Investment Banking Investment banking activity continued to suffer from diminished corporate and investor confidence in a tough business environment. Industry volumes for completed mergers decreased again in 2003 and equity underwriting volumes remained low. Global completed mergers decreased 17% from 2002, and were 70% below volumes in 2000, the prior peak. Our results reflected this difficult industry environment. Investment Banking net revenues were $2.71 billion, down 4% from 2002, and pre-tax earnings were $207 million, down from $376 million the year before. However, despite this difficult environment, we maintained our focus on serving clients and continued as the market leader in our core franchise businesses, including mergers and acquisitions, and IPO, equity, and equity-linked underwriting. In addition, we developed a prominent position in the issuance of high-yield securities. We think the strength of our franchise and the quality of our client relationships are evident in this performance. We do not, however, seek to be number one in all areas. Pursuing market share in some products makes no sense to us when the profitability is too small or non-existent. We believe that our role as a core advisor to clients has never been stronger. Our investment banking professionals continue to play a vital role in advising senior executives and a broad range of clients throughout the world. Through these relationships, our people are able to identify the needs of our clients and offer solutions by providing advice, products and services from across our firm. Trading and Principal Investments Once again in 2003, Trading and Principal Investments produced excellent results. Net revenues were $10.44 billion, a 21% increase from 2002. Pre-tax earnings were $3.51 billion, a 64% increase from 2002. We measure the effectiveness of our trading businesses by evaluating overall profitability relative to the risk we assume and the opportunities available. While there is no perfect measure of market risk, a topic we'll discuss later in this letter, our risk levels were higher in 2003 than in 2002. We were very pleased with the results our businesses were able to produce by effectively deploying incremental capital. Fixed Income, Currency and Commodities (FICC) had another record year, with net revenues of $5.60 billion, a 20% increase from 2002. During 2003, FICC operated in a generally favorable environment characterized by tightening corporate credit spreads, low interest rates, a steep yield curve and strong customer demand. As we look forward to 2004, we do not see clear signs that FICC activity levels will slow. However, we know that there is no such thing as a trading backlog and our business opportunities will always depend on the overall environment. One important aspect of our FICC business that is often overlooked is the range and diversity of activities it comprises. Within the five major areas of FICC—interest rates, credit, mortgages, currencies and commodities—are a wide range of individual operations around the globe. While there can be no guarantee about performance in any of our businesses, we believe that this diversity is an important strength. Our Equities business continued to face a very challenging environment. Equities net revenues of $4.28 billion increased 7% compared with 2002, primarily due to higher net revenues in principal strategies. While equity markets certainly improved in 2003 relative to the previous few years, conditions remained tough. Commission rates and spreads have continued to decline, the need to commit capital in a variety of circumstances is rising and volume growth is low. At Goldman Sachs, we have focused on the optimal size and structure for our Equities business in this difficult environment. We are pleased with the results of this effort, which we believe will be an important driver of future performance. Beginning with the appointment in 2002 of common management for our securities businesses, we have been more closely coordinating the activities of our FICC and Equities businesses to share best practices, capture synergies and drive efficiencies. In 2003, we continued this work, combining our Equities cash and derivatives client businesses under one leadership team. This builds on the experience of a similar combination in FICC in 2000 and will position us well to capture a range of opportunities. 2 / 6 2 / 6 © Copyright 2007, The Goldman Sachs Group, Inc. All rights reserved.