Asset Management and Securities Services Our Asset Management and Securities Services business had an excellent year. Net revenues were $2.86 billion, a 14% increase from 2002. Pre-tax earnings were $968 million in 2003, compared with $947 million in 2002. In Asset Management, net revenues were $1.85 billion, a 12% increase from 2002, primarily reflecting an increase in average assets under management, the contribution from the acquisition of Ayco and increased incentive income. Total assets under management increased 7% to a record $373 billion. Two closely related factors are critical to building our business: the ability to generate attractive investment performance and the ability to raise new assets. During 2003, our investment performance, together with our distribution strength, allowed us to generate $15 billion of net client inflows across non-money market asset classes. These increases were offset by $19 billion of outflows in money market assets, as economic prospects improved and higher returns were being generated in other asset classes. Within our Securities Services business, net revenues were $1.01 billion, up 17% from 2002. This business continues to benefit from the creation and growth of new and existing hedge funds. In addition, the rally in equity markets helped to increase customer balances. We believe our Asset Management and Securities Services business represents one of our best opportunities for substantial growth. Expenses Managing expenses in this challenging environment has been one of our highest priorities. During 2003, excluding the impact of acquisitions, we reduced our headcount by 7%. While painful, these reductions were necessary to scale our operations to the available opportunities and were a key factor in our ability to generate an attractive return in 2003. Our largest expense—in a people business—is compensation, and we track this expense as a percentage of the net revenues we generate in our businesses overall. For 2003, the ratio of compensation to net revenues was 46% versus 48% in 2002. We remain focused on controlling our non-compensation expenses. However, there are some areas that remain difficult to forecast. For instance, in 2003 we took provisions of $159 million for a number of litigation and regulatory proceedings. Given the range of litigation and investigations underway, these expenses may remain high. Strategy and Competitive Dynamics Goldman Sachs is not a financial services conglomerate but an integrated investment bank, securities firm and asset manager. This focused strategy has allowed us to build a strong global franchise—we take pride in being a market leader in Europe and Asia as well as the United States. It has also allowed us to benefit from the long-term growth of the global capital markets which we believe will continue to provide us with excellent growth opportunities over the cycle. We aspire to be the preeminent global provider of advisory, financing, investment and risk management services to corporations, institutions, governments and high-net-worth individuals. To succeed in this mission, the firm has always placed great reliance on attracting and retaining outstanding people. And we work hard to foster teamwork and encourage creativity, client focus and innovation. We believe that our unique culture, coupled with the quality of our people, is Goldman Sachs' most important competitive strength. Our business has always been highly competitive and cyclical. We face strong competition today, as in the past, from larger competitors, but we don't view our size as a competitive disadvantage because we have never been constrained by a lack of capital. We believe our biggest challenge is to strengthen our culture of teamwork and excellence in the face of the growing size and scope of our business. We are determined to meet this challenge because we believe our ability to do so is critical to our continued success in executing our global strategy and serving our clients. 5 / 6 5 / 6 © Copyright 2007, The Goldman Sachs Group, Inc. All rights reserved.