Goldman Sachs - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

		For the quarterly period ended May 30, 2008

or

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

		For the transition period from to

Commission File Number:001-14965

The Goldman Sachs Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		13-4019460
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

85 Broad Street, New York, NY		10004
(Address of principal executive offices)		(Zip Code)

(212) 902-1000

(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. x Yes o No

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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” inRule 12b-2of the Exchange Act.

Large accelerated filer x Accelerated filer o

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of June 27, 2008, there were 393,804,838 shares of the registrant’s common stock outstanding.

THE GOLDMAN SACHS GROUP, INC.

QUARTERLY REPORT ONFORM 10-QFOR THE FISCAL QUARTER ENDED MAY 30, 2008

INDEX


		Page
Form 10-QItem Number:		No.


PART I:	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings for the three and six months ended May 30, 2008 and May 25, 2007		2
	Condensed Consolidated Statements of Financial Condition as of May 30, 2008 and November 30, 2007		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the periods ended May 30, 2008 and November 30, 2007		4
	Condensed Consolidated Statements of Cash Flows for the six months ended May 30, 2008 and May 25, 2007		5
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended May 30, 2008 and May 25, 2007		6
	Notes to Condensed Consolidated Financial Statements		7
	Report of Independent Registered Public Accounting Firm		61

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		62

Item 3:	Quantitative and Qualitative Disclosures About Market Risk		117

Item 4:	Controls and Procedures		117

PART II:	OTHER INFORMATION

Item 1:	Legal Proceedings		118

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		119

Item 4:	Submission of Matters to a Vote of Security Holders		120

Item 6:	Exhibits		121

SIGNATURES			122
EX-12.1: STATEMENT RE: COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
EX-15.1: LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION
EX-31.1: RULE 13A-14(A) CERTIFICATIONS
EX-32.1: SECTION 1350 CERTIFICATIONS

PART I: FINANCIAL INFORMATION


Item 1:	Financial Statements (Unaudited)

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
	(in millions, except per share amounts)

Revenues
Investment banking	$	1,685	$	1,720	$	2,851	$	3,436
Trading and principal investments		5,239		6,242		10,116		15,315
Asset management and securities services		1,221		1,107		2,562		2,240
Interest income		9,498		11,282		20,743		21,640

Total revenues		17,643		20,351		36,272		42,631

Interest expense		8,221		10,169		18,515		19,719

Revenues, net of interest expense		9,422		10,182		17,757		22,912

Operating expenses
Compensation and benefits		4,522		4,887		8,523		10,998

Brokerage, clearing, exchange and distribution fees		741		638		1,531		1,189
Market development		126		144		270		276
Communications and technology		192		161		379		312
Depreciation and amortization		183		140		353		272
Amortization of identifiable intangible assets		37		50		121		101
Occupancy		234		210		470		414
Professional fees		185		161		363		322
Other expenses		370		360		772		738

Totalnon-compensationexpenses		2,068		1,864		4,259		3,624

Total operating expenses		6,590		6,751		12,782		14,622


Pre-taxearnings		2,832		3,431		4,975		8,290
Provision for taxes		745		1,098		1,377		2,760

Net earnings		2,087		2,333		3,598		5,530
Preferred stock dividends		36		46		80		95

Net earnings applicable to common shareholders	$	2,051	$	2,287	$	3,518	$	5,435

Earnings per common share
Basic	$	4.80	$	5.25	$	8.18	$	12.35
Diluted		4.58		4.93		7.81		11.61

Dividends declared and paid per common share	$	0.35	$	0.35	$	0.70	$	0.70

Average common shares outstanding
Basic		427.5		435.8		430.3		440.2
Diluted		447.4		464.1		450.6		468.0

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


	As of
	May			November
	2008			2007
	(in millions, except share
	and per share amounts)

Assets
Cash and cash equivalents	$	13,781		$	11,882
Cash and securities segregated for regulatory and other purposes (includes $63,732 and $94,018 at fair value as of May 2008 and November 2007, respectively)		84,880			119,939
Receivables from brokers, dealers and clearing organizations		23,122			19,078
Receivables from customers and counterparties (includes $1,100 and $1,950 at fair value as of May 2008 and November 2007, respectively)		99,935			129,105
Collateralized agreements:
Securities borrowed (includes $69,200 and $83,277 at fair value as of May 2008 and November 2007, respectively)		298,424			277,413
Financial instruments purchased under agreements to resell, at fair value		130,897			85,717

Financial instruments owned, at fair value		373,811			406,457
Financial instruments owned and pledged as collateral, at fair value		37,383			46,138

Total financial instruments owned, at fair value		411,194			452,595
Other assets		25,912			24,067

Total assets	$	1,088,145		$	1,119,796


Liabilities and shareholders’ equity
Unsecuredshort-termborrowings, including the current portion of unsecuredlong-termborrowings (includes $38,678 and $48,331 at fair value as of May 2008 and November 2007, respectively)	$	71,176		$	71,557
Bank deposits (includes $728 and $463 at fair value as of May 2008 and November 2007, respectively)		29,518			15,370
Payables to brokers, dealers and clearing organizations		10,894			8,335
Payables to customers and counterparties		335,481			310,118
Collateralized financings:
Securities loaned (includes $7,353 and $5,449 at fair value as of May 2008 and November 2007, respectively)		34,439			28,624
Financial instruments sold under agreements to repurchase, at fair value		115,733			159,178
Other secured financings (includes $26,289 and $33,581 at fair value as of May 2008 and November 2007, respectively)		53,090			65,710
Financial instruments sold, but not yet purchased, at fair value		182,869			215,023
Other liabilities and accrued expenses		28,076			38,907

Unsecuredlong-termborrowings (includes $22,845 and $15,928 at fair value as of May 2008 and November 2007, respectively)		182,051			164,174

Total liabilities		1,043,327			1,076,996

Commitments, contingencies and guarantees

Shareholders’ equity
Preferred stock, par value $0.01 per share; 150,000,000 shares authorized, 124,000 shares issued and outstanding as of both May 2008 and November 2007, with liquidation preference of $25,000 per share		3,100			3,100
Common stock, par value $0.01 per share; 4,000,000,000 shares authorized, 631,702,706 and 618,707,032 shares issued as of May 2008 and November 2007, respectively, and 394,721,798 and 390,682,013 shares outstanding as of May 2008 and November 2007, respectively		6			6
Restricted stock units and employee stock options		8,653			9,302
Nonvoting common stock, par value $0.01 per share; 200,000,000 shares authorized, no shares issued and outstanding		—			—
Additionalpaid-incapital		23,463			22,027
Retained earnings		41,646			38,642
Accumulated other comprehensive income/(loss)		(136	)		(118	)
Common stock held in treasury, at cost, par value $0.01 per share; 236,980,908 and 228,025,019 shares as of May 2008 and November 2007, respectively		(31,914	)		(30,159	)

Total shareholders’ equity		44,818			42,800

Total liabilities and shareholders’ equity	$	1,088,145		$	1,119,796

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)


	Period Ended
	May			November
	2008			2007
	(in millions, except
	per share amounts)

Preferred stock
Balance, beginning of year	$	3,100		$	3,100
Issued		—			—

Balance, end of period		3,100			3,100
Common stock, par value $0.01 per share
Balance, beginning of year		6			6
Issued		—			—

Balance, end of period		6			6
Restricted stock units and employee stock options
Balance, beginning of year		9,302			6,290
Issuance and amortization of restricted stock units and employee stock options		1,428			4,684
Delivery of common stock underlying restricted stock units		(1,993	)		(1,548	)
Forfeiture of restricted stock units and employee stock options		(83	)		(113	)
Exercise of employee stock options		(1	)		(11	)

Balance, end of period		8,653			9,302
Additionalpaid-incapital
Balance, beginning of year		22,027			19,731
Issuance of common stock, including the delivery of common stock underlying restricted stock units and proceeds from the exercise of employee stock options		2,153			2,338
Cancellation of restricted stock units in satisfaction of withholding tax requirements		(1,313	)		(929	)
Stock purchase contract fee related to automatic preferred enhanced capital securities		—			(20	)
Excess net tax benefit related toshare-basedcompensation		596			908
Cash settlement ofshare-basedcompensation		—			(1	)

Balance, end of period		23,463			22,027
Retained earnings
Balance, beginning of year, as previously reported		38,642			27,868
Cumulative effect of adjustment from adoption of FIN No. 48		(201	)		—
Cumulative effect of adjustment from adoption of SFAS No. 157, net of tax		—			51
Cumulative effect of adjustment from adoption of SFAS No. 159, net of tax		—			(45	)

Balance, beginning of year, after cumulative effect of adjustments		38,441			27,874
Net earnings		3,598			11,599
Dividends and dividend equivalents declared on common stock and restricted stock units		(313	)		(639	)
Dividends declared on preferred stock		(80	)		(192	)

Balance, end of period		41,646			38,642
Accumulated other comprehensive income/(loss)
Balance, beginning of year		(118	)		21
Adjustment from adoption of SFAS No. 158, net of tax		—			(194	)
Currency translation adjustment, net of tax		(12	)		39
Pension and postretirement liability adjustment, net of tax		6			38
Net gains/(losses) on cash flow hedges, net of tax		—			(2	)
Net unrealized gains/(losses) onavailable-for-salesecurities, net of tax		(12	)		(12	)
Reclassification to retained earnings from adoption of SFAS No. 159, net of tax		—			(8	)

Balance, end of period		(136	)		(118	)
Common stock held in treasury, at cost
Balance, beginning of year		(30,159	)		(21,230	)
Repurchased		(1,764	)		(8,956	)
Reissued		9			27

Balance, end of period		(31,914	)		(30,159	)

Total shareholders’ equity	$	44,818		$	42,800

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Six Months
	Ended May
	2008			2007
	(in millions)

Cash flows from operating activities
Net earnings	$	3,598		$	5,530
Non-cash items included in net earnings
Depreciation and amortization		533			416
Amortization of identifiable intangible assets		121			137
Share-basedcompensation		894			713
Changes in operating assets and liabilities
Cash and securities segregated for regulatory and other purposes		35,265			2,643
Net receivables from brokers, dealers and clearing organizations		(1,485	)		(1,165	)
Net payables to customers and counterparties		54,916			(28,905	)
Securities borrowed, net of securities loaned		(15,196	)		(8,636	)
Financial instruments sold under agreements to repurchase, net of financial instruments purchased under agreements to resell		(88,625	)		9,861
Financial instruments owned, at fair value		28,881			(48,688	)
Financial instruments sold, but not yet purchased, at fair value		(32,154	)		20,829
Other, net		35			2,094

Net cash used for operating activities		(13,217	)		(45,171	)
Cash flows from investing activities
Purchase of property, leasehold improvements and equipment		(1,033	)		(1,029	)
Proceeds from sales of property, leasehold improvements and equipment		55			15
Business acquisitions, net of cash acquired		(2,199	)		(631	)
Proceeds from sales of investments		80			321
Purchase ofavailable-for-salesecurities		(2,556	)		(450	)
Proceeds from sales ofavailable-for-salesecurities		2,090			388

Net cash used for investing activities		(3,563	)		(1,386	)
Cash flows from financing activities
Unsecuredshort-termborrowings, net		(7,286	)		8,736
Other secured financings(short-term),net		(8,341	)		12,731
Proceeds from issuance of other secured financings(long-term)		5,014			5,135
Repayment of other secured financings(long-term),including the current portion		(3,648	)		(2,104	)
Proceeds from issuance of unsecuredlong-termborrowings		31,790			30,744
Repayment of unsecuredlong-termborrowings, including the current portion		(11,751	)		(8,193	)
Derivative contracts with a financing element, net		155			2,145
Bank deposits, net		14,148			2,233
Common stock repurchased		(1,761	)		(3,820	)
Dividends and dividend equivalents paid on common stock, preferred stock and restricted stock units		(393	)		(419	)
Proceeds from issuance of common stock		170			453
Excess tax benefit related toshare-basedcompensation		582			632

Net cash provided by financing activities		18,679			48,273
Net increase/(decrease) in cash and cash equivalents		1,899			1,716
Cash and cash equivalents, beginning of year		11,882			6,293

Cash and cash equivalents, end of period	$	13,781		$	8,009

SUPPLEMENTAL DISCLOSURES:

Cash payments for interest, net of capitalized interest, were $18.68 billion and $18.88 billion during the six months ended May 2008 and May 2007, respectively.

Cash payments for income taxes, net of refunds, were $1.39 billion and $3.63 billion during the six months ended May 2008 and May 2007, respectively.

Non-cash activities:

The firm assumed $610 million and $135 million of debt in connection with business acquisitions during the six months ended May 2008 and May 2007, respectively. The firm issued $17 million of common stock in connection with business acquisitions for the six months ended May 2007.

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

Net earnings	$	2,087		$	2,333		$	3,598		$	5,530
Currency translation adjustment, net of tax		(21	)		15			(12	)		20
Pension and postretirement liability adjustment, net of tax		6			—			6			—
Net gains/(losses) on cash flow hedges, net of tax		—			(4	)		—			(2	)
Net unrealized gains/(losses) onavailable-for-salesecurities, net of tax		23			(6	)		(12	)		(8	)

Comprehensive income	$	2,095		$	2,338		$	3,580		$	5,540

The accompanying notes are an integral part of these condensed consolidated financial statements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Note 1.	Description of Business

The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, together with its consolidated subsidiaries (collectively, the firm), is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments andhigh-net-worthindividuals.

The firm’s activities are divided into three segments:


	•	Investment Banking. The firm provides a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals.

	•	Trading and Principal Investments. The firm facilitates client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and takes proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, the firm engages in market-making and specialist activities on equities and options exchanges and clears client transactions on major stock, options and futures exchanges worldwide. In connection with the firm’s merchant banking and other investing activities, the firm makes principal investments directly and through funds that the firm raises and manages.

	•	Asset Management and Securities Services. The firm provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and tohigh-net-worthindividuals worldwide.


Note 2.	Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements include the accounts of Group Inc. and all other entities in which the firm has a controlling financial interest. All material intercompany transactions and balances have been eliminated.

The firm determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity, a variable interest entity (VIE) or a qualifyingspecial-purposeentity (QSPE) under generally accepted accounting principles.


	•	Voting Interest Entities. Voting interest entities are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. Voting interest entities are consolidated in accordance with Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements,” as amended. The usual condition for a controlling financial interest in an entity is ownership of a majority voting interest. Accordingly, the firm consolidates voting interest entities in which it has a majority voting interest.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	•	Variable Interest Entities. VIEs are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has a variable interest, or a combination of variable interests, that will absorb a majority of the VIE’s expected losses, receive a majority of the VIE’s expected residual returns, or both. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. In accordance with Financial Accounting Standards Board (FASB) Interpretation (FIN)No. 46-R,“Consolidation of Variable Interest Entities,” the firm consolidates VIEs for which it is the primary beneficiary. The firm determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis of the VIE’s expected losses and expected residual returns. This analysis includes a review of, among other factors, the VIE’s capital structure, contractual terms, which interests create or absorb variability, related party relationships and the design of the VIE. Where qualitative analysis is not conclusive, the firm performs a quantitative analysis. For purposes of allocating a VIE’s expected losses and expected residual returns to its variable interest holders, the firm utilizes the “top down” method. Under that method, the firm calculates its share of the VIE’s expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangementsand/or the firm’s position in the capital structure of the VIE, under various probability-weighted scenarios. The firm reassesses its initial evaluation of an entity as a VIE and its initial determination of whether the firm is the primary beneficiary of a VIE upon the occurrence of certain reconsideration events as defined inFIN No. 46-R.

	•	QSPEs. QSPEs are passive entities that are commonly used in mortgage and other securitization transactions. Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” sets forth the criteria an entity must satisfy to be a QSPE. These criteria include the types of assets a QSPE may hold, limits on asset sales, the use of derivatives and financial guarantees, and the level of discretion a servicer may exercise in attempting to collect receivables. These criteria may require management to make judgments about complex matters, such as whether a derivative is considered passive and the level of discretion a servicer may exercise, including, for example, determining when default is reasonably foreseeable. In accordance with SFAS No. 140 andFIN No. 46-R,the firm does not consolidate QSPEs.

	•	Equity-MethodInvestments. When the firm does not have a controlling financial interest in an entity but exerts significant influence over the entity’s operating and financial policies (generally defined as owning a voting interest of 20% to 50%) and has an investment in common stock or in-substance common stock, the firm accounts for its investment either in accordance with Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock” or at fair value in accordance with SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” In general, the firm accounts for investments acquired subsequent to the adoption of SFAS No. 159 at fair value. In certain cases, the firm may apply the equity method of accounting to new investments that are strategic in nature or closely related to the firm’s principal business activities, where the firm has a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant. See “— Revenue Recognition — Other Financial Assets and Financial Liabilities at Fair Value” below for a discussion of the firm’s application of SFAS No. 159.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	•	Other. If the firm does not consolidate an entity or apply the equity method of accounting, the firm accounts for its investment at fair value. The firm also has formed numerous nonconsolidated investment funds withthird-partyinvestors that are typically organized as limited partnerships. The firm acts as general partner for these funds and generally does not hold a majority of the economic interests in these funds. The firm has generally provided thethird-partyinvestors with rights to terminate the funds or to remove the firm as the general partner. As a result, the firm does not consolidate these funds. These fund investments are included in “Financial instruments owned, at fair value” in the condensed consolidated statements of financial condition.

These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the firm’s Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007. The condensed consolidated financial information as of November 30, 2007 has been derived from audited consolidated financial statements not included herein.

These unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.

Unless specifically stated otherwise, all references to May 2008 and May 2007 refer to the firm’s fiscal periods ended, or the dates, as the context requires, May 30, 2008 and May 25, 2007, respectively. All references to November 2007, unless specifically stated otherwise, refer to the firm’s fiscal year ended, or the date, as the context requires, November 30, 2007. All references to 2008, unless specifically stated otherwise, refer to the firm’s fiscal year ending, or the date, as the context requires, November 28, 2008. Certain reclassifications have been made to previously reported amounts to conform to the current presentation.

Use of Estimates

These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles that require management to make certain estimates and assumptions. The most important of these estimates and assumptions relate to fair value measurements, the accounting for goodwill and identifiable intangible assets and the provision for potential losses that may arise from litigation and regulatory proceedings and tax audits. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Revenue Recognition

Investment Banking. Underwriting revenues and fees from mergers and acquisitions and other financial advisory assignments are recognized in the condensed consolidated statements of earnings when the services related to the underlying transaction are completed under the terms of the engagement. Expenses associated with such transactions are deferred until the related revenue is recognized or the engagement is otherwise concluded. Underwriting revenues are presented net of related expenses. Expenses associated with financial advisory transactions are recorded asnon-compensationexpenses, net of client reimbursements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Financial Instruments. “Total financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value” are reflected in the condensed consolidated statements of financial condition on a trade-date basis. Related unrealized gains or losses are generally recognized in “Trading and principal investments” in the condensed consolidated statements of earnings. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Instruments that the firm owns (long positions) are marked to bid prices, and instruments that the firm has sold, but not yet purchased (short positions), are marked to offer prices. Fair value measurements do not include transaction costs.

SFAS No. 157, “Fair Value Measurements,” establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

Basis of Fair Value Measurement


	Level 1	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

	Level 2	Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly;

	Level 3	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

In determining fair value, the firm separates its “Financial instruments owned, at fair value” and its “Financial instruments sold, but not yet purchased, at fair value” into two categories: cash instruments and derivative contracts.


	•	Cash Instruments. The firm’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and sovereign obligations, active listed equities and most money market securities. Such instruments are generally classified within level 1 of the fair value hierarchy. The firm does not adjust the quoted price for such instruments, even in situations where the firm holds a large position and a sale could reasonably impact the quoted price.

The types of instruments that trade in markets that are not considered to be active, but are valued based on quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most government agency securities, investment-grade corporate bonds, certain mortgage products, certain bank loans and bridge loans, less liquid listed equities, state, municipal and provincial obligations, most physical commodities and certain loan commitments. Such instruments are generally classified within level 2 of the fair value hierarchy.

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Certain cash instruments are classified within level 3 of the fair value hierarchy because they trade infrequently and therefore have little or no price transparency. Such instruments include private equity and real estate fund investments, certain bank loans and bridge loans (including certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt), less liquid corporate debt securities and other debt obligations (including less liquidhigh-yieldcorporate bonds, distressed debt instruments and collateralized debt obligations (CDOs) backed by corporate obligations), less liquid mortgage whole loans and securities (backed by either commercial or residential real estate), and acquired portfolios of distressed loans. The transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pendingthird-partytransactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.

For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidityand/ornon-transferability,and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.


	•	Derivative Contracts. Derivative contracts can beexchange-tradedor over-the-counter (OTC).Exchange-tradedderivatives typically fall within level 1 or level 2 of the fair value hierarchy depending on whether they are deemed to be actively traded or not. The firm generally valuesexchange-tradedderivatives within portfolios using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of theexchange-tradedderivatives and their underlying cash instruments. In such cases,exchange-tradedderivatives are classified within level 2 of the fair value hierarchy.

OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. The firm generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment. OTC derivatives are classified within level 2 of the fair value hierarchy when all of the significant inputs can be corroborated to market evidence.

Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Such instruments are classified within level 3 of the fair value hierarchy. Where the firm does not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. The valuations of these less

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liquid OTC derivatives are typically based on level 1and/or level 2 inputs that can be observed in the market, as well as unobservable level 3 inputs. Subsequent to initial recognition, the firm updates the level 1 and level 2 inputs to reflect observable market changes, with resulting gains and losses reflected within level 3. Level 3 inputs are only changed when corroborated by evidence such as similar market transactions,third-partypricing servicesand/orbroker or dealer quotations, or other empirical market data. In circumstances where the firm cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value.

When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations. Such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Other Financial Assets and Financial Liabilities at Fair Value. The firm has elected to account for certain of the firm’s other financial assets and financial liabilities at fair value under SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140,” or SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (i.e., the fair value option). The primary reasons for electing the fair value option are mitigating volatility in earnings from using different measurement attributes, simplification and cost-benefit considerations.

Such financial assets and financial liabilities accounted for at fair value include (i) certain unsecuredshort-termborrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; (ii) certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings; (iii) certain unsecuredlong-termborrowings, including prepaid physical commodity transactions; (iv) resale and repurchase agreements; (v) securities borrowed and loaned within Trading and Principal Investments, consisting of the firm’s matched book and certain firm financing activities; (vi) corporate loans, loan commitments and certain certificates of deposit issued by Goldman Sachs Bank USA (GS Bank USA) as well as securities held by GS Bank USA (which would otherwise be accounted for asavailable-for-sale);(vii) receivables from customers and counterparties arising from transfers accounted for as secured loans rather than purchases under SFAS No. 140; and (viii) in general, investments acquired after the adoption of SFAS No. 159 where the firm has significant influence over the investee and would otherwise apply the equity method of accounting.

Collateralized Agreements and Financings. Collateralized agreements consist of resale agreements and securities borrowed. Collateralized financings consist of repurchase agreements, securities loaned and other secured financings. Interest on collateralized agreements and collateralized financings is recognized in “Interest income” and “Interest expense,” respectively, over the life of the transaction.


	•	Resale and Repurchase Agreements. Financial instruments purchased under agreements to resell and financial instruments sold under agreements to repurchase, principally U.S. government, federal agency and investment-grade sovereign obligations, represent collateralized financing transactions. The firm receives financial instruments purchased under agreements to resell, makes delivery of financial instruments sold under agreements to repurchase, monitors the market value of these financial instruments on a daily basis and delivers or obtains additional collateral as appropriate. As noted above, resale and repurchase agreements are carried in the condensed consolidated statements of financial condition at fair value as allowed by SFAS No. 159. Resale and repurchase agreements are generally valued

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		based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. Resale and repurchase agreements are presented on anet-by-counterpartybasis when the requirements of FIN No. 41, “Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements,” or FIN No. 39, “Offsetting of Amounts Related to Certain Contracts,” are satisfied.


	•	Securities Borrowed and Loaned. Securities borrowed and loaned are generally collateralized by cash, securities or letters of credit. The firm receives securities borrowed, makes delivery of securities loaned, monitors the market value of securities borrowed and loaned, and delivers or obtains additional collateral as appropriate. Securities borrowed and loaned within Securities Services, relating to both customer activities and, to a lesser extent, certain firm financing activities, are recorded based on the amount of cash collateral advanced or received plus accrued interest. As these arrangements generally can be terminatedon-demand,they exhibit little, if any, sensitivity to changes in interest rates. As noted above, securities borrowed and loaned within Trading and Principal Investments, which are related to the firm’s matched book and certain firm financing activities, are recorded at fair value as allowed by SFAS No. 159. These securities borrowed and loaned transactions are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy.

	•	Other Secured Financings. In addition to repurchase agreements and securities loaned, the firm funds assets through the use of other secured financing arrangements and pledges financial instruments and other assets as collateral in these transactions. As noted above, the firm has elected to apply SFAS No. 159 to transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings, for which the use of fair value eliminates non-economic volatility in earnings that would arise from using different measurement attributes. These other secured financing transactions are generally valued based on inputs with reasonable levels of price transparency and are classified within level 2 of the fair value hierarchy. Other secured financings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest. See Note 3 for further information regarding other secured financings.

Hybrid Financial Instruments. Hybrid financial instruments are instruments that contain bifurcatable embedded derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and do not require settlement by physical delivery of non-financial assets (e.g., physical commodities). If the firm elects to bifurcate the embedded derivative, it is accounted for at fair value and the host contract is accounted for at amortized cost, adjusted for the effective portion of any fair value hedge accounting relationships. If the firm does not elect to bifurcate, the entire hybrid financial instrument is accounted for at fair value under SFAS No. 155. See Notes 3 and 4 for additional information about hybrid financial instruments.

Transfers of Financial Assets. In general, transfers of financial assets are accounted for as sales under SFAS No. 140 when the firm has relinquished control over the transferred assets. For transfers accounted for as sales, any related gains or losses are recognized in net revenues. Transfers that are not accounted for as sales are accounted for as collateralized financings, with the related interest expense recognized in net revenues over the life of the transaction.

Commissions. Commission revenues from executing and clearing client transactions on stock, options and futures markets are recognized in “Trading and principal investments” in the condensed consolidated statements of earnings on a trade-date basis.

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Insurance Activities. Revenues from variable annuity and life insurance contracts, and from providing reinsurance of such contracts, generally consist of fees assessed on contract holder account balances for mortality charges, policy administration and surrender charges. These fees are recognized within “Trading and principal investments” in the condensed consolidated statements of earnings in the period that services are provided.

Interest credited to variable annuity and life insurance account balances and changes in reserves are recognized in “Other expenses” in the condensed consolidated statements of earnings.

Premiums earned for providing property catastrophe reinsurance are recognized within “Trading and principal investments” in the condensed consolidated statements of earnings over the coverage period, net of premiums ceded for the cost of reinsurance. Expenses for liabilities related to property catastrophe reinsurance claims, including estimates of claims that have been incurred but not reported, are recognized within “Other expenses” in the condensed consolidated statements of earnings.

Merchant Banking Overrides. The firm is entitled to receive merchant banking overrides (i.e., an increased share of a fund’s income and gains) when the return on the funds’ investments exceeds certain threshold returns. Overrides are based on investment performance over the life of each merchant banking fund, and future investment underperformance may require amounts of override previously distributed to the firm to be returned to the funds. Accordingly, overrides are recognized in the condensed consolidated statements of earnings only when all material contingencies have been resolved. Overrides are included in “Trading and principal investments” in the condensed consolidated statements of earnings.

Asset Management. Management fees are recognized over the period that the related service is provided based upon average net asset values. In certain circumstances, the firm is also entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds specified benchmark returns or other performance targets. Incentive fees are generally based on investment performance over a12-monthperiod and are subject to adjustment prior to the end of the measurement period. Accordingly, incentive fees are recognized in the condensed consolidated statements of earnings when the measurement period ends. Asset management fees and incentive fees are included in “Asset management and securities services” in the condensed consolidated statements of earnings.

Share-BasedCompensation

The firm accounts forshare-basedcompensation in accordance withSFAS No. 123-R,“Share-BasedPayment.” The cost of employee services received in exchange for ashare-basedaward is generally measured based on the grant-date fair value of the award.Share-basedawards that do not require future service (i.e., vested awards, including awards granted to retirement-eligible employees) are expensed immediately.Share-basedemployee awards that require future service are amortized over the relevant service period. Expected forfeitures are included in determiningshare-basedemployee compensation expense. The firm adoptedSFAS No. 123-Runder the modified prospective adoption method. Under that method of adoption, the provisions ofSFAS No. 123-Rare generally applied only toshare-basedawards granted subsequent to adoption.Share-basedawards held by employees that were retirement-eligible on the date of adoption ofSFAS No. 123-Rmust continue to be amortized over the stated service period of the award (and accelerated if the employee actually retires).

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The firm pays cash dividend equivalents on outstanding restricted stock units. Dividend equivalents paid on restricted stock units are generally charged to retained earnings. Dividend equivalents paid on restricted stock units expected to be forfeited are included in compensation expense. The tax benefit related to dividend equivalents paid on restricted stock units is accounted for as a reduction of income tax expense (see “— Recent Accounting Developments” for a discussion of Emerging Issues Task Force (EITF) IssueNo. 06-11,“Accounting for Income Tax Benefits of Dividends onShare-BasedPayment Awards”).

In certain cases, primarily related to the death of an employee or conflicted employment (as outlined in the applicable award agreements), the firm may cash settleshare-basedcompensation awards. For awards accounted for as equity instruments, “Additionalpaid-incapital” is adjusted to the extent of the difference between the current value of the award and the grant-date value of the award.

Goodwill

Goodwill is the cost of acquired companies in excess of the fair value of identifiable net assets at acquisition date. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested at least annually for impairment. An impairment loss is recognized if the estimated fair value of an operating segment, which is a component one level below the firm’s three business segments, is less than its estimated net book value. Such loss is calculated as the difference between the estimated fair value of goodwill and its carrying value.

Identifiable Intangible Assets

Identifiable intangible assets, which consist primarily of customer lists, specialist rights and the value of business acquired (VOBA) and deferred acquisition costs (DAC) in the firm’s insurance subsidiaries, are amortized over their estimated lives in accordance with SFAS No. 142 or, in the case of insurance contracts, in accordance with SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for CertainLong-DurationContracts and for Realized Gains and Losses from the Sale of Investments.” Identifiable intangible assets are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

Property, Leasehold Improvements and Equipment

Property, leasehold improvements and equipment, net of accumulated depreciation and amortization, are included in “Other assets” in the condensed consolidated statements of financial condition.

Substantially all property and equipment are depreciated on a straight-line basis over the useful life of the asset. Leasehold improvements are amortized on a straight-line basis over the useful life of the improvement or the term of the lease, whichever is shorter. Certain costs of software developed or obtained for internal use are capitalized and amortized on a straight-line basis over the useful life of the software.

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Property, leasehold improvements and equipment are tested for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the expected undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

The firm’s operating leases include space held in excess of current requirements. Rent expense relating to space held for growth is included in “Occupancy” in the condensed consolidated statements of earnings. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” the firm records a liability, based on the fair value of the remaining lease rentals reduced by any potential or existing sublease rentals, for leases where the firm has ceased using the space and management has concluded that the firm will not derive any future economic benefits. Costs to terminate a lease before the end of its term are recognized and measured at fair value upon termination.

Foreign Currency Translation

Assets and liabilities denominated innon-U.S. currenciesare translated at rates of exchange prevailing on the date of the condensed consolidated statement of financial condition, and revenues and expenses are translated at average rates of exchange for the period. Gains or losses on translation of the financial statements of anon-U.S. operation,when the functional currency is other than the U.S. dollar, are included, net of hedges and taxes, in the condensed consolidated statements of comprehensive income. The firm seeks to reduce its net investment exposure to fluctuations in foreign exchange rates through the use of foreign currency forward contracts and foreign currency-denominated debt. For foreign currency forward contracts, hedge effectiveness is assessed based on changes in forward exchange rates; accordingly, forward points are reflected as a component of the currency translation adjustment in the condensed consolidated statements of comprehensive income. For foreign currency-denominated debt, hedge effectiveness is assessed based on changes in spot rates. Foreign currency remeasurement gains or losses on transactions in nonfunctional currencies are included in the condensed consolidated statements of earnings.

Income Taxes

Deferred tax assets and liabilities are recognized for temporary differences between the financial reporting and tax bases of the firm’s assets and liabilities. Valuation allowances are established to reduce deferred tax assets to the amount that more likely than not will be realized. The firm’s tax assets and liabilities are presented as a component of “Other assets” and “Other liabilities and accrued expenses,” respectively, in the condensed consolidated statements of financial condition. Tax provisions are computed in accordance with SFAS No. 109, “Accounting for Income Taxes.”

The firm adopted the provisions of FIN No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,” as of December 1, 2007, and recorded a transition adjustment resulting in a reduction of $201 million to beginning retained earnings (see Note 13 for further information regarding the firm’s adoption of FIN No. 48). A tax position can be recognized in the financial statements only when it is more likely than not that the position will be sustained upon examination by the relevant taxing authority based on the technical merits of the position. A position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized upon settlement. A liability is established for differences between positions taken in a tax return and amounts recognized in the financial statements. FIN No. 48 also provides guidance on

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derecognition, classification, interim period accounting and accounting for interest and penalties. Prior to the adoption of FIN No. 48, contingent liabilities related to income taxes were recorded when the criteria for loss recognition under SFAS No. 5, “Accounting for Contingencies,” as amended, had been met.

Earnings Per Common Share (EPS)

Basic EPS is calculated by dividing net earnings applicable to common shareholders by the weighted average number of common shares outstanding. Common shares outstanding includes common stock and restricted stock units for which no future service is required as a condition to the delivery of the underlying common stock. Diluted EPS includes the determinants of basic EPS and, in addition, reflects the dilutive effect of the common stock deliverable pursuant to stock options and to restricted stock units for which future service is required as a condition to the delivery of the underlying common stock.

Cash and Cash Equivalents

The firm defines cash equivalents as highly liquid overnight deposits held in the ordinary course of business.

Recent Accounting Developments

EITF IssueNo. 06-11. In June 2007, the EITF reached consensus on IssueNo. 06-11,“Accounting for Income Tax Benefits of Dividends onShare-BasedPayment Awards.” EITF IssueNo. 06-11requires that the tax benefit related to dividend equivalents paid on restricted stock units, which are expected to vest, be recorded as an increase to additionalpaid-incapital. The firm currently accounts for this tax benefit as a reduction to income tax expense. EITF IssueNo. 06-11is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007, and the firm expects to adopt the provisions of EITF IssueNo. 06-11beginning in the first quarter of 2009. The firm does not expect the adoption of EITF IssueNo. 06-11to have a material effect on its financial condition, results of operations or cash flows.

FASB Staff Position (FSP)FAS No. 140-3. In February 2008, the FASB issued FSPFAS No. 140-3,“Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSPNo. 140-3requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No. 140 unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. FSPNo. 140-3is effective for fiscal years beginning after November 15, 2008, and will be applied to new transactions entered into after the date of adoption. Early adoption is prohibited. The firm is currently evaluating the impact of adopting FSPNo. 140-3on its financial condition and cash flows. Adoption of FSPNo. 140-3will have no effect on the firm’s results of operations.

SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. The firm will adopt SFAS No. 161 in the first quarter of 2009. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 will not affect the firm’s financial condition, results of operations or cash flows.

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FASB Staff Position (FSP) No. EITF03-6-1. In June 2008, the FASB issued FSP EITFNo. 03-6-1,“Determining Whether Instruments Granted inShare-BasedPayment Transactions Are Participating Securities.” The FSP addresses whether instruments granted inshare-basedpayment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvestedshare-basedpayment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The firm does not expect adoption of FSP EITFNo. 03-6-1to have a material effect on its results of operations or earnings per share.

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Note 3.	Financial Instruments

Fair Value of Financial Instruments

The following table sets forth the firm’s financial instruments owned, at fair value, including those pledged as collateral, and financial instruments sold, but not yet purchased, at fair value. At any point in time, the firm may use cash instruments as well as derivatives to manage a long or short risk position.


	As of
	May 2008						November 2007
	Assets			Liabilities			Assets			Liabilities
				(in millions)

Commercial paper, certificates of deposit, time deposits and other money market instruments	$	16,949	⁽¹⁾	$	—		$	8,985	⁽¹⁾	$	—
U.S. government, federal agency and sovereign obligations		62,583			44,194			70,774			58,637
Mortgage and otherasset-backed loans and securities		37,523			687			54,073	⁽⁶⁾		—
Bank loans and bridge loans		35,949			1,600	⁽⁴⁾		49,154			3,563	⁽⁴⁾
Corporate debt securities and other debt obligations		35,197			8,147			39,219			8,280
Equities and convertible debentures		101,295			30,172			122,205			45,130
Physical commodities		1,248			47			2,571			35
Derivative contracts		120,450	⁽²⁾		98,022	⁽⁵⁾		105,614	⁽²⁾		99,378	⁽⁵⁾

Total	$	411,194	⁽³⁾	$	182,869		$	452,595	⁽³⁾	$	215,023


⁽¹⁾		Includes $5.13 billion and $6.17 billion as of May 2008 and November 2007, respectively, of money market instruments held by William Street Funding Corporation (Funding Corp.) to support the William Street credit extension program (see Note 6 for further information regarding the William Street program).

⁽²⁾		Net of cash received pursuant to credit support agreements of $84.56 billion and $59.05 billion as of May 2008 and November 2007, respectively.

⁽³⁾		Includes $1.87 billion and $1.17 billion as of May 2008 and November 2007, respectively, of securities held within the firm’s insurance subsidiaries which are accounted for asavailable-for-saleunder SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

⁽⁴⁾		Includes the fair value of commitments to extend credit.

⁽⁵⁾		Net of cash paid pursuant to credit support agreements of $33.90 billion and $27.76 billion as of May 2008 and November 2007, respectively.

⁽⁶⁾		Includes $7.64 billion as of November 2007, of mortgage whole loans that were transferred to securitization vehicles where such transfers were accounted for as secured financings rather than sales under SFAS No. 140. The firm distributed to investors the securities that were issued by the securitization vehicles and therefore did not bear economic exposure to the underlying mortgage whole loans.

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Fair Value Hierarchy

The firm’s financial assets at fair value classified within level 3 of the fair value hierarchy are summarized below:


	As of
	May			November
	2008			2007
	($ in millions)

Total level 3 assets	$	78,088	⁽²⁾	$	69,151
Level 3 assets for which the firm bears economic exposure ⁽¹⁾		67,341			54,714

Total assets		1,088,145			1,119,796
Total financial assets at fair value		676,123			717,557

Total level 3 assets as a percentage of Total assets		7	%		6	%
Level 3 assets for which the firm bears economic exposure as a percentage of Total assets		6			5

Total level 3 assets as a percentage of Total financial assets at fair value		12			10
Level 3 assets for which the firm bears economic exposure as a percentage of Total financial assets at fair value		10			8


⁽¹⁾		Excludes assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

⁽²⁾		Total level 3 assets as of February 2008 were $96.39 billion.

The following tables set forth by level within the fair value hierarchy “Financial instruments owned, at fair value,” “Financial instruments sold, but not yet purchased, at fair value” and other financial assets and financial liabilities accounted for at fair value under SFAS No. 155 and SFAS No. 159 as of May 2008 and November 2007 (see Note 2 for further information on the fair value hierarchy). As required by SFAS No. 157, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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	Financial Assets at Fair Value as of May 2008
										Netting and
	Level 1			Level 2			Level 3			Collateral			Total
	(in millions)

Commercial paper, certificates of deposit, time deposits and other money market instruments	$	6,274		$	10,675		$	—		$	—		$	16,949
U.S. government, federal agency and sovereign obligations		35,172			27,411			—			—			62,583
Mortgage and otherasset-backedloans and securities		—			19,676			17,847			—			37,523
Bank loans and bridge loans		—			22,648			13,301			—			35,949
Corporate debt securities and other debt obligations		138			23,213			11,846			—			35,197
Equities and convertible debentures		57,725			26,893			16,677	⁽⁶⁾		—			101,295
Physical commodities		—			1,248			—			—			1,248

Cash instruments		99,309			131,764			59,671			—			290,744
Derivative contracts		108			190,587			18,417			(88,662	) ⁽⁷⁾		120,450

Financial instruments owned, at fair value		99,417			322,351			78,088			(88,662	)		411,194
Securities segregated for regulatory and other purposes		25,090	⁽⁴⁾		38,642	⁽⁵⁾		—			—			63,732
Receivables from customers and counterparties ⁽¹⁾		—			1,100			—			—			1,100
Securities borrowed ⁽²⁾		—			69,200			—			—			69,200
Financial instruments purchased under agreements to resell, at fair value		—			130,897			—			—			130,897

Total assets at fair value	$	124,507		$	562,190		$	78,088		$	(88,662	)	$	676,123

Level 3 assets for which the firm does not bear economic exposure ⁽³⁾								(10,747	)

Level 3 assets for which the firm bears economic exposure							$	67,341


⁽¹⁾	Principally consists of transfers accounted for as secured loans rather than purchases under SFAS No. 140 and prepaid variable share forwards.

⁽²⁾	Reflects securities borrowed within Trading and Principal Investments. Excludes securities borrowed within Securities Services, which are accounted for based on the amount of cash collateral advanced plus accrued interest.

⁽³⁾	Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

⁽⁴⁾	Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value under AICPASOP 03-1,“Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”

⁽⁵⁾	Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.

⁽⁶⁾	Consists of private equity and real estate fund investments.

⁽⁷⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Liabilities at Fair Value as of May 2008
								Netting and
	Level 1		Level 2		Level 3			Collateral			Total
	(in millions)

U.S. government, federal agency and sovereign obligations	$	42,094	$	2,100	$	—		$	—		$	44,194
Mortgage and otherasset-backedloans and securities		—		674		13			—			687
Bank loans and bridge loans		—		1,258		342			—			1,600
Corporate debt securities and other debt obligations		—		7,927		220			—			8,147
Equities and convertible debentures		29,200		966		6			—			30,172
Physical commodities		—		47		—			—			47

Cash instruments		71,294		12,972		581			—			84,847
Derivative contracts		55		124,067		11,909			(38,009	) ⁽⁷⁾		98,022

Financial instruments sold, but not yet purchased, at fair value		71,349		137,039		12,490			(38,009	)		182,869
Unsecuredshort-termborrowings ⁽¹⁾		15		34,826		3,837			—			38,678
Bank deposits ⁽²⁾		—		728		—			—			728
Securities loaned ⁽³⁾		—		7,353		—			—			7,353
Financial instruments sold under agreements to repurchase, at fair value		—		115,733		—			—			115,733
Other secured financings ⁽⁴⁾		—		25,409		880			—			26,289
Unsecuredlong-termborrowings ⁽⁵⁾		—		20,843		2,002			—			22,845

Total liabilities at fair value	$	71,364	$	341,931	$	19,209	⁽⁶⁾	$	(38,009	)	$	394,495


⁽¹⁾	Consists of promissory notes, commercial paper and hybrid financial instruments.

⁽²⁾	Consists of certain certificates of deposit issued by GS Bank USA.

⁽³⁾	Reflects securities loaned within Trading and Principal Investments. Excludes securities loaned within Securities Services, which are accounted for based on the amount of cash collateral received plus accrued interest.

⁽⁴⁾	Primarily includes transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings.

⁽⁵⁾	Primarily includes hybrid financial instruments and prepaid physical commodity transactions.

⁽⁶⁾	Level 3 liabilities were 5% of Total liabilities at fair value.

⁽⁷⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Assets at Fair Value as of November 2007
										Netting and
	Level 1			Level 2			Level 3			Collateral			Total
	(in millions)

Commercial paper, certificates of deposit, time deposits and other money market instruments	$	6,237		$	2,748		$	—		$	—		$	8,985
U.S. government, federal agency and sovereign obligations		37,966			32,808			—			—			70,774
Mortgage and otherasset-backedloans and securities		—			38,073			16,000			—			54,073
Bank loans and bridge loans		—			35,820			13,334			—			49,154
Corporate debt securities and other debt obligations		915			32,193			6,111			—			39,219
Equities and convertible debentures		68,727			35,472			18,006	⁽⁶⁾		—			122,205
Physical commodities		—			2,571			—			—			2,571

Cash instruments		113,845			179,685			53,451			—			346,981
Derivative contracts		286			153,065			15,700			(63,437	) ⁽⁷⁾		105,614

Financial instruments owned, at fair value		114,131			332,750			69,151			(63,437	)		452,595
Securities segregated for regulatory and other purposes		24,078	⁽⁴⁾		69,940	⁽⁵⁾		—			—			94,018
Receivables from customers and counterparties ⁽¹⁾		—			1,950			—			—			1,950
Securities borrowed ⁽²⁾		—			83,277			—			—			83,277
Financial instruments purchased under agreements to resell, at fair value		—			85,717			—			—			85,717

Total assets at fair value	$	138,209		$	573,634		$	69,151		$	(63,437	)	$	717,557

Level 3 assets for which the firm does not bear economic exposure ⁽³⁾								(14,437	)

Level 3 assets for which the firm bears economic exposure							$	54,714


⁽¹⁾	Consists of transfers accounted for as secured loans rather than purchases under SFAS No. 140 and prepaid variable share forwards.

⁽²⁾	Reflects securities borrowed within Trading and Principal Investments. Excludes securities borrowed within Securities Services, which are accounted for based on the amount of cash collateral advanced plus accrued interest.

⁽³⁾	Consists of level 3 assets which are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

⁽⁴⁾	Consists of U.S. Treasury securities and money market instruments as well as insurance separate account assets measured at fair value under AICPASOP 03-1,“Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts.”

⁽⁵⁾	Principally consists of securities borrowed and resale agreements. The underlying securities have been segregated to satisfy certain regulatory requirements.

⁽⁶⁾	Consists of private equity and real estate fund investments.

⁽⁷⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Financial Liabilities at Fair Value as of November 2007
								Netting and
	Level 1		Level 2		Level 3			Collateral			Total
	(in millions)

U.S. government, federal agency and sovereign obligations	$	57,714	$	923	$	—		$	—		$	58,637
Bank loans and bridge loans		—		3,525		38			—			3,563
Corporate debt securities and other debt obligations		—		7,764		516			—			8,280
Equities and convertible debentures		44,076		1,054		—			—			45,130
Physical commodities		—		35		—			—			35

Cash instruments		101,790		13,301		554			—			115,645
Derivative contracts		212		117,794		13,644			(32,272	) ⁽⁷⁾		99,378

Financial instruments sold, but not yet purchased, at fair value		102,002		131,095		14,198			(32,272	)		215,023
Unsecured short-term borrowings ⁽¹⁾		—		44,060		4,271			—			48,331
Bank deposits ⁽²⁾		—		463		—			—			463
Securities loaned ⁽³⁾		—		5,449		—			—			5,449
Financial instruments sold under agreements to repurchase, at fair value		—		159,178		—			—			159,178
Other secured financings ⁽⁴⁾		—		33,581		—			—			33,581
Unsecured long-term borrowings ⁽⁵⁾		—		15,161		767			—			15,928

Total liabilities at fair value	$	102,002	$	388,987	$	19,236	⁽⁶⁾	$	(32,272	)	$	477,953


⁽¹⁾	Consists of promissory notes, commercial paper and hybrid financial instruments.

⁽²⁾	Consists of certain certificates of deposit issued by GS Bank USA.

⁽³⁾	Reflects securities loaned within Trading and Principal Investments. Excludes securities loaned within Securities Services, which are accounted for based on the amount of cash collateral received plus accrued interest.

⁽⁴⁾	Primarily includes transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through the firm’s William Street program and certain other nonrecourse financings.

⁽⁵⁾	Primarily includes hybrid financial instruments and prepaid physical commodity transactions.

⁽⁶⁾	Level 3 liabilities were 4% of Total liabilities at fair value.

⁽⁷⁾	Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Level 3 Unrealized Gains/(Losses)

The table below sets forth a summary of unrealized gains/(losses) on the firm’s level 3 financial assets and financial liabilities still held at the reporting date for the three and six months ended May 2008 and May 2007.


	Level 3 Unrealized Gains/(Losses)
	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

Cash Instruments — Assets	$	(944	)	$	98		$	(3,194	)	$	1,179
Cash Instruments — Liabilities		—			9			(264	)		(15	)

Net unrealized gains/(losses) on level 3 cash instruments		(944	)		107			(3,458	)		1,164
Derivative Contracts — Net		(447	)		(204	)		1,900			(168	)
UnsecuredShort-TermBorrowings		(18	)		(189	)		40			(251	)
UnsecuredLong-TermBorrowings		(71	)		2			32			36

Total level 3 unrealized gains/(losses)	$	(1,480	)	$	(284	)	$	(1,486	)	$	781

Cash Instruments

The net unrealized loss on level 3 cash instruments of $944 million for the three months ended May 2008 primarily consisted of unrealized losses on certain bank loans and bridge loans, and corporate debt securities and other debt obligations, reflecting continued weakness in the credit markets. The net unrealized loss on level 3 cash instruments of $3.46 billion for the six months ended May 2008 primarily consisted of unrealized losses on loans and securities backed by commercial and residential real estate, certain bank loans and bridge loans, and corporate debt securities and other debt obligations, reflecting continued weakness in the broader credit markets.

Level 3 cash instruments are frequently hedged with instruments classified within level 1 and level 2, and accordingly, gains or losses that have been reported in level 3 are frequently offset by gains or losses attributable to instruments classified within level 1 or level 2 or by gains or losses on derivative contracts classified in level 3 of the fair value hierarchy.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Derivative Contracts

The net unrealized loss on level 3 derivative contracts of $447 million for the three months ended May 2008 and net unrealized gain of $1.90 billion for the six months ended May 2008 was primarily attributable to observable changes in underlying credit spreads (which are level 2 inputs). Level 3 gains and losses on derivative contracts should be considered in the context of the following factors:


	•	A derivative contract with level 1and/orlevel 2 inputs is classified as a level 3 financial instrument in its entirety if it has at least one significant level 3 input.

	•	If there is one significant level 3 input, the entire gain or loss from adjusting only observable inputs (i.e., level 1 and level 2) is still classified as level 3.

	•	Gains or losses that have been reported in level 3 resulting from changes in level 1 or level 2 inputs are frequently offset by gains or losses attributable to instruments classified within level 1 or level 2 or by cash instruments reported in level 3 of the fair value hierarchy.

The tables below set forth a summary of changes in the fair value of the firm’s level 3 financial assets and financial liabilities for the three and six months ended May 2008 and May 2007. The tables reflect gains and losses, including gains and losses on financial assets and financial liabilities that were transferred to level 3 during the period, for the three and six month periods for all financial assets and financial liabilities categorized as level 3 as of May 2008 and May 2007, respectively. The tables do not include gains or losses that were reported in level 3 in prior periods for instruments that were sold or transferred out of level 3 prior to the end of the period presented.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Level 3 Financial Assets and Financial Liabilities
	Three Months Ended May 2008
	Cash			Cash			Derivative			Unsecured			Other			Unsecured
	Instruments			Instruments			Contracts			Short-Term			Secured			Long-Term
	- Assets			- Liabilities			- Net			Borrowings			Financings			Borrowings
	(in millions)

Balance, beginning of period	$	71,373		$	(977	)	$	9,394		$	(3,839	)	$	—		$	(1,247	)
Realized gains/(losses)		624	⁽¹⁾		13	⁽⁴⁾		(8	) ⁽⁴⁾		(134	) ⁽⁴⁾		(6	) ⁽⁴⁾		(4	) ⁽⁴⁾
Unrealized gains/(losses) relating to instruments still held at the reporting date		(944	) ⁽¹⁾		—	⁽⁴⁾		(447	) ⁽⁴⁾⁽⁵⁾		(18	) ⁽⁴⁾		—			(71	) ⁽⁴⁾
Purchases, issuances and settlements		(2,330	) ⁽²⁾		301			68			357			18			(603	)
Transfers inand/or out of level 3		(9,052	) ⁽²⁾⁽³⁾		82			(2,499	) ⁽⁶⁾		(203	)		(892	)		(77	)

Balance, end of period	$	59,671		$	(581	)	$	6,508		$	(3,837	)	$	(880	)	$	(2,002	)



	Level 3 Financial Assets and Financial Liabilities
	Three Months Ended May 2007
	Cash			Cash			Derivative			Unsecured			Other			Unsecured
	Instruments			Instruments			Contracts			Short-Term			Secured			Long-Term
	- Assets			- Liabilities			- Net			Borrowings			Financings			Borrowings
	(in millions)

Balance, beginning of period	$	37,848		$	(224	)	$	341		$	(4,836	)	$	—		$	(777	)
Realized gains/(losses)		587	⁽¹⁾		9	⁽⁴⁾		483	⁽⁴⁾		71	⁽⁴⁾		—			(4	) ⁽⁴⁾
Unrealized gains/(losses) relating to instruments still held at the reporting date		98	⁽¹⁾		9	⁽⁴⁾		(204	) ⁽⁴⁾⁽⁵⁾		(189	) ⁽⁴⁾		—			2	⁽⁴⁾
Purchases, issuances and settlements		5,499			(452	)		(920	)		(946	)		—			(123	)
Transfers inand/or out of level 3		1,109	⁽⁷⁾		(191	)		699			393			—			399

Balance, end of period	$	45,141		$	(849	)	$	399		$	(5,507	)	$	—		$	(503	)


⁽¹⁾	The aggregate amounts include approximately $(1.02) billion and $696 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the three months ended May 2008. The aggregate amounts include approximately $355 million and $330 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the three months ended May 2007.

⁽²⁾	The aggregate amount includes a decrease of $8.80 billion due to full and partial dispositions.

⁽³⁾	Includes transfers of loans and securities backed by commercial real estate, and bank loans and bridge loans to level 2 within the fair value hierarchy, reflecting improved price transparency for these financial instruments, largely as a result of partial dispositions.

⁽⁴⁾	Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.

⁽⁵⁾	Principally resulted from changes in level 2 inputs.

⁽⁶⁾	Principally reflects transfers to level 2 within the fair value hierarchy ofmortgage-relatedderivative assets due to improved transparency of the correlation inputs used to value these financial instruments.

⁽⁷⁾	Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial and residential real estate and private equity investments, reflecting reduced price transparency for these financial instruments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	Level 3 Financial Assets and Financial Liabilities
	Six Months Ended May 2008
	Cash			Cash			Derivative			Unsecured			Other			Unsecured
	Instruments			Instruments			Contracts			Short-Term			Secured			Long-Term
	- Assets			- Liabilities			- Net			Borrowings			Financings			Borrowings
	(in millions)

Balance, beginning of year	$	53,451		$	(554	)	$	2,056		$	(4,271	)	$	—		$	(767	)
Realized gains/(losses)		1,370	⁽¹⁾		10	⁽³⁾		104	⁽³⁾		(184	) ⁽³⁾		(6	) ⁽³⁾		5	⁽³⁾
Unrealized gains/(losses) relating to instruments still held at the reporting date		(3,194	) ⁽¹⁾		(264	) ⁽³⁾		1,900	⁽³⁾⁽⁴⁾		40	⁽³⁾		—			32	⁽³⁾
Purchases, issuances and settlements		5,422			251			71			699			(874	)		(1,072	)
Transfers inand/or out of level 3		2,622	⁽²⁾		(24	)		2,377	⁽⁵⁾		(121	)		—			(200	)

Balance, end of period	$	59,671		$	(581	)	$	6,508		$	(3,837	)	$	(880	)	$	(2,002	)



	Level 3 Financial Assets and Financial Liabilities
	Six Months Ended May 2007
	Cash			Cash			Derivative			Unsecured			Other			Unsecured
	Instruments			Instruments			Contracts			Short-Term			Secured			Long-Term
	- Assets			- Liabilities			- Net			Borrowings			Financings			Borrowings
	(in millions)

Balance, beginning of year	$	29,905		$	(223	)	$	580		$	(3,253	)	$	—		$	(135	)
Realized gains/(losses)		804	⁽¹⁾		16	⁽³⁾		(12	) ⁽³⁾		72	⁽³⁾		—			(4	) ⁽³⁾
Unrealized gains/(losses) relating to instruments still held at the reporting date		1,179	⁽¹⁾		(15	) ⁽³⁾		(168	) ⁽³⁾⁽⁴⁾		(251	) ⁽³⁾		—			36	⁽³⁾
Purchases, issuances and settlements		10,535			(351	)		(372	)		(2,589	)		—			(595	)
Transfers inand/or out of level 3		2,718	⁽⁶⁾		(276	)		371			514			—			195

Balance, end of period	$	45,141		$	(849	)	$	399		$	(5,507	)	$	—		$	(503	)


⁽¹⁾	The aggregate amounts include approximately $(3.09) billion and $1.27 billion reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the six months ended May 2008. The aggregate amounts include approximately $1.03 billion and $953 million reported in “Trading and principal investments” and “Interest income,” respectively, in the condensed consolidated statements of earnings for the six months ended May 2007.

⁽²⁾	Principally reflects transfers of corporate debt securities and other debt obligations, and loans and securities backed by commercial real estate from level 2 within the fair value hierarchy, reflecting reduced price transparency for these financial instruments.

⁽³⁾	Substantially all is reported in “Trading and principal investments” in the condensed consolidated statements of earnings.

⁽⁴⁾	Principally resulted from changes in level 2 inputs.

⁽⁵⁾	Principally reflects transfers to level 2 within the fair value hierarchy of derivative liabilities due to improved transparency of the correlation inputs used to value these financial instruments.

⁽⁶⁾	Principally reflects transfers from level 2 within the fair value hierarchy of loans and securities backed by commercial and residential real estate, and bank loans and bridge loans, reflecting reduced price transparency for these financial instruments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

For the three and six months ended May 2008 and May 2007, the changes in the fair value of receivables (including securities borrowed and resale agreements) for which the fair value option was elected that were attributable to changes in instrument-specific credit spreads were not material. As of May 2008 and November 2007, the difference between the fair value and the aggregate contractual principal amount of bothlong-termreceivables andlong-termdebt instruments (principal and non-principal protected) for which the fair value option was elected was not material to the carrying value of either thelong-termreceivables or thelong-termdebt.

The following table sets forth the gains/(losses) attributable to the impact of changes in the firm’s own credit spreads on liabilities for which the fair value option was elected. The firm calculates the impact of its own credit spread on liabilities carried at fair value by discounting future cash flows at a rate which incorporates the firm’s observable credit spreads.


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008		2007
	(in millions)

Gains/(losses) including hedges	$	(178	)	$	(28	)	$	155	$	(2	)
Gains/(losses) excluding hedges		(375	)		(28	)		143		(2	)

The following table sets forth the gains/(losses) included in earnings for the three and six months ended May 2008 and May 2007 related to financial assets and financial liabilities for which the firm has elected to apply the fair value option under SFAS No. 155 and SFAS No. 159. The table does not reflect the impact to the firm’s earnings of applying SFAS No. 159 because a significant amount of these gains and losses would have also been recognized under previously issued generally accepted accounting principles, or are economically hedged with instruments accounted for at fair value under other generally accepted accounting principles that are not reflected in the table below.


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

Other secured financings	$	134	⁽¹⁾	$	5		$	1,165	⁽¹⁾	$	(125	)
Financial instruments owned, at fair value ⁽²⁾		(97	)		65			(402	)		72
Unsecuredshort-termborrowings		(34	)		(108	)		228			(352	)
Unsecuredlong-termborrowings		(1,906	)		61			(2,124	)		(731	)
Other ⁽³⁾		(27	)		—			(21	)		(1	)

Total ⁽⁴⁾	$	(1,930	)	$	23		$	(1,154	)	$	(1,137	)


⁽¹⁾		Includes $70 million and $870 million, for the three and six months ended May 2008, respectively, related to financings recorded as a result of certain mortgage securitizations that were accounted for as secured financings rather than sales under SFAS No. 140. Changes in the fair value of these secured financings are equally offset by changes in the fair value of the related mortgage whole loans, which were included within the firm’s “Financial instruments owned, at fair value” in the condensed consolidated statement of financial condition.

⁽²⁾		Primarily consists of investments for which the firm would otherwise have applied the equity method of accounting as well as securities held in GS Bank USA (which would otherwise be accounted for asavailable-for-sale).

⁽³⁾		Primarily consists of resale and repurchase agreements and securities borrowed and loaned within Trading and Principal Investments and certain certificates of deposit issued by GS Bank USA.

⁽⁴⁾		Reported within “Trading and principal investments” within the condensed consolidated statements of earnings. The amounts exclude contractual interest, which is included in “Interest income” and “Interest expense,” for all instruments other than hybrid financial instruments.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Derivative Activities

Derivative contracts are instruments, such as futures, forwards, swaps or option contracts, that derive their value from underlying assets, indices, reference rates or a combination of these factors. Derivative instruments may be privately negotiated contracts, which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. Derivatives may involve future commitments to purchase or sell financial instruments or commodities, or to exchange currency or interest payment streams. The amounts exchanged are based on the specific terms of the contract with reference to specified rates, securities, commodities, currencies or indices.

Certain cash instruments, such asmortgage-backedsecurities, interest-only and principal-only obligations, and indexed debt instruments, are not considered derivatives even though their values or contractually required cash flows are derived from the price of some other security or index. However, certain commodity-related contracts are included in the firm’s derivatives disclosure, as these contracts may be settled in cash or the assets to be delivered under the contract are readily convertible into cash.

The firm enters into derivative transactions to facilitate client transactions, to take proprietary positions and as a means of risk management. Risk exposures are managed through diversification, by controlling position sizes and by entering into offsetting positions. For example, the firm may manage the risk related to a portfolio of common stock by entering into an offsetting position in a relatedequity-indexfutures contract.

The firm applies hedge accounting under SFAS No. 133 to certain derivative contracts. The firm uses these derivatives to manage certain interest rate and currency exposures, including the firm’s net investment innon-U.S. operations.The firm designates certain interest rate swap contracts as fair value hedges. These interest rate swap contracts hedge changes in the relevant benchmark interest rate (e.g., London Interbank Offered Rate (LIBOR)), effectively converting a substantial portion of the firm’s unsecuredlong-termand certain unsecuredshort-termborrowings into floating rate obligations. See Note 2 for information regarding the firm’s accounting policy for foreign currency forward contracts used to hedge its net investment innon-U.S. operations.

The firm applies a long-haul method to all of its hedge accounting relationships to perform an ongoing assessment of the effectiveness of these relationships in achieving offsetting changes in fair value or offsetting cash flows attributable to the risk being hedged. The firm utilizes a dollar-offset method, which compares the change in the fair value of the hedging instrument to the change in the fair value of the hedged item, excluding the effect of the passage of time, to prospectively and retrospectively assess hedge effectiveness. The firm’s prospective dollar-offset assessment utilizes scenario analyses to test hedge effectiveness via simulations of numerous parallel and slope shifts of the relevant yield curve. Parallel shifts change the interest rate of all maturities by identical amounts. Slope shifts change the curvature of the yield curve. For both the prospective assessment, in response to each of the simulated yield curve shifts, and the retrospective assessment, a hedging relationship is deemed to be effective if the fair value of the hedging instrument and the hedged item change inversely within a range of 80% to 125%.

For fair value hedges, gains or losses on derivative transactions are recognized in “Interest expense” in the condensed consolidated statements of earnings. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is subsequently amortized into interest expense over its remaining life. Gains or losses related to hedge ineffectiveness for all hedges are generally included in “Interest expense.” These gains or losses and the component of gains or losses on derivative transactions excluded from the assessment

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

of hedge effectiveness (e.g., the effect of the passage of time on fair value hedges of the firm’s borrowings) were not material to the firm’s results of operations for the three and six months ended May 2008 or May 2007. Gains and losses on derivatives used for trading purposes are included in “Trading and principal investments” in the condensed consolidated statements of earnings.

The fair value of the firm’s derivative contracts is reflected net of cash paid or received pursuant to credit support agreements and is reported on anet-by-counterpartybasis in the firm’s condensed consolidated statements of financial condition when management believes a legal right of setoff exists under an enforceable netting agreement. The fair value of derivative financial instruments, presented in accordance with the firm’s netting policy, is set forth below:


	As of
	May 2008						November 2007
	Assets			Liabilities			Assets			Liabilities
	(in millions)
Contract Type
Forward settlement contracts	$	21,392		$	25,928		$	22,561		$	27,138
Swap agreements		138,286			62,625			104,793			62,697
Option contracts		62,777			60,820			53,056			53,047

Subtotal	$	222,455		$	149,373		$	180,410		$	142,882
Netting across contract types ⁽¹⁾		(17,449	)		(17,449	)		(15,746	)		(15,746	)
Cash collateral netting ⁽²⁾		(84,556	)		(33,902	)		(59,050	)		(27,758	)

Total	$	120,450		$	98,022		$	105,614		$	99,378


⁽¹⁾		Represents the netting of receivable balances with payable balances for the same counterparty across contract types pursuant to credit support agreements.

⁽²⁾		Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

The fair value of derivatives accounted for as qualifying hedges under SFAS No. 133 consisted of $8.83 billion and $5.12 billion in assets as of May 2008 and November 2007, respectively, and $751 million and $354 million in liabilities as of May 2008 and November 2007, respectively.

The firm also has embedded derivatives that have been bifurcated from related borrowings under SFAS No. 133. Such derivatives, which are classified in unsecuredshort-termand unsecuredlong-termborrowings, had a carrying value of $187 million and $463 million (excluding the debt host contract) as of May 2008 and November 2007, respectively. See Notes 4 and 5 for further information regarding the firm’s unsecured borrowings.

Securitization Activities

The firm securitizes commercial and residential mortgages, home equity and auto loans, government and corporate bonds and other types of financial assets. The firm acts as underwriter of the beneficial interests that are sold to investors. The firm derecognizes financial assets transferred in securitizations, provided it has relinquished control over such assets. Transferred assets are accounted for at fair value prior to securitization. Net revenues related to these underwriting activities are recognized in connection with the sales of the underlying beneficial interests to investors.

The firm may retain interests in securitized financial assets, primarily in the form of senior or subordinated securities, including residual interests. Retained interests are accounted for at fair value and are included in “Total financial instruments owned, at fair value” in the condensed consolidated statements of financial condition.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth the amount of financial assets the firm securitized, as well as cash flows received on retained interests:


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

Residential mortgages	$	2,591		$	10,350		$	4,111		$	19,996
Commercial mortgages		773			1,361			773			1,361
Other financial assets		605	⁽¹⁾		9,650	⁽²⁾		1,654	⁽¹⁾		24,449	⁽²⁾

Total	$	3,969		$	21,361		$	6,538		$	45,806

Cash flows received on retained interests	$	155		$	203		$	271		$	365


⁽¹⁾		Primarily in connection with collateralized loan obligations (CLOs).

⁽²⁾		Primarily in connection with CDOs and CLOs.

As of May 2008 and November 2007, the firm held $2.74 billion and $4.57 billion of retained interests, respectively, from these securitization activities, including $2.12 billion and $2.72 billion, respectively, held in QSPEs.

The following table sets forth the weighted average key economic assumptions used in measuring the fair value of the firm’s retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions:


	As of May 2008						As of November 2007
	Type of Retained Interests						Type of Retained Interests
	Mortgage-			CDOs and			Mortgage-			CDOs and
	Backed			CLOs ⁽⁴⁾			Backed			CLOs ⁽⁴⁾
	($ in millions)

Fair value of retained interests	$	1,944		$	794		$	3,378		$	1,188

Weighted average life (years)		4.8			4.0			6.6			2.7

Constant prepayment rate ⁽¹⁾		15.3	%		10.5	%		15.1	%		11.9	%
Impact of 10% adverse change ⁽¹⁾	$	(18	)	$	(13	)	$	(50	)	$	(43	)
Impact of 20% adverse change ⁽¹⁾		(36	)		(28	)		(91	)		(98	)

Anticipated credit losses ⁽²⁾		3.3	%		N/A			4.3	%		N/A
Impact of 10% adverse change ⁽³⁾	$	(5	)	$	—		$	(45	)	$	—
Impact of 20% adverse change ⁽³⁾		(10	)		—			(72	)		—

Discount rate		14.6	%		21.2	%		8.4	%		23.1	%
Impact of 10% adverse change	$	(51	)	$	(43	)	$	(89	)	$	(46	)
Impact of 20% adverse change		(99	)		(82	)		(170	)		(92	)


⁽¹⁾	Constant prepayment rate is included only for positions for which constant prepayment rate is a key assumption in the determination of fair value.

⁽²⁾	Anticipated credit losses are computed only on positions for which expected credit loss is a key assumption in the determination of fair value or positions for which expected credit loss is not reflected within the discount rate.

⁽³⁾	The impacts of adverse change take into account credit mitigants incorporated in the retained interests, including over-collateralization and subordination provisions.

⁽⁴⁾	Includes $437 million and $905 million as of May 2008 and November 2007, respectively, of retained interests related to transfers of securitized assets that were accounted for as secured financings rather than sales under SFAS No. 140.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The preceding table does not give effect to the offsetting benefit of other financial instruments that are held to mitigate risks inherent in these retained interests. Changes in fair value based on an adverse variation in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value is not usually linear. In addition, the impact of a change in a particular assumption is calculated independently of changes in any other assumption. In practice, simultaneous changes in assumptions might magnify or counteract the sensitivities disclosed above.

In addition to the retained interests described above, the firm also held interests in residential mortgage QSPEs purchased in connection with secondary market-making activities. These purchased interests were approximately $3 billion and $6 billion as of May 2008 and November 2007, respectively.

As of May 2008 and November 2007, the firm held mortgage servicing rights with a fair value of $248 million and $93 million, respectively. These servicing assets represent the firm’s right to receive a future stream of cash flows, such as servicing fees, in excess of the firm’s obligation to service residential mortgages. The fair value of mortgage servicing rights will fluctuate in response to changes in certain economic variables, such as discount rates and loan prepayment rates. The firm estimates the fair value of mortgage servicing rights by using valuation models that incorporate these variables in quantifying anticipated cash flows related to servicing activities. Mortgage servicing rights are included in “Financial instruments owned, at fair value” in the condensed consolidated statements of financial condition and are classified within level 3 of the fair value hierarchy. The following table sets forth changes in the firm’s mortgage servicing rights, as well as servicing fees earned:


	Three Months Ended			Six Months Ended
	May 2008			May 2008
	(in millions)

Balance, beginning of period	$	283		$	93
Purchases		—			212	⁽²⁾
Servicing assets that resulted from transfers of financial assets		—			3
Changes in fair value due to changes in valuation inputs and assumptions		(35	)		(60	)

Balance, end of period ⁽¹⁾	$	248		$	248


Contractually specified servicing fees	$	72		$	137


⁽¹⁾		Fair value as of May 2008 was estimated using a weighted average discount rate of approximately 16% and a weighted average prepayment rate of approximately 26%.

⁽²⁾		Related to the acquisition of Litton Loan Servicing LP.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Variable Interest Entities (VIEs)

The firm, in the ordinary course of business, retains interests in VIEs in connection with its securitization activities. The firm also purchases and sells variable interests in VIEs, which primarily issuemortgage-backedand otherasset-backedsecurities, CDOs and CLOs, in connection with its market-making activities and makes investments in and loans to VIEs that hold performing and nonperforming debt, equity, real estate, power-related and other assets. In addition, the firm utilizes VIEs to provide investors with principal-protected notes,credit-linkednotes andasset-repackagednotes designed to meet their objectives.

VIEs generally purchase assets by issuing debt and equity instruments. In certain instances, the firm provides guarantees to VIEs or holders of variable interests in VIEs. In such cases, the maximum exposure to loss included in the tables set forth below is the notional amount of such guarantees. Such amounts do not represent anticipated losses in connection with these guarantees.

The firm’s variable interests in VIEs include senior and subordinated debt; loan commitments; limited and general partnership interests; preferred and common stock; interest rate, foreign currency, equity, commodity and credit derivatives; guarantees; and residual interests inmortgage-backedandasset-backedsecuritization vehicles, CDOs and CLOs. The firm’s exposure to the obligations of VIEs is generally limited to its interests in these entities.

The following tables set forth total assets in nonconsolidated VIEs in which the firm holds significant variable interests and the firm’s maximum exposure to loss associated with these variable interests. The firm has aggregated nonconsolidated VIEs based on principal business activity, as reflected in the first column. The nature of the firm’s variable interests can take different forms, as described in the columns under maximum exposure to loss.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

These tables do not give effect to the benefit of any offsetting financial instruments that are held to mitigate risks related to the firm’s interests in nonconsolidated VIEs.


	As of May 2008
			Maximum Exposure to Loss in Nonconsolidated VIEs ⁽¹⁾
			Purchased		Commitments
	VIE		and Retained		and					Loans and
	Assets		Interests		Guarantees		Derivatives			Investments		Total
			(in millions)
Mortgage CDOs	$	18,569	$	516	$	—	$	8,144	⁽⁴⁾	$	—	$	8,660
Corporate CDOs and CLOs		10,891		402		—		1,398	⁽⁵⁾		—		1,800
Real estate, credit-related and other investing ⁽²⁾		28,216		—		8		—			3,977		3,985
Municipal bond securitizations		254		—		254		—			—		254
Otherasset-backed		4,200		—		—		1,793			—		1,793
Power-related		438		2		37		—			16		55
Principal-protected notes ⁽³⁾		5,948		—		—		5,683			—		5,683

Total	$	68,516	$	920	$	299	$	17,018		$	3,993	$	22,230


	As of November 2007
			Maximum Exposure to Loss in Nonconsolidated VIEs ⁽¹⁾
			Purchased		Commitments
	VIE		and Retained		and					Loans and
	Assets		Interests		Guarantees		Derivatives			Investments		Total
			(in millions)
Mortgage CDOs	$	18,914	$	1,011	$	—	$	10,089	⁽⁴⁾	$	—	$	11,100
Corporate CDOs and CLOs		10,750		411		—		2,218	⁽⁵⁾		—		2,629
Real estate, credit-related and other investing ⁽²⁾		17,272		—		107		12			3,141		3,260
Municipal bond securitizations		1,413		—		1,413		—			—		1,413
Othermortgage-backed		3,881		719		—		—			—		719
Otherasset-backed		3,771		—		—		1,579			—		1,579
Power-related		438		2		37		—			16		55
Principal-protected notes ⁽³⁾		5,698		—		—		5,186			—		5,186

Total	$	62,137	$	2,143	$	1,557	$	19,084		$	3,157	$	25,941


⁽¹⁾	Such amounts do not represent the anticipated losses in connection with these transactions.

⁽²⁾	The firm obtains interests in these VIEs in connection with making proprietary investments in real estate, distressed loans and other types of debt, mezzanine instruments and equities.

⁽³⁾	Consists ofout-of-the-moneywritten put options that provide principal protection to clients invested in various fund products, with risk to the firm mitigated through portfolio rebalancing.

⁽⁴⁾	Primarily consists of written protection on investment-grade,short-termcollateral held by VIEs that have issued CDOs.

⁽⁵⁾	Primarily consists of total return swaps on CDOs and CLOs. The firm has generally transferred the risks related to the underlying securities through derivatives with non-VIEs.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following table sets forth the firm’s total assets and maximum exposure to loss associated with its significant variable interests in consolidated VIEs where the firm does not hold a majority voting interest. The firm has aggregated consolidated VIEs based on principal business activity, as reflected in the first column.

The table does not give effect to the benefit of any offsetting financial instruments that are held to mitigate risks related to the firm’s interests in consolidated VIEs.


	As of May 2008				As of November 2007
			Maximum				Maximum
			Exposure				Exposure
	VIE Assets ⁽¹⁾		to Loss ⁽²⁾		VIE Assets ⁽¹⁾		to Loss ⁽²⁾
	(in millions)

Real estate, credit-related and other investing	$	2,116	$	527	$	2,118	$	525
Municipal bond securitizations		1,814		1,814		1,959		1,959
CDOs,mortgage-backedand otherasset-backed		232		176		604		109
Foreign exchange and commodities		455		477		300		329
Principal-protected notes		803		817		1,119		1,118

Total	$	5,420	$	3,811	$	6,100	$	4,040


⁽¹⁾		Consolidated VIE assets include assets financed on a nonrecourse basis.

⁽²⁾		Such amounts do not represent the anticipated losses in connection with these transactions.

While the firm is routinely involved with VIEs and QSPEs in connection with its securitization activities, the firm did not haveoff-balance-sheetcommitments to purchase or finance CDOs held by structured investment vehicles as of May 2008 or November 2007.

Collateralized Transactions

The firm receives financial instruments as collateral, primarily in connection with resale agreements, securities borrowed, derivative transactions and customer margin loans. Such financial instruments may include obligations of the U.S. government, federal agencies, sovereigns and corporations, as well as equities and convertibles.

In many cases, the firm is permitted to deliver or repledge these financial instruments in connection with entering into repurchase agreements, securities lending agreements and other secured financings, collateralizing derivative transactions and meeting firm or customer settlement requirements. As of May 2008 and November 2007, the fair value of financial instruments received as collateral by the firm that it was permitted to deliver or repledge was $868.19 billion and $891.05 billion, respectively, of which the firm delivered or repledged $730.10 billion and $785.62 billion, respectively.

The firm also pledges assets that it owns to counterparties who may or may not have the right to deliver or repledge them. Financial instruments owned and pledged to counterparties that have the right to deliver or repledge are reported as “Financial instruments owned and pledged as collateral, at fair value” in the condensed consolidated statements of financial condition and were $37.38 billion and $46.14 billion as of May 2008 and November 2007, respectively. Financial instruments owned and pledged in connection with repurchase agreements, securities lending agreements and other secured financings to counterparties that did not have the right to sell or repledge are included in “Financial instruments owned, at fair value” in the condensed consolidated statements of financial condition and were $120.98 billion and $156.92 billion as of May 2008 and November 2007, respectively. Other

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

assets (primarily real estate and cash) owned and pledged in connection with other secured financings to counterparties that did not have the right to sell or repledge were $7.65 billion and $5.86 billion as of May 2008 and November 2007, respectively.

In addition to repurchase agreements and securities lending agreements, the firm obtains secured funding through the use of other arrangements. Other secured financings include arrangements that are nonrecourse, that is, only the subsidiary that executed the arrangement or a subsidiary guaranteeing the arrangement is obligated to repay the financing. Other secured financings consist of liabilities related to the firm’s William Street program, consolidated VIEs, collateralized central bank financings, transfers of financial assets that are accounted for as financings rather than sales under SFAS No. 140 (primarily pledged bank loans and mortgage whole loans) and other structured financing arrangements.

Other secured financings by maturity are set forth in the table below:


	As of
	May		November
	2008		2007
	(in millions)

Other secured financings(short-term) ⁽¹⁾⁽²⁾	$	27,168	$	32,410
Other secured financings(long-term):
2009		482		2,903
2010		2,342		2,301
2011		4,599		2,427
2012		4,319		4,973
2013		1,828		702
2014-thereafter		12,352		19,994

Total other secured financings(long-term) ⁽³⁾⁽⁴⁾		25,922		33,300

Total other secured financings ⁽⁵⁾	$	53,090	$	65,710


⁽¹⁾		As of May 2008, consists of U.S. dollar-denominated financings of $22.73 billion with a weighted average interest rate of 2.81% andnon-U.S. dollar-denominatedfinancings of $4.44 billion with a weighted average interest rate of 1.59%, after giving effect to hedging activities. As of November 2007, consists of U.S. dollar-denominated financings of $18.47 billion with a weighted average interest rate of 5.32% andnon-U.S. dollar-denominatedfinancings of $13.94 billion with a weighted average interest rate of 0.91%, after giving effect to hedging activities. The weighted average interest rates as of May 2008 and November 2007 excluded financial instruments accounted for at fair value under SFAS No. 159.

⁽²⁾		Includes other secured financings maturing within one year of the financial statement date and other secured financings that are redeemable within one year of the financial statement date at the option of the holder.

⁽³⁾		As of May 2008, consists of U.S. dollar-denominated financings of $12.30 billion with a weighted average interest rate of 4.14% andnon-U.S. dollar-denominatedfinancings of $13.62 billion with a weighted average interest rate of 4.57%, after giving effect to hedging activities. As of November 2007, consists of U.S. dollar-denominated financings of $22.13 billion with a weighted average interest rate of 5.73% andnon-U.S. dollar-denominatedfinancings of $11.17 billion with a weighted average interest rate of 4.28%, after giving effect to hedging activities. The weighted average interest rates as of May 2008 and November 2007 excluded financial instruments accounted for at fair value under SFAS No. 159.

⁽⁴⁾		Securedlong-termfinancings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Securedlong-termfinancings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.

⁽⁵⁾		As of May 2008, $47.18 billion of these financings were collateralized by financial instruments and $5.91 billion by other assets (primarily real estate and cash). As of November 2007, $61.34 billion of these financings were collateralized by financial instruments and $4.37 billion by other assets (primarily real estate and cash). Other secured financings include $19.10 billion and $25.37 billion of nonrecourse obligations as of May 2008 and November 2007, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 4.	UnsecuredShort-TermBorrowings

The firm obtains unsecuredshort-termborrowings primarily through the issuance of promissory notes, commercial paper and hybrid financial instruments. As of May 2008 and November 2007, these borrowings were $71.18 billion and $71.56 billion, respectively. Such amounts also include the portion of unsecuredlong-termborrowings maturing within one year of the financial statement date and unsecuredlong-termborrowings that are redeemable within one year of the financial statement date at the option of the holder. The firm accounts for promissory notes, commercial paper and certain hybrid financial instruments at fair value under SFAS No. 155 or SFAS No. 159.Short-termborrowings that are not recorded at fair value are recorded based on the amount of cash received plus accrued interest, and such amounts approximate fair value due to theshort-termnature of the obligations.

Unsecuredshort-termborrowings are set forth below:


	As of
	May		November
	2008		2007
	(in millions)

Promissory notes	$	8,468	$	13,251
Commercial paper		1,352		4,343
Current portion of unsecuredlong-termborrowings		28,939		22,740
Hybrid financial instruments		21,389		22,318
Othershort-termborrowings		11,028		8,905

Total ⁽¹⁾	$	71,176	$	71,557


⁽¹⁾		The weighted average interest rates for these borrowings, after giving effect to hedging activities, were 2.76% and 5.05% as of May 2008 and November 2007, respectively. The weighted average interest rates as of May 2008 and November 2007 excluded financial instruments accounted for at fair value under SFAS No. 155 or SFAS No. 159.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 5.	UnsecuredLong-TermBorrowings

The firm’s unsecuredlong-termborrowings extend through 2043 and consist principally of senior borrowings.

Unsecuredlong-termborrowings are set forth below:


	As of
	May		November
	2008		2007
	(in millions)

Fixed rate obligations ⁽¹⁾
U.S. dollar	$	62,092	$	55,281
Non-U.S. dollar		38,134		29,139
Floating rate obligations ⁽²⁾
U.S. dollar		44,162		47,308
Non-U.S. dollar		37,663		32,446

Total	$	182,051	$	164,174


⁽¹⁾		As of May 2008 and November 2007, interest rates on U.S. dollar fixed rate obligations ranged from 3.87% to 10.04% and from 3.88% to 10.04%, respectively. As of both May 2008 and November 2007, interest rates onnon-U.S. dollarfixed rate obligations ranged from 0.67% to 8.88%.

⁽²⁾		Floating interest rates generally are based on LIBOR or the federal funds target rate.Equity-linkedand indexed instruments are included in floating rate obligations.

Unsecuredlong-termborrowings by maturity date are set forth below:


	As of
	May 2008 ⁽¹⁾⁽²⁾						November 2007 ⁽¹⁾⁽²⁾
	U.S.		Non-U.S.				U.S.		Non-U.S.
	Dollar		Dollar		Total		Dollar		Dollar		Total
	(in millions)

2009	$	8,709	$	1,429	$	10,138	$	20,204	$	2,978	$	23,182
2010		8,905		6,003		14,908		7,989		5,714		13,703
2011		7,038		5,293		12,331		5,848		4,839		10,687
2012		15,397		3,945		19,342		14,913		3,695		18,608
2013		6,646		14,391		21,037		6,490		9,326		15,816
2014-thereafter		59,559		44,736		104,295		47,145		35,033		82,178

Total	$	106,254	$	75,797	$	182,051	$	102,589	$	61,585	$	164,174


⁽¹⁾		Unsecuredlong-termborrowings maturing within one year of the financial statement date and certain unsecuredlong-termborrowings that are redeemable within one year of the financial statement date at the option of the holder are included as unsecuredshort-termborrowings in the condensed consolidated statements of financial condition.

⁽²⁾		Unsecuredlong-termborrowings that are repayable prior to maturity at the option of the firm are reflected at their contractual maturity dates. Unsecuredlong-termborrowings that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm enters into derivative contracts, such as interest rate futures contracts, interest rate swap agreements, currency swap agreements, commodity contracts andequity-linkedand indexed contracts, to effectively convert a substantial portion of its unsecuredlong-termborrowings into U.S. dollar-based floating rate obligations. Accordingly, excluding the cumulative impact of changes in the firm’s credit spreads, the carrying value of unsecuredlong-termborrowings approximated fair value as of May 2008 and November 2007. For unsecuredlong-termborrowings for which the firm did not elect the fair value option, the cumulative impact due to the widening of the firm’s own credit spreads was a reduction in the fair value of total unsecuredlong-termborrowings of approximately 4% and 1% as of May 2008 and November 2007, respectively.

The effective weighted average interest rates for unsecuredlong-termborrowings are set forth below:


	As of
	May 2008					November 2007
	Amount		Rate			Amount		Rate
	($ in millions)

Fixed rate obligations	$	3,998		4.97	%	$	3,787		5.28	%
Floating rate obligations ⁽¹⁾		178,053		3.45			160,387		5.68

Total ⁽²⁾	$	182,051		3.49		$	164,174		5.67


⁽¹⁾		Includes fixed rate obligations that have been converted into floating rate obligations through derivative contracts.

⁽²⁾		The weighted average interest rates as of May 2008 and November 2007 excluded financial instruments accounted for at fair value under SFAS No. 155 or SFAS No. 159.

Subordinated Borrowings

Unsecuredlong-termborrowings include subordinated borrowings with outstanding principal amounts of $20.15 billion and $16.32 billion as of May 2008 and November 2007, respectively, as set forth below.

Subordinated Debt. As of May 2008, the firm had $15.06 billion of senior subordinated debt outstanding with maturities ranging from 2009 to 2038. The effective weighted average interest rate on this debt was 3.96%, after giving effect to derivative contracts used to convert fixed rate obligations into floating rate obligations. As of November 2007, the firm had $11.23 billion of senior subordinated debt outstanding with maturities ranging from fiscal 2009 to 2037. The effective weighted average interest rate on this debt was 5.75%, after giving effect to derivative contracts used to convert fixed rate obligations into floating rate obligations. This debt is junior in right of payment to all of the firm’s senior indebtedness.

Junior Subordinated Debt Issued to a Trust in Connection with Trust Preferred Securities. The firm issued $2.84 billion of junior subordinated debentures in 2004 to Goldman Sachs Capital I (the Trust), a Delaware statutory trust that, in turn, issued $2.75 billion of guaranteed preferred beneficial interests to third parties and $85 million of common beneficial interests to the firm and invested the proceeds from the sale in junior subordinated debentures issued by the firm. The Trust is a wholly owned finance subsidiary of the firm for regulatory and legal purposes but is not consolidated for accounting purposes.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm pays interestsemi-annuallyon these debentures at an annual rate of 6.345% and the debentures mature on February 15, 2034. The coupon rate and the payment dates applicable to the beneficial interests are the same as the interest rate and payment dates applicable to the debentures. The firm has the right, from time to time, to defer payment of interest on the debentures, and, therefore, cause payment on the Trust’s preferred beneficial interests to be deferred, in each case up to ten consecutivesemi-annualperiods. During any such extension period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common stock. The Trust is not permitted to pay any distributions on the common beneficial interests held by the firm unless all dividends payable on the preferred beneficial interests have been paid in full. These debentures are junior in right of payment to all of the firm’s senior indebtedness and all of the firm’s subordinated borrowings, other than the junior subordinated debt issued in connection with the Normal Automatic Preferred Enhanced Capital Securities (see discussion below).

Junior Subordinated Debt Issued to Trusts in Connection withFixed-to-Floatingand Floating Rate Normal Automatic Preferred Enhanced Capital Securities. In 2007, the firm issued a total of $2.25 billion of remarketable junior subordinated debt to Goldman Sachs Capital II and Goldman Sachs Capital III (the APEX Trusts), Delaware statutory trusts that, in turn, issued $2.25 billion of guaranteed perpetual Automatic Preferred Enhanced Capital Securities (APEX) to third parties and a de minimis amount of common securities to the firm. The firm also entered into contracts with the APEX Trusts to sell $2.25 billion of perpetualnon-cumulativepreferred stock to be issued by the firm (the stock purchase contracts). The APEX Trusts are wholly owned finance subsidiaries of the firm for regulatory and legal purposes but are not consolidated for accounting purposes.

The firm pays interestsemi-annuallyon $1.75 billion of junior subordinated debt issued to Goldman Sachs Capital II at a fixed annual rate of 5.59% and the debt matures on June 1, 2043. The firm pays interest quarterly on $500 million of junior subordinated debt issued to Goldman Sachs Capital III at a rate per annum equal to three-month LIBOR plus .57% and the debt matures on September 1, 2043. In addition, the firm makes contract payments at a rate of .20% per annum on the stock purchase contracts held by the APEX Trusts. The firm has the right to defer payments on the junior subordinated debt and the stock purchase contracts, subject to limitations, and therefore cause payment on the APEX to be deferred. During any such extension period, the firm will not be permitted to, among other things, pay dividends on or make certain repurchases of its common or preferred stock. The junior subordinated debt is junior in right of payment to all of the firm’s senior indebtedness and all of the firm’s other subordinated borrowings.

In connection with the APEX issuance, the firm covenanted in favor of certain of its debtholders, who are initially the holders of the firm’s 6.345% Junior Subordinated Debentures due February 15, 2034, that, subject to certain exceptions, the firm would not redeem or purchase (i) the firm’s junior subordinated debt issued to the APEX Trusts prior to the applicable stock purchase date or (ii) APEX or shares of the firm’s Series E or Series F Preferred Stock prior to the date that is ten years after the applicable stock purchase date, unless the applicable redemption or purchase price does not exceed a maximum amount determined by reference to the aggregate amount of net cash proceeds that the firm has received from the sale of qualifying equity securities during the180-dayperiod preceding the redemption or purchase.

The firm has accounted for the stock purchase contracts as equity instruments under EITF IssueNo. 00-19,“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” and, accordingly, recorded the cost of the stock purchase contracts as a reduction to additionalpaid-incapital. See Note 7 for information on the preferred stock that the firm will issue in connection with the stock purchase contracts.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 6.	Commitments, Contingencies and Guarantees

Commitments

Forward Starting Collateralized Agreements and Financings. The firm had forward starting resale agreements and securities borrowing agreements of $27.92 billion and $28.14 billion as of May 2008 and November 2007, respectively. The firm had forward starting repurchase agreements and securities lending agreements of $10.63 billion and $15.39 billion as of May 2008 and November 2007, respectively.

Commitments to Extend Credit. In connection with its lending activities, the firm had outstanding commitments to extend credit of $73.98 billion and $82.75 billion as of May 2008 and November 2007, respectively. The firm’s commitments to extend credit are agreements to lend to counterparties that have fixed termination dates and are contingent on the satisfaction of all conditions to borrowing set forth in the contract. Since these commitments may expire unused or be reduced or cancelled at the counterparty’s request, the total commitment amount does not necessarily reflect the actual future cash flow requirements. The firm accounts for these commitments at fair value. To the extent that the firm recognizes losses on these commitments, such losses are recorded within the firm’s Trading and Principal Investments segment net of any related underwriting fees.

The following table summarizes the firm’s commitments to extend credit as of May 2008 and November 2007:


	As of
	May		November
	2008		2007
	(in millions)

Commercial lending commitments
Investment-grade	$	22,545	$	11,719
Non-investment-grade		21,552		41,930
William Street program		23,890		24,488
Warehouse financing		5,988		4,610

Total commitments to extend credit	$	73,975	$	82,747


	•	Commercial lending commitments. The firm’s commercial lending commitments are generally extended in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. The total commitment amount does not necessarily reflect the actual future cash flow requirements, as the firm may syndicate all or substantial portions of these commitments, the commitments may expire unused, or the commitments may be cancelled or reduced at the request of the counterparty. In addition, commitments that are extended for contingent acquisition financing are often intended to beshort-termin nature, as borrowers often seek to replace them with other funding sources.

Included within non-investment-grade commitments as of May 2008 was $10.15 billion of exposure to leveraged lending capital market transactions, $1.80 billion related to commercial real estate transactions and $9.60 billion arising from other unfunded credit facilities. Included within the non-investment-grade amount as of November 2007 was $26.09 billion of exposure to leveraged lending capital market transactions, $3.50 billion related to commercial real estate transactions and $12.34 billion arising from other unfunded credit facilities. Including funded loans, the firm’s total exposure to leveraged lending capital market transactions was $22.34 billion and $43.06 billion as of May 2008 and November 2007, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


	•	William Street program. Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the program are extended by William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are legally separated from other assets and liabilities of the firm, William Street Credit Corporation, GS Bank USA, Goldman Sachs Credit Partners L.P. or other consolidated wholly owned subsidiaries of Group Inc. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are also legally separated from other assets and liabilities of the firm. The assets of Commitment Corp. and of Funding Corp. will not be available to their respective shareholders until the claims of their respective creditors have been paid. In addition, no affiliate of either Commitment Corp. or Funding Corp., except in limited cases as expressly agreed in writing, is responsible for any obligation of either entity. With respect to most of the William Street commitments, Sumitomo Mitsui Financial Group, Inc. (SMFG) provides the firm with credit loss protection that is generally limited to 95% of the first loss the firm realizes on approved loan commitments, up to a maximum of $1.00 billion. In addition, subject to the satisfaction of certain conditions, upon the firm’s request, SMFG will provide protection for 70% of the second loss on such commitments, up to a maximum of $1.13 billion. The firm also uses other financial instruments to mitigate credit risks related to certain William Street commitments not covered by SMFG.

	•	Warehouse financing. The firm provides financing for the warehousing of financial assets to be securitized. These financings generally are expected to be repaid from the proceeds of the related securitizations for which the firm may or may not act as underwriter. These arrangements are secured by the warehoused assets, primarily consisting of corporate bank loans and commercial mortgages as of May 2008 and November 2007. In connection with its warehouse financing activities, the firm had loans of $34 million and $44 million collateralized by subprime mortgages as of May 2008 and November 2007, respectively.

Letters of Credit. The firm provides letters of credit issued by various banks to counterparties in lieu of securities or cash to satisfy various collateral and margin deposit requirements. Letters of credit outstanding were $9.47 billion and $8.75 billion as of May 2008 and November 2007, respectively.

Investment Commitments. In connection with its merchant banking and other investing activities, the firm invests in private equity, real estate and other assets directly and through funds that it raises and manages. In connection with these activities, the firm had commitments to invest up to $14.94 billion and $17.76 billion as of May 2008 and November 2007, respectively, including $12.28 billion and $12.32 billion, respectively, of commitments to invest in funds managed by the firm.

Construction-Related Commitments. As of May 2008 and November 2007, the firm had construction-related commitments of $643 million and $769 million, respectively, including commitments of $443 million and $642 million as of May 2008 and November 2007, respectively, related to the firm’s new world headquarters in New York City, which is expected to cost between $2.3 billion and $2.5 billion. The firm has partially financed this construction project with $1.65 billion oftax-exemptLiberty Bonds.

Underwriting Commitments. As of May 2008 and November 2007, the firm had commitments to purchase $3.35 billion and $88 million, respectively, of securities in connection with its underwriting activities.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Other. The firm had other purchase commitments of $908 million and $420 million as of May 2008 and November 2007, respectively.

In addition, in February 2008, Rothesay Life Limited, a wholly owned subsidiary of the firm, entered into an agreement with The Rank Group Plc to acquire its defined benefit pension plan, which has both assets and pension obligations of approximately $1.4 billion. The purchase price is not material to the firm’s financial condition. The transaction is expected to close by the end of the firm’s third fiscal quarter, subject to closing conditions.

Leases. The firm has contractual obligations underlong-termnoncancelable lease agreements, principally for office space, expiring on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. Future minimum rental payments, net of minimum sublease rentals are set forth below:


	(in millions)

Minimum rental payments
Remainder of 2008	$	240
2009		470
2010		430
2011		335
2012		272
2013-thereafter		2,062

Total	$	3,809

Contingencies

The firm is involved in a number of judicial, regulatory and arbitration proceedings concerning matters arising in connection with the conduct of its businesses. Management believes, based on currently available information, that the results of such proceedings, in the aggregate, will not have a material adverse effect on the firm’s financial condition, but may be material to the firm’s operating results for any particular period, depending, in part, upon the operating results for such period. Given the inherent difficulty of predicting the outcome of the firm’s litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, the firm cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.

In connection with its insurance business, the firm is contingently liable to provide guaranteed minimum death and income benefits to certain contract holders and has established a reserve related to $9.10 billion and $10.84 billion of contract holder account balances as of May 2008 and November 2007, respectively, for such benefits. The weighted average attained age of these contract holders was 68 years and 67 years as of May 2008 and November 2007, respectively. The net amount at risk, representing guaranteed minimum death and income benefits in excess of contract holder account balances, was $1.26 billion and $1.04 billion as of May 2008 and November 2007, respectively. See Note 10 for more information on the firm’s insurance liabilities.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Guarantees

The firm enters into various derivative contracts that meet the definition of a guarantee under FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Such derivative contracts include credit default and total return swaps, written equity and commodity put options, written currency contracts and interest rate caps, floors and swaptions. FIN No. 45 does not require disclosures about derivative contracts if such contracts may be cash settled and the firm has no basis to conclude it is probable that the counterparties held, at inception, the underlying instruments related to the derivative contracts. The firm has concluded that these conditions have been met for certain large, internationally active commercial and investment bank end users and certain other users. Accordingly, the firm has not included such contracts in the tables below.

The firm, in its capacity as an agency lender, indemnifies most of its securities lending customers against losses incurred in the event that borrowers do not return securities and the collateral held is insufficient to cover the market value of the securities borrowed.

In the ordinary course of business, the firm provides other financial guarantees of the obligations of third parties (e.g., performance bonds, standby letters of credit and other guarantees to enable clients to complete transactions and merchant banking fund-related guarantees). These guarantees represent obligations to make payments to beneficiaries if the guaranteed party fails to fulfill its obligation under a contractual arrangement with that beneficiary.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The following tables set forth certain information about the firm’s derivative contracts that meet the definition of a guarantee and certain other guarantees as of May 2008 and November 2007:


	As of May 2008
	Maximum Payout/Notional Amount by Period of Expiration ⁽¹⁾
	Remainder		2009-		2011-		2013-
	of 2008		2010		2012		Thereafter		Total
	(in millions)

Derivatives ⁽²⁾	$	298,791	$	481,284	$	433,912	$	570,630	$	1,784,617
Securities lending indemnifications ⁽³⁾		34,675		—		—		—		34,675
Performance bonds ⁽⁴⁾		2,175		—		—		—		2,175
Other financial guarantees ⁽⁵⁾		208		315		333		95		951

	As of November 2007
	Maximum Payout/Notional Amount by Period of Expiration ⁽¹⁾
			2009-		2011-		2013-
	2008		2010		2012		Thereafter		Total
	(in millions)

Derivatives ⁽²⁾	$	580,769	$	492,563	$	457,511	$	514,498	$	2,045,341
Securities lending indemnifications ⁽³⁾		26,673		—		—		—		26,673
Performance bonds ⁽⁴⁾		2,046		—		—		—		2,046
Other financial guarantees ⁽⁵⁾		381		121		258		46		806


⁽¹⁾		Such amounts do not represent the anticipated losses in connection with these contracts.

⁽²⁾		The aggregate carrying value of these derivatives was a liability of $38.71 billion and $33.10 billion as of May 2008 and November 2007, respectively. The carrying value excludes the effect of a legal right of setoff that may exist under an enforceable netting agreement. These derivative contracts are risk managed together with derivative contracts that are not considered guarantees under FIN No. 45, and therefore, these amounts do not reflect the firm’s overall risk related to its derivative activities.

⁽³⁾		Collateral held by the lenders in connection with securities lending indemnifications was $36.21 billion and $27.49 billion as of May 2008 and November 2007, respectively.

⁽⁴⁾		Excludes collateral of $2.18 billion and $2.05 billion related to these obligations as of May 2008 and November 2007, respectively.

⁽⁵⁾		The carrying value of these guarantees was a liability of $64 million and $43 million as of May 2008 and November 2007, respectively.

The firm has established trusts, including Goldman Sachs Capital I, II and III, and other entities for the limited purpose of issuing securities to third parties, lending the proceeds to the firm and entering into contractual arrangements with the firm and third parties related to this purpose. (See Note 5 for information regarding the transactions involving Goldman Sachs Capital I, II and III.) The firm effectively provides for the full and unconditional guarantee of the securities issued by these entities, which are not consolidated for accounting purposes. Timely payment by the firm of amounts due to these entities under the borrowing, preferred stock and related contractual arrangements will be sufficient to cover payments due on the securities issued by these entities. Management believes that it is unlikely that any circumstances will occur, such as nonperformance on the part of paying agents or other service providers, that would make it necessary for the firm to make payments related to these entities other than those required under the terms of the borrowing, preferred stock and related contractual arrangements and in connection with certain expenses incurred by these entities.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

In the ordinary course of business, the firm indemnifies and guarantees certain service providers, such as clearing and custody agents, trustees and administrators, against specified potential losses in connection with their acting as an agent of, or providing services to, the firm or its affiliates. The firm also indemnifies some clients against potential losses incurred in the event specifiedthird-partyservice providers, includingsub-custodiansandthird-partybrokers, improperly execute transactions. In addition, the firm is a member of payment, clearing and settlement networks as well as securities exchanges around the world that may require the firm to meet the obligations of such networks and exchanges in the event of member defaults. In connection with its prime brokerage and clearing businesses, the firm agrees to clear and settle on behalf of its clients the transactions entered into by them with other brokerage firms. The firm’s obligations in respect of such transactions are secured by the assets in the client’s account as well as any proceeds received from the transactions cleared and settled by the firm on behalf of the client. In connection with joint venture investments, the firm may issue loan guarantees under which it may be liable in the event of fraud, misappropriation, environmental liabilities and certain other matters involving the borrower. The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no liabilities related to these guarantees and indemnifications have been recognized in the condensed consolidated statements of financial condition as of May 2008 and November 2007.

The firm provides representations and warranties to counterparties in connection with a variety of commercial transactions and occasionally indemnifies them against potential losses caused by the breach of those representations and warranties. The firm may also provide indemnifications protecting against changes in or adverse application of certain U.S. tax laws in connection with ordinary-course transactions such as securities issuances, borrowings or derivatives. In addition, the firm may provide indemnifications to some counterparties to protect them in the event additional taxes are owed or payments are withheld, due either to a change in or an adverse application of certainnon-U.S. taxlaws. These indemnifications generally are standard contractual terms and are entered into in the ordinary course of business. Generally, there are no stated or notional amounts included in these indemnifications, and the contingencies triggering the obligation to indemnify are not expected to occur. The firm is unable to develop an estimate of the maximum payout under these guarantees and indemnifications. However, management believes that it is unlikely the firm will have to make any material payments under these arrangements, and no liabilities related to these arrangements have been recognized in the condensed consolidated statements of financial condition as of May 2008 and November 2007.


Note 7.	Shareholders’ Equity

On June 16, 2008, the Board of Directors of Group Inc. (the Board) declared a dividend of $0.35 per common share with respect to the firm’s second quarter of 2008 to be paid on August 28, 2008, to common shareholders of record on July 29, 2008.

During the three and six months ended May 2008, the firm repurchased 1.2 million and 9.0 million shares of its common stock at a total cost of $203 million and $1.76 billion, respectively. The average price paid per share for repurchased shares was $173.85 and $195.63 for the three and six months ended May 2008, respectively. In addition, to satisfy minimum statutory employee tax withholding requirements related to the delivery of common stock underlying restricted stock units, the firm cancelled 6.7 million of restricted stock units with a total value of $1.31 billion in the first half of 2008.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm’s share repurchase program is intended to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employeeshare-basedcompensation. The repurchase program is effected primarily through regularopen-marketpurchases, the amounts and timing of which are determined primarily by the firm’s current and projected capital positions (i.e., comparisons of the firm’s desired level of capital to its actual level of capital) but which may also be influenced by general market conditions and the prevailing price and trading volumes of the firm’s common stock.

As of May 2008, the firm had 124,000 shares of perpetualnon-cumulativepreferred stock issued and outstanding in four series as set forth in the following table:


	Shares		Shares			Earliest	Redemption Value
Series	Issued		Authorized		Dividend Rate	Redemption Date	(in millions)

A		30,000		50,000	3 month LIBOR + 0.75%, with floor of 3.75% per annum	April 25, 2010	$	750

B		32,000		50,000	6.20% per annum	October 31, 2010		800

C		8,000		25,000	3 month LIBOR + 0.75%, with floor of 4.00% per annum	October 31, 2010		200

D		54,000		60,000	3 month LIBOR + 0.67%, with floor of 4.00% per annum	May 24, 2011		1,350

		124,000		185,000			$	3,100

In 2007, the Board authorized 17,500.1 shares of perpetualNon-CumulativePreferred Stock, Series E and 5,000.1 shares of perpetualNon-CumulativePreferred Stock, Series F in connection with the APEX issuance (see Note 5 for further information on the APEX issuance). Under the stock purchase contracts, the firm will issue on the relevant stock purchase dates (on or before June 1, 2013 and September 1, 2013 for Series E and Series F preferred stock, respectively) one share of Series E and Series F preferred stock to Goldman Sachs Capital II and III, respectively, for each $100,000 principal amount of subordinated debt held by these trusts. When issued, each share of Series E and Series F preferred stock will have a par value of $0.01 and a liquidation preference of $100,000 per share. Dividends on Series E preferred stock, if declared, will be payablesemi-annuallyat a fixed annual rate of 5.79% if the stock is issued prior to June 1, 2012 and quarterly thereafter, at a rate per annum equal to the greater of (i) three-month LIBOR plus 0.77% and (ii) 4.00%. Dividends on Series F preferred stock, if declared, will be payable quarterly at a rate per annum equal to three-month LIBOR plus 0.77% if the stock is issued prior to September 1, 2012 and quarterly thereafter, at a rate per annum equal to the greater of (i) three-month LIBOR plus 0.77% and (ii) 4.00%. The preferred stock may be redeemed at the option of the firm on the stock purchase dates or any day thereafter, subject to the approval of the U.S. Securities and Exchange Commission (SEC) and certain covenant restrictions governing the firm’s ability to redeem or purchase the preferred stock without issuing common stock or other instruments withequity-likecharacteristics.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

On June 16, 2008, the Board declared a dividend per preferred share of $236.98, $387.50, $252.78 and $252.78 for Series A, Series B, Series C and Series D preferred stock, respectively, to be paid on August 11, 2008 to preferred shareholders of record on July 27, 2008.

The following table sets forth the firm’s accumulated other comprehensive income/(loss) by type:


	As of
	May			November
	2008			2007
	(in millions)

Adjustment from adoption of SFAS No. 158, net of tax	$	(194	)	$	(194	)
Currency translation adjustment, net of tax		56			68
Net unrealized gains/(losses) onavailable-for-salesecurities, net of tax ⁽¹⁾		(4	)		8
Pension and postretirement liability adjustment, net of tax		6			—

Total accumulated other comprehensive income, net of tax	$	(136	)	$	(118	)


⁽¹⁾		Consists of net unrealized losses of $16 million onavailable-for-salesecurities held by the firm’s insurance subsidiaries and net unrealized gains of $12 million onavailable-for-salesecurities held by investees accounted for under the equity method as of May 2008. Consists of net unrealized gains of $9 million onavailable-for-salesecurities held by investees accounted for under the equity method and net unrealized losses of $1 million onavailable-for-salesecurities held by the firm’s insurance subsidiaries as of November 2007.


Note 8.	Earnings Per Common Share

The computations of basic and diluted earnings per common share are set forth below:


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
	(in millions, except per share amounts)

Numerator for basic and diluted EPS — net earnings applicable to common shareholders	$	2,051	$	2,287	$	3,518	$	5,435

Denominator for basic EPS — weighted average number of common shares		427.5		435.8		430.3		440.2
Effect of dilutive securities ⁽¹⁾
Restricted stock units		9.6		13.3		9.1		12.5
Stock options		10.3		15.0		11.2		15.3

Dilutive potential common shares		19.9		28.3		20.3		27.8

Denominator for diluted EPS — weighted average number of common shares and dilutive potential common shares		447.4		464.1		450.6		468.0

Basic EPS	$	4.80	$	5.25	$	8.18	$	12.35
Diluted EPS		4.58		4.93		7.81		11.61


⁽¹⁾		The diluted EPS computations do not include the antidilutive effect of the following restricted stock units and stock options:

Three Months

Six Months

Ended May

2008

2007

2008

2007

(in millions)

Number of antidilutive restricted stock units and stock options, end of period

6.4

—

7.0

—

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 9.	Goodwill and Identifiable Intangible Assets

Goodwill

The following table sets forth the carrying value of the firm’s goodwill by operating segment, which is included in “Other assets” in the condensed consolidated statements of financial condition:


	As of
	May		November
	2008		2007
	(in millions)

Investment Banking
Underwriting	$	125	$	125
Trading and Principal Investments
FICC		301		123
Equities ⁽¹⁾		2,389		2,381
Principal Investments		34		11
Asset Management and Securities Services
Asset Management ⁽²⁾		564		564
Securities Services		117		117

Total	$	3,530	$	3,321


⁽¹⁾		Primarily related to SLK LLC (SLK).

⁽²⁾		Primarily related to The Ayco Company, L.P. (Ayco).

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Identifiable Intangible Assets

The following table sets forth the gross carrying amount, accumulated amortization and net carrying amount of the firm’s identifiable intangible assets:


		As of
		May			November
		2008			2007
		(in millions)

Customer lists ⁽¹⁾	Gross carrying amount	$	1,171		$	1,086
	Accumulated amortization		(396	)		(354	)

	Net carrying amount	$	775		$	732

New York Stock	Gross carrying amount	$	714		$	714
Exchange (NYSE)	Accumulated amortization		(232	)		(212	)

specialist rights	Net carrying amount	$	482		$	502

Insurance-related	Gross carrying amount	$	438		$	461
assets ⁽²⁾	Accumulated amortization		(104	)		(89	)

	Net carrying amount	$	334		$	372

Exchange-traded	Gross carrying amount	$	138		$	138
fund (ETF) lead	Accumulated amortization		(40	)		(38	)

market maker rights	Net carrying amount	$	98		$	100

Other ⁽³⁾	Gross carrying amount	$	145		$	360
	Accumulated amortization		(69	)		(295	)

	Net carrying amount	$	76		$	65

Total	Gross carrying amount	$	2,606		$	2,759
	Accumulated amortization		(841	)		(988	)

	Net carrying amount	$	1,765		$	1,771


⁽¹⁾		Primarily includes the firm’s clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco.

⁽²⁾		Consists of VOBA and DAC. VOBA represents the present value of estimated future gross profits of the variable annuity and life insurance business. DAC results from commissions paid by the firm to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with the firm and to cover the ceding company’s acquisition expenses. VOBA and DAC are amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The weighted average remaining amortization period for VOBA and DAC is seven years as of May 2008.

⁽³⁾		Primarily includes marketing-related assets and power contracts.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Substantially all of the firm’s identifiable intangible assets are considered to have finite lives and are amortized over their estimated lives. The weighted average remaining life of the firm’s identifiable intangibles is approximately 12 years.

The estimated future amortization for existing identifiable intangible assets through 2013 is set forth below:


	(in millions)

Remainder of 2008	$	104
2009		179
2010		162
2011		160
2012		148
2013		133


Note 10.	Other Assets and Other Liabilities

Other Assets

Other assets are generally less liquid, nonfinancial assets. The following table sets forth the firm’s other assets by type:


	As of
	May		November
	2008		2007
	(in millions)

Property, leasehold improvements and equipment ⁽¹⁾	$	10,515	$	8,975
Goodwill and identifiable intangible assets ⁽²⁾		5,295		5,092
Income tax-related assets		4,032		4,177
Equity-methodinvestments ⁽³⁾		1,823		2,014
Miscellaneous receivables and other		4,247		3,809

Total	$	25,912	$	24,067


⁽¹⁾		Net of accumulated depreciation and amortization of $6.35 billion and $5.88 billion as of May 2008 and November 2007, respectively.

⁽²⁾		See Note 9 for further information regarding the firm’s goodwill and identifiable intangible assets.

⁽³⁾		Excludes investments of $3.20 billion and $2.25 billion accounted for at fair value under SFAS No. 159 as of May 2008 and November 2007, respectively, which are included in “Financial instruments owned, at fair value” in the condensed consolidated statements of financial condition.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Other Liabilities

The following table sets forth the firm’s other liabilities and accrued expenses by type:


	As of
	May		November
	2008		2007
	(in millions)

Insurance-related liabilities ⁽¹⁾	$	10,114	$	10,344
Minority interest ⁽²⁾		3,687		7,265
Compensation and benefits		6,900		11,816
Income tax-related liabilities		1,984		2,546
Accrued expenses and other payables		4,901		4,749
Employee interests in consolidated funds		490		2,187

Total	$	28,076	$	38,907


⁽¹⁾		Insurance-related liabilities are set forth in the table below:


	As of
	May		November
	2008		2007
	(in millions)

Separate account liabilities	$	6,205	$	7,039
Liabilities for future benefits and unpaid claims		2,762		2,142
Contract holder account balances		919		937
Reserves for guaranteed minimum death and income benefits		228		226

Total insurance-related liabilities	$	10,114	$	10,344

Separate account liabilities are offset by separate account assets, representing segregated contract holder funds under variable annuity and life insurance contracts. Separate account assets are included in “Cash and securities segregated for regulatory and other purposes” in the condensed consolidated statements of financial condition.

Liabilities for future benefits and unpaid claims include liabilities arising from reinsurance provided by the firm to other insurers. The firm had a receivable for $1.28 billion and $1.30 billion as of May 2008 and November 2007, respectively, related to such reinsurance contracts, which is reported in “Receivables from customers and counterparties” in the condensed consolidated statements of financial condition. In addition, the firm has ceded risks to reinsurers related to certain of its liabilities for future benefits and unpaid claims and had a receivable of $768 million and $785 million as of May 2008 and November 2007, respectively, related to such reinsurance contracts, which is reported in “Receivables from customers and counterparties” in the condensed consolidated statements of financial condition. Contracts to cede risks to reinsurers do not relieve the firm from its obligations to contract holders.

Reserves for guaranteed minimum death and income benefits represent a liability for the expected value of guaranteed benefits in excess of projected annuity account balances. These reserves are computed in accordance with AICPASOP 03-1and are based on total payments expected to be made less total fees expected to be assessed over the life of the contract.


⁽²⁾		Includes $2.21 billion and $5.95 billion related to consolidated investment funds as of May 2008 and November 2007, respectively.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 11.	Employee Benefit Plans

The firm sponsors various pension plans and certain other postretirement benefit plans, primarily healthcare and life insurance. The firm also provides certain benefits to former or inactive employees prior to retirement.

Defined Benefit Pension Plans and Postretirement Plans

Employees of certainnon-U.S. subsidiariesparticipate in various defined benefit pension plans. These plans generally provide benefits based on years of credited service and a percentage of the employee’s eligible compensation. The firm maintains a defined benefit pension plan for substantially all U.K. employees. As of April 2008, this plan has been closed to new participants, but will continue to accrue benefits for existing participants.

The firm also maintains a defined benefit pension plan for substantially all U.S. employees hired prior to November 1, 2003. As of November 2004, this plan was closed to new participants and frozen such that existing participants would not accrue any additional benefits. In addition, the firm maintains unfunded postretirement benefit plans that provide medical and life insurance for eligible retirees and their dependents covered under these programs.

The components of pension expense/(income) and postretirement expense are set forth below:


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

U.S. pension
Interest cost	$	6		$	5		$	11		$	11
Expected return on plan assets		(8	)		(8	)		(16	)		(16	)
Net amortization		—			1			—			1

Total	$	(2	)	$	(2	)	$	(5	)	$	(4	)

Non-U.S. pension
Service cost	$	21		$	19		$	42		$	37
Interest cost		11			8			21			16
Expected return on plan assets		(11	)		(9	)		(21	)		(17	)
Net amortization		—			3			1			5

Total	$	21		$	21		$	43		$	41

Postretirement
Service cost	$	5		$	4		$	10		$	9
Interest cost		6			5			13			10
Net amortization		5			4			9			8

Total	$	16		$	13		$	32		$	27

The firm expects to contribute a minimum of $134 million to its pension plans and $8 million to its postretirement plans in 2008.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)


Note 12.	Transactions with Affiliated Funds

The firm has formed numerous nonconsolidated investment funds withthird-partyinvestors. The firm generally acts as the investment manager for these funds and, as such, is entitled to receive management fees and, in certain cases, advisory fees, incentive fees or overrides from these funds. These fees amounted to $1.76 billion for the six months ended both May 2008 and May 2007. As of May 2008 and November 2007, the fees receivable from these funds were $763 million and $596 million, respectively. Additionally, the firm may invest alongside thethird-partyinvestors in certain funds. The aggregate carrying value of the firm’s interests in these funds was $14.91 billion and $12.90 billion as of May 2008 and November 2007, respectively. In the ordinary course of business, the firm may also engage in other activities with these funds, including, among others, securities lending, trade execution, trading, custody, and acquisition and bridge financing. See Note 6 for the firm’s commitments related to these funds.


Note 13.	Income Taxes

FIN No. 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold required before a tax position can be recognized in the financial statements. FIN No. 48 also provides guidance on measurement, derecognition, classification, interim period accounting and accounting for interest and penalties. The firm adopted the provisions of FIN No. 48 as of December 1, 2007 and recorded a transition adjustment resulting in a reduction of $201 million to beginning retained earnings.

FIN No. 48 requires disclosure of the following amounts as of the date of adoption, and on an annual basis thereafter. As of December 1, 2007 (date of adoption), the firm’s liability for unrecognized tax benefits reported in “Other liabilities and accrued expenses” in the condensed consolidated statement of financial condition was $1.04 billion. The firm reported a related deferred tax asset of $497 million in “Other assets” in the condensed consolidated statement of financial condition. If recognized, the net liability of $545 million would reduce the firm’s effective income tax rate. As of December 1, 2007, the firm’s accrued liability for interest expense related to income tax matters and income tax penalties was $79 million. The firm reports interest expense related to income tax matters in “Provision for taxes” in the condensed consolidated statements of earnings and income tax penalties in “Other expenses” in the condensed consolidated statements of earnings.

During the six months ended May 30, 2008, the net liability of $545 million as of December 1, 2007 increased by approximately $81 million. The firm does not expect unrecognized tax benefits to change significantly during the twelve months subsequent to May 30, 2008.

The firm is subject to examination by the U.S. Internal Revenue Service (IRS) and other taxing authorities in jurisdictions where the firm has significant business operations, such as the United Kingdom, Japan, Hong Kong, Korea and various states, such as New York. The tax years under examination vary by jurisdiction. During fiscal 2007, the IRS substantially concluded its examination of fiscal years 2003 and 2004. Tax audits that have been substantially concluded in other jurisdictions in which the firm has significant business operations include New York State’s examination of fiscal years through 2003, the United Kingdom’s review of fiscal years through 2003 and Hong Kong’s review of fiscal years through 2001. The firm does not expect that potential additional assessments from these examinations will be material to its results of operations.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Below is a table of the earliest tax years that remain subject to examination by major jurisdiction:


	Earliest
	Tax Year
	Subject to
Jurisdiction	Examination

U.S. Federal		2005	⁽¹⁾
New York State and City		2004	⁽²⁾
United Kingdom		2004
Japan		2005
Hong Kong		2002
Korea		2003


⁽¹⁾		IRS examination of fiscal 2005 and 2006 is expected to begin during 2008.

⁽²⁾		New York State and City examination of fiscal 2004, 2005 and 2006 began in 2008.

All years subsequent to the above years remain open to examination by the taxing authorities. The firm believes that the liability for unrecognized tax benefits it has established is adequate in relation to the potential for additional assessments. The resolution of tax matters is not expected to have a material effect on the firm’s financial condition but may be material to the firm’s operating results for a particular period, depending, in part, upon the operating results for that period.


Note 14.	Regulation

The firm is regulated by the SEC as a Consolidated Supervised Entity (CSE) and, as such, is subject togroup-widesupervision and examination by the SEC and to minimum capital adequacy standards on a consolidated basis. The firm was in compliance with the CSE capital adequacy standards as of May 2008 and November 2007.

The firm’s principal U.S. regulated subsidiaries include Goldman, Sachs & Co. (GS&Co.) and Goldman Sachs Execution & Clearing, L.P. (GSEC). GS&Co. and GSEC are registeredU.S. broker-dealersand futures commission merchants subject toRule 15c3-1of the SEC and Rule 1.17 of the Commodity Futures Trading Commission, which specify uniform minimum net capital requirements, as defined, for their registrants, and also require that a significant part of the registrants’ assets be kept in relatively liquid form. GS&Co. and GSEC have elected to compute their minimum capital requirements in accordance with the “Alternative Net Capital Requirement” as permitted byRule 15c3-1.As of May 2008, GS&Co. had regulatory net capital, as defined byRule 15c3-1,of $11.14 billion, which exceeded the amounts required by $8.28 billion. As of May 2008, GSEC had regulatory net capital, as defined byRule 15c3-1,of $1.16 billion, which exceeded the amounts required by $1.09 billion. In addition to its alternative minimum net capital requirements, GS&Co. is also required to hold tentative net capital in excess of $1 billion and net capital in excess of $500 million in accordance with the market and credit risk standards of Appendix E ofRule 15c3-1.GS&Co. is also required to notify the SEC in the event that its tentative net capital is less than $5 billion. As of May 2008 and November 2007, GS&Co. had tentative net capital and net capital in excess of both the minimum and the notification requirements.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

GS Bank USA, a wholly owned industrial bank, is regulated by the Federal Deposit Insurance Corporation and the State of Utah Department of Financial Institutions. Goldman Sachs Bank Europe PLC (GS Bank Europe), a wholly owned credit institution, is regulated by the Irish Financial Regulator. Both entities are subject to minimum capital requirements and as of May 2008, both were in compliance with all regulatory capital requirements. As of May 2008 and November 2007, substantially all bank deposits were held at GS Bank USA and GS Bank Europe. Deposits at GS Bank USA were $22.36 billion and $15.26 billion as of May 2008 and November 2007, respectively, all of which were U.S. dollar-denominated and the weighted average interest rates for these deposits were 2.61% and 4.71% as of May 2008 and November 2007, respectively. As of May 2008, deposits at GS Bank Europe were $7.10 billion, substantially all of which were either U.S. dollar or Euro-denominated and the weighted average interest rate for these deposits was 3.11%. Substantially all of these deposits have no stated maturity and can be withdrawn upon short notice. The carrying value of bank deposits approximated fair value as of May 2008 and November 2007.

The firm has U.S. insurance subsidiaries that are subject to state insurance regulation and oversight in the states in which they are domiciled and in the other states in which they are licensed. In addition, certain of the firm’s insurance subsidiaries outside of the U.S. are regulated by the Bermuda Registrar of Companies and the U.K.’s Financial Services Authority (FSA). The firm’s insurance subsidiaries were in compliance with all regulatory capital requirements as of May 2008 and November 2007.

The firm’s principalnon-U.S. regulatedsubsidiaries include Goldman Sachs International (GSI) and Goldman Sachs Japan Co., Ltd. (GSJCL). GSI, the firm’s regulated U.K.broker-dealer,is subject to the capital requirements of the FSA. GSJCL, the firm’s regulated Japanesebroker-dealer,is subject to the capital requirements of Japan’s Financial Services Agency. As of May 2008 and November 2007, GSI and GSJCL were in compliance with their local capital adequacy requirements. Certain othernon-U.S.subsidiaries of the firm are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of May 2008 and November 2007, these subsidiaries were in compliance with their local capital adequacy requirements.


Note 15.	Business Segments

In reporting to management, the firm’s operating results are categorized into the following three business segments: Investment Banking, Trading and Principal Investments, and Asset Management and Securities Services.

Basis of Presentation

In reporting segments, certain of the firm’s business lines have been aggregated where they have similar economic characteristics and are similar in each of the following areas: (i) the nature of the services they provide, (ii) their methods of distribution, (iii) the types of clients they serve and (iv) the regulatory environments in which they operate.

The cost drivers of the firm taken as a whole — compensation, headcount and levels of business activity — are broadly similar in each of the firm’s business segments. Compensation and benefits expenses within the firm’s segments reflect, among other factors, the overall performance of the firm as well as the performance of individual business units. Consequently,pre-taxmargins in one segment of the firm’s business may be significantly affected by the performance of the firm’s other business segments. The timing and magnitude of changes in the firm’s bonus accruals can have a significant effect on segment results in a given period.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

The firm allocates revenues and expenses among the three business segments. Due to the integrated nature of these segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments are based on specific criteria or approximatethird-partyrates. Total operating expenses include corporate items that have not been allocated to individual business segments. The allocation process is based on the manner in which management views the business of the firm.

The segment information presented in the table below is prepared according to the following methodologies:


	•	Revenues and expenses directly associated with each segment are included in determiningpre-taxearnings.

	•	Net revenues in the firm’s segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. Net interest is included within segment net revenues as it is consistent with the way in which management assesses segment performance.

	•	Overhead expenses not directly allocable to specific segments are allocated ratably based on direct segment expenses.

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Segment Operating Results

Management believes that the following information provides a reasonable representation of each segment’s contribution to consolidatedpre-taxearnings and total assets:


		As of or for the				As of or for the
		Three Months				Six Months
		Ended May				Ended May
		2008		2007		2008		2007
		(in millions)

Investment	Net revenues	$	1,685	$	1,721	$	2,857	$	3,437
Banking	Operating expenses		1,155		1,246		2,095		2,540

	Pre-tax earnings	$	530	$	475	$	762	$	897

	Segment assets	$	7,269	$	5,504	$	7,269	$	5,504

Trading and	Net revenues	$	5,591	$	6,649	$	10,715	$	16,066
Principal	Operating expenses		3,961		4,196		7,704		9,590

Investments	Pre-tax earnings	$	1,630	$	2,453	$	3,011	$	6,476

	Segment assets	$	724,122	$	615,519	$	724,122	$	615,519

Asset Management	Net revenues	$	2,146	$	1,812	$	4,185	$	3,409
and Securities	Operating expenses		1,477		1,307		2,970		2,490

Services	Pre-tax earnings	$	669	$	505	$	1,215	$	919

	Segment assets	$	356,754	$	322,173	$	356,754	$	322,173

Total	Net revenues ⁽¹⁾	$	9,422	$	10,182	$	17,757	$	22,912
	Operating expenses ⁽²⁾		6,590		6,751		12,782		14,622

	Pre-taxearnings ⁽³⁾	$	2,832	$	3,431	$	4,975	$	8,290

	Total assets	$	1,088,145	$	943,196	$	1,088,145	$	943,196


⁽¹⁾		Net revenues include net interest as set forth in the table below:


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
	(in millions)

Investment Banking	$	—	$	1	$	6	$	1
Trading and Principal Investments		352		407		599		751
Asset Management and Securities Services		925		705		1,623		1,169

Total net interest	$	1,277	$	1,113	$	2,228	$	1,921


⁽²⁾		Operating expenses include net provisions for a number of litigation and regulatory proceedings of $(3) million and $2 million for the three months ended May 2008 and May 2007, respectively, and $13 million and $2 million for the six months ended May 2008 and May 2007, respectively, that have not been allocated to the firm’s segments.

⁽³⁾		Pre-taxearnings include total depreciation and amortization as set forth in the table below:


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
	(in millions)

Investment Banking	$	38	$	34	$	76	$	67
Trading and Principal Investments		214		203		460		400
Asset Management and Securities Services		59		44		118		86

Total depreciation and amortization	$	311	$	281	$	654	$	553

THE GOLDMAN SACHS GROUP, INC. and SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(UNAUDITED)

Geographic Information

Due to the highly integrated nature of international financial markets, the firm manages its businesses based on the profitability of the enterprise as a whole. Since a significant portion of the firm’s activities require cross-border coordination in order to facilitate the needs of the firm’s clients, the methodology for allocating the firm’s profitability to geographic regions is dependent on the judgment of management.

Geographic results are generally allocated as follows:


	•	Investment Banking: location of the client and investment banking team.

	•	Fixed Income, Currency and Commodities, and Equities: location of the trading desk.

	•	Principal Investments: location of the investment.

	•	Asset Management: location of the sales team.

	•	Securities Services: location of the primary market for the underlying security.

The following table sets forth the total net revenues of the firm and its consolidated subsidiaries by geographic region allocated on the methodology described above, as well as the percentage of total net revenues for each geographic region:


	Three Months								Six Months
	Ended May								Ended May
	2008				2007				2008				2007
	($ in millions)

Net revenues
Americas ⁽¹⁾	$	5,316	57	%	$	4,896	48	%	$	9,523	53	%	$	11,159	49	%
EMEA ⁽²⁾		2,756	29			3,465	34			5,430	31			7,632	33
Asia		1,350	14			1,821	18			2,804	16			4,121	18

Total net revenues	$	9,422	100	%	$	10,182	100	%	$	17,757	100	%	$	22,912	100	%


⁽¹⁾		Substantially all relates to the U.S.

⁽²⁾		EMEA (Europe, Middle East and Africa).

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Shareholders of

The Goldman Sachs Group, Inc.:

We have reviewed the accompanying condensed consolidated statement of financial condition of The Goldman Sachs Group, Inc. and its subsidiaries (the Company) as of May 30, 2008, the related condensed consolidated statements of earnings for the three and six months ended May 30, 2008 and May 25, 2007, the condensed consolidated statement of changes in shareholders’ equity for the six months ended May 30, 2008, the condensed consolidated statements of cash flows for the six months ended May 30, 2008 and May 25, 2007, and the condensed consolidated statements of comprehensive income for the three and six months ended May 30, 2008 and May 25, 2007. These condensed consolidated interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of November 30, 2007, and the related consolidated statements of earnings, changes in shareholders’ equity, cash flows and comprehensive income for the year then ended (not presented herein), and in our report dated January 24, 2008 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of November 30, 2007 and the condensed consolidated statement of changes in shareholders’ equity for the year ended November 30, 2007, is fairly stated in all material respects in relation to the consolidated financial statements from which it has been derived.

/s/ PricewaterhouseCoopers LLP

New York, New York

June 28, 2008


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

INDEX


	Page
	No.

Introduction		63

Executive Overview		64

Business Environment		66

Critical Accounting Policies		67

Fair Value		67

Goodwill and Identifiable Intangible Assets		74

Use of Estimates		76

Results of Operations		77

Financial Overview		77

Segment Operating Results		81

Geographic Data		88

Off-Balance-SheetArrangements		88

Equity Capital		89

Contractual Obligations and Commitments		97

Market Risk		100

Credit Risk		104

Derivatives		105

Liquidity and Funding Risk		109

Recent Accounting Developments		116

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995		117

Introduction

Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments andhigh-net-worthindividuals.

Our activities are divided into three segments:


	•	Investment Banking. We provide a broad range of investment banking services to a diverse group of corporations, financial institutions, investment funds, governments and individuals.

	•	Trading and Principal Investments. We facilitate client transactions with a diverse group of corporations, financial institutions, investment funds, governments and individuals and take proprietary positions through market making in, trading of and investing in fixed income and equity products, currencies, commodities and derivatives on these products. In addition, we engage in market-making and specialist activities on equities and options exchanges and clear client transactions on major stock, options and futures exchanges worldwide. In connection with our merchant banking and other investing activities, we make principal investments directly and through funds that we raise and manage.

	•	Asset Management and Securities Services. We provide investment advisory and financial planning services and offer investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and provide prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and tohigh-net-worthindividuals worldwide.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007. References herein to the Annual Report onForm 10-Kare to our Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007.

Unless specifically stated otherwise, all references to May 2008 and May 2007 refer to our fiscal periods ended, or the dates, as the context requires, May 30, 2008 and May 25, 2007, respectively. All references to November 2007, unless specifically stated otherwise, refer to our fiscal year ended, or the date, as the context requires, November 30, 2007. All references to 2008, unless specifically stated otherwise, refer to our fiscal year ending, or the date, as the context requires, November 28, 2008.

When we use the terms “Goldman Sachs,” “we,” “us” and “our,” we mean The Goldman Sachs Group, Inc. (Group Inc.), a Delaware corporation, and its consolidated subsidiaries.

Executive Overview

Three Months Ended May 2008 versus May 2007. Our diluted earnings per common share were $4.58 for the second quarter of 2008 compared with $4.93 for the second quarter of 2007. Annualized return on average tangible common shareholders’ equity⁽¹⁾was 23.5% and annualized return on average common shareholders’ equity was 20.4% for the second quarter of 2008. Book value per common share increased 5% during the quarter to $97.49.

Our results for the second quarter of 2008, although lower than the same period last year, were strong, particularly given the continued challenging market conditions. Net revenues in Trading and Principal Investments decreased compared with the second quarter of 2007, primarily reflecting a significant decrease in Fixed Income, Currency and Commodities (FICC). The decrease in FICC reflected significantly lower results in credit products. Credit products included a loss of approximately $775 million (including a loss of approximately $500 million from hedges) related to non-investment-grade credit origination activities, and lower results from investments compared with the second quarter of 2007. The decrease in credit products was partially offset by higher net revenues in mortgages, which improved from a difficult second quarter of 2007, as well as higher net revenues in interest rate products, commodities and currencies. During the quarter, FICC operated in an environment characterized by solid client activity, generally tighter corporate credit spreads and volatile markets. Net revenues in Principal Investments were strong, but lower compared with the second quarter of 2007, primarily reflecting lower gains from corporate principal investments, partially offset by improved results related to our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC). Net revenues in Equities were essentially unchanged from the second quarter of 2007, as significantly higher net revenues in the client franchise businesses were offset by significantly lower net revenues in principal strategies. Commission volumes were strong and were higher compared with the second quarter of 2007. During the quarter, Equities operated in an environment generally characterized by strong client activity and higher equity prices, as well as continued high levels of volatility.

Net revenues in Investment Banking decreased slightly compared with a strong second quarter of 2007, reflecting a decrease in Underwriting, partially offset by an increase in Financial Advisory. The decrease in Underwriting reflected significantly lower net revenues in debt underwriting, partially offset by significantly higher net revenues in equity underwriting, which achieved its best quarterly performance in eight years. The decline in debt underwriting was principally due to a decrease in leveraged finance activity, as market conditions remained challenging. The increase in equity underwriting reflected strong client activity. Our investment banking transaction backlog decreased during the quarter. ⁽²⁾

Net revenues in Asset Management and Securities Services increased significantly compared with the second quarter of 2007. Asset Management net revenues increased, reflecting higher management and other fees. During the quarter, assets under management increased $22 billion to a record $895 billion. Securities Services achieved record quarterly net revenues, as our prime brokerage business continued to generate strong results, primarily reflecting significantly higher customer balances.

Six Months Ended May 2008 versus May 2007. Our diluted earnings per common share were $7.81 for the six months ended May 2008 compared with $11.61 for the same period last year. Annualized return on average tangible common shareholders’ equity⁽¹⁾was 20.2% and annualized return on average common shareholders’ equity was 17.6% for the six months ended May 2008.

⁽¹⁾ Return on average tangible common shareholders’ equity (ROTE) is computed by dividing net earnings (or annualized net earnings for annualized ROTE) applicable to common shareholders by average monthly tangible common shareholders’ equity. See “— Results of Operations — Financial Overview” below for further information regarding our calculation of ROTE.

⁽²⁾ Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not.

Our results for the first half of 2008 reflected less favorable market conditions compared with the same period last year. Net revenues in Trading and Principal Investments were significantly lower compared with a strong first half of 2007, reflecting significant decreases in FICC and Principal Investments, as well as lower net revenues in Equities. Results in FICC were adversely affected by weakness in the broader credit markets. Credit products included a loss of approximately $1.8 billion (including a loss of approximately $150 million from hedges) related to non-investment-grade credit origination activities, as well as lower results from investments compared with the same period last year. Net losses on residential mortgage loans and securities included a loss of approximately $1 billion in the first quarter of 2008. Across the broader franchise in FICC, client activity levels were high and results were strong during the first half of 2008. Net revenues in interest rate products, currencies and commodities were significantly higher compared with the same period last year. The decrease in Principal Investments reflected significantly lower gains and overrides from corporate and, to a lesser extent, real estate principal investments. The decrease in Equities reflected significantly lower results in principal strategies, partially offset by higher net revenues in the client franchise businesses. During the first half of 2008, Equities operated in an environment generally characterized by lower equity prices. However, volatility levels remained high and client activity levels were strong, which contributed to a significant increase in commissions compared with the same period last year.

Net revenues in Investment Banking declined compared with a strong first half of 2007, reflecting significantly lower net revenues in Underwriting, as well as lower net revenues in Financial Advisory. The decrease in Underwriting reflected significantly lower net revenues in debt underwriting, partially offset by higher net revenues in equity underwriting. The decline in debt underwriting was primarily due to a significant decrease in leveraged finance and, to a lesser extent,mortgage-relatedactivity, reflecting difficult market conditions. The decrease in Financial Advisory reflected a decline in industry-wide completed mergers and acquisitions.

Net revenues in Asset Management and Securities Services increased significantly compared with the first half of 2007. Securities Services net revenues were significantly higher, primarily reflecting significantly higher customer balances. Asset Management net revenues also increased, reflecting higher management and other fees, and higher incentive fees.

Our business, by its nature, does not produce predictable earnings. Our results in any given period can be materially affected by conditions in global financial markets and economic conditions generally. For a further discussion of the factors that may affect our future operating results, see “Risk Factors” in Part I, Item 1A of our Annual Report onForm 10-K.

Business Environment

Global economic growth continued to slow during our second quarter of fiscal 2008. While economic growth in emerging economies generally remained solid, growth in the major economies slowed as consumer confidence continued to decline. Financial markets experienced elevated levels of volatility as abroad-basedshift of capital towards low-risk asset classes in early March gave way to improved sentiment over the remainder of the quarter. Equity prices in most of the major global equity markets recovered during the quarter and corporate credit spreads generally tightened. In addition to reducing its federal funds target rate, the U.S. Federal Reserve took measures to address elevated pressures inshort-termfunding markets through the introduction of two new liquidity facilities for primary dealers in March. Commodity prices rose significantly during the quarter, with the price of oil rising to record levels, while the U.S. dollar depreciated further against the Euro, but appreciated slightly against the Japanese yen. Investment banking activity levels generally improved from our first fiscal quarter, as evidenced by higher industry-wide announced mergers and acquisitions and common stock offerings, but were lower relative to the same period last year.

In the U.S., real gross domestic product (GDP) growth appeared to remain slow during our second quarter. Domestic demand growth remained weak, with continued weakness in both business fixed investment and residential investment. Growth in consumer spending also slowed and surveys of consumer confidence deteriorated during the quarter. However, international trade continued to provide support for the economy as export growth accelerated and import growth remained slow. Levels of unemployment increased, with private-sector employment contracting each month during the quarter. Although the rate of inflation increased, measures of core inflation moderated slightly and the U.S. Federal Reserve reduced its federal funds target rate by 100 basis points to 2.00% during our second quarter. The10-yearU.S. Treasury note yield ended our quarter 53 basis points higher at 4.06%. In the equity markets, the NASDAQ Composite Index, the S&P 500 Index and the Dow Jones Industrial Average increased by 11%, 5% and 3%, respectively.

In the Eurozone economies, real GDP growth appeared to slow during our second quarter. While growth in industrial production and fixed investment was solid, growth in private consumption slowed and surveys of business activity weakened significantly. In addition, surveys of business and consumer confidence declined during our fiscal quarter and signs of weakness appeared in several housing markets. Measures of core inflation remained elevated during the quarter and the European Central Bank left its main refinancing operations rate unchanged at 4.00%. The Euro appreciated 3% against the U.S. dollar. In the U.K., real GDP growth also appeared to slow. Surveys of consumer confidence deteriorated further during the quarter, with continued concerns over the impact on economic growth of tightening credit conditions and weakness in the housing market. Although inflationary pressures remained elevated, the Bank of England reduced its official bank rate by 25 basis points to 5.00% during our fiscal quarter. The British pound depreciated slightly against the U.S. dollar. In both the U.K. and continental Europe, equity markets ended the quarter higher andlong-termgovernment bond yields increased during our fiscal quarter.

In Japan, real GDP growth appeared to slow during our second quarter. Growth in industrial production and exports remained at modest levels while housing sector activity appeared to recover. However, business and consumer confidence deteriorated and growth in consumer spending was subdued. Measures of inflation appeared to increase during the quarter. The Bank of Japan left its target overnight call rate unchanged at 0.50%, while the yield on10-yearJapanese government bonds increased during the quarter. The Nikkei 225 Index ended our fiscal quarter 5% higher.

In China, the pace of real GDP growth moderated, but remained strong during our second quarter, reflecting strength in domestic demand and exports. Measures of inflation remained elevated during our fiscal quarter. The People’s Bank of China left itsone-yearbenchmark lending rate unchanged at 7.47%, but raised the reserve requirement ratio by 150 basis points. The Chinese yuan continued to appreciate against the U.S. dollar, increasing by approximately 2%. The Shanghai Composite Index continued to decline sharply, ending our fiscal quarter 21% lower. In India, the pace of real GDP growth continued to moderate due to slower growth in agriculture and in exports. Measures of inflation continued to increase, reflecting the impact of higher food and commodity prices. The Indian rupee depreciated 5% against the U.S. dollar. Equity markets ended the quarter lower in India while, elsewhere in Asia, equity markets in Korea, Taiwan and Hong Kong ended the quarter higher.

Critical Accounting Policies

Fair Value

The use of fair value to measure financial instruments, with related unrealized gains or losses generally recognized in “Trading and principal investments” in our condensed consolidated statements of earnings, is fundamental to our financial statements and our risk management processes and is our most critical accounting policy. The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). Instruments that we own (long positions) are marked to bid prices, and instruments that we have sold, but not yet purchased (short positions) are marked to offer prices.

In determining fair value, we separate our “Financial instruments, owned at fair value” and “Financial instruments sold, but not yet purchased, at fair value” into two categories: cash instruments and derivative contracts, as set forth in the following table:

Financial Instruments by Category
(in millions)


	As of May 2008						As of November 2007
				Financial						Financial
	Financial			Instruments Sold,			Financial			Instruments Sold,
	Instruments			but not Yet			Instruments			but not Yet
	Owned, at			Purchased, at			Owned, at			Purchased, at
	Fair Value			Fair Value			Fair Value			Fair Value

Cash trading instruments	$	265,807		$	82,144		$	324,181		$	112,018
ICBC		7,124	⁽¹⁾		—			6,807	⁽¹⁾		—
SMFG		2,706			2,703	⁽⁴⁾		4,060			3,627	⁽⁴⁾
Other principal investments		15,107	⁽²⁾		—			11,933	⁽²⁾		—

Principal investments		24,937			2,703			22,800			3,627

Cash instruments		290,744			84,847			346,981			115,645
Exchange-traded		13,525			14,499			13,541			12,280
Over-the-counter		106,925			83,523			92,073			87,098

Derivative contracts		120,450	⁽³⁾		98,022	⁽⁵⁾		105,614	⁽³⁾		99,378	⁽⁵⁾

Total	$	411,194		$	182,869		$	452,595		$	215,023


⁽¹⁾		Includes interests of $4.50 billion and $4.30 billion as of May 2008 and November 2007, respectively, held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of ICBC, which trade on The Stock Exchange of Hong Kong, includes the effect of foreign exchange revaluation for which we maintain an economic currency hedge.

⁽²⁾		The following table sets forth the principal investments (in addition to our investments in ICBC and Sumitomo Mitsui Financial Group, Inc. (SMFG)) included within the Principal Investments component of our Trading and Principal Investments segment:


	As of May 2008						As of November 2007
	Corporate		Real Estate		Total		Corporate		Real Estate		Total
	(in millions)

Private	$	9,022	$	3,263	$	12,285	$	7,297	$	2,361	$	9,658
Public		2,764		58		2,822		2,208		67		2,275

Total	$	11,786	$	3,321	$	15,107	$	9,505	$	2,428	$	11,933


⁽³⁾		Net of cash received pursuant to credit support agreements of $84.56 billion and $59.05 billion as of May 2008 and November 2007, respectively.

⁽⁴⁾		Represents an economic hedge on the shares of common stock underlying our investment in the convertible preferred stock of SMFG.

⁽⁵⁾		Net of cash paid pursuant to credit support agreements of $33.90 billion and $27.76 billion as of May 2008 and November 2007, respectively.

Cash Instruments. Cash instruments include cash trading instruments, public principal investments and private principal investments.


	•	Cash Trading Instruments. Our cash trading instruments are generally valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and sovereign obligations, active listed equities and most money market securities.

Certain cash trading instruments trade infrequently and therefore have little or no price transparency. Such instruments include private equity and real estate fund investments, certain bank loans and bridge loans (including certain mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt), less liquid corporate debt securities and other debt obligations (including less liquidhigh-yieldcorporate bonds, distressed debt instruments and collateralized debt obligations (CDOs) backed by corporate obligations), less liquid mortgage whole loans and securities (backed by either commercial or residential real estate), and acquired portfolios of distressed loans. The transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. This valuation is adjusted only when changes to inputs and assumptions are corroborated by evidence such as transactions in similar instruments, completed or pendingthird-partytransactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.


	•	Public Principal Investments. Our public principal investments held within the Principal Investments component of our Trading and Principal Investments segment tend to be large, concentrated holdings resulting from initial public offerings or other corporate transactions, and are valued based on quoted market prices. For positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidityand/ornon-transferability,and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

Our most significant public principal investment is our investment in the ordinary shares of ICBC. Our investment in ICBC is valued using the quoted market prices adjusted for transfer restrictions. The ordinary shares acquired from ICBC are subject to transfer restrictions that, among other things, prohibit any sale, disposition or other transfer until April 28, 2009. From April 28, 2009 to October 20, 2009, we may transfer up to 50% of the aggregate ordinary shares of ICBC that we owned as of October 20, 2006. We may transfer the remaining shares after October 20, 2009. A portion of our interest is held by investment funds managed by Goldman Sachs.

We also have an investment in the convertible preferred stock of SMFG. This investment is valued using a model that is principally based on SMFG’s common stock price. During our second quarter of 2008, we convertedone-third of our preferred stock investment into SMFG common stock, and delivered the common stock to close outone-third of our hedge position. As of May 2008, we remained hedged on the common stock underlying our remaining investment in SMFG.


	•	Private Principal Investments. Our private principal investments held within the Principal Investments component of our Trading and Principal Investments segment include investments in private equity, debt and real estate, primarily held through investment funds. By their nature, these investments have little or no price transparency. We value such instruments initially at transaction price and adjust valuations when evidence is available to support such adjustments. Such evidence includes transactions in similar instruments, completed or pendingthird-partytransactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.

Derivative Contracts. Derivative contracts can beexchange-tradedor over-the-counter (OTC). We generally valueexchange-tradedderivatives within portfolios using models which calibrate to market-clearing levels and eliminate timing differences between the closing price of theexchange-tradedderivatives and their underlying cash instruments.

OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value an OTC derivative depends upon the contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. We generally use similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be verified and model selection does not involve significant management judgment.

Certain OTC derivatives trade in less liquid markets with limited pricing information, and the determination of fair value for these derivatives is inherently more difficult. Where we do not have corroborating market evidence to support significant model inputs and cannot verify the model to market transactions, transaction price is initially used as the best estimate of fair value. Accordingly, when a pricing model is used to value such an instrument, the model is adjusted so that the model value at inception equals the transaction price. Subsequent to initial recognition, we only update valuation inputs when corroborated by evidence such as similar market transactions,third-partypricing servicesand/orbroker or dealer quotations, or other empirical market data. In circumstances where we cannot verify the model value to market transactions, it is possible that a different valuation model could produce a materially different estimate of fair value. See “— Derivatives” below for further information on our OTC derivatives.

Controls Over Valuation of Financial Instruments. A control infrastructure, independent of the trading and investing functions, is fundamental to ensuring that our financial instruments are appropriately valued at market-clearing levels (i.e., exit prices) and that fair value measurements are reliable.

We employ an oversight structure that includes appropriate segregation of duties. Senior management, independent of the trading and investing functions, is responsible for the oversight of control and valuation policies and for reporting the results of these policies to our Audit Committee. We seek to maintain the necessary resources to ensure that control functions are performed to the highest standards. We employ procedures for the approval of new transaction types and markets, price verification, review of daily profit and loss, and review of valuation models by personnel with appropriate technical knowledge of relevant products and markets. These procedures are performed by personnel independent of the trading and investing functions. For trading and principal investments where prices or valuations that require inputs are less observable, we employ, where possible, procedures that include comparisons with similar observable positions, analysis of actual to projected cash flows, comparisons with subsequent sales and discussions with senior business leaders. See “— Market Risk” and “— Credit Risk” below for a further discussion of how we manage the risks inherent in our trading and principal investing businesses.

Fair Value Hierarchy — Level 3. Statement of Financial Accounting Standards (SFAS) No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Instruments that trade infrequently and therefore have little or no price transparency are classified within level 3 of the fair value hierarchy. We determine which instruments are classified within level 3 based on the results of our price verification process. This process is performed by personnel independent of our trading and investing functions who corroborate valuations to external market data (e.g., quoted market prices, broker or dealer quotations,third-partypricing vendors, recent trading activity and comparative analyses to similar instruments). The methodologies we use to value instruments classified within level 3 are described in the table on the following page. See Notes 2 and 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding SFAS No. 157.

Total level 3 assets were $78.09 billion, $96.39 billion and $69.15 billion as of May 2008, February 2008 and November 2007, respectively. The decrease in level 3 assets during the three months ended May 2008 primarily reflected full and partial dispositions as well as transfers to level 2 of loans and securities backed by commercial real estate, and certain bank loans and bridge loans. The transfers to level 2 were driven by improved price transparency largely as a result of partial sales. The decrease also reflected transfers to level 2 ofmortgage-relatedderivative assets due to improved transparency of the correlation inputs used to value these financial instruments.

The increase in level 3 assets during the six months ended May 2008 primarily reflected purchases and transfers to level 3 of corporate debt securities and other debt obligations, and transfers to level 3 of loans and securities backed by commercial real estate. The transfers to level 3 reflected reduced levels of liquidity, and therefore reduced price transparency. The increase also reflected gains on derivative assets primarily attributable to observable changes in credit spreads (which are level 2 inputs).

The following table sets forth the fair values of assets classified as level 3 within the fair value hierarchy, along with a brief description of the valuation technique for each type of asset:

Level 3 Financial Assets at Fair Value
(in millions)


	As of
	May			November			Valuation
Description	2008			2007			Technique

Private equity and real estate fund
investments ⁽¹⁾		$16,677			$18,006		Initially valued at transaction price. Subsequently valued based on third-party investments, pending transactions or changes in financial ratios (e.g., earnings multiples) and discounted cash flows.


Bank loans and bridge loans ⁽²⁾		13,301			13,334		Initially valued at transaction price. Subsequently valued using market data for similar instruments (e.g., recent transactions or broker quotes), comparisons to benchmark derivative indices or movements in underlying credit spreads.

Corporate debt securities and other debt obligations ⁽³⁾		11,846			6,111

Mortgage and otherasset-backedloans and securities

Loans and securities backed by
commercial real estate		10,265			7,410		Initially valued at transaction price. Subsequently valued by comparison to transactions in instruments with similar collateral and risk profiles (including relevant indices, such as the CMBX ⁽⁴⁾) and discounted cash flow techniques.

Loans and securities backed
by residential real estate		2,330			2,484		Initially valued at transaction price. Subsequently valued by comparison to transactions in instruments with similar collateral and risk profiles (including relevant indices, such as the ABX ⁽⁴⁾), discounted cash flow techniques, option adjusted spread analyses, and hypothetical securitization analyses.

Loan portfolios ⁽⁵⁾		5,252			6,106		Initially valued at transaction price. Subsequently valued using transactions for similar instruments and discounted cash flow techniques.

Cash instruments		59,671			53,451

Derivative contracts		18,417			15,700		Valuation models are calibrated to initial trade price. Subsequent valuations are based on observable inputs to the valuation model (e.g., interest rates, credit spreads, volatilities, etc.). Model inputs are changed only when corroborated by market data.

Total level 3 assets at fair value		78,088	⁽⁷⁾		69,151

Level 3 assets for which we do not bear economic exposure ⁽⁶⁾		(10,747	)		(14,437	)

Level 3 assets for which we bear economic exposure		$67,341			$54,714


⁽¹⁾	Includes $2.35 billion and $7.06 billion as of May 2008 and November 2007, respectively, of assets for which we do not bear economic exposure. Also includes $3.09 billion and $2.02 billion as of May 2008 and November 2007, respectively, of real estate fund investments.

⁽²⁾	Includes mezzanine financing, leveraged loans arising from capital market transactions and other corporate bank debt.

⁽³⁾	Includes $1.24 billion and $2.49 billion as of May 2008 and November 2007, respectively, of CDOs backed by corporate obligations.

⁽⁴⁾	The CMBX and ABX are tradeable indices that track the performance of commercial mortgage bonds and subprime residential mortgage bonds, respectively.

⁽⁵⁾	Consists of acquired portfolios of distressed loans and securities, primarily backed by commercial and residential real estate collateral.

⁽⁶⁾	We do not bear economic exposure to these level 3 assets as they are financed by nonrecourse debt, attributable to minority investors or attributable to employee interests in certain consolidated funds.

⁽⁷⁾	Total level 3 assets at fair value as of February 2008 were $96.39 billion.

Loans and securities backed by residential real estate. We securitize, underwrite and make markets in various types of residential mortgages, including prime, Alt-Aand subprime. At any point in time, we may use cash instruments as well as derivatives to manage our long or short risk position in the residential mortgage market. The following table sets forth the fair value of our long positions in prime,Alt-A and subprime mortgage cash instruments:

Long Positions in Loans and Securities Backed by Residential Real Estate
(in millions)


	As of
	May		November
	2008		2007

Prime	$	8,597	$	14,370
Alt-A		4,704		6,358
Subprime ⁽¹⁾		1,937		2,109

Total ⁽²⁾	$	15,238	$	22,837


⁽¹⁾		Includes $264 million and $316 million of CDOs backed by subprime mortgages as of May 2008 and November 2007, respectively.

⁽²⁾		Includes $2.33 billion and $2.48 billion of financial instruments (primarily loans and investment-grade securities, the majority of which were issued during 2006 and 2007) classified as level 3 under the fair value hierarchy as of May 2008 and November 2007, respectively.

Loans and securities backed by commercial real estate. We originate, securitize and syndicate fixed and floating rate commercial mortgages globally. At any point in time, we may use cash instruments as well as derivatives to manage our risk position in the commercial mortgage market. The following table sets forth the fair value of our long positions in loans and securities backed by commercial real estate by geographic region. The decrease in loans and securities backed by commercial real estate from November 2007 to May 2008 was primarily due to dispositions.

Long Positions in Loans and Securities Backed by
Commercial Real Estate by Geographic Region
(in millions)


	As of
	May			November
	2008			2007

Americas ⁽¹⁾	$	10,298		$	12,361
EMEA ⁽²⁾		6,136			6,607
Asia		138			52

Total ⁽³⁾	$	16,572	⁽⁴⁾	$	19,020	⁽⁵⁾


⁽¹⁾		Substantially all relates to the U.S.

⁽²⁾		EMEA (Europe, Middle East and Africa).

⁽³⁾		Includes $10.27 billion and $7.41 billion of financial instruments classified as level 3 under the fair value hierarchy as of May 2008 and November 2007, respectively.

⁽⁴⁾		Includes loans of $14.68 billion and commercialmortgage-backedsecurities of $1.89 billion as of May 2008, of which $15.42 billion was floating rate and $1.15 billion was fixed rate.

⁽⁵⁾		Includes loans of $16.27 billion and commercialmortgage-backedsecurities of $2.75 billion as of November 2007, of which $16.52 billion was floating rate and $2.50 billion was fixed rate.

Other Financial Assets and Financial Liabilities at Fair Value. In addition to “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value,” we have elected to account for certain of our other financial assets and financial liabilities at fair value under SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and 140,” or SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” (i.e., the fair value option). The primary reasons for electing the fair value option are mitigating volatility in earnings from using different measurement attributes, simplification and cost-benefit considerations.

Such financial assets and financial liabilities accounted for at fair value include (i) certain unsecuredshort-termborrowings, consisting of all promissory notes and commercial paper and certain hybrid financial instruments; (ii) certain other secured financings, primarily transfers accounted for as financings rather than sales under SFAS No. 140, debt raised through our William Street program and certain other nonrecourse financings; (iii) certain unsecuredlong-termborrowings, including prepaid physical commodity transactions; (iv) resale and repurchase agreements; (v) securities borrowed and loaned within Trading and Principal Investments, consisting of our matched book and certain firm financing activities; (vi) corporate loans, loan commitments and certain certificates of deposit issued by Goldman Sachs Bank USA (GS Bank USA) as well as securities held by GS Bank USA (which would otherwise be accounted for asavailable-for-sale);(vii) receivables from customers and counterparties arising from transfers accounted for as secured loans rather than purchases under SFAS No. 140; and (viii) in general, investments acquired after the adoption of SFAS No. 159 where we have significant influence over the investee and would otherwise apply the equity method of accounting. In certain cases, we may apply the equity method of accounting to new investments that are strategic in nature or closely related to our principal business activities, where we have a significant degree of involvement in the cash flows or operations of the investee, or where cost-benefit considerations are less significant.

Goodwill and Identifiable Intangible Assets

As a result of our acquisitions, principally SLK LLC (SLK) in 2000, The Ayco Company, L.P. (Ayco) in 2003 and our variable annuity and life insurance business in 2006, we have acquired goodwill and identifiable intangible assets. Goodwill is the cost of acquired companies in excess of the fair value of net assets, including identifiable intangible assets, at the acquisition date.

Goodwill. We test the goodwill in each of our operating segments, which are components one level below our three business segments, for impairment at least annually in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” by comparing the estimated fair value of each operating segment with its estimated net book value. We derive the fair value of each of our operating segments primarily based on price-earnings and price-book multiples. We derive the net book value of our operating segments by estimating the amount of shareholders’ equity required to support the activities of each operating segment. Our last annual impairment test was performed during our 2007 fourth quarter and no impairment was identified.

The following table sets forth the carrying value of our goodwill by operating segment:

Goodwill by Operating Segment
(in millions)


	As of
	May		November
	2008		2007

Investment Banking
Underwriting	$	125	$	125
Trading and Principal Investments
FICC		301		123
Equities ⁽¹⁾		2,389		2,381
Principal Investments		34		11
Asset Management and Securities Services
Asset Management ⁽²⁾		564		564
Securities Services		117		117

Total	$	3,530	$	3,321


⁽¹⁾		Primarily related to SLK.

⁽²⁾		Primarily related to Ayco.

Identifiable Intangible Assets. We amortize our identifiable intangible assets over their estimated useful lives in accordance with SFAS No. 142, and test for impairment whenever events or changes in circumstances suggest that an asset’s or asset group’s carrying value may not be fully recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

The following table sets forth the carrying value and range of remaining lives of our identifiable intangible assets by major asset class:

Identifiable Intangible Assets by Asset Class
($ in millions)


	As of May 2008				As of November 2007
			Range of Estimated
			Remaining Useful
	Carrying		Lives		Carrying
	Value		(in years)		Value

Customer lists ⁽¹⁾	$	775		3 - 17	$	732
New York Stock Exchange (NYSE) specialist rights		482		14		502
Insurance-related assets ⁽²⁾		334		7		372
Exchange-tradedfund (ETF) lead market maker rights		98		19		100
Other ⁽³⁾		76		1 - 18		65

Total	$	1,765			$	1,771


⁽¹⁾		Primarily includes our clearance and execution and NASDAQ customer lists related to SLK and financial counseling customer lists related to Ayco.

⁽²⁾		Consists of the value of business acquired (VOBA) and deferred acquisition costs (DAC). VOBA represents the present value of estimated future gross profits of the variable annuity and life insurance business. DAC results from commissions paid by Goldman Sachs to the primary insurer (ceding company) on life and annuity reinsurance agreements as compensation to place the business with us and to cover the ceding company’s acquisition expenses. VOBA and DAC are amortized over the estimated life of the underlying contracts based on estimated gross profits, and amortization is adjusted based on actual experience. The seven-year estimated life represents the weighted average remaining amortization period of the underlying contracts (certain of which extend for approximately 30 years).

⁽³⁾		Primarily includes marketing-related assets and power contracts.

A prolonged period of weakness in global equity markets and the trading of securities in multiple markets and on multiple exchanges could adversely impact our businesses and impair the value of our goodwilland/oridentifiable intangible assets. In addition, certain events could indicate a potential impairment of our identifiable intangible assets, including (i) changes in market structure that could adversely affect our specialist businesses (see discussion below), (ii) an adverse action or assessment by a regulator, or (iii) adverse actual experience on the contracts in our variable annuity and life insurance business.

During the fourth quarter of 2007, as a result of continuing weak operating results in our NYSE specialist business, we tested our NYSE specialist rights for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Under SFAS No. 144, an impairment loss is recognized if the carrying amount of our NYSE specialist rights exceeds the projected undiscounted cash flows of the business over the estimated remaining useful life of our NYSE specialist rights. Projected undiscounted cash flows exceeded the carrying amount of our NYSE specialist rights, and accordingly, we did not record an impairment loss.

In June 2008, the NYSE formally filed rule changes with the SEC which are expected to be adopted and implemented upon completion of the statutory review and comment periods. These rule changes will further align the NYSE’s model with investor requirements for speed and efficiency of execution and will establish specialists as Designated Market Makers (DMMs). DMMs will have an obligation to commit capital but for the first time, DMMs will be able to trade on parity with other market participants. In addition, during our second quarter of 2008, the NYSE introduced a reserve order system that allows for anonymous trade execution and is expected to increase liquidity and market share. The new rules and the launch of the reserve order system are expected to bolster the NYSE’s competitive position by simplifying trading and advancing the NYSE’s goal of increasing execution speeds.

In projecting the undiscounted cash flows of the business for the purpose of performing our impairment test during the fourth quarter of 2007, we made several important assumptions about the potential beneficial effects of the rule and market structure changes described above. Specifically, we assumed that:


	•	overall equity trading volumes will continue to grow at a rate consistent with recent historical trends;

	•	the NYSE will be able to recapture approximatelyone-half of the market share that it lost in 2007; and

	•	we will increase our market share of the NYSE specialist business and, as a DMM, the profitability of each share traded.

There can be no assurance that the assumptions, rule or structure changes described above will result in sufficient cash flows to avoid future impairment of our NYSE specialist rights. As of May 30, 2008, the carrying value of our NYSE specialist rights was $482 million. To the extent that there were to be an impairment in the future, it could result in a significant writedown in the carrying value of these specialist rights.

Use of Estimates

The use of generally accepted accounting principles requires management to make certain estimates and assumptions. In addition to the estimates we make in connection with fair value measurements and the accounting for goodwill and identifiable intangible assets, the use of estimates and assumptions is also important in determining provisions for potential losses that may arise from litigation and regulatory proceedings and tax audits.

A substantial portion of our compensation and benefits represents discretionary bonuses, which are determined at year end. We believe the most appropriate way to allocate estimated annual discretionary bonuses among interim periods is in proportion to the net revenues earned in such periods. In addition to the level of net revenues, our overall compensation expense in any given year is also influenced by, among other factors, prevailing labor markets, business mix and the structure of ourshare-basedcompensation programs. Our ratio of compensation and benefits to net revenues was 48.0% for the first half of 2008, consistent with the same period last year.

We estimate and provide for potential losses that may arise out of litigation and regulatory proceedings to the extent that such losses are probable and can be estimated, in accordance with SFAS No. 5, “Accounting for Contingencies.” We estimate and provide for potential liabilities that may arise out of tax audits to the extent that uncertain tax positions fail to meet the recognition standard of FIN No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” See Note 13 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information on FIN No. 48.

Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total estimated liability in respect of litigation and regulatory proceedings is determined on acase-by-casebasis and represents an estimate of probable losses after considering, among other factors, the progress of each case or proceeding, our experience and the experience of others in similar cases or proceedings, and the opinions and views of legal counsel. Given the inherent difficulty of predicting the outcome of our litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred. See “— Legal Proceedings” in Part I, Item 3 of the Annual Report onForm 10-K,and in Part II, Item 1 of this Quarterly Report onForm 10-Qfor information on our judicial, regulatory and arbitration proceedings.

Results of Operations

The composition of our net revenues has varied over time as financial markets and the scope of our operations have changed. The composition of net revenues can also vary over the shorter term due to fluctuations in U.S. and global economic and market conditions. See “Risk Factors” in Part I, Item 1A of the Annual Report onForm 10-Kfor a further discussion of the impact of economic and market conditions on our results of operations.

Financial Overview

The following table sets forth an overview of our financial results:

Financial Overview
($ in millions, except per share amounts)


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007

Net revenues	$	9,422		$	10,182		$	17,757		$	22,912
Pre-taxearnings		2,832			3,431			4,975			8,290
Net earnings		2,087			2,333			3,598			5,530
Net earnings applicable to common shareholders		2,051			2,287			3,518			5,435
Diluted earnings per common share		4.58			4.93			7.81			11.61
Annualized return on average common shareholders’ equity ⁽¹⁾		20.4	%		26.7	%		17.6	%		32.3	%
Annualized return on average tangible common shareholders’ equity ⁽²⁾		23.5	%		31.2	%		20.2	%		37.8	%


⁽¹⁾		Return on average common shareholders’ equity (ROE) is computed by dividing net earnings (or annualized net earnings for annualized ROE) applicable to common shareholders by average monthly common shareholders’ equity.

⁽²⁾		Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. Identifiable intangible assets associated with power contracts are not deducted from total shareholders’ equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity.

We believe that return on average tangible common shareholders’ equity (ROTE) is meaningful because it measures the performance of businesses consistently, whether they were acquired or developed internally. ROTE is computed by dividing net earnings (or annualized net earnings for annualized ROTE) applicable to common shareholders by average monthly tangible common shareholders’ equity.

The following table sets forth the reconciliation of average total shareholders’ equity to average tangible common shareholders’ equity:


	Average for the
	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007
	(in millions)

Total shareholders’ equity	$	43,261		$	37,374		$	43,076		$	36,804
Preferred stock		(3,100	)		(3,100	)		(3,100	)		(3,100	)

Common shareholders’ equity		40,161			34,274			39,976			33,704
Goodwill and identifiable intangible assets, excluding power contracts		(5,218	)		(4,938	)		(5,212	)		(4,967	)

Tangible common shareholders’ equity	$	34,943		$	29,336		$	34,764		$	28,737

Net Revenues

Three Months Ended May 2008 versus May 2007. Our net revenues were $9.42 billion for the second quarter of 2008, a decrease of 7% compared with the second quarter of 2007. Our net revenues, although lower than the same period last year, were strong, particularly given the continued challenging market conditions. Net revenues in Trading and Principal Investments decreased compared with the second quarter of 2007, primarily reflecting a significant decrease in FICC. The decrease in FICC reflected significantly lower results in credit products. Credit products included a loss of approximately $775 million (including a loss of approximately $500 million from hedges) related to non-investment-grade credit origination activities, and lower results from investments compared with the second quarter of 2007. The decrease in credit products was partially offset by higher net revenues in mortgages, which improved from a difficult second quarter of 2007, as well as higher net revenues in interest rate products, commodities and currencies. During the quarter, FICC operated in an environment characterized by solid client activity, generally tighter corporate credit spreads and volatile markets. Net revenues in Principal Investments were strong, but lower compared with the second quarter of 2007, primarily reflecting lower gains from corporate principal investments, partially offset by improved results related to our investment in the ordinary shares of ICBC. Net revenues in Equities were essentially unchanged from the second quarter of 2007, as significantly higher net revenues in the client franchise businesses were offset by significantly lower net revenues in principal strategies. Commission volumes were strong and were higher compared with the second quarter of 2007. During the quarter, Equities operated in an environment generally characterized by strong client activity and higher equity prices, as well as continued high levels of volatility.

Six Months Ended May 2008 versus May 2007. Our net revenues were $17.76 billion for the six months ended May 2008, a decrease of 22% compared with the same period last year, reflecting less favorable market conditions. Net revenues in Trading and Principal Investments were significantly lower compared with a strong first half of 2007, reflecting significant decreases in FICC and Principal Investments, as well as lower net revenues in Equities. Results in FICC were adversely affected by weakness in the broader credit markets. Credit products included a loss of approximately $1.8 billion (including a loss of approximately $150 million from hedges) related to non-investment-grade credit origination activities, as well as lower results from investments compared with the same period last year. Net losses on residential mortgage loans and securities included a loss of approximately $1 billion in the first quarter of 2008. Across the broader franchise in FICC, client activity levels were high and results were strong during the first half of 2008. Net revenues in interest rate products, currencies and commodities were significantly higher compared with the same period last year. The decrease in Principal Investments reflected significantly lower gains and overrides from corporate and, to a lesser extent, real estate principal investments. The decrease in Equities reflected significantly lower results in principal strategies, partially offset by higher net revenues in the client franchise businesses. During the first half of 2008, Equities operated in an environment generally characterized by lower equity prices. However, volatility levels remained high and client activity levels were strong, which contributed to a significant increase in commissions compared with the same period last year.

Operating Expenses

Our operating expenses are primarily influenced by compensation, headcount and levels of business activity. A substantial portion of our compensation expense represents discretionary bonuses which are significantly impacted by, among other factors, the level of net revenues, prevailing labor markets, business mix and the structure of ourshare-basedcompensation programs. During the first half of 2008, our ratio of compensation and benefits to net revenues was 48.0%, consistent with the same period last year.

The following table sets forth our operating expenses and number of employees:

Operating Expenses and Employees
($ in millions)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007

Compensation and benefits ⁽¹⁾	$	4,522	$	4,887	$	8,523	$	10,998

Brokerage, clearing, exchange and distribution fees		741		638		1,531		1,189
Market development		126		144		270		276
Communications and technology		192		161		379		312
Depreciation and amortization		183		140		353		272
Amortization of identifiable intangible assets		37		50		121		101
Occupancy		234		210		470		414
Professional fees		185		161		363		322
Other expenses ⁽²⁾		370		360		772		738

Totalnon-compensationexpenses		2,068		1,864		4,259		3,624

Total operating expenses	$	6,590	$	6,751	$	12,782	$	14,622

Employees at period end ⁽³⁾		31,495		28,012


⁽¹⁾		Compensation and benefits includes $66 million and $50 million for the three months ended May 2008 and May 2007, respectively, and $129 million and $85 million for the six months ended May 2008 and May 2007, respectively, attributable to consolidated entities held for investment purposes. Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses.

⁽²⁾		Beginning in the first quarter of 2008, “Cost of power generation” was reclassified into “Other expenses” in the condensed consolidated statements of earnings. Prior periods have been reclassified to conform to the current presentation.

⁽³⁾		Excludes 4,948 and 4,841 employees as of May 2008 and May 2007, respectively, of consolidated entities held for investment purposes (see footnote 1 above).

The following table sets forthnon-compensationexpenses of consolidated entities held for investment purposes and our remainingnon-compensationexpenses by line item:

Non-CompensationExpenses
(in millions)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007

Non-compensationexpenses of consolidated investments ⁽¹⁾	$	123	$	101	$	248	$	188

Non-compensationexpenses excluding consolidated investments
Brokerage, clearing, exchange and distribution fees		741		638		1,531		1,189
Market development		124		142		265		272
Communications and technology		191		161		377		311
Depreciation and amortization		148		121		294		239
Amortization of identifiable intangible assets		36		48		119		98
Occupancy		211		192		428		381
Professional fees		181		160		357		320
Other expenses ⁽²⁾		313		301		640		626

Subtotal		1,945		1,763		4,011		3,436

Totalnon-compensationexpenses, as reported	$	2,068	$	1,864	$	4,259	$	3,624


⁽¹⁾		Consolidated entities held for investment purposes are entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to our principal businesses. For example, these investments include consolidated entities that hold real estate assets, such as hotels, but exclude investments in entities that primarily hold financial assets. We believe that it is meaningful to reviewnon-compensationexpenses excluding expenses related to these consolidated entities in order to evaluate trends innon-compensationexpenses related to our principal business activities. Revenues related to such entities are included in “Trading and principal investments” in the condensed consolidated statements of earnings.

⁽²⁾		Beginning in the first quarter of 2008, “Cost of power generation” was reclassified into “Other expenses” in the condensed consolidated statements of earnings. Prior periods have been reclassified to conform to the current presentation.

Three Months Ended May 2008 versus May 2007. Operating expenses of $6.59 billion for the second quarter of 2008 decreased 2% compared with the second quarter of 2007. Compensation and benefits expenses of $4.52 billion decreased 7% compared with the second quarter of 2007, commensurate with lower net revenues. Employment levels decreased 1% during the second quarter of 2008.

Non-compensationexpenses were $2.07 billion, 11% higher than the second quarter of 2007. Approximatelyone-half of the increase was attributable to higher brokerage, clearing, exchange and distribution fees, which principally reflected higher activity levels in Equities and FICC. The remainder of the increase compared with the second quarter of 2007 generally reflected the impact of geographic expansion and growth in employment levels.

Six Months Ended May 2008 versus May 2007. Operating expenses of $12.78 billion for the first half of 2008 decreased 13% compared with the same period last year. Compensation and benefits expenses of $8.52 billion decreased 23% compared with the same period last year, commensurate with lower net revenues. Employment levels increased 3% during the first half of 2008, due to the acquisition of Litton Loan Servicing LP.

Non-compensationexpenses were $4.26 billion, 18% higher than the same period last year. More thanone-half of the increase was attributable to higher brokerage, clearing, exchange and distribution fees, which principally reflected higher activity levels in Equities and FICC. The remainder of the increase compared with the same period last year generally reflected the impact of geographic expansion and growth in employment levels.

Provision for Taxes

The effective income tax rate for the first half of 2008 was 27.7%, down from 29.5% for the first quarter of 2008 and 34.1% for fiscal year 2007. The decreases in the effective tax rate were primarily due to changes in geographic earnings mix.

Segment Operating Results

The following table sets forth the net revenues, operating expenses andpre-taxearnings of our segments:

Segment Operating Results
(in millions)


		Three Months				Six Months
		Ended May				Ended May
		2008		2007		2008		2007

Investment	Net revenues	$	1,685	$	1,721	$	2,857	$	3,437
Banking	Operating expenses		1,155		1,246		2,095		2,540

	Pre-tax earnings	$	530	$	475	$	762	$	897

Trading and Principal	Net revenues	$	5,591	$	6,649	$	10,715	$	16,066
Investments	Operating expenses		3,961		4,196		7,704		9,590

	Pre-taxearnings	$	1,630	$	2,453	$	3,011	$	6,476

Asset Management and	Net revenues	$	2,146	$	1,812	$	4,185	$	3,409
Securities Services	Operating expenses		1,477		1,307		2,970		2,490

	Pre-tax earnings	$	669	$	505	$	1,215	$	919

Total	Net revenues	$	9,422	$	10,182	$	17,757	$	22,912
	Operating expenses ⁽¹⁾		6,590		6,751		12,782		14,622

	Pre-taxearnings	$	2,832	$	3,431	$	4,975	$	8,290


⁽¹⁾		Operating expenses include net provisions for a number of litigation and regulatory proceedings of $(3) million and $2 million for the three months ended May 2008 and May 2007, respectively, and $13 million and $2 million for the six months ended May 2008 and May 2007, respectively, that have not been allocated to our segments.

Net revenues in our segments include allocations of interest income and interest expense to specific securities, commodities and other positions in relation to the cash generated by, or funding requirements of, such underlying positions. See Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our business segments.

The cost drivers of Goldman Sachs taken as a whole — compensation, headcount and levels of business activity — are broadly similar in each of our business segments. Compensation and benefits expenses within our segments reflect, among other factors, the overall performance of Goldman Sachs as well as the performance of individual business units. Consequently,pre-taxmargins in one segment of our business may be significantly affected by the performance of our other business segments. The timing and magnitude of changes in our bonus accruals can have a significant effect on segment results in a given period. A discussion of segment operating results follows.

Investment Banking

Our Investment Banking segment is divided into two components:


	•	Financial Advisory. Financial Advisory includes advisory assignments with respect to mergers and acquisitions, divestitures, corporate defense activities, restructurings andspin-offs.

	•	Underwriting. Underwriting includes public offerings and private placements of a wide range of securities and other financial instruments.

The following table sets forth the operating results of our Investment Banking segment:

Investment Banking Operating Results
(in millions)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007

Financial Advisory	$	800	$	709	$	1,463	$	1,570

Equity underwriting		616		358		788		624
Debt underwriting		269		654		606		1,243

Total Underwriting		885		1,012		1,394		1,867

Total net revenues		1,685		1,721		2,857		3,437
Operating expenses		1,155		1,246		2,095		2,540

Pre-taxearnings	$	530	$	475	$	762	$	897

The following table sets forth our financial advisory and underwriting transaction volumes:

Goldman Sachs Global Investment Banking Volumes⁽¹⁾(in billions)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007

Announced mergers and acquisitions	$	372	$	484	$	509	$	810
Completed mergers and acquisitions		238		237		372		576
Equity andequity-relatedofferings ⁽²⁾		19		21		31		34
Debt offerings ⁽³⁾		64		100		124		193


⁽¹⁾		Source: Thomson Reuters. Announced and completed mergers and acquisitions volumes are based on full credit to each of the advisors in a transaction. Equity andequity-relatedofferings and debt offerings are based on full credit for single book managers and equal credit for joint book managers. Transaction volumes may not be indicative of net revenues in a given period.

⁽²⁾		Includes Rule 144A and public common stock offerings, convertible offerings and rights offerings.

⁽³⁾		Includes non-convertible preferred stock,mortgage-backedsecurities,asset-backedsecurities and taxable municipal debt. Includes publicly registered and Rule 144A issues.

Three Months Ended May 2008 versus May 2007. Net revenues in Investment Banking of $1.69 billion for the second quarter of 2008 decreased 2% compared with the second quarter of 2007.

Net revenues in Financial Advisory of $800 million increased 13% compared with the second quarter of 2007, reflecting strong client activity. Net revenues in our Underwriting business of $885 million decreased 13% compared with the second quarter of 2007, reflecting significantly lower net revenues in debt underwriting, partially offset by significantly higher net revenues in equity underwriting. The decline in debt underwriting was principally due to a decrease in leveraged finance activity, as market conditions remained challenging. The increase in equity underwriting reflected strong client activity. Our investment banking transaction backlog decreased during the quarter.⁽¹⁾

Operating expenses of $1.16 billion for the second quarter of 2008 decreased 7% compared with the second quarter of 2007, due to decreased compensation and benefits expenses, resulting from lower levels of discretionary compensation.Pre-taxearnings of $530 million in the second quarter of 2008 increased 12% compared with the second quarter of 2007.

Six Months Ended May 2008 versus May 2007. Net revenues in Investment Banking of $2.86 billion for the first half of 2008 decreased 17% compared with the same period last year.

Net revenues in Financial Advisory of $1.46 billion decreased 7% compared with the same period last year, reflecting a decrease in industry-wide completed mergers and acquisitions. Net revenues in our Underwriting business of $1.39 billion decreased 25% compared with the same period last year, reflecting significantly lower net revenues in debt underwriting, partially offset by higher net revenues in equity underwriting. The decline in debt underwriting was primarily due to a significant decrease in leveraged finance and, to a lesser extent,mortgage-relatedactivity, reflecting difficult market conditions.

Operating expenses of $2.10 billion for the first half of 2008 decreased 18% compared with the same period last year, due to decreased compensation and benefits expenses, resulting from lower levels of discretionary compensation.Pre-taxearnings of $762 million in the first half of 2008 decreased 15% compared with the same period last year.

⁽¹⁾ Our investment banking transaction backlog represents an estimate of our future net revenues from investment banking transactions where we believe that future revenue realization is more likely than not.

Trading and Principal Investments

Our Trading and Principal Investments segment is divided into three components:


	•	FICC. We make markets in and trade interest rate and credit products,mortgage-relatedsecurities and loan products and otherasset-backedinstruments, currencies and commodities, structure and enter into a wide variety of derivative transactions, and engage in proprietary trading and investing.

	•	Equities. We make markets in and trade equities andequity-relatedproducts, structure and enter into equity derivative transactions and engage in proprietary trading. We generate commissions from executing and clearing client transactions on major stock, options and futures exchanges worldwide through our Equities client franchise and clearing activities. We also engage in specialist and insurance activities.

	•	Principal Investments. We make real estate and corporate principal investments, including our investment in the ordinary shares of ICBC. We generate net revenues from returns on these investments and from the increased share of the income and gains derived from our merchant banking funds when the return on a fund’s investments over the life of the fund exceeds certain threshold returns (typically referred to as an override).

Substantially all of our inventory ismarked-to-marketdaily and, therefore, its value and our net revenues are subject to fluctuations based on market movements. In addition, net revenues derived from our principal investments in privately held concerns and in real estate may fluctuate significantly depending on the revaluation of these investments in any given period. We also regularly enter into large transactions as part of our trading businesses. The number and size of such transactions may affect our results of operations in a given period.

Net revenues from Principal Investments do not include management fees generated from our merchant banking funds. These management fees are included in the net revenues of the Asset Management and Securities Services segment.

The following table sets forth the operating results of our Trading and Principal Investments segment:

Trading and Principal Investments Operating Results
(in millions)


	Three Months						Six Months
	Ended May						Ended May
	2008			2007			2008			2007

FICC	$	2,379		$	3,368		$	5,521		$	7,972

Equities trading		1,253			1,415			2,529			3,578
Equities commissions		1,234			1,082			2,472			2,006

Total Equities		2,487			2,497			5,001			5,584

ICBC		214			(125	)		79			102

Gross gains		979			1,144			1,336			2,488
Gross losses		(503	)		(299	)		(1,270	)		(359	)

Net other corporate and real estate investments		476			845			66			2,129
Overrides		35			64			48			279


Total Principal Investments		725			784			193			2,510

Total net revenues		5,591			6,649			10,715			16,066
Operating expenses		3,961			4,196			7,704			9,590

Pre-taxearnings	$	1,630		$	2,453		$	3,011		$	6,476

Three Months Ended May 2008 versus May 2007. Net revenues in Trading and Principal Investments of $5.59 billion for the second quarter of 2008 decreased 16% compared with the same period last year.

Net revenues in FICC of $2.38 billion for the second quarter of 2008 decreased 29% compared with the second quarter of 2007, reflecting significantly lower results in credit products. Credit products included a loss of approximately $775 million (including a loss of approximately $500 million from hedges) related to non-investment-grade credit origination activities, and lower results from investments compared with the second quarter of 2007. The decrease in credit products was partially offset by higher net revenues in mortgages, which improved from a difficult second quarter of 2007, as well as higher net revenues in interest rate products, commodities and currencies. During the quarter, FICC operated in an environment characterized by solid client activity, generally tighter corporate credit spreads and volatile markets.

Net revenues in Equities of $2.49 billion for the second quarter of 2008 were essentially unchanged compared with the second quarter of 2007, as significantly higher net revenues in the client franchise businesses were offset by significantly lower net revenues in principal strategies. Commission volumes were strong and were higher compared with the second quarter of 2007. During the quarter, Equities operated in an environment generally characterized by strong client activity and higher equity prices, as well as continued high levels of volatility.

Principal Investments recorded net revenues of $725 million for the second quarter of 2008. These results primarily reflected gains from corporate principal investments, as well as a $214 million gain related to our investment in the ordinary shares of ICBC.

Operating expenses of $3.96 billion for the second quarter of 2008 decreased 6% compared with the second quarter of 2007, due to decreased compensation and benefits expenses, resulting from lower levels of discretionary compensation. This decrease was partially offset by highernon-compensationexpenses. Brokerage, clearing, exchange and distribution fees increased primarily due to higher activity levels in Equities and FICC. Growth in othernon-compensationexpenses generally reflected the impact of geographic expansion and growth in employment levels.Pre-taxearnings of $1.63 billion in the second quarter of 2008 decreased 34% compared with the second quarter of 2007.

Six Months Ended May 2008 versus May 2007. Net revenues in Trading and Principal Investments of $10.72 billion for the first half of 2008 decreased 33% compared with the same period last year.

Net revenues in FICC of $5.52 billion decreased 31% compared with the same period last year as results were adversely affected by weakness in the broader credit markets. Credit products included a loss of approximately $1.8 billion (including a loss of approximately $150 million from hedges) related to non-investment-grade credit origination activities, as well as lower results from investments compared with the same period last year. Net losses on residential mortgage loans and securities included a loss of approximately $1 billion in the first quarter of 2008. Across the broader franchise in FICC, client activity levels were high and results were strong during the first half of 2008. Net revenues in interest rate products, currencies and commodities were significantly higher compared with the same period last year.

Net revenues in Equities of $5.00 billion decreased 10% compared with the same period last year, reflecting significantly lower results in principal strategies, partially offset by higher net revenues in the client franchise businesses. During the first half of 2008, Equities operated in an environment generally characterized by lower equity prices. However, volatility levels remained high and client activity levels were strong, which contributed to a significant increase in commissions compared with the same period last year.

Principal Investments recorded net revenues of $193 million for the first half of 2008, primarily reflecting gains from real estate principal investments and a $79 million gain from our investment in the ordinary shares of ICBC, partially offset by losses from other corporate principal investments.

Operating expenses of $7.70 billion for the first half of 2008 decreased 20% compared with the same period last year, due to decreased compensation and benefits expenses, resulting from lower levels of discretionary compensation. This decrease was partially offset by highernon-compensationexpenses. Brokerage, clearing, exchange and distribution fees increased primarily due to higher activity levels in Equities and FICC. Growth in othernon-compensationexpenses generally reflected the impact of geographic expansion and growth in employment levels.Pre-taxearnings of $3.01 billion in the first half of 2008 decreased 54% compared with the same period last year.

Asset Management and Securities Services

Our Asset Management and Securities Services segment is divided into two components:


	•	Asset Management. Asset Management provides investment advisory and financial planning services and offers investment products (primarily through separately managed accounts and commingled vehicles, such as mutual funds and private investment funds) across all major asset classes to a diverse group of institutions and individuals worldwide and primarily generates revenues in the form of management and incentive fees.

	•	Securities Services. Securities Services provides prime brokerage services, financing services and securities lending services to institutional clients, including hedge funds, mutual funds, pension funds and foundations, and tohigh-net-worthindividuals worldwide, and generates revenues primarily in the form of interest rate spreads or fees.

Assets under management typically generate fees as a percentage of asset value, which is affected by investment performance and by inflows or redemptions. The fees that we charge vary by asset class, as do our related expenses. In certain circumstances, we are also entitled to receive incentive fees based on a percentage of a fund’s return or when the return on assets under management exceeds specified benchmark returns or other performance targets. Incentive fees are recognized when the performance period ends and they are no longer subject to adjustment. We have numerous incentive fee arrangements, many of which have annual performance periods that end on December 31. For that reason, incentive fees have been seasonally weighted to our first quarter.

The following table sets forth the operating results of our Asset Management and Securities Services segment:

Asset Management and Securities Services Operating Results
(in millions)


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
Management and other fees	$	1,153	$	1,035	$	2,276	$	2,017
Incentive fees		8		20		202		110

Total Asset Management		1,161		1,055		2,478		2,127
Securities Services		985		757		1,707		1,282

Total net revenues		2,146		1,812		4,185		3,409
Operating expenses		1,477		1,307		2,970		2,490

Pre-taxearnings	$	669	$	505	$	1,215	$	919

Assets under management include our mutual funds, alternative investment funds and separately managed accounts for institutional and individual investors. Substantially all assets under management are valued as of calendar month end. Assets under management do not include assets in brokerage accounts that generate commissions,mark-ups and spreads based on transactional activity, or our own investments in funds that we manage.

The following table sets forth our assets under management by asset class:

Assets Under Management by Asset Class
(in billions)


	As of				As of
	May 31,				November 30,
	2008		2007		2007		2006

Alternative investments ⁽¹⁾	$	146	$	151	$	151	$	145
Equity		211		253		255		215
Fixed income		269		221		256		198

Totalnon-moneymarket assets		626		625		662		558
Money markets		269		133		206		118

Total assets under management	$	895	$	758	$	868	$	676


⁽¹⁾		Primarily includes hedge funds, private equity, real estate, currencies, commodities and asset allocation strategies.

The following table sets forth a summary of the changes in our assets under management:

Changes in Assets Under Management
(in billions)


	Three Months					Six Months
	Ended May 31					Ended May 31
	2008			2007		2008			2007

Balance, beginning of period	$	873		$	719	$	868		$	676

Net inflows/(outflows)
Alternative investments		(3	)		—		(5	)		2
Equity		(18	)		7		(35	)		18
Fixed income		10			7		12			18

Totalnon-moneymarket net inflows/(outflows)		(11	)		14		(28	)		38
Money markets		17			4		63			15

Total net inflows/(outflows)		6			18		35			53

Net market appreciation/(depreciation)		16			21		(8	)		29

Balance, end of period	$	895		$	758	$	895		$	758

Three Months Ended May 2008 versus May 2007. Net revenues in Asset Management and Securities Services of $2.15 billion for the second quarter of 2008 increased 18% compared with the second quarter of 2007.

Asset Management net revenues of $1.16 billion for the second quarter of 2008 increased 10% compared with the second quarter of 2007, reflecting higher management and other fees. During the quarter, assets under management increased $22 billion to $895 billion, due to $16 billion of market appreciation and $6 billion of net inflows. The increase in assets under management primarily reflected market appreciation in equity assets and net inflows in money market and fixed income assets, partially offset by net outflows in equity assets.

Securities Services net revenues of $985 million increased 30% compared with the second quarter of 2007, as our prime brokerage business continued to generate strong results, primarily reflecting significantly higher customer balances.

Operating expenses of $1.48 billion for the second quarter of 2008 increased 13% compared with the second quarter of 2007, primarily due to increased compensation and benefits expenses.Pre-taxearnings of $669 million increased 32% compared with the second quarter of 2007.

Six Months Ended May 2008 versus May 2007. Net revenues in Asset Management and Securities Services of $4.19 billion for the first half of 2008 increased 23% compared with the same period last year.

Asset Management net revenues of $2.48 billion increased 17% compared with the same period last year, reflecting higher management and other fees, and higher incentive fees. During the first half of 2008, assets under management increased $27 billion to $895 billion, due to net inflows of $35 billion, partially offset by market depreciation of $8 billion. The increase in assets under management primarily reflected net inflows in money market and fixed income assets, partially offset by net outflows and depreciation in equity assets.

Securities Services net revenues of $1.71 billion increased 33% compared with the same period last year, as our prime brokerage business continued to generate strong results, primarily reflecting significantly higher customer balances.

Operating expenses of $2.97 billion for the first half of 2008 increased 19% compared with the same period last year, primarily due to increased compensation and benefits expenses and higher distribution fees.Pre-taxearnings of $1.22 billion increased 32% compared with the same period last year.

Geographic Data

See Note 15 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor a summary of our net revenues by geographic region.

Off-Balance-SheetArrangements

We have various types ofoff-balance-sheetarrangements that we enter into in the ordinary course of business. Our involvement in these arrangements can take many different forms, including purchasing or retaining residual and other interests inmortgage-backedand otherasset-backedsecuritization vehicles; holding senior and subordinated debt, interests in limited and general partnerships, and preferred and common stock in other nonconsolidated vehicles; entering into interest rate, foreign currency, equity, commodity and credit derivatives, including total return swaps; entering into operating leases; and providing guarantees, indemnifications, loan commitments, letters of credit and representations and warranties.

We enter into these arrangements for a variety of business purposes, including the securitization of commercial and residential mortgages, home equity and auto loans, government and corporate bonds, and other types of financial assets. Other reasons for entering into these arrangements include underwriting client securitization transactions; providing secondary market liquidity; making investments in performing and nonperforming debt, equity, real estate and other assets; providing investors withcredit-linkedandasset-repackagednotes; and receiving or providing letters of credit to satisfy margin requirements and to facilitate the clearance and settlement process.

We engage in transactions with variable interest entities (VIEs) and qualifyingspecial-purposeentities (QSPEs). Such vehicles are critical to the functioning of several significant investor markets, including themortgage-backedand otherasset-backedsecurities markets, since they offer investors access to specific cash flows and risks created through the securitization process. Our financial interests in, and derivative transactions with, such nonconsolidated entities are accounted for at fair value, in the same manner as our other financial instruments, except in cases where we apply the equity method of accounting.

While we are routinely involved with VIEs and QSPEs in connection with our securitization activities, we did not haveoff-balance-sheetcommitments to purchase or finance CDOs held by structured investment vehicles as of May 2008 or November 2007.

In December 2007, the American Securitization Forum (ASF) issued the “Streamlined Foreclosure and Loss Avoidance Framework for Securitized Subprime Adjustable Rate Mortgage Loans” (the “ASF Framework”). The ASF Framework provides guidance for servicers to streamline borrower evaluation procedures and to facilitate the use of foreclosure and loss prevention measures for securitized subprime residential mortgages that meet certain criteria. For certain eligible loans as defined in the ASF Framework, servicers may presume default is reasonably foreseeable and apply afast-trackloan modification plan, under which the loan interest rate will be kept at the introductory rate for a period of five years following the upcoming reset date. Mortgage loan modifications of these eligible loans will not affect our accounting treatment for QSPEs that hold the subprime loans.

The following table sets forth where a discussion ofoff-balance-sheetarrangements may be found in Part I, Items 1 and 2 of this Quarterly Report onForm 10-Q:


Type of Off-Balance-Sheet Arrangement		Disclosure in Quarterly Report onForm 10-Q



Retained interests or contingent interests in assets transferred by us to nonconsolidated entities		See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

Leases, letters of credit, and loans and other commitments		See “— Contractual Obligations and Commitments” below and Note 6 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

Guarantees		See Note 6 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

Other obligations, including contingent obligations, arising out of variable interests we have in nonconsolidated entities		See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

Derivative contracts		See “— Critical Accounting Policies” above and “— Derivatives” below and Notes 3 and 5 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Q.

In addition, see Note 2 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor a discussion of our consolidation policies.

Equity Capital

The level and composition of our equity capital are principally determined by our consolidated regulatory capital requirements but may also be influenced by rating agency guidelines, subsidiary capital requirements, the business environment, conditions in the financial markets and assessments of potential future losses due to extreme and adverse changes in our business and market environments. As of May 2008, our total shareholders’ equity was $44.82 billion (consisting of common shareholders’ equity of $41.72 billion and preferred stock of $3.10 billion) compared with total shareholders’ equity of $42.80 billion as of November 2007 (consisting of common shareholders’ equity of $39.70 billion and preferred stock of $3.10 billion). In addition to total shareholders’ equity, we consider the $5.00 billion of junior subordinated debt issued to trusts (see discussion below) to be part of our equity capital, as it qualifies as capital for regulatory and certain rating agency purposes.

Consolidated Regulatory Capital Requirements

Goldman Sachs is regulated by the SEC as a Consolidated Supervised Entity (CSE) and, as such, is subject togroup-widesupervision and examination by the SEC and to minimum capital adequacy standards on a consolidated basis. Tier 1 Capital and Total Allowable Capital are stated as a percentage of Risk-Weighted Assets (RWAs). As a CSE, Goldman Sachs is required to notify the SEC in the event that the Total Capital Ratio falls below 10% or is expected to do so within the next month. As of May 2008, our Total Capital Ratio was 14.2%. Accordingly, Goldman Sachs was in compliance with the CSE capital adequacy standards as of that date. There is no required minimum Tier 1 Ratio. Tier 1 Capital and Total Allowable Capital are calculated in a manner generally consistent with that set out in the Revised Framework for the International Convergence of Capital Measurement and Capital Standards issued by the Basel Committee on Banking Supervision (Basel II).

The following table sets forth additional information on our regulatory capital ratios:

Consolidated Regulatory Capital Ratios


	As of
	May 2008
	($ in millions)

I. Tier 1 and Total Allowable Capital
Total shareholders’ equity	$	44,818
Junior subordinated debt issued to trusts		5,000
Less: Goodwill		(3,530	)
Less: Disallowable intangible assets		(1,460	)
Less: Other deductions ⁽¹⁾		(1,348	)

Tier 1 Capital		43,480
Other components of Total Allowable Capital
Qualifying subordinated debt ⁽²⁾		14,589
Less: Other deductions ⁽¹⁾		(943	)

Total Allowable Capital	$	57,126

II. Risk-Weighted Assets
Market risk	$	206,072
Credit risk		158,042
Operational risk		37,500

Total Risk-Weighted Assets	$	401,614

III. Tier 1 Ratio		10.8	%
IV. Total Capital Ratio		14.2	%


⁽¹⁾		Principally includes investments in regulated insurance entities and certain financial service entities (50% is deducted from both Tier 1 Capital and Total Allowable Capital).

⁽²⁾		Substantially all of our existing subordinated debt qualifies as Total Allowable Capital for CSE purposes.

Our RWAs are driven by the amount of market risk, credit risk and operational risk associated with our business activities, as calculated by methodologies approved by the SEC, which are generally consistent with those set out in Basel II. Further details on the methodologies used to calculate RWAs are set forth below.

Risk-Weighted Assets for Market Risk

The methodologies used to compute RWAs for market risk are closely aligned with our risk management practices. See “— Market Risk” below for a discussion of how we manage risks in our trading and principal investing businesses.


	•	For positions captured in VaR, RWAs are calculated using VaR and other model-based measures, including requirements for incremental default risk and other event risks. VaR is the potential loss in value of trading positions due to adverse market movements over a defined time horizon with a specified confidence level. The SEC has approved the use of our VaR model used for internal risk management purposes to calculate RWAs for trading positions. The requirements are calculated consistent with the specific conditions set out in the Basel framework (based on VaR calibrated to a 99% confidence level, over a10-dayholding period, multiplied by a factor prescribed by the SEC). Additional RWAs are calculated with respect to incremental default risk and other event risks, in a manner generally consistent with our internal risk management methodologies.

	•	For positions not included in VaR because VaR is not the most appropriate measure of risk, we calculate RWAs based on alternative methodologies, including sensitivity analyses.

Risk-Weighted Assets for Credit Risk

RWAs for credit risk are calculated for on- and off-balance sheet exposures that are not captured in our market risk RWAs, with the exception of OTC derivatives for which both market risk and credit risk RWAs are calculated. The calculations are consistent with the Advanced Internal Ratings Based (AIRB) approach and the Internal Models Method (IMM) of Basel II, and are based on Exposure at Default (EAD), which is an estimate of the amount that would be owed to us at the time of a default, multiplied by each counterparty’s risk weight.

The SEC has approved the use of the Basel II AIRB approach. Under this approach, a counterparty’s risk weight is generally derived from a combination of the Probability of Default (PD), the Loss Given Default (LGD), and the maturity of the trade or portfolio of trades, where:


	•	PD is an estimate of the probability that an obligor will default over aone-yearhorizon. PD is derived from the use of internally determined equivalents of public rating agency ratings.

	•	LGD is an estimate of the economic loss rate if a default occurs during economic downturn conditions. LGD is determined based on industry data.

For OTC derivatives and funding trades (such as repurchase and reverse repurchase transactions), the SEC has approved the use of the Basel II IMM approach, which allows EAD to be calculated using model-based measures to determine potential exposure, consistent with models and methodologies that we use for internal risk management purposes. For commitments, EAD is calculated as a percentage of the outstanding notional balance. For other credit exposures, EAD is generally the carrying value of the exposure.

Risk-Weighted Assets for Operational Risk

RWAs for operational risk are calculated using a risk-based methodology consistent with the qualitative and quantitative criteria for the Advanced Measurement Approach (AMA), as defined in Basel II. The methodology incorporates internal loss events, relevant external loss events, results of scenario analyses and management’s assessment of our business environment and internal controls. We estimate capital requirements for both expected and unexpected losses, seeking to capture the major drivers of operational risk over aone-yeartime horizon, at a 99.9% confidence level. Operational risk capital is allocated among our businesses and is regularly reported to senior management and key risk and oversight committees. Given that the quantification of operational risk is still in the early stages of development, the SEC currently requires Goldman Sachs to apply a floor to the capital requirements for operational risk; the level of the floor is slightly higher than the calculation based on the AMA methodology as of May 2008.

Rating Agency Guidelines

The credit rating agencies assign credit ratings to the obligations of The Goldman Sachs Group, Inc., which directly issues or guarantees substantially all of Goldman Sachs’ senior unsecured obligations. The level and composition of our equity capital are among the many factors considered in determining our credit ratings. Each agency has its own definition of eligible capital and methodology for evaluating capital adequacy, and assessments are generally based on a combination of factors rather than a single calculation. See “— Liquidity and Funding Risk — Credit Ratings” below for further information regarding our credit ratings.

Subsidiary Capital Requirements

Many of our principal subsidiaries are subject to separate regulation and capital requirements in the United Statesand/orelsewhere. Goldman, Sachs & Co. and Goldman Sachs Execution & Clearing, L.P. are registeredU.S. broker-dealersand futures commissions merchants, and are subject to regulatory capital requirements, including those imposed by the SEC, the Commodity Futures Trading Commission, the Chicago Board of Trade, The Financial Industry Regulatory Authority (FINRA) and the National Futures Association. Goldman Sachs International, our regulated U.K.broker-dealer,is subject to minimum capital requirements imposed by the U.K.’s Financial Services Authority. Goldman Sachs Japan Co., Ltd., our regulated Japanesebroker-dealer,is subject to minimum capital requirements imposed by Japan’s Financial Services Agency. Several other subsidiaries of Goldman Sachs are regulated by securities, investment advisory, banking, insurance, and other regulators and authorities around the world. As of May 2008 and November 2007, these subsidiaries were in compliance with their local capital requirements.

As discussed above, many of our subsidiaries are subject to regulatory capital requirements in jurisdictions throughout the world. Subsidiaries not subject to separate regulation may hold capital to satisfy local tax guidelines, rating agency requirements (for entities with assigned credit ratings) or internal policies, including policies concerning the minimum amount of capital a subsidiary should hold based on its underlying level of risk. See “— Liquidity and Funding Risk — Conservative Liability Structure” below for a discussion of our potential inability to access funds from our subsidiaries.

Equity investments in subsidiaries are generally funded with parent company equity capital. As of May 2008, Group Inc.’s equity investment in subsidiaries was $39.67 billion compared with its total shareholders’ equity of $44.82 billion.

Our capital invested innon-U.S. subsidiariesis generally exposed to foreign exchange risk, substantially all of which is managed through a combination of derivative contracts andnon-U.S.denominated debt. In addition, we generally manage thenon-tradingexposure to foreign exchange risk that arises from transactions denominated in currencies other than the transacting entity’s functional currency.

See Note 14 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our regulated subsidiaries.

Equity Capital Management

Our objective is to maintain a sufficient level and optimal composition of equity capital. We manage our capital through repurchases of our common stock and issuances of preferred stock, junior subordinated debt issued to trusts and other subordinated debt. We manage our capital requirements principally by setting limits on balance sheet assetsand/orlimits on risk, in each case at both the consolidated and business unit levels. We attribute capital usage to each of our business units based upon the CSE regulatory capital framework and manage the levels of usage based upon the balance sheet and risk limits established.

Share Repurchase Program. We use our share repurchase program to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employeeshare-basedcompensation. The repurchase program is effected primarily through regularopen-marketpurchases, the amounts and timing of which are determined primarily by our current and projected capital positions (i.e., comparisons of our desired level of capital to our actual level of capital) but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock.

The following table sets forth the level of share repurchases for the three and six months ended May 2008 and May 2007:


	Three Months				Six Months
	Ended May				Ended May
	2008		2007		2008		2007
	(in millions, except per share amounts)

Number of shares repurchased		1.17		5.44		9.02		18.41
Total cost	$	203	$	1,135	$	1,764	$	3,823
Average cost per share	$	173.85	$	208.41	$	195.63	$	207.60

As of May 2008, we were authorized to repurchase up to 62.4 million additional shares of common stock pursuant to our repurchase program. See “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II, Item 2 of this Quarterly Report onForm 10-Qfor additional information on our repurchase program.

Preferred Stock. As of May 2008, Goldman Sachs had 124,000 shares of perpetualnon-cumulativepreferred stock issued and outstanding in four series as set forth in the following table:

Preferred Stock by Series


	Shares		Shares			Earliest	Redemption Value
Series	Issued		Authorized		Dividend Rate	Redemption Date	(in millions)

A		30,000		50,000	3 month LIBOR + 0.75%, with floor of 3.75% per annum	April 25, 2010	$	750
B		32,000		50,000	6.20% per annum	October 31, 2010		800
C		8,000		25,000	3 month LIBOR + 0.75%, with floor of 4.00% per annum	October 31, 2010		200
D		54,000		60,000	3 month LIBOR + 0.67%, with floor of 4.00% per annum	May 24, 2011		1,350

		124,000		185,000			$	3,100

Each share of preferred stock issued and outstanding has a par value of $0.01, has a liquidation preference of $25,000, is represented by 1,000 depositary shares and is redeemable at our option at a redemption price equal to $25,000 plus declared and unpaid dividends. Dividends on each series of preferred stock, if declared, are payable quarterly in arrears. Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, our common stock is subject to certain restrictions in the event that we fail to pay or set aside full dividends on our preferred stock for the latest completed dividend period. All series of preferred stock are pari passu and have a preference over our common stock upon liquidation. Though we are not required to replace any redeemed, defeased or purchased outstanding preferred stock with other capital, it is our current intention to redeem, defease or purchase any such preferred stock only with the proceeds of replacement capital securities, raised within 180 days prior to the applicable redemption, defeasance or purchase date, that have terms and conditions that are at least asequity-likeat the time of replacement, as determined by a nationally recognized rating agency in connection with such replacement, as the preferred stock being redeemed, defeased or purchased; provided, however, that none of the foregoing shall apply to any transactions by any subsidiary in connection with any market-making or other secondary market activities.

Junior Subordinated Debt Issued to Trusts in Connection with Normal Automatic Preferred Enhanced Capital Securities. In 2007, we issued $1.75 billion of fixed rate junior subordinated debt to Goldman Sachs Capital II and $500 million of floating rate junior subordinated debt to Goldman Sachs Capital III, Delaware statutory trusts that, in turn, issued $2.25 billion of guaranteed perpetual Automatic Preferred Enhanced Capital Securities (APEX) to third parties and a de minimis amount of common securities to Goldman Sachs. The junior subordinated debt is included in “Unsecuredlong-termborrowings” in the condensed consolidated statements of financial condition. In connection with the APEX issuance, we entered into stock purchase contracts with Goldman Sachs Capital II and III under which we will be obligated to sell and these entities will be obligated to purchase $2.25 billion of perpetualnon-cumulativepreferred stock that we will issue in the future. Goldman Sachs Capital II and III are required to remarket the junior subordinated debt in order to fund their purchase of the preferred stock, but in the event that a remarketing is unsuccessful, they will relinquish the subordinated debt to us in exchange for the preferred stock. Because of certain characteristics of the junior subordinated debt (and the associated APEX), including itslong-termnature, the future issuance of perpetualnon-cumulativepreferred stock under the stock purchase contracts, our ability to defer payments due on the debt and the subordinated nature of the debt in our capital structure, it qualifies as Tier 1 and Total Allowable Capital for CSE purposes and is included as part of our equity capital.

Junior Subordinated Debt Issued to a Trust in Connection with Trust Preferred Securities. We issued $2.84 billion of junior subordinated debentures in 2004 to Goldman Sachs Capital I, a Delaware statutory trust that, in turn, issued $2.75 billion of guaranteed preferred beneficial interests to third parties and $85 million of common beneficial interests to Goldman Sachs. The junior subordinated debentures are included in “Unsecuredlong-termborrowings” in the condensed consolidated statements of financial condition. Because of certain characteristics of the junior subordinated debt (and the associated trust preferred securities), including itslong-termnature, our ability to defer coupon interest for up to ten consecutivesemi-annualperiods and the subordinated nature of the debt in our capital structure, it qualifies as Tier 1 and Total Allowable Capital for CSE purposes and is included as part of our equity capital.

Subordinated Debt. In addition to junior subordinated debt issued to trusts, we had other outstanding subordinated debt of $15.06 billion as of May 2008. Although not part of our shareholders’ equity, substantially all of our subordinated debt qualifies as Total Allowable Capital for CSE purposes.

Other Capital Ratios and Metrics

The following table sets forth information on our assets, shareholders’ equity, leverage ratios and book value per common share:


	As of
	May			November
	2008			2007
	($ in millions, except
	per share amounts)

Total assets	$	1,088,145		$	1,119,796
Adjusted assets ⁽¹⁾		653,514			747,300
Total shareholders’ equity		44,818			42,800
Tangible equity capital ⁽²⁾		44,541			42,728
Leverage ratio ⁽³⁾		24.3	x		26.2	x
Adjusted leverage ratio ⁽⁴⁾		14.7	x		17.5	x
Debt to equity ratio ⁽⁵⁾		4.1	x		3.8	x
Common shareholders’ equity	$	41,718		$	39,700
Tangible common shareholders’ equity ⁽⁶⁾		36,441			34,628
Book value per common share ⁽⁷⁾	$	97.49		$	90.43
Tangible book value per common share ⁽⁸⁾		85.16			78.88


⁽¹⁾		Adjusted assets excludes (i) low-risk collateralized assets generally associated with our matched book and securities lending businesses, (ii) cash and securities we segregate for regulatory and other purposes and (iii) goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total assets in order to be consistent with the calculation of tangible equity capital and the adjusted leverage ratio (see footnote 2 below).

The following table sets forth the reconciliation of total assets to adjusted assets:


		As of
		May			November
		2008			2007
		(in millions)

Total assets		$	1,088,145		$	1,119,796
Deduct:	Securities borrowed		(298,424	)		(277,413	)
	Financial instruments purchased under agreements to resell, at fair value		(130,897	)		(85,717	)
Add:	Financial instruments sold, but not yet purchased, at fair value		182,869			215,023
	Less derivative liabilities		(98,022	)		(99,378	)

	Subtotal		84,847			115,645
Deduct:	Cash and securities segregated for regulatory and other purposes		(84,880	)		(119,939	)
	Goodwill and identifiable intangible assets, excluding power contracts		(5,277	)		(5,072	)

Adjusted assets		$	653,514		$	747,300


⁽²⁾		Tangible equity capital equals total shareholders’ equity and junior subordinated debt issued to trusts less goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total shareholders’ equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity. We consider junior subordinated debt issued to trusts to be a component of our tangible equity capital base due to certain characteristics of the debt, including itslong-termnature, our ability to defer payments due on the debt and the subordinated nature of the debt in our capital structure.

The following table sets forth the reconciliation of total shareholders’ equity to tangible equity capital:


	As of
	May			November
	2008			2007
	(in millions)

Total shareholders’ equity	$	44,818		$	42,800
Add: Junior subordinated debt issued to trusts		5,000			5,000
Deduct: Goodwill and identifiable intangible assets, excluding power contracts		(5,277	)		(5,072	)

Tangible equity capital	$	44,541		$	42,728


⁽³⁾		Leverage ratio equals total assets divided by total shareholders’ equity.

⁽⁴⁾		Adjusted leverage ratio equals adjusted assets divided by tangible equity capital. We believe that the adjusted leverage ratio is a more meaningful measure of our capital adequacy than the leverage ratio because it excludes certain low-risk collateralized assets that are generally supported with little or no capital and reflects the tangible equity capital deployed in our businesses.

⁽⁵⁾		Debt to equity ratio equals unsecuredlong-termborrowings divided by total shareholders’ equity.

⁽⁶⁾		Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts. We do not deduct identifiable intangible assets associated with power contracts from total shareholders’ equity because, unlike other intangible assets, less than 50% of these assets are supported by common shareholders’ equity.

The following table sets forth the reconciliation of total shareholders’ equity to tangible common shareholders’ equity:


	As of
	May			November
	2008			2007
	(in millions)

Total shareholders’ equity	$	44,818		$	42,800
Deduct: Preferred stock		(3,100	)		(3,100	)

Common shareholders’ equity		41,718			39,700
Deduct: Goodwill and identifiable intangible assets, excluding power contracts		(5,277	)		(5,072	)

Tangible common shareholders’ equity	$	36,441		$	34,628


⁽⁷⁾		Book value per common share is based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 427.9 million and 439.0 million as of May 2008 and November 2007, respectively.

⁽⁸⁾		Tangible book value per common share is computed by dividing tangible common shareholders’ equity by the number of common shares outstanding, including restricted stock units granted to employees with no future service requirements.

Contractual Obligations and Commitments

Goldman Sachs has contractual obligations to make future payments related to our unsecuredlong-termborrowings, securedlong-termfinancings,long-termnoncancelable lease agreements and purchase obligations and has commitments under a variety of commercial arrangements.

The following table sets forth our contractual obligations by fiscal maturity date as of May 2008:

Contractual Obligations
(in millions)


	Remainder		2009-		2011-		2013-
	of 2008		2010		2012		Thereafter		Total
Unsecuredlong-termborrowings ^(1)(2)(3)	$	—	$	25,046	$	31,673	$	125,332	$	182,051
Securedlong-termfinancings ^(1)(2)(4)		—		2,824		8,918		14,180		25,922
Minimum rental payments		240		900		607		2,062		3,809
Purchase obligations		1,104		398		21		28		1,551


⁽¹⁾		Obligations maturing within one year of our financial statement date or redeemable within one year of our financial statement date at the option of the holder are excluded from this table and are treated asshort-termobligations. See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our secured financings.

⁽²⁾		Obligations that are repayable prior to maturity at the option of Goldman Sachs are reflected at their contractual maturity dates. Obligations that are redeemable prior to maturity at the option of the holder are reflected at the dates such options become exercisable.

⁽³⁾		Includes $22.85 billion accounted for at fair value under SFAS No. 155 or SFAS No. 159, primarily consisting of hybrid financial instruments.

⁽⁴⁾		These obligations are reported within “Other secured financings” in the condensed consolidated statements of financial condition and include $9.94 billion accounted for at fair value under SFAS No. 159.

As of May 2008, our unsecuredlong-termborrowings were $182.05 billion, with maturities extending to 2043, and consisted principally of senior borrowings. See Note 5 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our unsecuredlong-termborrowings.

As of May 2008, our future minimum rental payments, net of minimum sublease rentals, under noncancelable leases were $3.81 billion. These lease commitments, principally for office space, expire on various dates through 2069. Certain agreements are subject to periodic escalation provisions for increases in real estate taxes and other charges. See Note 6 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our leases.

Our occupancy expenses include costs associated with office space held in excess of our current requirements. This excess space, the cost of which is charged to earnings as incurred, is being held for potential growth or to replace currently occupied space that we may exit in the future. We regularly evaluate our current and future space capacity in relation to current and projected staffing levels. We may incur exit costs in 2008 and thereafter to the extent we (i) reduce our space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate and, consequently, dispose of existing space that had been held for potential growth. These exit costs may be material to our results of operations in a given period.

As of May 2008 and November 2007, we had construction-related obligations of $643 million and $769 million, respectively, including commitments of $443 million and $642 million as of May 2008 and November 2007, respectively, related to our new world headquarters in New York City, which is expected to cost between $2.3 billion and $2.5 billion. We have partially financed this construction project with $1.65 billion oftax-exemptLiberty Bonds.

In addition, in February 2008, Rothesay Life Limited, a wholly owned subsidiary of Group Inc., entered into an agreement with The Rank Group Plc to acquire its defined benefit pension plan, which has both assets and pension obligations of approximately $1.4 billion. The purchase price is not material to our financial condition. The transaction is expected to close by the end of our third fiscal quarter, subject to closing conditions.

Due to the uncertainty of the timing and amounts that will ultimately be paid, our liability for unrecognized tax benefits has been excluded from the above contractual obligations table. See Note 13 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information on FIN No. 48.

The following table sets forth our commitments as of May 2008:

Commitments
(in millions)


	Commitment Amount by Fiscal Period of Expiration
	Remainder		2009-		2011-		2013-
	of 2008		2010		2012		Thereafter		Total
Commitments to extend credit
Commercial lending:
Investment-grade	$	1,590	$	14,257	$	3,743	$	2,955	$	22,545
Non-investment-grade		1,387		2,041		4,895		13,229		21,552
William Street program		1,710		4,123		15,667		2,390		23,890
Warehouse financing		4,005		1,983		—		—		5,988

Total commitments to extend credit		8,692		22,404		24,305		18,574		73,975
Forward starting resale and securities borrowing agreements		21,927		5,990		—		—		27,917
Forward starting repurchase and securities lending agreements		6,431		4,195		—		—		10,626
Commitments under letters of credit issued by banks to counterparties		8,204		1,074		176		12		9,466
Investment commitments		3,881		9,093		894		1,068		14,936
Underwriting commitments		3,351		—		—		—		3,351

Total	$	52,486	$	42,756	$	25,375	$	19,654	$	140,271

Our commitments to extend credit are agreements to lend to counterparties that have fixed termination dates and are contingent on the satisfaction of all conditions to borrowing set forth in the contract. In connection with our lending activities, we had outstanding commitments to extend credit of $73.98 billion as of May 2008 compared with $82.75 billion as of November 2007. Since these commitments may expire unused or be reduced or cancelled at the counterparty’s request, the total commitment amount does not necessarily reflect the actual future cash flow requirements. Our commercial lending commitments are generally extended in connection with contingent acquisition financing and other types of corporate lending as well as commercial real estate financing. We may seek to reduce our credit risk on these commitments by syndicating all or substantial portions of commitments to other investors. In addition, commitments that are extended for contingent acquisition financing are often intended to beshort-termin nature, as borrowers often seek to replace them with other funding sources.

The following table sets forth our exposure to leveraged lending capital market transactions by geographic region:

Leveraged Lending Capital Market Exposure by Geographic Region
(in millions)


	As of May 2008
	Funded		Unfunded		Total
Americas ⁽¹⁾	$	7,010	$	8,971	$	15,981
EMEA ⁽²⁾		4,819		1,057		5,876
Asia		369		117		486

Total	$	12,198	$	10,145	$	22,343


⁽¹⁾		Substantially all relates to the U.S.

⁽²⁾		EMEA (Europe, Middle East and Africa).

Substantially all of the commitments provided under the William Street credit extension program are to investment-grade corporate borrowers. Commitments under the program are extended by William Street Commitment Corporation (Commitment Corp.), a consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are legally separated from other assets and liabilities of Goldman Sachs, William Street Credit Corporation, GS Bank USA, Goldman Sachs Credit Partners L.P. or other consolidated wholly owned subsidiaries of Group Inc. The commitments extended by Commitment Corp. are supported, in part, by funding raised by William Street Funding Corporation (Funding Corp.), another consolidated wholly owned subsidiary of Group Inc. whose assets and liabilities are also legally separated from other assets and liabilities of Goldman Sachs. With respect to most of the William Street commitments, SMFG provides us with credit loss protection that is generally limited to 95% of the first loss we realize on approved loan commitments, up to a maximum of $1.00 billion. In addition, subject to the satisfaction of certain conditions, upon our request, SMFG will provide protection for 70% of the second loss on such commitments, up to a maximum of $1.13 billion. We also use other financial instruments to mitigate credit risks related to certain William Street commitments not covered by SMFG.

Our commitments to extend credit also include financing for the warehousing of financial assets to be securitized. These financings generally are expected to be repaid from the proceeds of the related securitizations for which we may or may not act as underwriter. These arrangements are secured by the warehoused assets, primarily consisting of corporate bank loans and commercial mortgages as of May 2008 and November 2007.

See Note 6 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our commitments, contingencies and guarantees.

Market Risk

The potential for changes in the market value of our trading and investing positions is referred to as market risk. Such positions result from market-making, proprietary trading, underwriting, specialist and investing activities. Substantially all of our inventory positions aremarked-to-marketon a daily basis and changes are recorded in net revenues.

Categories of market risk include exposures to interest rates, equity prices, currency rates and commodity prices. A description of each market risk category is set forth below:


	•	Interest rate risks primarily result from exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates, mortgage prepayment speeds and credit spreads.

	•	Equity price risks result from exposures to changes in prices and volatilities of individual equities, equity baskets and equity indices.

	•	Currency rate risks result from exposures to changes in spot prices, forward prices and volatilities of currency rates.

	•	Commodity price risks result from exposures to changes in spot prices, forward prices and volatilities of commodities, such as electricity, natural gas, crude oil, petroleum products, and precious and base metals.

We seek to manage these risks by diversifying exposures, controlling position sizes and establishing economic hedges in related securities or derivatives. For example, we may hedge a portfolio of common stocks by taking an offsetting position in a relatedequity-indexfutures contract. The ability to manage an exposure may, however, be limited by adverse changes in the liquidity of the security or the related hedge instrument and in the correlation of price movements between the security and related hedge instrument.

In addition to applying business judgment, senior management uses a number of quantitative tools to manage our exposure to market risk for “Financial instruments owned, at fair value” and “Financial instruments sold, but not yet purchased, at fair value” in the condensed consolidated statements of financial condition. These tools include:


	•	risk limits based on a summary measure of market risk exposure referred to as VaR;

	•	scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equity markets and significant moves in selected emerging markets; and

	•	inventory position limits for selected business units.

VaR

VaR is the potential loss in value of trading positions due to adverse market movements over a defined time horizon with a specified confidence level.

For the VaR numbers reported below, aone-day time horizon and a 95% confidence level were used. This means that there is a 1 in 20 chance that daily trading net revenues will fall below the expected daily trading net revenues by an amount at least as large as the reported VaR. Thus, shortfalls from expected trading net revenues on a single trading day greater than the reported VaR would be anticipated to occur, on average, about once a month. Shortfalls on a single day can exceed reported VaR by significant amounts. Shortfalls can also accumulate over a longer time horizon such as a number of consecutive trading days.

100

The modeling of the risk characteristics of our trading positions involves a number of assumptions and approximations. While we believe that these assumptions and approximations are reasonable, there is no standard methodology for estimating VaR, and different assumptionsand/orapproximations could produce materially different VaR estimates.

We use historical data to estimate our VaR and, to better reflect current asset volatilities, we generally weight historical data to give greater importance to more recent observations. Given its reliance on historical data, VaR is most effective in estimating risk exposures in markets in which there are no sudden fundamental changes or shifts in market conditions. An inherent limitation of VaR is that the distribution of past changes in market risk factors may not produce accurate predictions of future market risk. Different VaR methodologies and distributional assumptions could produce a materially different VaR. Moreover, VaR calculated for aone-day time horizon does not fully capture the market risk of positions that cannot be liquidated or offset with hedges within one day.

The following tables set forth the daily VaR:

Average Daily VaR⁽¹⁾⁽²⁾(in millions)


	Average for the
	Three Months						Six Months
	Ended May						Ended May
Risk Categories	2008			2007			2008			2007

Interest rates	$	144		$	81		$	125		$	69
Equity prices		79			101			84			98
Currency rates		32			20			31			19
Commodity prices		48			24			43			27
Diversification effect ⁽³⁾		(119	)		(93	)		(112	)		(83	)

Total	$	184		$	133		$	171		$	130


⁽¹⁾		Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictionsand/orilliquidity). See “— Other Market Risk Measures” below.

⁽²⁾		VaR excludes the impact of changes in counterparty and our own credit spreads on derivatives as well as changes in our own credit spreads onlong-termborrowings for which the fair value option was elected.

⁽³⁾		Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.

Our average daily VaR increased to $184 million for the second quarter of 2008 from $133 million for the second quarter of 2007. The increase was primarily due to higher levels of volatility and wider spreads in certain products in interest rates, as well as higher levels of volatility in commodity prices and currency rates. These increases were partially offset by a decrease in exposures to equity prices and an increased diversification benefit across risk categories.

101

Daily VaR
(in millions)


	As of						Three Months Ended
	May			February			May 2008
Risk Categories	2008			2008			High		Low

Interest rates	$	149		$	126		$	175	$	123
Equity prices		86			83			98		42
Currency rates		26			31			40		24
Commodity prices		54			46			57		39
Diversification effect ⁽¹⁾		(121	)		(115	)

Total	$	194		$	171		$	214	$	170


⁽¹⁾		Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated.

Our daily VaR increased to $194 million as of May 2008 from $171 million as of February 2008. The increase was primarily due to higher levels of volatility in interest rates.

Daily VaR
($ in millions)

102

Trading Net Revenues Distribution

The following chart sets forth the frequency distribution of our daily trading net revenues for substantially all inventory positions included in VaR for the quarter ended May 2008:

Daily Trading Net Revenues
($ in millions)

As part of our overall risk control process, daily trading net revenues are compared with VaR calculated as of the end of the prior business day. Trading losses incurred on a single day exceeded our 95%one-day VaR on three occasions during the second quarter of 2008.

Other Market Risk Measures

Certain portfolios and individual positions are not included in VaR, where VaR is not the most appropriate measure of risk (e.g., due to transfer restrictionsand/orilliquidity). The market risk related to our investment in the ordinary shares of ICBC, excluding interests held by investment funds managed by Goldman Sachs, is measured by estimating the potential reduction in net revenues associated with a 10% decline in the ICBC ordinary share price. The market risk related to the remaining positions is measured by estimating the potential reduction in net revenues associated with a 10% decline in asset values.

The sensitivity analyses for equity and debt positions in our trading portfolio and equity, debt (primarily mezzanine instruments) and real estate positions in ournon-tradingportfolio are measured by the impact of a decline in the asset values (including the impact of leverage in the underlying investments for real estate positions in ournon-tradingportfolio) of such positions. The fair value of the underlying positions may be impacted by factors such as transactions in similar instruments, completed or pendingthird-partytransactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt capital markets, and changes in financial ratios or cash flows.

103

The following table sets forth market risk for positions not included in VaR. These measures do not reflect diversification benefits across asset categories and, given the differing likelihood of the potential declines in asset categories, these measures have not been aggregated:


		10% Sensitivity
		Amount as of
Asset Categories	10% Sensitivity Measure	May 2008		February 2008
		(in millions)

Trading Risk⁽¹⁾
Equity	Underlying asset value	$	1,102	$	1,094
Debt	Underlying asset value		1,147		1,112

Non-tradingRisk
ICBC	ICBC ordinary share price		262		239
Other Equity	Underlying asset value		1,224		1,083
Debt	Underlying asset value		637		550
Real Estate ⁽²⁾	Underlying asset value		1,369		1,241


⁽¹⁾		In addition to the positions in these portfolios, which are accounted for at fair value, we make investments accounted for under the equity method and we also make direct investments in real estate, both of which are included in “Other assets” in the condensed consolidated statements of financial condition. Direct investments in real estate are accounted for at cost less accumulated depreciation. See Note 10 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor information on “Other assets.”

⁽²⁾		Relates to interests in our real estate investment funds.

During the second quarter of 2008, the increase in our 10% sensitivity measure for other equity, debt and real estate positions in ournon-tradingportfolio was primarily due to new investments.

In addition, as of May 2008 and February 2008, in our bank and insurance subsidiaries we held approximately $13.96 billion and $14.54 billion of financial instruments, respectively, primarily consisting ofmortgage-backed,federal agency and investment-grade corporate bonds, and money market instruments.

Credit Risk

Credit risk represents the loss that we would incur if a counterparty or an issuer of securities or other instruments we hold fails to perform under its contractual obligations to us, or upon a deterioration in the credit quality of third parties whose securities or other instruments, including OTC derivatives, we hold. Our exposure to credit risk principally arises through our trading, investing and financing activities. To reduce our credit exposures, we seek to enter into netting agreements with counterparties that permit us to offset receivables and payables with such counterparties. In addition, we attempt to further reduce credit risk with certain counterparties by (i) entering into agreements that enable us to obtain collateral from a counterparty on an upfront or contingent basis, (ii) seekingthird-partyguarantees of the counterparty’s obligations,and/or(iii) transferring our credit risk to third parties using credit derivativesand/or other structures and techniques.

To measure and manage our credit exposures, we use a variety of tools, including credit limits referenced to both current exposure and potential exposure. Potential exposure is generally based on projected worst-case market movements over the life of a transaction. In addition, as part of our market risk management process, for positions measured by changes in credit spreads, we use VaR and other sensitivity measures. To supplement our primary credit exposure measures, we also use scenario analyses, such as credit spread widening scenarios, stress tests and other quantitative tools.

104

Our global credit management systems monitor credit exposure to individual counterparties and on an aggregate basis to counterparties and their affiliates. These systems also provide management, including the Firmwide Risk and Credit Policy Committees, with information regarding credit risk by product, industry sector, country and region.

While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and other institutional clients, resulting in significant credit concentration with respect to this industry. In the ordinary course of business, we may also be subject to a concentration of credit risk to a particular counterparty, borrower or issuer.

As of May 2008 and November 2007, we held $39.06 billion (4% of total assets) and $45.75 billion (4% of total assets), respectively, of U.S. government and federal agency obligations (including securities guaranteed by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation) included in “Financial instruments owned, at fair value” and “Cash and securities segregated for regulatory and other purposes” in the condensed consolidated statements of financial condition. As of May 2008 and November 2007, we held $27.78 billion (3% of total assets) and $31.65 billion (3% of total assets), respectively, of other sovereign obligations, principally consisting of securities issued by the governments of Japan and the United Kingdom. In addition, as of May 2008 and November 2007, $127.29 billion and $144.92 billion of our financial instruments purchased under agreements to resell and securities borrowed (including those in “Cash and securities segregated for regulatory and other purposes”), respectively, were collateralized by U.S. government and federal agency obligations. As of May 2008 and November 2007, $47.26 billion and $41.26 billion of our financial instruments purchased under agreements to resell and securities borrowed, respectively, were collateralized by other sovereign obligations. As of May 2008 and November 2007, we did not have credit exposure to any other counterparty that exceeded 2% of our total assets. However, over the past several years, the amount and duration of our credit exposures have been increasing, due to, among other factors, the growth of our lending and OTC derivative activities and market evolution toward longer dated transactions. A further discussion of our derivative activities follows below.

Derivatives

Substantially all of our derivative transactions are entered into to facilitate client transactions, to take proprietary positions or as a means of risk management. In addition to derivative transactions entered into for trading purposes, we enter into derivative contracts to manage currency exposure on our net investment innon-U.S. operationsand to manage the interest rate and currency exposure on ourlong-termborrowings and certainshort-termborrowings.

Derivatives are used in many of our businesses, and we believe that the associated market risk can only be understood relative to all of the underlying assets or risks being hedged, or as part of a broader trading strategy. Accordingly, the market risk of derivative positions is managed together with our nonderivative positions.

The fair value of our derivative contracts is reflected net of cash paid or received pursuant to credit support agreements and is reported on anet-by-counterpartybasis in our condensed consolidated statements of financial condition when we believe a legal right of setoff exists under an enforceable netting agreement. For an OTC derivative, our credit exposure is directly with our counterparty and continues until the maturity or termination of such contract.

105

The following tables set forth the fair values of our OTC derivative assets and liabilities by product and by remaining contractual maturity:

OTC Derivatives
(in millions)


Assets	As of May 2008
	0 - 6			6 - 12			1 - 5			5 - 10			10 Years
Contract Type	Months			Months			Years			Years			or Greater			Total

Interest rates ⁽¹⁾	$	6,142		$	13,912		$	45,575		$	31,493		$	38,884		$	136,006
Currencies		11,146			4,632			12,979			6,378			3,695			38,830
Commodities		8,059			11,551			21,973			1,854			2,671			46,108
Equities		4,938			4,712			2,694			3,790			781			16,915
Netting across contract types ⁽²⁾		(1,760	)		(1,097	)		(5,951	)		(2,212	)		(934	)		(11,954	)

Subtotal	$	28,525		$	33,710		$	77,270		$	41,303		$	45,097		$	225,905

Cross maturity netting ⁽³⁾																	(34,424	)
Cash collateral netting ⁽⁴⁾																	(84,556	)

Total																$	106,925


Liabilities
	0 - 6			6 - 12			1 - 5			5 - 10			10 Years
Contract Type	Months			Months			Years			Years			or Greater			Total

Interest rates ⁽¹⁾	$	8,809		$	9,214		$	23,729		$	12,587		$	18,092		$	72,431
Currencies		11,293			5,204			8,964			2,340			1,147			28,948
Commodities		10,724			10,640			14,744			3,798			1,452			41,358
Equities		7,766			4,231			6,249			2,599			221			21,066
Netting across contract types ⁽²⁾		(1,760	)		(1,097	)		(5,951	)		(2,212	)		(934	)		(11,954	)

Subtotal	$	36,832		$	28,192		$	47,735		$	19,112		$	19,978		$	151,849

Cross maturity netting ⁽³⁾																	(34,424	)
Cash collateral netting ⁽⁴⁾																	(33,902	)

Total																$	83,523


⁽¹⁾		Includes credit derivatives.

⁽²⁾		Represents the netting of receivable balances with payable balances for the same counterparty across contract types within a maturity category, pursuant to credit support agreements.

⁽³⁾		Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories, pursuant to credit support agreements.

⁽⁴⁾		Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

106

OTC Derivatives
(in millions)


Assets	As of November 2007
	0 - 6			6 - 12			1 - 5			5 - 10			10 Years
Contract Type	Months			Months			Years			Years			or Greater			Total

Interest rates ⁽¹⁾	$	10,382		$	10,242		$	23,000		$	22,520		$	47,591		$	113,735
Currencies		16,994			4,797			9,275			5,106			2,127			38,299
Commodities		4,712			2,321			12,064			1,766			899			21,762
Equities		11,213			4,702			5,312			4,273			1,603			27,103
Netting across contract types ⁽²⁾		(1,501	)		(960	)		(4,694	)		(1,975	)		(1,106	)		(10,236	)

Subtotal	$	41,800		$	21,102		$	44,957		$	31,690		$	51,114		$	190,663

Cross maturity netting ⁽³⁾																	(39,540	)
Cash collateral netting ⁽⁴⁾																	(59,050	)

Total																$	92,073


Liabilities
	0 - 6			6 - 12			1 - 5			5 - 10			10 Years
Contract Type	Months			Months			Years			Years			or Greater			Total

Interest rates ⁽¹⁾	$	11,362		$	6,710		$	21,673		$	13,743		$	25,404		$	78,892
Currencies		14,205			3,559			9,815			1,446			1,772			30,797
Commodities		5,883			3,638			9,690			2,757			506			22,474
Equities		11,174			8,357			7,723			3,833			1,382			32,469
Netting across contract types ⁽²⁾		(1,501	)		(960	)		(4,694	)		(1,975	)		(1,106	)		(10,236	)

Subtotal	$	41,123		$	21,304		$	44,207		$	19,804		$	27,958		$	154,396

Cross maturity netting ⁽³⁾																	(39,540	)
Cash collateral netting ⁽⁴⁾																	(27,758	)

Total																$	87,098


⁽¹⁾		Includes credit derivatives.

⁽²⁾		Represents the netting of receivable balances with payable balances for the same counterparty across contract types within a maturity category, pursuant to credit support agreements.

⁽³⁾		Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories, pursuant to credit support agreements.

⁽⁴⁾		Represents the netting of cash collateral received and posted on a counterparty basis pursuant to credit support agreements.

We enter into certain OTC option transactions that provide us or our counterparties with the right to extend the maturity of the underlying contract. The fair value of these option contracts is not material to the aggregate fair value of our OTC derivative portfolio. In the tables above, for option contracts that require settlement by delivery of an underlying derivative instrument, the remaining contractual maturity is generally classified based upon the maturity date of the underlying derivative instrument. In those instances where the underlying instrument does not have a maturity date or either counterparty has the right to settle in cash, the remaining contractual maturity is generally based upon the option expiration date.

107

The following tables set forth the distribution, by credit rating, of substantially all of our exposure with respect to OTC derivatives by remaining contractual maturity, both before and after consideration of the effect of collateral and netting agreements. The categories shown reflect our internally determined public rating agency equivalents:

OTC Derivative Credit Exposure
(in millions)


	As of May 2008
																		Exposure
Credit Rating	0 - 6		6 - 12		1 - 5		5 - 10		10 Years									Net of
Equivalent	Months		Months		Years		Years		or Greater		Total		Netting ⁽¹⁾			Exposure		Collateral

AAA/Aaa	$	1,804	$	1,407	$	5,627	$	2,692	$	3,482	$	15,012	$	(2,957	)	$	12,055	$	8,729
AA/Aa2		6,638		14,466		26,069		18,420		22,252		87,845		(59,070	)		28,775		25,930
A/A2		9,060		8,104		23,746		12,869		15,707		69,486		(41,421	)		28,065		21,042
BBB/Baa2		4,149		4,396		9,671		2,093		1,662		21,971		(7,710	)		14,261		9,316
BB/Ba2 or lower		5,925		5,033		11,477		4,761		1,887		29,083		(7,540	)		21,543		12,488
Unrated		949		304		680		468		107		2,508		(282	)		2,226		1,194

Total	$	28,525	$	33,710	$	77,270	$	41,303	$	45,097	$	225,905	$	(118,980	)	$	106,925	$	78,699


	As of November 2007
																		Exposure
Credit Rating	0 - 6		6 - 12		1 - 5		5 - 10		10 Years									Net of
Equivalent	Months		Months		Years		Years		or Greater		Total		Netting ⁽¹⁾			Exposure		Collateral

AAA/Aaa	$	4,013	$	2,037	$	3,354	$	2,893	$	7,875	$	20,172	$	(3,489	)	$	16,683	$	14,596
AA/Aa2		14,696		7,583		14,339		13,184		22,708		72,510		(43,948	)		28,562		24,419
A/A2		11,589		4,670		13,380		10,012		15,133		54,784		(34,042	)		20,742		16,189
BBB/Baa2		3,231		1,056		5,774		1,707		2,777		14,545		(4,649	)		9,896		6,558
BB/Ba2 or lower		4,969		2,348		5,676		3,347		2,541		18,881		(5,185	)		13,696		7,478
Unrated		3,302		3,408		2,434		547		80		9,771		(7,277	)		2,494		1,169

Total	$	41,800	$	21,102	$	44,957	$	31,690	$	51,114	$	190,663	$	(98,590	)	$	92,073	$	70,409


⁽¹⁾	Represents the netting of receivable balances with payable balances for the same counterparty across maturity categories and the netting of cash collateral received, pursuant to credit support agreements. Receivable and payable balances with the same counterparty in the same maturity category are netted within such maturity category, where appropriate.

Derivative transactions may also involve legal risks including the risk that they are not authorized or appropriate for a counterparty, that documentation has not been properly executed or that executed agreements may not be enforceable against the counterparty. We attempt to minimize these risks by obtaining advice of counsel on the enforceability of agreements as well as on the authority of a counterparty to effect the derivative transaction. In addition, certain derivative transactions (e.g., credit derivative contracts) involve the risk that we may have difficulty obtaining, or be unable to obtain, the underlying security or obligation in order to satisfy any physical settlement requirement.

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Liquidity and Funding Risk

Liquidity is of critical importance to companies in the financial services sector. Most failures of financial institutions have occurred in large part due to insufficient liquidity resulting from adverse circumstances. Accordingly, Goldman Sachs has in place a comprehensive set of liquidity and funding policies that are intended to maintain significant flexibility to address both Goldman Sachs-specific and broader industry or market liquidity events. Our principal objective is to be able to fund Goldman Sachs and to enable our core businesses to continue to generate revenues, even under adverse circumstances.

We have implemented a number of policies according to the following liquidity risk management framework:


	•	Excess Liquidity — We maintain substantial excess liquidity to meet a broad range of potential cash outflows in a stressed environment, including financing obligations.

	•	Asset-LiabilityManagement — We seek to maintain secured and unsecured funding sources that are sufficientlylong-term in order to withstand a prolonged or severe liquidity-stressed environment without having to rely on asset sales.

	•	Conservative Liability Structure — We access funding across a diverse range of markets, products and counterparties, emphasize less credit-sensitive sources of funding and conservatively manage the distribution of funding across our entity structure.

	•	Crisis Planning — We base our liquidity and funding management onstress-scenarioplanning and maintain a crisis plan detailing our response to a liquidity-threatening event.

Excess Liquidity

Our most important liquidity policy is topre-fundwhat we estimate will be our likely cash needs during a liquidity crisis and hold such excess liquidity in the form of unencumbered, highly liquid securities that may be sold or pledged to providesame-dayliquidity. This “Global Core Excess” liquidity is intended to allow us to meet immediate obligations without needing to sell other assets or depend on additional funding from credit-sensitive markets. We believe that this pool of excess liquidity provides us with a resilient source of funds and gives us significant flexibility in managing through a difficult funding environment. Our Global Core Excess reflects the following principles:


	•	The first days or weeks of a liquidity crisis are the most critical to a company’s survival.

	•	Focus must be maintained on all potential cash and collateral outflows, not just disruptions to financing flows. Goldman Sachs’ businesses are diverse, and its cash needs are driven by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment.

	•	During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms or availability of other types of secured financing may change.

	•	As a result of our policy topre-fundliquidity that we estimate may be needed in a crisis, we hold more unencumbered securities and have larger unsecured debt balances than our businesses would otherwise require. We believe that our liquidity is stronger with greater balances of highly liquid unencumbered securities, even though it increases our unsecured liabilities.

The size of our Global Core Excess is based on an internal liquidity model together with a qualitative assessment of the condition of the financial markets and of Goldman Sachs. Our liquidity model identifies and estimates cash and collateral outflows over ashort-termhorizon in a liquidity crisis, including, but not limited to:


	•	upcoming maturities of unsecured debt and letters of credit;

	•	potential buybacks of a portion of our outstanding negotiable unsecured debt;

	•	adverse changes in the terms or availability of secured funding;

	•	derivatives and other margin and collateral outflows, including those due to market moves;

	•	potential cash outflows associated with our prime brokerage business;

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	•	additional collateral that could be called in the event of a two-notch downgrade in our credit ratings;

	•	draws on our unfunded commitments not supported by William Street Funding Corporation ⁽¹⁾; and

	•	upcoming cash outflows, such as tax and other large payments.

The following table sets forth the average loan value (the estimated amount of cash that would be advanced by counterparties against these securities) of our Global Core Excess:


	Three Months Ended		Year Ended
	May 2008		November 2007
	(in millions)

U.S. dollar-denominated	$	71,772	$	48,635
Non-U.S. dollar-denominated		15,984		11,928

Total Global Core Excess	$	87,756	$	60,563

The U.S. dollar-denominated excess is comprised of only unencumbered U.S. government securities, U.S. agency securities and highly liquid U.S. agencymortgage-backedsecurities, all of which are Federal Reserve repo-eligible, as well as overnight cash deposits. Ournon-U.S. dollar-denominatedexcess is comprised of only unencumbered French, German, United Kingdom and Japanese government bonds and euro, British pound and Japanese yen overnight cash deposits. We strictly limit our Global Core Excess to this narrowly defined list of securities and cash because we believe they are highly liquid, even in a difficult funding environment. We do not believe other potential sources of excess liquidity, such as lower-quality unencumbered securities or committed credit facilities, are as reliable in a liquidity crisis.

The majority of our Global Core Excess is structured such that it is available to meet the liquidity requirements of our parent company, Group Inc., and all of its subsidiaries. The remainder is held in our principalnon-U.S. operatingentities, primarily to better match the currency and timing requirements for those entities’ potential liquidity obligations.

In addition to our Global Core Excess, we have a significant amount of other unencumbered securities as a result of our business activities. These assets, which are located in the United States, Europe and Asia, include other government bonds, high-grade money market securities, corporate bonds and marginable equities. We do not include these securities in our Global Core Excess.

We maintain our Global Core Excess and other unencumbered assets in an amount that, if pledged or sold, would provide the funds necessary to replace at least 110% of our unsecured obligations that are scheduled to mature (or where holders have the option to redeem) within the next 12 months. We assume conservative loan values that are based onstress-scenarioborrowing capacity and we regularly review these assumptions asset class by asset class. The estimated aggregate loan value of our Global Core Excess and our other unencumbered assets averaged $169.27 billion and $156.74 billion for the three months ended May 2008 and year ended November 2007, respectively.

Asset-LiabilityManagement

We seek to maintain a highly liquid balance sheet and substantially all of our inventory ismarked-to-marketdaily. We utilize aged inventory limits for certain financial instruments as a disincentive to our businesses to hold inventory over longer periods of time. We believe that these limits provide a complementary mechanism for ensuring appropriate balance sheet liquidity in addition to our standard position limits. Although our balance sheet fluctuates due to seasonal activity, market conventions and periodic market opportunities in certain of our businesses, our total assets and adjusted assets at financial statement dates are not materially different from those occurring within our reporting periods.

⁽¹⁾ The Global Core Excess excludes liquid assets of $5.13 billion held separately by William Street Funding Corporation. See “— Contractual Obligations and Commitments” above for a further discussion of the William Street credit extension program.

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We seek to manage the maturity profile of our secured and unsecured funding base such that we should be able to liquidate our assets prior to our liabilities coming due, even in times of prolonged or severe liquidity stress. We do not rely on immediate sales of assets (other than our Global Core Excess) to maintain liquidity in a distressed environment, although we recognize orderly asset sales may be prudent and necessary in a persistent liquidity crisis.

In order to avoid reliance on asset sales, our goal is to ensure that we have sufficient total capital (unsecuredlong-termborrowings plus total shareholders’ equity) to fund our balance sheet for at least one year. The target amount of our total capital is based on an internal liquidity model, which incorporates, among other things, the followinglong-termfinancing requirements:


	•	the portion of financial instruments owned that we believe could not be funded on a secured basis in periods of market stress, assuming conservative loan values;

	•	goodwill and identifiable intangible assets, property, leasehold improvements and equipment, and other illiquid assets;

	•	derivative and other margin and collateral requirements;

	•	anticipated draws on our unfunded loan commitments; and

	•	capital or other forms of financing in our regulated subsidiaries that are in excess of theirlong-termfinancing requirements. See “— Conservative Liability Structure” below for a further discussion of how we fund our subsidiaries.

Certain financial instruments may be more difficult to fund on a secured basis during times of market stress. Accordingly, we generally hold higher levels of total capital for these assets than more liquid types of financial instruments. The table below sets forth our aggregate holdings in these categories of financial instruments:


	As of
	May		November
	2008		2007
	(in millions)

Mortgage and otherasset-backedloans and securities	$	37,523	$	46,436	⁽⁶⁾
Bank loans and bridge loans ⁽¹⁾		35,949		49,154
Emerging market debt securities		2,429		3,343
High-yieldand other debt obligations		13,833		12,807
Private equity and real estate fund investments ⁽²⁾		19,502		16,244
Emerging market equity securities		5,650		8,014
ICBC ordinary shares ⁽³⁾		7,124		6,807
SMFG convertible preferred stock ⁽⁴⁾		2,706		4,060
Other restricted public equity securities		2,109		3,455
Other investments in funds ⁽⁵⁾		3,334		3,437


⁽¹⁾		Includes funded commitments and inventory held in connection with our origination and secondary trading activities.

⁽²⁾		Includes interests in our merchant banking funds. Such amounts exclude assets related to consolidated investment funds of $2.56 billion and $8.13 billion as of May 2008 and November 2007, respectively, for which Goldman Sachs does not bear economic exposure.

⁽³⁾		Includes interests of $4.50 billion and $4.30 billion as of May 2008 and November 2007, respectively, held by investment funds managed by Goldman Sachs.

⁽⁴⁾		During our second quarter of 2008, we convertedone-third of our preferred stock investment into SMFG common stock, and delivered the common stock to close outone-third of our hedge position.



⁽⁵⁾		Includes interests in other investment funds that we manage.

⁽⁶⁾		Excludes $7.64 billion as of November 2007, of mortgage whole loans that were transferred to securitization vehicles where such transfers were accounted for as secured financings rather than sales under SFAS No. 140. We distributed to investors the securities that were issued by the securitization vehicles and therefore did not bear economic exposure to the underlying mortgage whole loans.

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A large portion of these assets are funded through secured funding markets or nonrecourse financing. We focus on demonstrating a consistent ability to fund these assets on a secured basis for extended periods of time to reduce refinancing risk and to help ensure that they have an established amount of loan value in order that they can be funded in periods of market stress.

See Note 3 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding the financial instruments we hold.

Conservative Liability Structure

We seek to structure our liabilities conservatively to reduce refinancing risk and the risk that we may redeem or repurchase certain of our borrowings prior to their contractual maturity.

We fund a substantial portion of our inventory on a secured basis, which we believe provides Goldman Sachs with a more stable source of liquidity than unsecured financing, as it is less sensitive to changes in our credit due to the underlying collateral. We recognize that the terms or availability of secured funding, particularly overnight funding, can deteriorate in a difficult environment. To help mitigate this risk, we raise the majority of our funding for durations longer than overnight. We seek longer durations for secured funding collateralized by lower quality assets, as we believe these funding transactions may pose greater refinancing risk. The weighted average life of our secured funding, excluding funding collateralized by highly liquid securities, such as U.S., French, German, United Kingdom and Japanese government bonds, and U.S. agency securities, exceeded 90 days as of May 2008.

Our liquidity also depends to an important degree on the stability of ourshort-termunsecured financing base. Accordingly, we prefer the use of promissory notes (in which Goldman Sachs does not make a market) over commercial paper, which we may repurchase prior to maturity through the ordinary course of business as a market maker. As of May 2008 and November 2007, our unsecuredshort-termborrowings, including the current portion of unsecuredlong-termborrowings, were $71.18 billion and $71.56 billion, respectively. See Note 4 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report onForm 10-Qfor further information regarding our unsecuredshort-termborrowings.

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We issuelong-termborrowings as a source of total capital in order to meet ourlong-termfinancing requirements. The following table sets forth our quarterly unsecuredlong-termborrowings maturity profile through the second quarter of 2014:

UnsecuredLong-TermBorrowings Maturity Profile
($ in millions)

The weighted average maturity of our unsecuredlong-termborrowings as of May 2008 was approximately eight years. To mitigate refinancing risk, we have created internal guidelines on the principal amount of debt maturing on any one day or during any week or year. We swap a substantial portion of ourlong-termborrowings into U.S. dollar obligations withshort-termfloating interest rates in order to minimize our exposure to interest rates and foreign exchange movements.

We issue substantially all of our unsecured debt without provisions that would, based solely upon an adverse change in our credit ratings, financial ratios, earnings, cash flows or stock price, trigger a requirement for an early payment, collateral support, change in terms, acceleration of maturity or the creation of an additional financial obligation.

We seek to maintain broad and diversified funding sources globally for both secured and unsecured funding. We make extensive use of the repurchase agreement and securities lending markets, as well as other secured funding markets. In addition, we issue debt through syndicated U.S. registered offerings, U.S. registered and 144Amedium-termnote programs, offshoremedium-termnote offerings and other bond offerings, U.S. andnon-U.S. commercialpaper and promissory note issuances, and other methods. We also arrange for letters of credit to be issued on our behalf.

We benefit from distributing our debt issuances through our own sales force to a large, diverse global creditor base and we believe that our relationships with our creditors are critical to our liquidity. Our creditors include banks, governments, securities lenders, pension funds, insurance companies

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and mutual funds. We access funding in a variety of markets in the Americas, Europe and Asia. We have imposed various internal guidelines on creditor concentration, including the amount of our commercial paper that can be owned and letters of credit that can be issued by any single creditor or group of creditors.

See “Risk Factors” in Part I, Item 1A of the Annual Report onForm 10-Kfor a discussion of factors that could impair our ability to access the capital markets.

Subsidiary Funding Policies. Substantially all of our unsecured funding is raised by our parent company, Group Inc. The parent company then lends the necessary funds to its subsidiaries, some of which are regulated, to meet their asset financing and capital requirements. In addition, the parent company provides its regulated subsidiaries with the necessary capital to meet their regulatory requirements. The benefits of this approach to subsidiary funding include enhanced control and greater flexibility to meet the funding requirements of our subsidiaries.

Our intercompany funding policies are predicated on an assumption that, unless legally provided for, funds or securities are not freely available from a subsidiary to its parent company or other subsidiaries. In particular, many of our subsidiaries are subject to laws that authorize regulatory bodies to block or limit the flow of funds from those subsidiaries to Group Inc. Regulatory action of that kind could impede access to funds that Group Inc. needs to make payments on obligations, including debt obligations. As such, we assume that capital or other financing provided to our regulated subsidiaries is not available to our parent company or other subsidiaries. In addition, we assume that the Global Core Excess held in our principalnon-U.S. operatingentities may not be available to our parent company or other subsidiaries and therefore may only be available to meet the potential liquidity requirements of those entities.

We also manage our liquidity risk by requiring senior and subordinated intercompany loans to have maturities equal to or shorter than the maturities of the aggregate borrowings of the parent company. This policy ensures that the subsidiaries’ obligations to the parent company will generally mature in advance of the parent company’sthird-partyborrowings. In addition, many of our subsidiaries and affiliates maintain unencumbered assets to cover their intercompany borrowings (other than subordinated debt) in order to mitigate parent company liquidity risk.

Group Inc. has provided substantial amounts of equity and subordinated indebtedness, directly or indirectly, to its regulated subsidiaries; for example, as of May 2008, Group Inc. had $25.05 billion of such equity and subordinated indebtedness invested in Goldman, Sachs & Co., its principal U.S. registeredbroker-dealer;$25.74 billion invested in Goldman Sachs International, a regulated U.K.broker-dealer;$2.25 billion invested in Goldman Sachs Execution & Clearing, L.P., a U.S. registeredbroker-dealer;and $3.66 billion invested in Goldman Sachs Japan Co., Ltd., a regulated Japanesebroker-dealer.Group Inc. also had $58.10 billion of unsubordinated loans to these entities as of May 2008, as well as significant amounts of capital invested in and loans to its other regulated subsidiaries.

Crisis Planning

In order to be prepared for a liquidity event, or a period of market stress, we base our liquidity risk management framework and our resulting funding and liquidity policies on conservativestress-scenarioassumptions. Our planning incorporates several market-based and operational stress scenarios. We also periodically conduct liquidity crisis drills to test our lines of communication and backup funding procedures.

In addition, we maintain a liquidity crisis plan that specifies an approach for analyzing and responding to a liquidity-threatening event. The plan provides the framework to estimate the likely impact of a liquidity event on Goldman Sachs based on some of the risks identified above and outlines which and to what extent liquidity maintenance activities should be implemented based on the severity of the event. It also lists the crisis management team and internal and external parties to be contacted to ensure effective distribution of information.

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Credit Ratings

We rely upon theshort-termandlong-termdebt capital markets to fund a significant portion of ourday-to-dayoperations. The cost and availability of debt financing is influenced by our credit ratings. Credit ratings are important when we are competing in certain markets and when we seek to engage in longer term transactions, including OTC derivatives. We believe our credit ratings are primarily based on the credit rating agencies’ assessment of our liquidity, market, credit and operational risk management practices, the level and variability of our earnings, our capital base, our franchise, reputation and management, our corporate governance and the external operating environment. See “Risk Factors” in Part I, Item 1A of the Annual Report onForm 10-Kfor a discussion of the risks associated with a reduction in our credit ratings.

The following table sets forth our unsecured credit ratings as of May 2008:


	Short-Term Debt	Long-Term Debt	Subordinated Debt	Preferred Stock

Dominion Bond Rating Service Limited	R-1 (middle)	AA (low)	A (high)	A
Fitch, Inc.	F1+	AA–	A+	A+
Moody’s Investors Service	P-1	Aa3	A1	A2
Standard & Poor’s	A-1+	AA–	A+	A
Rating and Investment Information, Inc.	a-1+	AA	Not Applicable	Not Applicable

On June 2, 2008, Standard & Poor’s affirmed Group Inc.’s credit ratings and retained its outlook of “negative.”

As of May 2008, collateral or termination payments pursuant to bilateral agreements with certain counterparties of approximately $785 million would have been required in the event of aone-notchreduction in ourlong-termcredit ratings. In evaluating our liquidity requirements, we consider additional collateral or termination payments that would be required in the event of a two-notch downgrade in ourlong-termcredit ratings, as well as collateral that has not been called by counterparties, but is available to them.

Cash Flows

As a global financial institution, our cash flows are complex and interrelated and bear little relation to our net earnings and net assets and, consequently, we believe that traditional cash flow analysis is less meaningful in evaluating our liquidity position than the excess liquidity andasset-liabilitymanagement policies described above. Cash flow analysis may, however, be helpful in highlighting certain macro trends and strategic initiatives in our business.

Six Months Ended May 2008. Our cash and cash equivalents increased by $1.90 billion to $13.78 billion at the end of the second quarter of 2008. We raised $18.68 billion in net cash from financing activities, primarily in unsecured borrowings and bank deposits, partially offset by repayments of secured financings. We used net cash of $16.78 billion in our operating and investing activities, primarily to capitalize on trading and investing opportunities for our clients and ourselves.

Six Months Ended May 2007. Our cash and cash equivalents increased by $1.72 billion to $8.01 billion at the end of the second quarter of 2007. We raised $48.27 billion in net cash from financing activities, primarily in unsecured borrowings, partially offset by common stock repurchases. We used net cash of $46.55 billion in our operating and investing activities, primarily to capitalize on trading and investing opportunities for our clients and ourselves.

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Recent Accounting Developments

EITF IssueNo. 06-11. In June 2007, the Emerging Issues Task Force (EITF) reached consensus on IssueNo. 06-11,“Accounting for Income Tax Benefits of Dividends onShare-BasedPayment Awards.” EITF IssueNo. 06-11requires that the tax benefit related to dividend equivalents paid on restricted stock units, which are expected to vest, be recorded as an increase to additionalpaid-incapital. We currently account for this tax benefit as a reduction to income tax expense. EITF IssueNo. 06-11is to be applied prospectively for tax benefits on dividends declared in fiscal years beginning after December 15, 2007, and we expect to adopt the provisions of EITF IssueNo. 06-11beginning in the first quarter of 2009. We do not expect the adoption of EITF IssueNo. 06-11to have a material effect on our financial condition, results of operations or cash flows.

FASB Staff Position (FSP)FAS No. 140-3. In February 2008, the FASB issued FSPFAS No. 140-3,“Accounting for Transfers of Financial Assets and Repurchase Financing Transactions.” FSPNo. 140-3requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction under SFAS No. 140 unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace. FSPNo. 140-3is effective for fiscal years beginning after November 15, 2008, and will be applied to new transactions entered into after the date of adoption. Early adoption is prohibited. We are currently evaluating the impact of adopting FSPNo. 140-3on our financial condition and cash flows. Adoption of FSPNo. 140-3will have no effect on our results of operations.

SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, and is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early application encouraged. We will adopt SFAS No. 161 in the first quarter of 2009. Since SFAS No. 161 requires only additional disclosures concerning derivatives and hedging activities, adoption of SFAS No. 161 will not affect our financial condition, results of operations or cash flows.

FASB Staff Position (FSP) No. EITF03-6-1. In June 2008, the FASB issued FSP EITFNo. 03-6-1,“Determining Whether Instruments Granted inShare-BasedPayment Transactions Are Participating Securities.” The FSP addresses whether instruments granted inshare-basedpayment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share.” The FSP requires companies to treat unvestedshare-basedpayment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The FSP is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. We do not expect adoption of FSP EITFNo. 03-6-1to have a material effect on our results of operations or earnings per share.

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Cautionary Statement Pursuant to the Private Securities

Litigation Reform Act of 1995

We have included or incorporated by reference in this Quarterly Report onForm 10-Q,and from time to time our management may make, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but instead represent only our beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. It is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect our future results and financial condition, see “Risk Factors” in Part I, Item 1A of the Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007.

Statements about our investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that we actually earn from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an inability to obtain adequate financing, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For a discussion of other important factors that could adversely affect our investment banking transactions, see “Risk Factors” in Part I, Item 1A of the Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007.


Item 3:	Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk are set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk” in Part I, Item 2 above.


Item 4:	Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by Goldman Sachs’ management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined inRule 13a-15(e)under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined inRule 13a-15(f)under the Securities Exchange Act of 1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION


Item 1:	Legal Proceedings

The following supplements and amends our discussion set forth under Item 3 “Legal Proceedings” in our Annual Report onForm 10-Kfor the fiscal year ended November 30, 2007, as updated by our Quarterly Report onForm 10-Qfor the quarter ended February 29, 2008.

IPO Process Matters

In the lawsuits alleging a conspiracy to fix at 7% the discount that underwriting syndicates receive from issuers of shares in certain offerings, on May 16, 2008, an agreement was reached to settle plaintiffs’ individual claims. The settlement has been consummated and the actions dismissed.

Research Independence Matters

In the class action relating to coverage of Exodus Communications, Inc., by an order dated June 3, 2008, the Court denied plaintiff’s motion seeking reconsideration of the complaint’s dismissal.

Enron Litigation Matters

On April 29, 2008, Goldman, Sachs & Co. moved for summary judgment in the actions seeking to recover as fraudulent transfersand/orpreferences payments by Enron Corp. in repurchasing its commercial paper.

Exodus Securities Litigation

In the class action relating to certain securities offerings by Exodus Communications, Inc., on April 19, 2008, plaintiffs and defendants entered into a settlement agreement pursuant to which the underwriters will contribute $1 million toward a settlement fund. The settlement is subject to, among other things, court approval.

Treasury Proceeding

On May 7, 2008, Goldman, Sachs & Co. moved for summary judgment in the purported class action pending in the U.S. District Court for the Northern District of Illinois.

Auction Products Matters

On April 16, 2008, The Goldman Sachs Group, Inc. and Goldman, Sachs & Co. were named as defendants in a putative securities class action brought in the U.S. District Court for the Southern District of New York on behalf of customers who purchased auction rate securities alleging that the firm violated the federal securities laws and seeking unspecified damages.

Fannie Mae Litigation

The Goldman Sachs Group, Inc. was named as a defendant in an additional purported derivative action commenced on June 28, 2008 in the U.S. District Court for the District of Columbia by Fannie Mae shareholders on behalf of Fannie Mae. The claim against The Goldman Sachs Group, Inc. is substantively identical to the claim asserted against the firm in the previous derivative action and generally alleges that the firm’s conduct in connection with the REMIC transactions constituted aiding and abetting a breach of fiduciary duty by certain Fannie Mae officers and directors as well as a breach of contract. The complaint also names as defendants certain former officers and directors of Fannie Mae as well as an outside accounting firm with respect to the allegations relating to The Goldman Sachs Group, Inc. The complaint seeks, inter alia, unspecified damages.

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Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the information with respect to purchases made by or on behalf of The Goldman Sachs Group, Inc. or any “affiliated purchaser” (as defined inRule 10b-18(a)(3)under the Securities Exchange Act of 1934) of our common stock during the three months ended May 30, 2008.

Total Number of

Maximum Number

Average

Shares Purchased

of Shares That May

Total Number

Price

as Part of Publicly

Yet Be Purchased

of Shares

Paid per

Announced Plans

Under the Plans or

Period

Purchased

Share

or Programs ⁽³⁾

Programs ⁽³⁾

Month #1

649,600

173.35

649,600

62,864,249

(March 1, 2008 to March 28, 2008)

Month #2

515,424

⁽²⁾

174.47

500,000

62,364,249

(March 29, 2008 to April 25, 2008)

Month #3

146

172.75

146

62,364,103

(April 26, 2008 to May 30, 2008)

Total ⁽¹⁾

1,165,170

1,149,746


⁽¹⁾		Goldman Sachs generally does not repurchase shares of its common stock as part of the repurchase program during self-imposed “black-out” periods, which run from the last two weeks of a fiscal quarter through and including the date of the earnings release for such quarter.

⁽²⁾		Includes 15,424 shares issued under ourequity-basedcompensation award program that were cancelled during the period.

⁽³⁾		On March 21, 2000, we announced that our board of directors had approved a repurchase program, pursuant to which up to 15 million shares of our common stock may be repurchased. This repurchase program was increased by an aggregate of 280 million shares by resolutions of our board of directors adopted on June 18, 2001, March 18, 2002, November 20, 2002, January 30, 2004, January 25, 2005, September 16, 2005, September 11, 2006 and December 17, 2007. We use our share repurchase program to help maintain the appropriate level of common equity and to substantially offset increases in share count over time resulting from employeeshare-basedcompensation. The repurchase program is effected primarily through regularopen-marketpurchases, the amounts and timing of which are determined primarily by our current and projected capital positions (i.e., comparisons of our desired level of capital to our actual level of capital) but which may also be influenced by general market conditions and the prevailing price and trading volumes of our common stock. The total remaining authorization under the repurchase program was 61,164,103 shares as of June 27, 2008; the repurchase program has no set expiration or termination date.

119


Item 4:	Submission of Matters to a Vote of Security Holders

On April 10, 2008, Group Inc. held its Annual Meeting of Shareholders at which the shareholders voted upon (i) the election of Lloyd C. Blankfein, John H. Bryan, Gary D. Cohn, Claes Dahlbäck, Stephen Friedman, William W. George, Rajat K. Gupta, James A. Johnson, Lois D. Juliber, Edward M. Liddy, Ruth J. Simmons and Jon Winkelried to the Board of Directors of Group Inc. forone-yearterms⁽¹⁾, (ii) the ratification of the appointment of PricewaterhouseCoopers LLP as Group Inc.’s independent registered public accounting firm for the 2008 fiscal year, (iii) a shareholder proposal that Group Inc. no longer grant stock options to senior executive officers, (iv) a shareholder proposal requesting that the Board of Directors of Group Inc. adopt a policy that provides for an advisory vote on executive compensation and (v) a shareholder proposal that the Board of Directors prepare a sustainability report.

The shareholders elected all twelve directors and approved the ratification of the appointment of PricewaterhouseCoopers LLP as Group Inc.’s independent registered public accounting firm for the 2008 fiscal year. The shareholder proposals did not receive the approval of a majority of the outstanding shares of our common stock; as a result, in accordance with our By-Laws, these shareholder proposals were not approved. The number of votes cast for or against and the number of abstentions and broker non-votes with respect to each matter voted upon, as applicable, is set forth below.


							Broker
	For		Against		Abstain		Non-Votes

Election of Directors:
Lloyd C. Blankfein		346,433,875		8,044,606		615,090		*
John H. Bryan		349,452,631		5,109,972		530,967		*
Gary D. Cohn		349,570,670		5,034,636		488,266		*
Claes Dahlbäck		346,519,110		7,845,494		728,966		*
Stephen Friedman		349,150,391		5,407,749		535,432		*
William W. George		350,359,551		4,193,174		540,847		*
Rajat K. Gupta		349,333,694		5,211,389		548,461		*
James A. Johnson		344,417,729		10,054,214		621,597		*
Lois D. Juliber		350,422,324		4,114,829		556,389		*
Edward M. Liddy		347,714,719		6,822,600		556,223		*
Ruth J. Simmons		350,324,051		4,217,837		551,654		*
Jon Winkelried		348,942,014		5,631,907		519,621		*
Ratification of the Appointment of Independent Registered Public Accounting Firm		347,477,323		3,798,527		3,817,710		*
Shareholder Proposal Regarding Stock Options		3,679,259		265,256,753		11,250,923		74,906,637
Shareholder Proposal Regarding an Advisory Vote on Executive Compensation		119,694,798		143,264,609		17,227,530		74,906,635
Shareholder Proposal Requesting a Sustainability Report		11,148,612		229,837,149		39,201,177		74,906,634


	⁽¹⁾	Effective June 28, 2008, Group Inc.’s Board of Directors elected Lakshmi N. Mittal as a director.


*		Not applicable

120


Item 6:	Exhibits


Exhibits:

10.1		Letter, dated June 28, 2008, from The Goldman Sachs Group, Inc. to Mr. Lakshmi N. Mittal (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K, filed June 30, 2008).

12.1		Statement re: Computation of ratios of earnings to fixed charges and ratios of earnings to combined fixed charges and preferred stock dividends.

15.1		Letter re: Unaudited Interim Financial Information.

31.1		Rule 13a-14(a) Certifications.

32.1		Section 1350 Certifications.

121

SIGNATURES

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 thereunto duly authorized.

THE GOLDMAN SACHS GROUP, INC.


	By:	/s/ David A. Viniar

Name: David A. Viniar


	Title:	Chief Financial Officer


	By:	/s/ Sarah E. Smith

Name: Sarah E. Smith


	Title:	Principal Accounting Officer

Date: July 3, 2008

122

Goldman Sachs - 10-Q quarterly report FY

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