Introduction 65

Executive Overview 66

Business Environment 68

Critical Accounting Policies 69

Fair Value 69

Goodwill and Identifiable Intangible Assets 76

Use of Estimates 79

Results of Operations 80

Financial Overview 80

Segment Operating Results 85

Geographic Data 92

Off-Balance-Sheet Arrangements 92

Equity Capital 93

Contractual Obligations and Commitments 101

Market Risk 104

Credit Risk 108

Derivatives 109

Liquidity and Funding Risk 113

Recent Accounting Developments 121

Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995 122

The Goldman Sachs Group, Inc. (Group Inc.) 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 and high-net-worth individuals. On September 21, 2008, Group Inc. became a bank holding company regulated by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the U.S. Bank Holding Company Act of 1956. See Note 16 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

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 to high-net-worth individuals worldwide.

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended November 30, 2007. References herein to the Annual Report on Form 10-K are to our Annual Report on Form 10-K for the fiscal year ended November 30, 2007.

Unless specifically stated otherwise, all references to August 2008, May 2008 and August 2007 refer to our fiscal periods ended, or the dates, as the context requires, August 29, 2008, May 30, 2008 and August 31, 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 Group Inc., a Delaware corporation, and its consolidated subsidiaries.

Three Months Ended August 2008 versus August 2007. Our diluted earnings per common share were $1.81 for the third quarter of 2008 compared with $6.13 for the third quarter of 2007. Annualized return on average tangible common shareholders' equity (1) was 8.8% and annualized return on average common shareholders' equity was 7.7% for the third quarter of 2008. Book value per common share increased 2% during the quarter to $99.30. Our Tier 1 Ratio (2) was 11.6% at the end of the third quarter of 2008, compared with 10.8% at the end of the second quarter of 2008.

Net revenues in Trading and Principal Investments decreased significantly compared with the third quarter of 2007, reflecting significant declines in Fixed Income, Currency and Commodities (FICC) and Equities compared with particularly strong results in the third quarter of 2007, as well as lower results in Principal Investments. The decrease in FICC primarily reflected very weak results in credit products and mortgages, which were adversely affected by broad-based declines in asset values. Credit products included very weak results from investments, particularly outside of the U.S., and a loss of approximately $275 million (including hedges) related to non-investment-grade credit origination activities. Mortgages included net losses of approximately $500 million on residential mortgage loans and securities and approximately $325 million on commercial mortgage loans and securities. Commodities produced strong results, which were higher compared with the third quarter of 2007. Net revenues in currencies and interest rate products were also strong, although essentially unchanged from the third quarter of 2007. During the quarter, FICC operated in an environment generally characterized by wider mortgage and corporate credit spreads, volatile markets and lower levels of client activity. The decline in net revenues in Equities reflected very weak results in principal strategies. In addition, net revenues in derivatives were significantly lower than a particularly strong third quarter of 2007. Commissions were strong, but lower, compared with the third quarter of 2007. Our Equities business operated in an environment characterized by a significant decline in global equity prices, deleveraging by clients and generally lower client activity levels towards the end of the quarter. The decrease in Principal Investments primarily reflected net losses from corporate and real estate principal investments, particularly outside of the U.S.

Net revenues in Investment Banking were significantly lower compared with the third quarter of 2007, reflecting a significant decrease in Financial Advisory, as well as lower net revenues in equity underwriting. In Financial Advisory, the decline from a particularly strong third quarter of 2007 primarily reflected a decrease in industry-wide completed mergers and acquisitions. The decrease in equity underwriting primarily reflected a decline in industry-wide initial public offerings. Our investment banking transaction backlog increased during the quarter. (3)

Net revenues in Asset Management and Securities Services increased slightly compared with the third quarter of 2007. Securities Services net revenues were higher, as our prime brokerage business continued to generate strong results. Customer balances were higher compared with the third quarter of 2007. Asset Management net revenues decreased, reflecting lower management and other fees, as well as lower incentive fees. The decrease in management and other fees primarily reflected the impact of one fewer week in our fiscal third quarter of 2008 compared with the third quarter of 2007.

Nine Months Ended August 2008 versus August 2007. Our diluted earnings per common share were $9.62 for the nine months ended August 2008 compared with $17.75 for the same period last year. Annualized return on average tangible common shareholders' equity (1) was 16.3% and annualized return on average common shareholders' equity was 14.2% for the nine months ended August 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) As of August 2008, Goldman Sachs was regulated by the SEC as a Consolidated Supervised Entity (CSE) and, as such, was subject to group-wide supervision and examination by the SEC and to minimum capital adequacy standards on a consolidated basis. The Tier 1 Ratio equals tier 1 capital divided by total risk-weighted assets. See "- Equity Capital" below for a further discussion of our Tier 1 Ratio. On September 21, 2008, Group Inc. became a bank holding company regulated by the Federal Reserve Board under the U.S. Bank Holding Company Act of 1956. See Note 16 to the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.

(3) 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 nine months of 2008 reflected significantly less favorable market conditions compared with the same period last year. Net revenues in Trading and Principal Investments were significantly lower compared with strong results for the first nine months of 2007, reflecting significant declines in FICC, Principal Investments and Equities. Results in FICC were adversely affected by weakness in the broader credit markets and broad-based declines in asset values. Credit products included very weak results from investments and a loss of approximately $2.1 billion (including hedges) related to non-investment-grade credit origination activities, partially offset by strong franchise trading results. Mortgages included net losses of approximately $1.6 billion on residential mortgage loans and securities and approximately $700 million on commercial mortgage loans and securities. Interest rate products, currencies and commodities generated strong results and net revenues were significantly higher than the same prior year period. During the first nine months of 2008, client activity levels were generally solid, although activity levels declined during our third quarter. The decline in Principal Investments primarily reflected losses from corporate principal investments, as well as lower gains and overrides from real estate principal investments. The decrease in Equities was principally due to significantly lower results in principal strategies. The client franchise businesses produced strong results and net revenues were slightly higher compared with the first nine months of 2007. Commissions were strong and higher compared with the same period last year. During the first nine months of 2008, Equities operated in an environment generally characterized by significantly lower equity prices, particularly in the third quarter, and high levels of volatility. Client activity levels, although generally solid, declined towards the end of our third quarter, reflecting the challenging market environment.

Net revenues in Investment Banking declined significantly compared with strong results for the first nine months of 2007, reflecting significantly lower net revenues in both Financial Advisory and Underwriting. The decrease in Financial Advisory reflected a decline in industry-wide completed mergers and acquisitions. 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 decrease in leveraged finance and, to a lesser extent, mortgage-related activity, reflecting challenging market conditions.

Net revenues in Asset Management and Securities Services increased compared with the first nine months of 2007. Securities Services net revenues were higher, as our prime brokerage business continued to generate strong results. Customer balances were higher compared with the same period last year. Asset Management net revenues also increased, reflecting higher average assets under management 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

Global economic growth continued to slow during our third quarter of fiscal 2008, with weakness becoming more broad-based across the major economies. In emerging markets, although economic growth generally remained solid, the pace of growth decelerated as a result of a lower contribution from net exports. Financial markets continued to experience elevated levels of volatility due to concerns about the outlook for global growth, inflation and asset writedowns. During our third quarter, global equity markets experienced significant declines, and mortgage and corporate credit spreads widened. After peaking in July, the price of crude oil fell over the remainder of our third quarter. The U.S. dollar appreciated against the Euro, British pound and Japanese yen. Investment banking activity levels were subdued in our third quarter. Although industry-wide announced and completed mergers and acquisitions increased slightly during our third quarter, industry-wide equity and equity-related offerings declined significantly.

In the U.S., real gross domestic product (GDP) growth appeared to soften in our third quarter as the impact of the federal government's stimulus package subsided. Residential investment continued to contract due to ongoing oversupply in the housing market. Surveys of consumer confidence deteriorated during our third quarter while business sentiment remained at low levels. The rate of unemployment continued to increase, reaching its highest level in nearly five years, with private-sector employment contracting each month during our third quarter. However, strong growth in exports, particularly to emerging markets, continued to provide support for economic growth and narrow the current account deficit. While the rate of inflation increased, long-term inflation expectations moderated as oil prices declined and capacity utilization decreased. The U.S. Federal Reserve maintained its federal funds target rate at 2.00% during our third quarter. The 10-year U.S. Treasury note yield ended our third quarter 23 basis points lower at 3.83%. In the equity markets, the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ Composite Index decreased during our third quarter by 9%, 8% and 6%, respectively.

In the Eurozone economies, real GDP growth appeared to remain slow in our third quarter, as growth in industrial production, fixed investment and consumer expenditure was weak. Surveys of business and consumer confidence declined during our third quarter and a number of housing markets showed signs of weakness. In response to elevated inflationary pressures, the European Central Bank raised its main refinancing operations rate by 25 basis points to 4.25%. The Euro depreciated by 6% against the U.S. dollar. In the U.K., the pace of real GDP growth appeared to slow. Surveys of consumer confidence worsened during our third quarter over concerns about the impact on economic growth from tighter credit conditions, a softer labor market and weakness in the housing sector. Although inflationary pressures remained elevated, the Bank of England kept its official bank rate at 5.00% during our third quarter. The British pound depreciated by 8% against the U.S. dollar. Equity markets and long-term government bond yields in both the U.K. and continental Europe decreased during our third quarter.

In Japan, real GDP growth appeared to remain slow in our third quarter, as growth in exports, capital expenditure and consumption remained slow. Business confidence remained low and the unemployment rate appeared to increase slightly over the quarter. Measures of inflation increased during our third quarter, with core inflation rising at its fastest pace in more than ten years. The Bank of Japan left its target overnight call rate unchanged at 0.50%, while the yield on 10-year Japanese government bonds decreased during our third quarter. The Nikkei 225 Index ended our third quarter 9% lower. The yen depreciated by 3% against the U.S. dollar.

In China, real GDP growth remained strong during our third quarter, as domestic demand growth was strong and export growth was solid. The rate of consumer inflation decreased during our third quarter. The People's Bank of China maintained its one-year benchmark lending rate at 7.47%, but raised the reserve requirement ratio by 100 basis points. The Chinese yuan continued to appreciate against the U.S. dollar, increasing by 2%. The Shanghai Composite Index declined sharply, ending our third quarter 30% lower. In India, while growth in the agricultural sector and in exports recovered modestly, overall real GDP growth slowed as business investment and industrial production slowed. Despite a tighter monetary stance, inflationary pressures continued to escalate, reflecting the impact of higher food and fuel prices. The Indian rupee depreciated by 4% against the U.S. dollar during our third quarter. Equity markets in Korea, Hong Kong and India also experienced significant declines during our third quarter.

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 August 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                                               $ 252,367         $     80,601          $ 324,181         $    112,018
ICBC                                                                       7,137  (1)               -              6,807  (1)               -
SMFG                                                                       1,941                1,936  (4)         4,060                3,627  (4)
Other principal investments                                               17,112  (2)               -             11,933  (2)               -

Principal investments                                                     26,190                1,936             22,800                3,627

Cash instruments                                                         278,557               82,537            346,981              115,645
Exchange-traded                                                           14,209               15,623             13,541               12,280
Over-the-counter                                                         107,354               88,281             92,073               87,098

Derivative contracts                                                     121,563  (3)         103,904  (5)       105,614  (3)          99,378  (5)

Total                                                                  $ 400,120         $    186,441          $ 452,595         $    215,023

(1) Includes interests of $4.51 billion and $4.30 billion as of August 2008 and November 2007, respectively, held by investment funds managed by Goldman Sachs. The fair value of our investment in the ordinary shares of Industrial and Commercial Bank of China Limited (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 August 2008                          As of November 2007
                Corporate     Real Estate      Total       Corporate      Real Estate      Total
                                                  (in millions)

     Private    $ 10,971      $    3,843     $ 14,814      $   7,297      $    2,361     $  9,658
     Public        2,249              49        2,298          2,208              67        2,275

     Total      $ 13,220      $    3,892     $ 17,112      $   9,505      $    2,428     $ 11,933

(3) Net of cash received pursuant to credit support agreements of $98.78 billion and $59.05 billion as of August 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 $26.26 billion and $27.76 billion as of August 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, 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 certain money market securities.

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 money market securities and loan commitments.

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 liquid high-yield corporate 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 pending third-party transactions 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 illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management's best estimate is used.

• 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 illiquidity and/or non-transferability, and such adjustments . . .