Annual Report 2008 ANNUAL REPORT For the Year Ended March 31, 2008 Domestic Tobacco Business CONTENTS 1 Financial Highlights 2 JT at a Glance 4 Towards Achieving Our Corporate Vision 6 To Our Stakeholders 10 Special Feature 12 The New JTI 16 Review of Operations 18 Domestic Tobacco Business 20 International Tobacco Business 22 Pharmaceutical Business 24 Foods Business 26 History of JT, Business Environment for JT 28 History of JT 30 Business Environment for JT 38 Corporate Social Responsibility 40 Corporate Governance 44 Activities Contributing to the Environment and Society 50 Financial Information 52 Consolidated Five-Year Financial Summary 54 Management’s Discussion and Analysis of Financial Condition and Business Results 66 Consolidated Balance Sheets 68 Consolidated Statements of Income 69 Consolidated Statements of Changes in Equity 71 Consolidated Statements of Cash Flows 72 Notes to Consolidated Financial Statements 98 Independent Auditors’ Report 99 Fact Sheets 100 Financial Data 106 Domestic Tobacco Business 116 International Tobacco Business 118 Pharmaceutical Business 119 Foods Business 119 Number of Employees 120 Shareholder Information 122 Members of the Board, Auditors, and Executive Officers 123 Corporate Data FORWARD-LOOKING AND CAUTIONARY STATEMENTS This presentation contains forward-looking statements about our industry, business, plans and objectives, financial condition and results of operations that are based on our current expectations, assump- tions, estimates and projections. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of our financial condition, or state other forward-looking information. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those suggested by any forward-looking statement. We assume no duty or obligation to update any forward-looking statement or to advise of any change in the assumptions and factors on which they are based. Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation: 1. health concerns relating to the use of tobacco products; 2. legal or regulatory developments and changes, including, without limitation, tax increases and restrictions on the sale, marketing and usage of tobacco products, and governmental investigations and pri- vately imposed smoking restrictions; 3. litigation in Japan and elsewhere; 4. our ability to further diversify our business beyond the tobacco industry; 5. our ability to successfully expand internationally and make investments outside of Japan; 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and 9. fluctuations in foreign exchange rates and the costs of raw materials. Unless otherwise specified in this annual report, the information herein is as of June 24, 2008. i Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31 Millions of Millions of yen U.S. dollars (Note 1) 2004 2005 2006 2007 2008 2008 For the year: Financial Highlights Net sales ¥ 4,625,151 ¥ 4,664,514 ¥ 4,637,657 ¥ 4,769,387 ¥ 6,409,727 $ 63,976 EBITDA (Note 2) 373,435 400,115 433,391 464,634 602,096 6,010 Depreciation and Amortization (Note 2) 139,401 126,744 126,445 132,643 171,542 1,712 Operating income 234,034 273,371 306,946 331,991 430,554 4,297 Net income (loss) (7,603) 62,584 201,542 210,772 238,702 2,382 Free cash flow (FCF) (Note 3) 269,174 269,459 145,590 223,007 (1,493,717) (14,909) At year-end: Total assets 3,029,084 2,982,056 3,037,379 3,364,663 5,087,214 50,776 Total equity 1,507,937 1,498,204 1,762,512 2,024,616 2,154,629 21,505 Ratios: Return on equity (ROE) (0.5%) 4.2% 12.4% 11.3% 11.8% — Special Feature: The New JTI Return on asset (ROA) 7.9% 9.2% 10.4% 10.7% 10.5% — Equity Ratio 49.8% 50.2% 58.0% 58.3% 40.8% — Amounts per share (in yen and U.S. dollars): (Note 4) Net income (loss) (Note 5) ¥ (793) ¥ 6,418 ¥ 21,017 ¥ 22,001 ¥ 24,916 — Total equity 154,303 156,363 183,956 204,618 216,707 — Cash dividends applicable to the year 2,000 2,600 3,200 4,000 4,800 — Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥100.19 per $1, the rate of exchange as of March 31, 2008. 2. EBITDA = operating income + depreciation and amortization Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill 3. FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of investment securities / pro- ceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item) 4. On April 1, 2006, a 5 for 1 stock split went into effect. Amounts per share for the years ended March 2004, 2005 and 2006 are on the assumption that this stock split took place at the beginning of each fiscal year. Review of Operations 5. Diluted net income (loss) per share. EBITDA and Net Income (Loss) and ROE Free Cash Flow Cash Dividends Applicable Operating Income to the Year (Billions of Yen) (Billions of Yen) (%) (Billions of Yen) (Yen) 269.2 269.5 238.7 4,800 223.0 602.1 201.5 210.8 12.4 11.8 4,000 11.3 145.6 464.6 3,200 433.4 430.6 400.1 373.4 2,600 332.0 History of JT, Business Environment for JT 306.9 273.4 62.6 2,000 4.2 234.0 -0.5 -7.6 -1,493.7 ’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08 ’04 ’05 ’06 ’07 ’08 EBITDA Operating Income Net Income (Loss) ROE (Years ended March 31) (Years ended March 31) JT Annual Report 2008 1 Corporate Social Responsibility JT at a Glance Japan Tobacco Inc. (JT) and its 47,500 employees are striving to become a “global growth company that develops diversified, value-creating businesses.” JT is the world’s third-largest tobacco company. Our domestic tobacco business continues to maintain a significant competitive position in the Japanese market, and the international tobacco business is delivering remarkable performance as the driver of profit growth for the JT Group. As future pillar businesses, the pharmaceutical business is steadily advancing the development of compounds, and the foods business is striving to consolidate its business foundation as an integrated foods manufacturer. Domestic Tobacco Business 52.5% Pharmaceutical Business 0.8% Net Sales EBITDA Operating Income Net Sales EBITDA Operating Income (Loss) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) 3,405.3 3,416.3 3,362.4 326.5 245.4 305.8 306.7 220.1 222.3 49.3 49.1 -5.1 45.5 -1.8 -9.6 -11.2 -6.3 Other Business -8.2 0.3% ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 Net Sales Breakdown, by Business Segment International Tobacco Business 41.2% Foods Business 5.2% Net Sales EBITDA Operating Income Net Sales EBITDA Operating Income (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) 2,640.0 270.8 205.4 336.4 11.9 12.0 286.6 6.3 6.7 278.4 8.4 999.7 881.2 94.1 112.7 81.1 71.0 0.7 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 ’06 ’07 ’08 2 JT Group and Competition in Tobacco Industry JT at a Glance [Geneva] Headquarters of the Group [Tokyo] ● Domestic Tobacco Business ● Pharmaceutical Business Torii Pharmaceuticals Co., Ltd. (Manufacturing and sale of drugs) ● Foods Business ● International Tobacco Business Katokichi Ltd. (Manufacturing and sale of processed foods) JT International S.A. Japan Beverage (Distributing and sale of beverages) (Headquarters of the International Tobacco Operations) Special Feature: The New JTI Major Tobacco Companies’ Share (2007) Worldwide Demand for Cigarette (Billions of Cigarettes) 5,686.0 Other Altria (USA) 5,597.0 55.9% 18.0% 5,585.0 5,494.0 5,508.0 British American Review of Operations Tobacco (UK) 12.0% 2002 2003 2004 2005 2006 Source: The Maxwell Report Altadis(3) (Spain) JT Group(1) 2.1% Top 5 Brands by Sales Volume Worldwide % (Year ended December 31, 2006) Imperial Tobacco(2) (UK) 10.6 (Billions of Cigarettes) 3.5% Brand Brand Owner Total World Annual Sales Volume 1. Marlboro Altria 466.3 History of JT, Business Environment for JT 2. Winston Total* 108.0 Source: Companies’ reports, The Maxwell Report (1): FY 3/2008 (2): FY 9/2007 (3): FY 12/2006 JT 94.6 Reynolds American 13.3 3. Mild Seven JT 106.1 4. L&M Altria 104.9 5. Camel Total* 60.7 JT 36.1 Reynolds American 24.7 Source: The Maxwell Report * Sales volume within the United States and that outside the United States belong to Reynolds American and JT, respectively JT Annual Report 2008 3 Corporate Social Responsibility Towards Achieving Our Corporate Vision Through various activities, we are committed to providing all of our stakeholders with a unique added value that JT alone can deliver as a surprise and delight that exceeds expectations.