		2004		2005		2006		2007
P&G (Blue)		100		102		127		125		135		151
Composite Group (Pink)		100		99		129		126		144		170
S&P 500 (Yellow)		100		100		119		127		138		166
DJIA (Aqua)		100		100		118		119		132		162

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

	1997		1998		1999		2000		2001		2002		2003		2004		2005		2006		2007
P&G (Blue)		100		130		130		84		96		138		140		175		172		185		208
Composite Group (Pink)		100		115		122		105		116		133		132		171		168		191		226
S&P 500 (Yellow)		100		130		160		171		146		120		120		143		152		165		199
DJIA (Aqua)		100		119		148		143		146		131		130		155		156		173		213

*  Amounts in millions of dollars except per share amounts or as otherwise specified.

EX-99.3

Exhibit 99-3: Updated Report of the Independent Registered Public Accountant

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
The Procter & Gamble Company

We have audited the accompanying Consolidated Balance Sheets of The Procter & Gamble Company and subsidiaries (the “Company”) as of June 30, 2007 and 2006, and the related Consolidated Statements of Earnings, Shareholders’ Equity, and Cash Flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such Consolidated Financial Statements present fairly, in all material respects, the financial position of the Company at June 30, 2007 and 2006, and the results of its operations and cash flows for each of the three years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the Consolidated Financial Statements, the Company adopted the provisions of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R),” effective June 30, 2007.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 14, 2007, not included herein, expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Cincinnati, Ohio
August 14, 2007, except as to Notes 2, 3 and 12, which are as of October 31, 2007

EX-99.4

Exhibit 99-4: Consent of Deloitte & Touche LLP

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following documents of our report dated August 14, 2007, except as to Notes 2, 3 and 12, which are as of October 31, 2007, relating to the consolidated financial statements of The Procter & Gamble Company and subsidiaries (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No, 87, 88, 106, and 132(R)”), appearing in this report on Form 8-K of The Procter & Gamble Company and subsidiaries dated October 31, 2007.

1.	Amendment No. 1 on Form S-8 Registration Statement No. 33-31855 on Form S-4 (now S-8) for the 1982 Noxell Employees’ Stock Option Plan and the 1984 Noxell Employees’ Stock Option Plan;
2.	Post-Effective Amendment No. a to Registration Statement No. 33-49289 on Form S-8 for The Procter & Gamble 1992 Stock Plan;
3.	Registration Statement No. 33-47656 on Form S-8 for The Procter & Gamble International Stock Ownership Plan;
4.	Registration Statement No. 33-50273 on Form S-8 for The Procter & Gamble Commercial Company Employees’ Savings Plan;
5.	Registration Statement No. 33-51469 on Form S-8 for The Procter & Gamble 1993 Non-Employee Directors’ Stock Plan;
6.	Registration Statement No. 333-05715 on Form S-8 for The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan;
7.	Post-Effective Amendment No. 2 to Registration Statement No. 33-59257 on Form S-3 for The Procter & Gamble Shareholder Investment Program;
8.	Registration Statement No. 333-14381 on Form S-8 for Profit Sharing Retirement Plan of The Procter & Gamble Commercial Company;
9.	Registration Statement No. 333-14397 on Form S-8 for Procter & Gamble Subsidiaries Savings Plan;
10.	Registration Statement No. 333-21783 on Form S-8 for The Procter & Gamble 1992 Stock Plan (Belgian Version);
11.	Registration Statement No. 333-37905 on Form S-8 for The Procter & Gamble Future Shares Plan;
12.	Registration Statement No. 333-51213 on Form S-8 for Group Profit Sharing, Incentive, and Employer Contribution Plan (France);

13.	Registration Statement No. 333-51219 on Form S-8 for Procter & Gamble Ireland Employees Share Ownership Plan;
14.	Registration Statement No. 333-51221 on Form S-8 for Employee Stock Purchase Plan (Japan);
15.	Registration Statement No. 333-51223 on Form S-8 for Savings and Thrift Plan (Saudi Arabia);
16.	Registration Statement No. 333-34606 on Form S-8 for The Procter & Gamble Future Shares Plan;
17.	Registration Statement No. 333-40264 on Form S-8 for Savings and Thrift Plan Saudi Arabia;
18.	Registration Statement No. 333-44034 on Form S-8 for The Procter & Gamble International Stock Ownership Plan;
19.	Registration Statement No. 333-47132 on Form S-8 for Employee Stock Purchase Plan (Japan);
20.	Registration Statement No. 333-49764 on Form S-3 for The Procter & Gamble U.K. Share Investment Scheme;
21.	Registration Statement No. 333-75030 on Form S-8 for The Procter & Gamble 2001 Stock and Incentive Compensation Plan;
22.	Registration Statement No. 333-100561 on Form S-8 for The Procter & Gamble (U.K.) 1-4-1 Plan;
23.	Registration Statement No. 333-108753 on Form S-8 for The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan;
24.	Registration Statement No. 333-108991 on Form S-8 for The Procter & Gamble 1992 Stock Plan (Belgian Version);
25.	Registration Statement No. 333-108992 on Form S-8 for Savings and Thrift Plan (Saudi Arabia);
26.	Registration Statement No. 333-108993 on Form S-8 for Employee Stock Purchase Plan (Japan);
27.	Registration Statement No. 333-108994 on Form S-8 for Procter & Gamble Ireland Employees Share Plan;
28.	Registration Statement No. 333-108995 on Form S-8 for Group Profit Sharing, Incentive, and Employer Contribution Plan (France);

29.	Registration Statement No. 333-108997 on Form S-8 for The Procter & Gamble International Stock Ownership Plan;
30.	Registration Statement No. 333-108998 on Form S-8 for The Procter & Gamble 1993 Non-Employee Directors’ Stock Plan;
31.	Registration Statement No. 333-108999 on Form S-8 for The Procter & Gamble 1992 Stock Plan;
32.	Registration Statement No. 333-111304 on Form S-8 for The Procter & Gamble 2003 Non-Employee Directors’ Stock Plan;
33.	Registration Statement No. 333-111305 on Form S-8 for The Procter & Gamble U.K. Share Investment Scheme;
34.	Amendment No. 1 to Registration Statement No. 333-113515 on Form S-3 for The Procter & Gamble Company Debt Securities and Warrants;
35.	Amendment No. 3 to Registration Statement No. 333-123309 on Form S-4 for The Procter & Gamble Company;
36.	Registration Statement No. 333-128859 on Form S-8 for certain employee benefit plans of The Gillette Company (2004 Long —Term Incentive Plan of The Gillette Company; 1971 Stock Option Plan of The Gillette Company; James M. Kilts Non-Statutory Stock Option Plan; The Gillette Company Employees’ Savings Plan; The Gillette Company Supplemental Savings Plan; The Gillette Company Global Employee Stock Ownership Plan (GESOP))
37.	Registration Statement No. 333-143801 on Form S-8 for The Procter & Gamble Savings Plan
38.	Registration Statement No. 333-145938 on Form S-3 for The Procter & Gamble Company and The Procter & Gamble International Funding SCA; and
39.	Registration Statement No. 333-146904 on Form S-8 for The Gillette Company Employees’ Savings Plan

/s/ DELOITTE & TOUCHE LLP

Deloitte & Touche LLP

Cincinnati, Ohio
October 31, 2007