UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

THE PROCTER & GAMBLE COMPANY

Ohio		31-0411980
(State of Incorporation)		(I.R.S. Employer Identification Number)
One Procter & Gamble Plaza, Cincinnati, Ohio		45202
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No þ

There were 3,052,985,133 shares of Common Stock outstanding as of March 31, 2008.

 

 

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements.

The Consolidated Statements of Earnings of The Procter & Gamble Company and subsidiaries (the “Company”, “we” or “our”) for the three months and nine months ended March 31, 2008 and 2007, the Consolidated Balance Sheets as of March 31, 2008 and June 30, 2007, and the Consolidated Statements of Cash Flows for the nine months ended March 31, 2008 and 2007 follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. However, such financial statements may not necessarily be indicative of annual results.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS

Amounts in millions except per share amounts

		Three Months Ended								Nine Months Ended
		March 31								March 31
		2008				2007				2008				2007
NET SALES		$	20,463			$	18,694			$	62,237			$	57,204
Cost of products sold			9,974				9,057				29,887				27,210
Selling, general and administrative expense			6,378				5,991				19,107				17,945
OPERATING INCOME			4,111				3,646				13,243				12,049
Interest expense			364				279				1,112				976
Other non-operating income, net			10				169				395				429
EARNINGS BEFORE INCOME TAXES			3,757				3,536				12,526				11,502
Income taxes			1,047				1,024				3,467				3,430
NET EARNINGS		$	2,710			$	2,512			$	9,059			$	8,072
PER COMMON SHARE:
Basic net earnings		$	0.87			$	0.78			$	2.89			$	2.51
Diluted net earnings		$	0.82			$	0.74			$	2.72			$	2.37
Dividends		$	0.35			$	0.31			$	1.05			$	0.93
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING			3,301.2				3,397.3				3,332.5				3,405.7

See accompanying Notes to Consolidated Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

										March 31				June 30
Amounts in Millions										2008				2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents										$	3,737			$	5,354
Investment securities											341				202
Accounts receivable											6,934				6,629
Inventories
Materials and supplies											2,272				1,590
Work in process											675				444
Finished goods											5,480				4,785
Total inventories											8,427				6,819
Deferred income taxes											2,044				1,727
Prepaid expenses and other current assets											4,259				3,300
TOTAL CURRENT ASSETS											25,742				24,031
PROPERTY, PLANT AND EQUIPMENT
Buildings											6,955				6,380
Machinery and equipment											29,311				27,492
Land											901				849
											37,167				34,721
Accumulated depreciation											(16,833	)			(15,181	)
NET PROPERTY, PLANT AND EQUIPMENT											20,334				19,540
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill											59,645				56,552
Trademarks and other intangible assets, net											34,305				33,626
NET GOODWILL AND OTHER INTANGIBLE ASSETS											93,950				90,178
OTHER NON-CURRENT ASSETS											5,379				4,265
TOTAL ASSETS										$	145,405			$	138,014
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable										$	5,535			$	5,710
Accrued and other liabilities											11,757				9,586
Taxes payable											684				3,382
Debt due within one year											13,287				12,039
TOTAL CURRENT LIABILITIES											31,263				30,717
LONG-TERM DEBT											23,673				23,375
DEFERRED INCOME TAXES											11,629				12,015
OTHER NON-CURRENT LIABILITIES											9,251				5,147
TOTAL LIABILITIES											75,816				71,254
SHAREHOLDERS’ EQUITY
Preferred stock											1,371				1,406
Common stock — shares issued —		Mar 31					3,999.3				3,999
		June 30					3,989.7								3,990
Additional paid-in capital											59,974				59,030
Reserve for ESOP debt retirement											(1,324	)			(1,308	)
Accumulated other comprehensive income											4,146				617
Treasury stock											(45,816	)			(38,772	)
Retained earnings											47,239				41,797
TOTAL SHAREHOLDERS’ EQUITY											69,589				66,760
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY										$	145,405			$	138,014

See accompanying Notes to Consolidated Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine Months Ended
		March 31
Amounts in millions		2008				2007
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		$	5,354			$	6,693
OPERATING ACTIVITIES
Net earnings			9,059				8,072
Depreciation and amortization			2,270				2,367
Share-based compensation expense			396				482
Deferred income taxes			1,065				306
Changes in:
Accounts receivable			253				(866	)
Inventories			(1,077	)			(636	)
Accounts payable, accrued and other liabilities			(410	)			(233	)
Other operating assets and liabilities			(385	)			38
Other			547				323
TOTAL OPERATING ACTIVITIES			11,718				9,853
INVESTING ACTIVITIES
Capital expenditures			(1,852	)			(1,996	)
Proceeds from asset sales			759				257
Acquisitions			36				(167	)
Change in investment securities			(188	)			725
TOTAL INVESTING ACTIVITIES			(1,245	)			(1,181	)
FINANCING ACTIVITIES
Dividends to shareholders			(3,385	)			(3,069	)
Change in short-term debt			1,216				9,074
Additions to long-term debt			6,534				1,403
Reductions of long-term debt			(10,227	)			(16,088	)
Impact of stock options and other			1,436				1,213
Treasury purchases			(8,035	)			(4,061	)
TOTAL FINANCING ACTIVITIES			(12,461	)			(11,528	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			371				157
CHANGE IN CASH AND CASH EQUIVALENTS			(1,617	)			(2,699	)
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	3,737			$	3,994

See accompanying Notes to Consolidated Financial Statements

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.		These statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007. The results of operations for the three-month and nine-month period ended March 31, 2008 are not necessarily indicative of annual results.
2.		Comprehensive Income — Total comprehensive income is composed primarily of net earnings, net currency translation gains and losses, impacts of net investment and cash flow hedges and net unrealized gains and losses on investment securities. Total comprehensive income for the three months ended March 31, 2008 and 2007 was $4,389 million and $2,800 million, respectively. For the nine months ended March 31, 2008 and 2007, total comprehensive income was $12,588 million and $8,976 million, respectively.
3.		Segment Information — Following is a summary of segment results. In May 2007, we announced a number of changes to our organization structure and certain of our key leadership positions. The changes became effective on July 1, 2007 and resulted in changes to our GBU and reporting segment structure. The businesses that previously comprised the Gillette GBU are now included within the Beauty and Household Care GBUs. The Braun business has been combined 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. Duracell was moved to our Household Care GBU and will 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 part of our Health and Well-Being GBU and will be reported as part of the Health Care reportable segment. The following segment information reflects the new segment reporting structure.

SEGMENT INFORMATION

Amounts in millions

						Three Months Ended March 31												Nine Months Ended March 31
										Earnings Before												Earnings Before
						Net Sales				Income Taxes				Net Earnings				Net Sales				Income Taxes				Net Earnings
Beauty GBU
Beauty			2008			$	4,743			$	784			$	589			$	14,479			$	2,788			$	2,161
			2007				4,365				792				603				13,345				2,654				2,041
Grooming			2008				1,977				551				403				6,153				1,761				1,283
			2007				1,744				429				310				5,565				1,486				1,081
Health & Well-Being GBU
Health Care			2008				3,651				943				617				10,982				2,979				1,980
			2007				3,291				827				536				10,034				2,665				1,777
Snacks, Coffee and Pet Care			2008				1,207				171				105				3,632				556				345
			2007				1,090				191				116				3,406				567				353
Household Care GBU
Fabric Care and Home Care			2008				5,759				1,165				781				17,737				3,827				2,579
			2007				5,220				1,058				700				16,083				3,517				2,365
Baby Care and Family Care			2008				3,531				739				471				10,325				2,069				1,319
			2007				3,268				606				382				9,486				1,754				1,106
Corporate			2008				(405	)			(596	)			(256	)			(1,071	)			(1,454	)			(608	)
			2007				(284	)			(367	)			(135	)			(715	)			(1,141	)			(651	)
Total			2008				20,463				3,757				2,710				62,237				12,526				9,059
			2007				18,694				3,536				2,512				57,204				11,502				8,072

4.

The Company acquired the Gillette Company in October 2005. At that time, we recognized an assumed liability for Gillette exit costs of $1.23 billion, including $854 million in separations related to approximately 5,500 people, $55 million in employee relocation costs and $320 million in other exit costs. These costs are 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. As of March 31, 2008, the remaining liability was $322 million. Total integration plan charges against the assumed liability were $94 million for the three months ended March 31, 2008 and $243 million for the nine months ended March 31, 2008. A total of $109 million of the liability was reversed to goodwill during the three months ended March 31, 2008 related to underspending on a number of projects that were concluded during the period. We expect such activities to be substantially complete by June 30, 2008.

5.

Goodwill and Other Intangible Assets — Goodwill as of March 31, 2008 is allocated by reportable segment and global business unit as follows (amounts in millions):

		Nine Months Ended
		March 31, 2008
BEAUTY GBU
Beauty, beginning of year		$	15,359
Acquisitions and divestitures			(81	)
Translation and other			1,406
Goodwill, March 31, 2008			16,684
Grooming, beginning of year			24,211
Acquisitions and divestitures			(242	)
Translation and other			1,408
Goodwill, March 31, 2008			25,377
HEALTH & WELL-BEING GBU
Health Care, beginning of year			8,482
Acquisitions and divestitures			(51	)
Translation and other			336
Goodwill, March 31, 2008			8,767
Snacks, Coffee and Pet Care, beginning of year			2,407
Acquisitions and divestitures			(5	)
Translation and other			36
Goodwill, March 31, 2008			2,438
HOUSEHOLD CARE GBU
Fabric Care and Home Care, beginning of year			4,470
Acquisitions and divestitures			(39	)
Translation and other			237
Goodwill, March 31, 2008			4,668
Baby Care and Family Care, beginning of year			1,623
Acquisitions and divestitures			(34	)
Translation and other			122
Goodwill, March 31, 2008			1,711
GOODWILL, Net, beginning of year			56,552
Acquisitions and divestitures			(452	)
Translation and other			3,545
Goodwill, March 31, 2008		$	59,645

The increase in goodwill from June 30, 2007 is primarily due to currency translation.

Identifiable intangible assets as of March 31, 2008 are comprised of (amounts in millions):

		Gross Carrying				Accumulated
		Amount				Amortization
Amortizable intangible assets with determinable lives		$	8,918			$	2,492
Intangible assets with indefinite lives			27,879				—
Total identifiable intangible assets		$	36,797			$	2,492

		Amortizable intangible assets consist principally of brands, patents, technology and customer relationships. The non-amortizable intangible assets consist primarily of brands.
		The amortization expense of intangible assets for the three months ended March 31, 2008 and 2007 was $156 million and $153 million, respectively. For the nine months ended March 31, 2008 and 2007, the amortization expense of intangible assets was $468 million and $484 million respectively.
6.		Pursuant to SFAS 123(R) “Share-Based Payment”, companies must recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (the “fair-value-based” method).
		Total share-based compensation for the three months and nine months ended March 31, 2008 and 2007 are summarized in the following table (amounts in millions):

		Three Months Ended								Nine Months Ended
		March 31								March 31
		2008				2007				2008				2007
Share-Based Compensation
SFAS 123(R) Stock Options		$	144			$	180			$	373			$	439
Other Share-Based Awards			10				13				23				43
Total Share-Based Compensation		$	154			$	193			$	396			$	482

Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.

7.		Postretirement Benefits — The Company offers various postretirement benefits to its employees.
		The components of net periodic benefit cost are as follows:

Amounts in millions

		Pension Benefits								Other Retiree Benefits
		Three Months Ended								Three Months Ended
		March 31								March 31
		2008				2007				2008				2007
Service Cost		$	63			$	67			$	24			$	20
Interest Cost			134				116				57				52
Expected Return on Plan Assets			(146	)			(107	)			(108	)			(102	)
Amortization of Deferred Amounts			3				3				—				(6	)
Curtailment Gain			—				(154	)			—				—
Recognized Net Actuarial Loss			(3	)			12				(4	)			1
Gross Benefit Cost (Credit)			51				(63	)			(31	)			(35	)
Dividends on ESOP Preferred Stock			—				—				(23	)			(20	)
Net Periodic Benefit Cost (Credit)		$	51				($63	)			($54	)			($55	)

Amounts in millions

		Pension Benefits								Other Retiree Benefits
		Nine Months Ended								Nine Months Ended
		March 31								March 31
		2008				2007				2008				2007
Service Cost		$	198			$	200			$	71			$	61
Interest Cost			400				352				169				154
Expected Return on Plan Assets			(419	)			(328	)			(322	)			(305	)
Amortization of Deferred Amounts			10				9				—				(17	)
Curtailment Gain			—				(154	)			—				—
Recognized Net Actuarial Loss			9				34				(11	)			2
Gross Benefit Cost (Credit)			198				113				(93	)			(105	)
Dividends on ESOP Preferred Stock			—				—				(69	)			(62	)
Net Periodic Benefit Cost (Credit)		$	198			$	113				($162	)			($167	)

For the year ending June 30, 2008, the expected return on plan assets is 7.4% and 9.3% for defined benefit and other retiree benefit plans, respectively.

8.		New Accounting Standards
		On July 1, 2007, we adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48). 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. The difference between the tax benefit recognized in the financial statements for a position in accordance with FIN 48 and the tax benefit claimed in the tax return is referred to as an unrecognized tax benefit.
		The adoption of FIN 48 resulted in a decrease to retained earnings as of July 1, 2007 of $232 million, which was reflected as a cumulative effect of a change in accounting principle, with a corresponding increase to the net liability for unrecognized tax benefits. The impact primarily reflects the accrual of additional statutory interest and penalties as required by FIN 48, partially offset by adjustments to existing unrecognized tax benefits to comply with FIN 48 measurement principles. The implementation of FIN 48 also resulted in a reduction in our net tax liabilities for uncertain tax positions related to prior acquisitions accounted for under purchase accounting, resulting in an $80 million decrease to goodwill. Additionally, the Company historically classified unrecognized tax benefits in current taxes payable. As a result of the adoption of FIN 48, unrecognized tax benefits not expected to be paid in the next 12 months were reclassified to other non-current liabilities.
		The total amount of unrecognized tax benefits at July 1, 2007 was $2,971 million, excluding any related accruals for interest and penalties. Included in this total was $1,893 million that, if recognized, would impact the effective tax rate in future periods. We recognize accrued interest and penalties related to unrecognized tax benefits in income tax expense. Accrued interest and penalties as of July 1, 2007 were $589 million and $128 million, respectively, on an after tax basis.
		P&G is present in over 140 taxable jurisdictions, and at any point in time, has 30-40 audits underway at various stages of completion. We have tax years open ranging from 1997 and forward. P&G has made a concerted effort to bring its audit inventory to a more current position. We have done this by working with tax authorities to conduct audits for several open years at once. While we may be able to estimate the timing of the resolution we are generally not able to reliably estimate the ultimate settlement amounts until the close of the audit. Based on information currently available we anticipate that over the next 12 month period net audit activity could favorably impact earnings by a range of up to $150 million to $250 million. On an ongoing basis, adjustments will be made to the liability for unrecognized tax benefits to reflect the impact of audit developments, tax law changes, statute expirations, as well as for the accrual of additional current year tax exposures and for interest and penalties on existing liabilities.
		The unrecognized tax benefits described above will be included in the Company’s annual Form 10-K contractual obligations table to the extent the Company is able to make reliable estimates of the timing of cash settlements with the respective taxing authorities. If not, the total amount of unrecognized tax benefits will be disclosed in a footnote to the contractual obligations table. At this time, the Company can not make a reliable estimate as to the timing of cash settlements.
		In December 2007, the FASB issued SFAS 141 (Revised), Business Combinations (SFAS 141R) and SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS 160). SFAS 141(R) and SFAS 160 revise the method of accounting for a number of aspects of business combinations and non-controlling interests, including acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent purchase price), the impacts of partial and

		step-acquisitions (including the valuation of net assets attributable to non-acquired minority interests), and post acquisition exit activities of acquired businesses. SFAS 141(R) and SFAS 160 will be effective for the company during our fiscal year beginning July 1, 2009.
		In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements with an enhanced understanding of 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for the Company beginning July 1, 2009. The Company is currently evaluating the provisions of SFAS 161 to determine the impact on its consolidated financial statements.
		No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on the consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 Results
	•		Forward-Looking Statements
	•		Results of Operations — Three Months Ended March 31, 2008
	•		Results of Operations — Nine months Ended March 31, 2008
	•		Business Segment Discussion — Three and Nine Months Ended March 31, 2008
	•		Financial Condition
	•		Reconciliation of Non-GAAP Measures

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 financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, free cash flow and free cash flow productivity. 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 market 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.

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 have also expanded our presence in “high frequency stores,” the neighborhood stores which serve many consumers in developing markets. We compete in multiple product categories and have three global business units (GBUs): Beauty; Health and Well-Being; and Household Care. Under U.S. Generally Accepted Accounting Principles, 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. We have on-the-ground operations in over 80 countries through our Market Development Organization, which leads country business teams to build our brands in local markets and is organized along seven geographic areas comprised of three developed regions (North America, Western Europe and Northeast Asia) and four developing regions (Latin America, Central and Eastern Europe/Middle East/Africa, Greater China and ASEAN/Australasia/India).

The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended March 31, 2008 (excludes net sales and net earnings in Corporate):

		Net Sales				Net Earnings
Beauty GBU			32	%			34	%
Beauty			23	%			20	%
Grooming			9	%			14	%
Health and Well-Being GBU			23	%			24	%
Health Care			17	%			21	%
Snacks, Coffee and Pet Care			6	%			3	%
Household Care GBU			45	%			42	%
Fabric Care and Home Care			28	%			26	%
Baby Care and Family Care			17	%			16	%
Total			100	%			100	%

The following table provides the percentage of net sales and net earnings by reportable business segment for the nine months ended March 31, 2008 (excludes net sales and net earnings in Corporate):

		Net Sales				Net Earnings
Beauty GBU			33	%			35	%
Beauty			23	%			22	%
Grooming			10	%			13	%
Health and Well-Being GBU			23	%			24	%
Health Care			17	%			20	%
Snacks, Coffee and Pet Care			6	%			4	%
Household Care GBU			44	%			41	%
Fabric Care and Home Care			28	%			27	%
Baby Care and Family Care			16	%			14	%
Total			100	%			100	%

SUMMARY OF RESULTS

Following are highlights of results for the nine months ended March 31, 2008:

	•		Net sales grew nine percent to $62.2 billion. Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, increased five percent.
	•		Unit volume increased five percent and organic volume, which excludes acquisitions and divestitures, grew six percent. Every reportable segment posted year-on-year volume growth and each geographic region delivered year-on-year organic volume growth.
	•		Net earnings increased 12 percent to $9.1 billion. Net earnings increased behind higher operating profit, a lower tax rate and favorable foreign exchange.
	•		Diluted net earnings per share were $2.72, an increase of 15 percent versus the comparable prior year period.
	•		Operating cash flow was $11.7 billion, an increase of 19 percent versus the prior year period. Free cash flow productivity was 109 percent for the fiscal year to date period. Free cash flow productivity is defined as the ratio of operating cash flow less capital expenditures to net earnings.

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 net 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 which can be affected by acquisitions and divestitures, we must manage and integrate key company transactions, such as the Gillette and Wella acquisitions, including achieving the cost and growth synergies for those transactions in accordance with stated goals, and the successful separation of the Company’s coffee business while continuing to deliver the Company’s 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 — Three Months Ended March 31, 2008

The following discussion provides a review of results for the three months ended March 31, 2008 versus the three months ended March 31, 2007.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information

		Three Months Ended
		March 31
		2008				2007				% CHG
NET SALES		$	20,463			$	18,694				9	%
COST OF PRODUCTS SOLD			9,974				9,057				10	%
GROSS MARGIN			10,489				9,637				9	%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			6,378				5,991				6	%
OPERATING INCOME			4,111				3,646				13	%
TOTAL INTEREST EXPENSE			364				279
OTHER NON-OPERATING INCOME, NET			10				169
EARNINGS BEFORE INCOME TAXES			3,757				3,536				6	%
INCOME TAXES			1,047				1,024
NET EARNINGS			2,710				2,512				8	%
EFFECTIVE TAX RATE			27.9	%			29.0	%
PER COMMON SHARE:
BASIC NET EARNINGS		$	0.87			$	0.78				12	%
DILUTED NET EARNINGS		$	0.82			$	0.74				11	%
DIVIDENDS		$	0.35			$	0.31				13	%
AVERAGE DILUTED SHARES OUTSTANDING			3,301.2				3,397.3
COMPARISONS AS A % OF NET SALES										Basis Pt Chg
COST OF PRODUCTS SOLD			48.7	%			48.4	%			30
GROSS MARGIN			51.3	%			51.6	%			(30	)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			31.2	%			32.0	%			(80	)
OPERATING MARGIN			20.1	%			19.5	%			60
EARNINGS BEFORE INCOME TAXES			18.4	%			18.9	%			(50	)
NET EARNINGS			13.2	%			13.4	%			(20	)

Net sales increased nine percent for the quarter to $20.5 billion. Volume was up four percent, including a negative one percent impact from the divestiture of our Western European family care business. Price increases, taken primarily to offset higher commodity costs, contributed one percent to net sales growth. These were partially offset by a negative one percent mix impact resulting from disproportionate double-digit volume growth in developing regions, where average selling price is below the company average. Favorable foreign exchange added five percent to net sales. Every reportable segment, except Beauty, posted mid-single digit or higher organic volume growth. Volume grew primarily behind initiative activity on our key brands and continued developing region expansion. The Company delivered high-single digit or higher volume growth on Always, Ariel, Dolce & Gabbana, Febreze, Fusion, Gain, Head & Shoulders, Naturella, Pampers, Pringles, Rejoice, Venus and Vicks for the quarter, partially offset by declines on Braun, Folgers and Mach3. Organic volume and sales were both up five percent for the quarter.

		Net Sales Change Drivers 2008 vs. 2007 (Three Months Ended Mar. 31)
		Volume with				Volume excluding
		Acquisitions &				Acquisitions &				Foreign								Mix/				Net Sales
		Divestitures				Divestitures				Exchange				Price				Other				Growth
Beauty GBU
Beauty			3	%			3	%			6	%			0	%			0	%			9	%
Grooming			6	%			6	%			7	%			2	%			-2	%			13	%
Health and Well-Being GBU
Health Care			6	%			6	%			6	%			0	%			-1	%			11	%
Snacks, Coffee and Pet Care			4	%			4	%			3	%			5	%			-1	%			11	%
Household Care GBU
Fabric Care and Home Care			6	%			6	%			5	%			0	%			-1	%			10	%
Baby Care and Family Care			1	%			7	%			5	%			1	%			1	%			8	%
Total Company			4	%			5	%			5	%			1	%			-1	%			9	%

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

Gross margin was down 30-basis points for the quarter to 51.3% of net sales. Commodity and energy cost increases had a negative impact on gross margin of over 220-basis points. These were largely offset by scale leverage from volume growth, pricing and cost savings projects resulting from manufacturing efficiency improvements and product reformulations. The year over year gross margin change was also impacted by a number of base period charges, including net charges related to the integration of Gillette, supply chain restructuring projects and the impacts of the pet food recall, that reduced the base period gross margin approximately 50-basis points.

Total selling, general and administrative expenses (SG&A) increased six percent to $6.4 billion. SG&A as a percentage of net sales was down 80-basis points as a result of lower overhead spending as a percentage of net sales. Total overhead spending increased, but was down as a percentage of net sales for the total Company and in each reportable segment primarily due to scale leverage, a focus on overhead productivity and Gillette synergy savings. Marketing spending as a percentage of net sales was in-line with the prior year period.

Interest expense for the quarter was up $85 million versus the year-ago period due to a higher debt level and a higher interest rate driven by the geographic mix of our short-term borrowings. Other non-operating income decreased $159 million versus the prior year period primarily due to lower current period interest income and base period gains on the sale of minor beauty and feminine care brands. Interest income declined primarily due to lower interest rates.

Net earnings increased eight percent for the quarter to $2.7 billion behind a 13 percent increase in operating profit and a lower tax rate, partially offset by lower other non-operating income. Our effective tax rate was down 110-basis points primarily due to a more favorable geographic mix of earnings. There is a possibility of favorable tax audit activity in the April - June quarter that could impact the Company’s fourth quarter and fiscal year effective tax rate. However, given the uncertainty around such items, we cannot quantify the potential impact at this time. Diluted net earnings per share were up 11 percent to $0.82. Diluted net earnings per share growth exceeded net earnings growth due to share repurchase activity. We repurchased $2.6 billion of treasury shares during the quarter under a previously announced share buyback program that started in July 2007.

RESULTS OF OPERATIONS — Nine months Ended March 31, 2008

The following discussion provides a review of results for the nine months ended March 31, 2008 versus the nine months ended March 31, 2007.

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information

		Nine months Ended
		March 31
		2008				2007				% CHG
NET SALES		$	62,237			$	57,204				9	%
COST OF PRODUCTS SOLD			29,887				27,210				10	%
GROSS MARGIN			32,350				29,994				8	%
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			19,107				17,945				6	%
OPERATING INCOME			13,243				12,049				10	%
TOTAL INTEREST EXPENSE			1,112				976
OTHER NON-OPERATING INCOME, NET			395				429
EARNINGS BEFORE INCOME TAXES			12,526				11,502				9	%
INCOME TAXES			3,467				3,430
NET EARNINGS			9,059				8,072				12	%
EFFECTIVE TAX RATE			27.7	%			29.8	%
PER COMMON SHARE:
BASIC NET EARNINGS		$	2.89			$	2.51				15	%
DILUTED NET EARNINGS		$	2.72			$	2.37				15	%
DIVIDENDS		$	1.05			$	0.93				13	%
AVERAGE DILUTED SHARES OUTSTANDING			3,332.5				3,405.7
COMPARISONS AS A % OF NET SALES										Basis Pt Chg
COST OF PRODUCTS SOLD			48.0	%			47.6	%			40
GROSS MARGIN			52.0	%			52.4	%			(40	)
SELLING, GENERAL & ADMINISTRATIVE EXPENSE			30.7	%			31.4	%			(70	)
OPERATING MARGIN			21.3	%			21.1	%			20
EARNINGS BEFORE INCOME TAXES			20.1	%			20.1	%			—
NET EARNINGS			14.6	%			14.1	%			50

Net sales for the fiscal year to date period were up nine percent to $62.2 billion behind five percent volume growth and a favorable five percent foreign exchange impact. This was partially offset by a negative one percent mix impact primarily due to disproportionate double-digit growth in developing regions. Volume growth was broad-based across segments and geographic regions. Each reportable segment posted year-on-year volume growth and each geographic region delivered year-on-year organic volume growth for the fiscal year to date period. Volume grew primarily behind initiative activity on key brands and continued expansion in developing regions. A number of the company’s key brands, including Always, Ariel, Dolce & Gabbana, Downy, Febreze, Fusion, Gain, Head & Shoulders, Hugo Boss, Naturella, Pampers, Pringles, Oral-B, Tide and Venus, posted high-single digit or higher volume growth to offset declines on Actonel, Braun, Iams and Mach3. Organic sales increased five percent for the fiscal year to date period behind six percent organic volume growth.

		Net Sales Change Drivers 2008 vs. 2007 (Nine months Ended Mar. 31)
		Volume with				Volume excluding
		Acquisitions &				Acquisitions &				Foreign								Mix/				Net Sales
		Divestitures				Divestitures				Exchange				Price				Other				Growth
Beauty GBU
Beauty			3	%			3	%			5	%			0	%			0	%			8	%
Grooming			6	%			7	%			7	%			1	%			-3	%			11	%
Health and Well-Being GBU
Health Care			5	%			4	%			5	%			0	%			-1	%			9	%
Snacks, Coffee and Pet Care			2	%			2	%			3	%			2	%			0	%			7	%
Household Care GBU
Fabric Care and Home Care			7	%			7	%			5	%			0	%			-2	%			10	%
Baby Care and Family Care			4	%			8	%			5	%			0	%			0	%			9	%
Total Company			5	%			6	%			5	%			0	%			-1	%			9	%

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

Gross margin was down 40-basis points fiscal year to date to 52.0% of net sales. Commodity and energy cost increases had a negative impact on gross margin of over 150-basis points. These were largely offset by scale leverage from volume growth and cost savings projects resulting from manufacturing efficiency improvements and product reformulations.

Total selling, general and administrative expenses (SG&A) increased six percent to $19.1 billion for the fiscal year to date period. SG&A as a percentage of net sales was down 70-basis points primarily behind lower overhead spending as a percentage of net sales, partially offset by higher marketing spending as a percentage of net sales. Total overhead spending increased, but was down as a percentage of net sales for the total Company and for each reportable segment primarily due to scale leverage, a focus on overhead productivity and Gillette synergy savings.

Interest expense for the fiscal year to date period was up $136 million versus the year-ago period due to a higher interest rate driven by the geographic mix of our short-term borrowings. Other non-operating income was down $34 million primarily due to lower interest income, which more than offset higher current period divestiture gains. Current year gains included a gain on the sale of our Western Europe family care business and our Japanese adult incontinence business. The base period included gains on the sale of Pert in North America, Sure and minor beauty and feminine care businesses.

Net earnings increased 12 percent to $9.1 billion behind higher operating profit, a lower tax rate and favorable foreign exchange. Our tax rate declined from 29.8% to 27.7% due to a one-time tax benefit resulting from a reduction in the German statutory tax rate, which reduced our deferred tax liabilities related to acquired intangible assets, the favorable settlement of tax audits and a more favorable geographic mix of earnings. Diluted net earnings per share were up 15 percent versus the prior year to $2.72 per share. Diluted net earnings per share growth exceeded net earnings growth due to share repurchase activity. We repurchased $8.0 billion of treasury shares during the fiscal year to date period under a previously announced share buyback program that started in July 2007.

BUSINESS SEGMENT DISCUSSION— Three and Nine months Ended March 31, 2008

The following discussion provides a review of results by business segment. Analyses of the results for the three and nine months ended March 31, 2008 are provided compared to the same three and nine month period ended March 31, 2007. The primary financial measures used to evaluate segment performance are net sales and net earnings. The table below provides supplemental information on net sales and net earnings by business segment for the three and nine months ended March 31, 2008 versus the comparable prior year period (Amounts in millions):

		Three Months Ended March 31, 2008
						% Change								% Change								% Change
						Versus				Earnings Before				Versus								Versus
		Net Sales				Year Ago				Income Taxes				Year Ago				Net Earnings				Year Ago
Beauty GBU
Beauty		$	4,743				9	%		$	784				-1	%		$	589				-2	%
Grooming			1,977				13	%			551				28	%			403				30	%
Health and Well-Being GBU
Health Care			3,651				11	%			943				14	%			617				15	%
Snacks, Coffee and Pet Care			1,207				11	%			171				-10	%			105				-9	%
Household Care GBU
Fabric Care and Home Care			5,759				10	%			1,165				10	%			781				12	%
Baby Care and Family Care			3,531				8	%			739				22	%			471				23	%
Total Business Segments			20,868				10	%			4,353				12	%			2,966				12	%
Corporate			(405	)			N/A				(596	)			N/A				(256	)			N/A
Total Company			20,463				9	%			3,757				6	%			2,710				8	%