QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)

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. Yes ý No o.

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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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

The number of shares outstanding of the issuer's classes of common stock as of July 31, 2008:

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2008
TABLE OF CONTENTS



PART I – Financial Information				1
	Item 1. Financial Statements			1
		Consolidated Statements of Income (Unaudited) – Three and Six Months Ended June 30, 2008 and 2007		1
		Consolidated Statements of Financial Condition (Unaudited) – June 30, 2008 and December 31, 2007		2
		Consolidated Statements of Stockholders' Equity and Comprehensive Income (Unaudited) – Six Months Ended June 30, 2008 and 2007		3
		Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2008 and 2007		4
		Notes to Consolidated Financial Statements (Unaudited)		6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			31
			Risk Factors	31
			Controls and Procedures	32
			Critical Accounting Estimates	33
			Overview	35
			Recently Issued Accounting Standards Not Yet Adopted	37
			Summary Financial Data	38
			Earnings Performance	39
			Review of Financial Condition	48
			Operating Segments	54
			Off-Balance Sheet Activities	60
			Risk Management	62
			Credit Risk Management	63
			Liquidity Risk and Capital Management	76
			Market Risk Management	80
			Operational Risk Management	85
			Goodwill Litigation	86
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			80
	Item 4. Controls and Procedures			32
PART II – Other Information				88
	Item 1. Legal Proceedings			88
	Item 1A. Risk Factors			31
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			93
	Item 4. Submission of Matters to a Vote of Security Holders			94
	Item 6. Exhibits			95

Part I – FINANCIAL INFORMATION

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

				Three Months Ended June 30,						Six Months Ended June 30,

				2008			2007			2008			2007
				(in millions, except per share amounts)
Interest Income
	Loans held for sale			$	52		$	421		$	138		$	984
	Loans held in portfolio				3,604			3,786			7,559			7,686
	Available-for-sale securities				335			351			691			682
	Trading assets				117			108			233			221
	Other interest and dividend income				94			82			171			183

		Total interest income			4,202			4,748			8,792			9,756
Interest Expense
	Deposits				1,115			1,723			2,443			3,495
	Borrowings				791			991			1,878			2,146

		Total interest expense			1,906			2,714			4,321			5,641

			Net interest income		2,296			2,034			4,471			4,115
	Provision for loan losses				5,913			372			9,423			606

			Net interest income (expense) after provision for loan losses		(3,617	)		1,662			(4,952	)		3,509
Noninterest Income
	Revenue from sales and servicing of home mortgage loans				(109	)		300			302			425
	Revenue from sales and servicing of consumer loans				159			403			407			846
	Depositor and other retail banking fees				767			720			1,470			1,385
	Credit card fees				177			183			358			355
	Securities fees and commissions				64			70			122			131
	Insurance income				32			29			63			58
	Loss on trading assets				(305	)		(145	)		(521	)		(253	)
	Gain (loss) on other available-for-sale securities				(402	)		7			(384	)		41
	Gain (loss) on extinguishment of borrowings				100			(14	)		113			(7	)
	Other income				78			205			199			318

		Total noninterest income			561			1,758			2,129			3,299
Noninterest Expense
	Compensation and benefits				939			977			1,853			1,979
	Occupancy and equipment				460			354			818			731
	Telecommunications and outsourced information services				123			132			253			261
	Depositor and other retail banking losses				61			58			124			119
	Advertising and promotion				103			113			208			211
	Professional fees				57			55			96			93
	Foreclosed asset expense				217			56			372			95
	Other expense				443			393			831			755

		Total noninterest expense			2,403			2,138			4,555			4,244
	Minority interest expense				75			42			151			85

			Income (loss) before income taxes		(5,534	)		1,240			(7,529	)		2,479
			Income taxes		(2,206	)		410			(3,063	)		865

Net Income (Loss)				$	(3,328	)	$	830		$	(4,466	)	$	1,614

Net Income (Loss) Applicable to Common Stockholders				$	(6,689	)	$	822		$	(7,892	)	$	1,599

Earnings Per Common Share:
	Basic			$	(6.58	)	$	0.95		$	(8.43	)	$	1.83
	Diluted				(6.58	)		0.92			(8.43	)		1.78
Dividends declared per common share					0.01			0.55			0.16			1.09
Basic weighted average number of common shares outstanding (in thousands)					1,016,081			868,968			936,502			871,876
Diluted weighted average number of common shares outstanding (in thousands)					1,016,081			893,090			936,502			896,304

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

				June 30, 2008			December 31, 2007

				(dollars in millions)
Assets
	Cash and cash equivalents			$	7,235		$	9,560
	Federal funds sold and securities purchased under agreements to resell				2,750			1,877
	Trading assets (including securities pledged of zero and $388)				2,308			2,768
	Available-for-sale securities, total amortized cost of $25,756 and $27,789:
		Mortgage-backed securities (including securities pledged of $121 and $1,221)			18,241			19,249
		Investment securities (including securities pledged of $112 and $3,078)			6,134			8,291

			Total available-for-sale securities		24,375			27,540
	Loans held for sale				1,877			5,403
	Loans held in portfolio				239,627			244,386
	Allowance for loan losses				(8,456	)		(2,571	)

			Loans held in portfolio, net		231,171			241,815
	Investment in Federal Home Loan Banks				3,498			3,351
	Mortgage servicing rights				6,175			6,278
	Goodwill				7,284			7,287
	Other assets				23,058			22,034

			Total assets	$	309,731		$	327,913

Liabilities
	Deposits:
		Noninterest-bearing deposits		$	31,112		$	30,389
		Interest-bearing deposits			150,811			151,537

			Total deposits		181,923			181,926
	Federal funds purchased and commercial paper				75			2,003
	Securities sold under agreements to repurchase				214			4,148
	Advances from Federal Home Loan Banks				58,363			63,852
	Other borrowings				30,590			38,958
	Other liabilities				8,566			8,523
	Minority interests				3,914			3,919

			Total liabilities		283,645			303,329
Stockholders' Equity
	Preferred stock				3,392			3,392
	Common stock, no par value: 3,000,000,000 shares authorized, 1,705,343,797 and 869,036,088 shares issued and outstanding				–			–
	Capital surplus – common stock				12,916			2,630
	Accumulated other comprehensive loss				(1,079	)		(359	)
	Retained earnings				10,857			18,921

			Total stockholders' equity		26,086			24,584

			Total liabilities and stockholders' equity	$	309,731		$	327,913

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME

(UNAUDITED)

			Number of Common Shares			Preferred Stock			Capital Surplus – Common Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total

			(in millions)
BALANCE, December 31, 2006				944.5		$	492		$	5,825		$	(287	)	$	20,939		$	26,969
Cumulative effect from the adoption of FASB Interpretation No. 48				–			–			–			–			(6	)		(6	)

Adjusted balance				944.5			492			5,825			(287	)		20,933			26,963
Comprehensive income:
	Net income			–			–			–			–			1,614			1,614
	Other comprehensive income (loss), net of tax:
		Net unrealized loss from securities arising during the period, net of reclassification adjustments		–			–			–			(303	)		–			(303	)
		Net unrealized gain from cash flow hedging instruments		–			–			–			22			–			22

Total comprehensive income				–			–			–			–			–			1,333
Cash dividends declared on common stock				–			–			–			–			(961	)		(961	)
Cash dividends declared on preferred stock				–			–			–			–			(15	)		(15	)
Common stock repurchased and retired				(74.9	)		–			(3,297	)		–			–			(3,297	)
Common stock issued				6.1			–			187			–			–			187

BALANCE, June 30, 2007				875.7		$	492		$	2,715		$	(568	)	$	21,571		$	24,210

BALANCE, December 31, 2007				869.0		$	3,392		$	2,630		$	(359	)	$	18,921		$	24,584
Cumulative effect from the adoption of accounting pronouncements, net of income taxes				–			–			–			–			(36	)		(36	)

Adjusted balance				869.0			3,392			2,630			(359	)		18,885			24,548
Comprehensive loss:
	Net loss			–			–			–			–			(4,466	)		(4,466	)
	Other comprehensive income (loss), net of tax:
		Net unrealized loss from securities arising during the period, net of reclassification adjustments		–			–			–			(702	)		–			(702	)
		Net unrealized loss from cash flow hedging instruments		–			–			–			(23	)		–			(23	)
		Amortization and deferral of gains, losses and prior service costs from defined benefit plans		–			–			–			5			–			5

Total comprehensive loss				–			–			–			–			–			(5,186	)
Preferred stock issued				–			5,010			–			–			–			5,010
Conversion of preferred stock into common stock				646.5			(5,010	)		5,010			–			–			–
Common stock issued				189.8			–			1,552			–			–			1,552
Warrants issued				–			–			434			–			–			434
Beneficial conversion feature				–			–			3,290			–			(3,290	)		–
Cash dividends declared on common stock				–			–			–			–			(140	)		(140	)
Cash dividends declared on preferred stock				–			–			–			–			(136	)		(136	)
Cash dividends returned⁽¹⁾				–			–			–			–			4			4

BALANCE, June 30, 2008				1,705.3		$	3,392		$	12,916		$	(1,079	)	$	10,857		$	26,086

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

				Six Months Ended June 30,

				2008			2007
				(in millions)
Cash Flows from Operating Activities
	Net income (loss)			$	(4,466	)	$	1,614
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Provision for loan losses			9,423			606
		Loss (gain) from home mortgage loans			19			(214	)
		Gain from credit card loans			–			(259	)
		Loss (gain) on available-for-sale securities			384			(41	)
		(Gain) loss on extinguishment of borrowings			(113	)		7
		Depreciation and amortization			150			306
		Change in fair value of MSR			492			333
		Stock dividends from Federal Home Loan Banks			(72	)		(55	)
		Capitalized interest income from option adjustable-rate mortgages			(591	)		(706	)
		Origination and purchases of loans held for sale, net of principal payments			(18,605	)		(54,637	)
		Proceeds from sales of loans originated and held for sale			20,271			57,928
		Net decrease (increase) in trading assets			481			(825	)
		Increase in other assets			(570	)		(382	)
		(Decrease) increase in other liabilities			(437	)		80

			Net cash provided by operating activities		6,366			3,755
Cash Flows from Investing Activities
	Purchases of available-for-sale securities				(5,694	)		(8,981	)
	Proceeds from sales of available-for-sale securities				6,822			4,370
	Principal payments and maturities on available-for-sale securities				1,566			1,227
	Purchases of Federal Home Loan Bank stock				(130	)		(24	)
	Redemption of Federal Home Loan Bank stock				55			1,188
	Origination and purchases of loans held in portfolio, net of principal payments				2,138			6,526
	Proceeds from sales of loans				19			22,692
	Proceeds from sales of foreclosed assets				545			354
	Net (increase) decrease in federal funds sold and securities purchased under agreements to resell				(873	)		476
	Purchases of premises and equipment, net				(30	)		(123	)

			Net cash provided by investing activities		4,418			27,705

			Six Months Ended June 30,

			2008			2007
			(in millions)
Cash Flows from Financing Activities
	Decrease in deposits		$	(3	)	$	(12,576	)
	(Decrease) increase in short-term borrowings			(5,512	)		1,907
	Proceeds from long-term borrowings			–			13,054
	Repayments of long-term borrowings			(8,828	)		(10,120	)
	Proceeds from advances from Federal Home Loan Banks			19,157			20,016
	Repayments of advances from Federal Home Loan Banks			(24,647	)		(42,904	)
	Proceeds from issuance of preferred stock			5,010			–
	Proceeds from issuance of common stock			1,552			154
	Proceeds from issuance of warrants			434			–
	Proceeds from issuance of preferred securities by subsidiary			–			497
	Cash dividends paid on preferred and common stock			(276	)		(976	)
	Repurchase of common stock			–			(3,297	)
	Other			4			4

		Net cash used by financing activities		(13,109	)		(34,241	)

		Decrease in cash and cash equivalents		(2,325	)		(2,781	)
		Cash and cash equivalents, beginning of period		9,560			6,948

		Cash and cash equivalents, end of period	$	7,235		$	4,167

Noncash Activities
	Conversion of preferred stock into common stock		$	5,010		$	–
	Loans exchanged for mortgage-backed securities			59			472
	Real estate acquired through foreclosure			1,088			627
	Loans transferred from held for sale to held in portfolio			1,434			2,624
	Loans transferred from held in portfolio to held for sale			2			2,908
Cash Paid During the Period For
	Interest on deposits		$	2,461		$	3,556
	Interest on borrowings			1,991			2,404
	Income taxes			149			1,146

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The accompanying Consolidated Financial Statements are unaudited and include the accounts of Washington Mutual, Inc. and its subsidiaries ("Washington Mutual," the "Company," "we," "us" or "our"). The Company's financial reporting and accounting policies conform to accounting principles generally accepted in the United States of America ("GAAP"), which include certain practices of the banking industry. In the opinion of management, all normal recurring adjustments have been included for a fair statement of the interim financial information. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.

The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.'s 2007 Annual Report on Form 10-K/A.

On January 1, 2008, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 157, Fair Value Measurements ("Statement No. 157"), Emerging Issues Task Force ("EITF") Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements ("Issue No. 06-4") and EITF Issue No. 06-10, Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements ("Issue No. 06-10"). The cumulative effect, net of income taxes, on the Consolidated Statements of Stockholders' Equity and Comprehensive Income upon the adoption of Statement No. 157, Issue No. 06-4 and Issue No. 06-10 was $1 million, $(35) million and $(2) million.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities–an amendment of FASB Statement No. 133 ("Statement No. 161"). Statement No. 161 amends and requires enhanced qualitative, quantitative and credit risk disclosures about an entity's derivative and hedging activities, but does not change the scope or accounting principles of Statement No. 133. Statement No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Because Statement No. 161 impacts the Company's disclosure and not its accounting treatment for derivative financial instruments and related hedged items, the Company's adoption of Statement No. 161 will not impact the Consolidated Statement of Income and the Consolidated Statement of Financial Condition.

In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3, Determination of the Useful Life of Intangible Assets ("FSP FAS 142-3"), which amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The Company is currently evaluating the effect FSP FAS 142-3 will have on the Consolidated Financial Statements.

In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles ("Statement No. 162"). Statement No. 162 is intended to improve financial reporting by

identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental entities. This statement is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is currently evaluating the effect, if any, that Statement No. 162 will have on the Consolidated Financial Statements.

In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60 ("Statement No. 163"). Statement No. 163 requires an insurance enterprise that issues financial guarantee insurance contracts to initially recognize the premiums received (or premiums expected to be received) for issuing the contracts as unearned premium revenue and to recognize that premium revenue over the period of the contract and in proportion to the amount of insurance protection provided. Statement No. 163 also requires recognition of a claim liability before an event of default if there is evidence that credit deterioration of the guaranteed obligation has occurred. This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, except for some disclosures about the insurance enterprise's risk-management activities and claim liabilities. Statement No. 163 requires that disclosures about the risk-management activities of the insurance enterprise and its claim liabilities be effective for the first period (including interim periods) beginning after its issuance. The Company is currently evaluating the effect, if any, that Statement No. 163 will have on the Consolidated Financial Statements.

In May 2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement) ("FSP APB 14-1"). FSP APB 14-1 addresses the accounting for convertible debt securities that, upon conversion, may be settled by the issuer fully or partially in cash (i.e., if the investor elects to convert, the issuer has the right to pay some or all of the conversion value in cash rather than to settle the conversion value fully in shares). Such guidance is effective for fiscal years and interim periods beginning after December 15, 2008. It requires retrospective application to instruments that are within the scope of this guidance and were outstanding during any period presented in the financial statements. The Company is currently evaluating the effect that FSP APB 14-1 will have on the Consolidated Financial Statements.

In June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the process of allocating earnings for purposes of computing earnings per share pursuant to the two-class method that is described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings Per Share. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early application is not permitted. The Company is currently evaluating the effect, if any, FSP EITF 03-6-1 will have on the Consolidated Financial Statements.

In June 2008, the FASB ratified the consensus reached by the EITF on Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock ("Issue No. 07-5"). Issue No. 07-5 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008 and is applicable to outstanding instruments as of January 1, 2009. The cumulative effect of the change in accounting principle, if any, shall be recognized as an adjustment to

beginning retained earnings as of January 1, 2009. The Company is currently evaluating the effect, if any, that Issue No. 07-5 will have on the Consolidated Financial Statements.

In June 2008, the FASB ratified the consensus reached by the EITF on Issue No 08-3, Accounting By Lessees for Maintenance Deposits ("Issue No. 08-3"), which clarifies that maintenance deposits shall be recognized as deposit assets and the amount that is not probable of being returned shall be recognized as additional expense. Issue No. 08-3 is effective for financial statements that are issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating the effect, if any, that Issue No. 08-3 will have on the Consolidated Financial Statements.

In June 2008, the FASB ratified the consensus reached by the EITF on Issue No. 08-4, Transition Guidance for Conforming Changes to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios ("Issue No. 08-4"). Such guidance shall be effective for financial statements that are issued for fiscal years ending after December 15, 2008, with early application permitted. The Company does not expect the application of Issue No. 08-4 to have a material effect on the Consolidated Financial Statements.

In the second quarter of 2008, the Company implemented a series of initiatives designed to further consolidate the Home Loans business and corporate support and other business functions and significantly reduce future operating costs. As part of these activities, the Company discontinued all lending conducted through its wholesale channel, closed all of its remaining freestanding home loan centers and sales offices, closed or consolidated certain loan fulfillment centers and reduced functions that primarily supported home loans activities that have been discontinued. In connection with these activities, the Company expects to incur pre-tax restructuring charges of approximately $390 million, which consists of approximately $110 million in termination benefits, approximately $140 million in lease terminations and other decommissioning costs and approximately $140 million in fixed asset write-downs. Of the total expense expected to be incurred, $204 million was recorded in the second quarter of 2008, which consisted of $66 million in employee termination benefits, $46 million in lease termination and other decommissioning costs and $92 million of fixed asset write-downs. These restructuring activities are expected to be substantially completed by the fourth quarter of 2008.

Charges for termination benefits were recorded in compensation and benefits expense; charges for lease terminations, other decommissioning costs and fixed asset write-downs were recorded in occupancy and equipment expense in the Consolidated Statements of Income. All of these charges were recorded within the Corporate Support/Treasury and Other category of the Company's operating segment structure.

At June 30, 2008, the outstanding liability of these restructuring charges was $103 million. Substantially all of the outstanding liability related to termination benefits is expected to be paid during the remainder of 2008. The liability related to lease terminations is expected to be paid over the remaining terms of the leases, substantially all of which will expire by December 31, 2013.

Revenue from sales and servicing of home mortgage loans, including the effects of derivative risk management instruments, consisted of the following:

					Three Months Ended June 30,						Six Months Ended June 30,

					2008			2007			2008			2007
					(in millions)
Revenue from sales and servicing of home mortgage loans:
	Sales activity:
		Gain (loss) from home mortgage loans and originated mortgage-backed securities⁽¹⁾			$	(162	)	$	66		$	(19	)	$	214
		Revaluation gain (loss) from derivatives economically hedging loans held for sale				11			126			(9	)		72

			Gain (loss) from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments			(151	)		192			(28	)		286
	Servicing activity:
		Home mortgage loan servicing revenue⁽²⁾				438			526			908			1,041
		Change in MSR fair value due to payments on loans and other				(301	)		(401	)		(531	)		(757	)
		Change in MSR fair value due to valuation inputs or assumptions				542			530			42			434
		Revaluation loss from derivatives economically hedging MSR				(637	)		(547	)		(89	)		(579	)

			Home mortgage loan servicing revenue, net of MSR valuation changes and derivative risk management instruments			42			108			330			139

				Total revenue from sales and servicing of home mortgage loans	$	(109	)	$	300		$	302		$	425

			Three Months Ended June 30,						Six Months Ended June 30,

			2008			2007			2008			2007
			(in millions)
Fair value, beginning of period			$	5,726		$	6,507		$	6,278		$	6,193
	Home loans:
		Additions		205			592			386			1,351
		Change in MSR fair value due to payments on loans and other		(301	)		(401	)		(531	)		(757	)
		Change in MSR fair value due to valuation inputs or assumptions		542			530			42			434
		Sale of MSR		–			–			(1	)		–
	Net change in commercial real estate MSR⁽¹⁾			3			3			1			10

Fair value, end of period			$	6,175		$	7,231		$	6,175		$	7,231

Unrealized gain still held⁽²⁾			$	544		$	N/A		$	42		$	N/A

In the ordinary course of business, the Company sells loans to third parties and in certain circumstances retains credit risk exposure on those loans and may be required to repurchase them. The Company may also be required to repurchase sold loans when representations and warranties made by the Company in connection with those sales are breached. Under certain circumstances, such as when a loan sold to an investor and serviced by the Company fails to perform according to its contractual terms within the six months after its origination or upon written request of the investor, the Company will review the loan file to determine whether or not errors may have been made in the process of originating the loan. If errors are discovered and it is determined that such errors constitute a breach

of a representation or warranty made to the investor in connection with the Company's sale of the loan, then if the breach had a material adverse effect on the value of the loan, the Company will be required to either repurchase the loan or indemnify the investor for losses sustained. Reserves established to repurchase loans or indemnify investors are recorded as a reduction to revenue from sales and servicing of home loans on the Consolidated Statements of Income.

In addition, the Company is a party to and from time to time enters into agreements that contain general indemnification provisions, primarily in connection with agreements to sell and service loans or other assets or the sales of mortgage servicing rights. These provisions typically require the Company to make payments to the purchasers or other third parties to indemnify them against losses they may incur due to actions taken by the Company prior to entering into the agreement or due to a breach of representations, warranties and covenants made in connection with the agreement or possible changes in or interpretations of tax law.

The Company has recorded reserves of $375 million and $268 million as of June 30, 2008 and December 31, 2007, to cover its estimated exposure related to all of the aforementioned loss contingencies.

From time to time, the Company and its subsidiaries enter into agreements in connection with the issuance of debt or equity securities which contain standard representations, warranties and indemnifications to third parties against damages, losses and expenses arising from those transactions. The extent of the Company's obligation under these agreements depends on the occurrence of future events that cannot be determined. Accordingly, the Company's potential future liability under these agreements cannot be estimated and it has therefore not accrued for these potential future liabilities.

In September 2006, WMB launched a €20 billion Covered Bond Program ("the Program") intended to diversify its investor base, lengthen the maturity profile of its liabilities and provide an additional source of stable funding. Under the Program, the Company may, from time to time, issue floating rate US dollar-denominated mortgage bonds secured principally by its portfolio of residential mortgage loans to a statutory trust not affiliated with the Company, which in turn will issue Euro-denominated covered bonds secured by the mortgage bonds.

At June 30, 2008 and December 31, 2007, €6.00 billion in principal amount of Euro-denominated covered bonds with an average interest rate of 4.08% and $7.78 billion in principal amount of mortgage bonds, which are included in other borrowings on the Consolidated Statements of Financial Condition, have been issued and are outstanding. Mortgage bonds are floating rate instruments with the applicable interest rate payable on mortgage bonds tied to short-term interest rates. Euro-denominated covered bonds (and related mortgage bonds) issued on September 26, 2006, mature on each of September 27, 2011 and September 27, 2016, respectively; additional Euro-denominated covered bonds (and related mortgage bonds) issued on May 18, 2007, mature on May 19, 2014.

At June 30, 2008, rating agencies required 13.4% over-collateralization with respect to assets comprising the cover pool. Over-collateralization requirements may change from time to time based on rating agency requirements, market conditions and composition of the cover pool.

To be included in the cover pool, mortgage loans must satisfy eligibility criteria which are as follows: (a) no mortgage bond issuer event of default would occur as a result of including the mortgage loan in the cover pool; (b) current ratings on covered bonds would not be adversely affected as a result

of including the mortgage loan in the cover pool; (c) the mortgage loan does not have an outstanding principal balance greater than $3,000,000; and (d) the mortgage loan is approved for inclusion in the cover pool by the rating agencies. The foregoing eligibility criteria may change from time to time subject to approval by the rating agencies. The Company may add and remove mortgage loans from the cover pool that collateralizes mortgage bonds.

At June 30, 2008, outstanding Euro-denominated covered bonds were rated AAA by each of Standard & Poor's and Fitch, and A2 by Moody's. Euro-denominated covered bonds were on "negative watch" by Moody's and Fitch. Mortgage bonds are not rated. Under current program covenants, due to the recent downgrades of Washington Mutual Bank's long-term rating by Moody's and Standard & Poor's, the Program may not issue additional covered bond series.

There are no material contingent liabilities, guarantees, or reimbursement programs entered into between the Company, its affiliates and the issuing trusts established under the Program. The Company is obligated to reimburse the issuing trusts for certain fees and expenses (primarily rating agency fees and trustee service fees) associated with the issuance of covered bonds as such fees and expenses become due; however, these are not material.

The statutory trusts formed in connection with the Program are not qualifying special purpose entities ("QSPEs") that meet all the conditions for non-consolidation in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("Statement No. 140"). The statutory trusts are special purpose entities ("SPEs") (which also meet the definition of variable interest entities), for purposes of FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities ("FIN46(R)"), but do not qualify for consolidation in the Company's financial statements. Specifically, under the Program documentation, the Company's interests in the statutory trusts do not cause the Company to absorb the majority of expected losses or entitle it to receive the majority of residual returns, if any, upon the liquidation of the statutory trusts. The statutory trusts' variable interests, including the covered bonds they issued, and the swap and the guaranteed investment contracts into which they entered, collectively absorb the majority of expected losses. Finally, the Company does not control the exercise of decision-making over the statutory trusts and has no voting rights with respect to the statutory trusts.

In addition, the Company created a separate account to guarantee payments to the statutory trusts SPEs. The separate account does not guarantee payments to an issuing trust. Rather, it constitutes an account to support payments under the mortgage bonds, which are direct obligations of the Company's principal banking subsidiary, WMB. Pre-funding arrangements for direct obligations of the Company or its subsidiaries would not affect consideration of the obligations by downstream holders of the obligations. The documentation for the Program does not entitle or obligate the Company to absorb potential gains or losses from the statutory trusts.

The issuing trusts enter into swap arrangements which economically hedge the interest rate and currency risks borne by those trusts. Those risks result from the differences between cash inflows from the mortgage bonds held by the trust and cash outflows of the covered bonds issued by the trust. The Company does not satisfy the conditions to consolidate the trusts and therefore is not subject to accounting requirements under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, ("Statement No. 133") with respect to those derivative instruments.

The Company has no reporting or disclosure obligations under Statement No.133 regarding foreign currency hedges and FASB Statement No. 52, Foreign Currency Translation, with respect to foreign

exchange transactions. The Company is not the issuer of the Euro-denominated covered bonds; its obligations under the Program are denominated in US Dollars. In addition, it is the non-consolidated statutory trusts, rather than the Company, that are parties to the currency hedging arrangements related to the Program.

At June 30, 2008 and December 31, 2007, loans totaling $9.74 billion and $9.09 billion were pledged to secure borrowings issued under the Program.

In April 2008, the Company sold $7.2 billion of equity securities to investment vehicles managed by TPG Capital ("TPG Investors") and to other qualified institutional buyers and institutional accredited investors ("Other Investors"), including many of the Company's largest institutional shareholders.

The Company issued 56,570 shares of preferred stock at a purchase price and liquidation preference of $100,000 per share. The preferred stock consisted of 19,928 shares of Series T Contingently Convertible Perpetual Non-cumulative Preferred Stock issued to TPG Investors and 36,642 shares of Series S Contingently Convertible Perpetual Non-cumulative Preferred Stock issued to Other Investors ("Series S and Series T Preferred Stock"). The conversion price of the Series S and Series T Preferred Stock was $8.75 per share. The recorded amount of the Series S and Series T Preferred Stock, based upon an allocation of the total proceeds, was $5.01 billion, net of issuance costs. All of the Series S and Series T Preferred Stock issued in April 2008 were converted into the Company's common stock on June 30, 2008. Prior to the conversion, the conversion prices of the Series S and Series T Preferred Stock were subject to anti-dilution adjustments.

The Company issued 176.3 million shares of its common stock, which included 822,857 shares issued to TPG Investors and 175.5 million shares issued to Other Investors, at $8.75 per share.

With the receipt of certain approvals, including the approval of the Company's shareholders, the Series S and Series T Preferred Stock was automatically converted into the Company's common stock on June 30, 2008. With the conversion of the Series S and Series T Preferred Stock, TPG Investors received 227.7 million shares and Other Investors received 418.8 million shares of the Company's common stock.

With limited exceptions, TPG Investors are restricted from disposing of the common stock acquired in this transaction. However, following the 18-month anniversary of the closing date of the transaction, TPG Investors may dispose of 1/18^th of their securities each month. All restrictions are removed following the three-year anniversary of the closing date of the transaction. Restrictions on the dispositions of the common stock acquired by certain of the Other Investors are similar except they are allowed to dispose of 1/9^th of the securities owned each month following the nine-month anniversary of the closing date of the transaction and all restrictions are removed following the 18-month anniversary of the closing date.

Warrants to acquire 68.3 million shares of the Company's common stock were issued to investors, including TPG Investors and certain of the Other Investors, who agreed to the above described transfer

restrictions on their shares, with the warrants being subject to the same restrictions. In accordance with the terms of the warrants, with the receipt of certain approvals, all of which were obtained prior to the end of the second quarter, the warrants became exercisable. The exercise price of the warrants is $10.06 per share and is no longer subject to a $0.50 per share reduction following each six-month anniversary from the issuance date of the warrants. The warrants are exercisable at any time until the fifth anniversary of the issuance of the warrants. The exercise price of the warrants is subject to anti-dilution adjustments. In addition, if certain events that constitute a fundamental change in control of the Company occur, investors may be permitted to put the instrument to the Company at fair value. The fair value of the warrants is $434 million and was recorded in capital surplus – common stock on the Consolidated Statements of Financial Condition.

If the Company engages in certain transactions, such as an issuance or sale of more than $500 million of common stock or other equity-linked securities (such as securities that are convertible into, exchangeable or exercisable for, or otherwise linked to the Company's common stock) or if there occurs a fundamental change in the ownership of the Company (such as a consolidation, merger, liquidation, or sale of all, or substantially all, the Company's assets) within 18 months from the closing date of the equity issuance, TPG Investors would, in the event that the effective price of a future transaction or fundamental change is less than $8.75 per share, receive from the Company either cash or shares of the Company's common stock and a reduction in the effective per share exercise price of any outstanding warrants (the "Price Protection Feature"). The Price Protection Feature also applies, with similar terms, to certain of the Other Investors who also agreed to the above described transfer restrictions on their shares, for those events which occur within 9 months of the closing date. Upon the occurrence of a triggering event, for each share of common stock subject to the Price Protection Feature (including those resulting from the exercise of warrants), investors would receive an amount equal to the difference between what the investor paid to acquire the stock and the effective per share price of the event that triggered the Price Protection Feature. In addition, the per share exercise price of any outstanding warrants would be reduced to the same effective per share price of the triggering event. The Price Protection Feature is recognized as a derivative and is recorded in other liabilities on the Consolidated Statements of Financial Condition with changes in fair value recognized in earnings.

The Company incurred $255 million in transaction-related costs that are recorded in capital surplus – common stock as a reduction of the proceeds from the equity issuance.

		Three Months Ended June 30,						Six Months Ended June 30,

		2008			2007			2008			2007
		(dollars in millions, except per share amounts; shares in thousands)
Net income (loss)		$	(3,328	)	$	830		$	(4,466	)	$	1,614
Preferred dividends declared:
	Series K		(5	)		(8	)		(13	)		(15	)
	Series R		(60	)		–			(117	)		–
	Series S and Series T		(6	)		–			(6	)		–
Beneficial conversion feature			(3,290	)		–			(3,290	)		–

Net income (loss) applicable to common stockholders for basic EPS			(6,689	)		822			(7,892	)		1,599
Effect of dilutive securities			–			–			–			(1	)

Net income (loss) applicable to common stockholders for diluted EPS		$	(6,689	)	$	822		$	(7,892	)	$	1,598

Basic weighted average number of common shares outstanding			1,016,081			868,968			936,502			871,876
Dilutive effect of potential common shares from:
	Awards granted under equity incentive programs		–			12,946			–			13,026
	Common stock warrants		–			9,999			–			10,225
	Convertible debt		–			1,177			–			1,177

Diluted weighted average number of common shares outstanding			1,016,081			893,090			936,502			896,304

Earnings per common share:
	Basic	$	(6.58	)	$	0.95		$	(8.43	)	$	1.83
	Diluted		(6.58	)		0.92			(8.43	)		1.78

The Company accounted for a contingent beneficial conversion feature ("BCF") related to the conversion option in the Series S and Series T Preferred Stock in accordance with EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF Issue 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, during the second quarter of 2008. The BCF was measured based on its intrinsic value at the commitment date, April 7, 2008. The intrinsic value of the BCF was based on the difference between the fair value of the Company's common stock and the effective conversion price per common share. The BCF was recognized as a one-time deemed preferred dividend in the second quarter of 2008 upon shareholder approval of the conversion. The BCF is a non-cash item that did not affect the Company's net loss but did have the effect of reducing earnings per common share as a subtraction from net loss applicable to common stockholders. The BCF was accounted for as a $3.29 billion reduction in retained earnings and a corresponding increase in capital surplus-common stock.

During the second quarter of 2008, dividends on the Series S and Series T Preferred Stock were payable, on a non-cumulative basis, in cash, on an as-converted basis. Dividends were payable at the same rate that dividends were payable to holders of shares of the Company's common stock. Due to this dividend feature, the Series S and Series T Preferred Stock, for purposes of calculating earnings per share, were considered to be participating securities and received application of the two-class method in accordance with FASB Statement No. 128, Earnings Per Share. During this period, holders of the Series S and Series T Preferred Stock received a $6 million dividend distribution which was subtracted from net loss applicable to common stockholders as a preferred dividend. Application of the two-class method had no impact on earnings per share in the second quarter.

Options under the equity incentive programs to purchase an additional 55.6 million and 19.1 million shares of common stock were outstanding at June 30, 2008 and 2007, and were not included in the above computations of diluted earnings per share because their inclusion would have had an antidilutive effect. Also outstanding at June 30, 2008 and excluded from the above computations of diluted earnings per share because of their antidilutive effect were 141.2 million shares of potential common stock related to Series R Non-cumulative Perpetual Convertible Preferred Stock, warrants to acquire an additional 68.3 million shares of common stock that were issued to TPG Investors and certain of the Other Investors, warrants to acquire an additional 29.2 million shares of common stock that were issued to holders of Trust Preferred Income Equity Redeemable Securities^SM and 18.6 million shares of potential common stock related to restricted stock and restricted stock units granted under equity incentive programs.

As part of the 1996 business combination with Keystone Holdings, Inc., 6 million shares of common stock, with an assigned value of $18.4944 per share, are being held in escrow for the benefit of certain of the former investors in Keystone Holdings and their transferees. At June 30, 2008, the conditions for releasing the shares from escrow to those investors and their transferees were not satisfied and therefore none of the shares in the escrow were included in the above computations.

Additionally, if an event were to occur which triggered the provisions of the Price Protection Feature, the Company would have a choice of settlement either with cash or (subject to certain restrictions) through the issuance of additional shares of common stock. At June 30, 2008, none of the events or conditions that would trigger a settlement of the Price Protection Feature had occurred and therefore there was no impact to the above computations of earnings per share.

Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for eligible employees. Benefits earned for each year of service are based primarily on the level of compensation in that year, plus a stipulated rate of return on the cash balance. It is the Company's policy to contribute funds to the Pension Plan on a current basis to the extent the amounts are sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws, plus such additional amounts the Company determines to be appropriate.

The Company, as successor to previously acquired companies, has assumed responsibility for a number of nonqualified, noncontributory, unfunded postretirement benefit plans, including retirement

restoration plans for certain employees, supplemental retirement plans for certain officers and multiple outside directors' retirement plans (the "Nonqualified Defined Benefit Plans"). Benefits under the retirement restoration plans are generally determined by the Company. Benefits under the supplemental retirement plans and outside directors' retirement plans are generally based on years of service.

The Company, as successor to previously acquired companies, maintains unfunded defined benefit postretirement plans (the "Other Postretirement Benefit Plans") that make medical and life insurance coverage available to eligible retired employees and their beneficiaries and covered dependents. The expected cost of providing these benefits to retirees, their beneficiaries and covered dependents was accrued during the years each employee provided services.

Components of net periodic benefit cost for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:

On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurements ("Statement No. 157"). Statement No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements for fair value measurements. The Company deferred the application of Statement No. 157 for nonfinancial assets and nonfinancial liabilities as provided for by FASB Staff Position ("FSP") FAS 157-2, Effective Date of FASB Statement No. 157. Issued in February 2008, FSP FAS 157-2 defers the effective date of Statement No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for nonfinancial assets and nonfinancial liabilities, except items that are recognized or disclosed at fair value in an entity's financial statements on a recurring basis (at least annually).

Statement No. 157 nullifies the guidance in EITF 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, which required the deferral of gains or losses at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation and requires retrospective application for certain financial instruments as of the beginning of the fiscal year it is adopted.

The Company's adoption of Statement No. 157 on January 1, 2008 resulted in a $1 million cumulative-effect adjustment, net of income taxes, to the opening balance of retained earnings.

Statement No. 157 defines the term "fair value" as 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. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. As required by Statement No. 157, the Company's policy is to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements.

Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels, considering the relative reliability of the inputs. The fair value hierarchy assigns the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of an input to the valuation that is significant to the fair value measurement. The three levels of inputs within the fair value hierarchy are defined as follows:

Fair value is based on quoted prices in an active market when available. In certain cases where a quoted price for an asset or liability is not available, the Company uses internal valuation models to estimate its fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The Company's estimates of fair value reflect inputs and assumptions which management believes are comparable to those that would be used by other market participants. The valuations are the Company's estimates, and are often calculated based on internal valuation models and consider the economic environment, estimates of future loss experience, the risk characteristics of the asset or liability and other such factors. As an estimate, the fair value cannot be determined with precision and may not be realized in an actual sale or transfer of the asset or liability in a current market exchange.

The following is a description of the valuation methodologies used for assets and liabilities measured at fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Trading assets and available-for-sale securities – Trading assets and available-for-sale securities are carried at fair value on a recurring basis. When available, fair value is based on quoted prices in an active market and as such, would be classified as Level 1 (e.g., U.S. Government securities). If quoted market prices are not available, fair values are estimated using quoted prices of securities with similar characteristics, discounted cash flows or other pricing models. Trading assets and available-for-sale securities that the Company classifies as Level 2 include certain agency and non-agency mortgage-backed securities, U.S. states and political subdivisions debt securities and other debt and equity securities. Trading assets classified as Level 3 include certain retained interests in securitizations, which are largely comprised of interests retained from credit card securitizations and other such securities for which fair value estimation requires the use of unobservable inputs. The Company values interests retained in credit card securitizations using a discounted cash flow approach that incorporates the Company's expectations of prepayment speeds and its expectations of net credit losses and finance charges and fees related to the securitized assets. Risk-adjusted discount rates are based on quotes from third party sources.

In addition, trading assets and available-for-sale securities classified as Level 3 include certain non-agency mortgage-backed securities for which quoted prices or readily observable market inputs are not available and the fair value is estimated using significant assumptions that are unobservable in the market. Since the third quarter of 2007, the valuation of certain mortgage-backed securities has been impacted by adverse market conditions as the observability of inputs to the valuation of these securities has diminished significantly. The Company generally values its non-agency mortgage-backed securities using a discounted cash flow approach using spreads for similar securities obtained from third-party sources such as broker-dealers. Due to the decline in liquidity in the mortgage-backed securities market, the spreads for certain securities obtained from multiple sources may not be available or may vary widely. As a result, the Company must exercise significant judgment in selecting the spreads used to estimate the fair values of these securities. The Company also employs a credit model within the

valuation process that projects loss expectations including severity and frequency as an input in valuing credit-sensitive securities.

Loans held for sale – Loans that the Company intends to sell or securitize are designated as held for sale. In some instances, the Company may use a fair value hedge, as prescribed by FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities ("Statement No. 133"). Loans held for sale achieving hedge accounting treatment, as prescribed by Statement No. 133, will be carried at fair value on a recurring basis. Loans held for sale where hedge accounting treatment does not apply are carried at the lower of cost or fair value and as such, when these loans are reported at fair value, it is on a nonrecurring basis. The fair values of loans held for sale are generally based on observable market prices of securities that have loan collateral or interests in loans that are similar to the held-for-sale loans or whole loan sale prices if formally committed. If market quotes are not readily available, fair value is estimated using a discounted cash flow model, which takes into account expected prepayment factors and the degree of credit risk associated with the loans. Conforming mortgage loans held for sale which are carried at fair value are largely classified as Level 2. Nonconforming loans held for sale where fair value is based on unobservable inputs are classified as Level 3.

Loans which are transferred from held for sale to held in portfolio are transferred at the lower of cost or fair value and as such, are reported at fair value on a nonrecurring basis. Such loans are classified as either Level 2 or Level 3. The Company may also record nonrecurring fair value adjustments to commercial real estate loans that are deemed impaired, as prescribed by FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, where the fair value is based on the current appraised value of the loan's collateral.

Mortgage servicing rights ("MSR") – MSR is classified as Level 3 as quoted prices are not available and the Company uses an Option Adjusted Spread ("OAS") valuation methodology to estimate the fair value of MSR. The OAS methodology projects cash flows over multiple interest rate scenarios and discounts these cash flows using risk-adjusted discount rates. Significant assumptions used in the valuation of MSR include market interest rates, projected prepayment speeds, cost of service, ancillary income and option adjusted spreads. Additionally, an independent broker estimate of the fair value of the MSR is obtained quarterly along with other market-based evidence. Management uses this information along with the OAS valuation methodology to estimate the fair value of MSR.

Derivatives – Quoted market prices are used to value exchange traded derivatives, such as futures which the Company would classify as Level 1. However, substantially all of the Company's derivatives are traded in over-the-counter ("OTC") markets where quoted market prices are not readily available. The fair value of OTC derivatives, which may include interest rate swaps, forward commitments to purchase or sell mortgage-backed securities, options and foreign currency swaps, is determined using quantitative models that require the use of multiple observable market inputs including forward interest rate projections, exchange rates and interest rate volatilities. Significant market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. These instruments fall within Level 2.

The Company has also entered into mortgage loan commitments that are accounted for as derivatives and are valued based upon models with significant unobservable market inputs. These mortgage loan commitments are classified as Level 3. In accordance with the provisions of SEC Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings Under Generally Accepted Accounting Principles, which the Company adopted on January 1, 2008, the expected net future cash flows related to the associated servicing of loans should be included in the fair value

estimation of derivative loan commitments. Under previous accounting rules, the expected value of net servicing cash flows was not recognized until the loan was funded and sold.

In connection with the April 2008 equity issuance, the agreements provided a Price Protection Feature to certain investors. The Price Protection Feature is accounted for by the Company as a derivative liability. The fair value of the Price Protection Feature derivative is estimated using a valuation method based on the Black-Scholes option pricing formula and taking into account contractual features and management assumptions. As the fair value estimation includes significant unobservable inputs, the Price Protection Feature derivative is classified as Level 3.

The following table presents for each hierarchy level the Company's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2008:

			Total			Level 1			Level 2			Level 3

			(in millions)
Assets:
	Trading assets		$	2,308		$	–		$	424		$	1,884
	Available-for-sale securities			24,375			124			22,429			1,822
	Loans held for sale⁽¹⁾			1,005			–			1,005			–
	Mortgage servicing rights			6,175			–			–			6,175
	Derivatives, included in other assets			1,809			–			1,799			10

		Total	$	35,672		$	124		$	25,657		$	9,891

		As a percentage of total assets		11	%		–	%		8	%		3	%
Liabilities:
	Derivatives, included in other liabilities		$	893		$	–		$	822		$	71
	Other liabilities⁽²⁾			62			62			–			–

		Total	$	955		$	62		$	822		$	71

The following table presents changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2008:

		Three Months Ended June 30, 2008									Six Months Ended June 30, 2008

		Trading Assets			Available-for- sale Securities			Derivatives⁽³⁾			Trading Assets			Available-for- sale Securities			Derivatives⁽³⁾
		(in millions)
Fair value, beginning of period		$	2,244		$	1,727		$	42		$	2,413		$	2,749		$	15
Total gains or (losses) (realized/unrealized):
	Included in earnings		(158	)		(395	)		(58	)		(134	)		(448	)		7
	Included in other comprehensive income (loss)		–			281			–			–			(156	)		–
Purchases, issuances and settlements			(230	)		(95	)		(45	)		(426	)		(154	)		(83	)
Net transfers into or out of Level 3⁽¹⁾			28			304			–			31			(169	)		–

Fair value, end of period		$	1,884		$	1,822		$	(61	)	$	1,884		$	1,822		$	(61	)

Net unrealized gains (losses) still held⁽²⁾		$	(158	)	$	(397	)	$	(48	)	$	(136	)	$	(450	)	$	(48	)

Note: For changes in the fair value of MSR, see Note 3 to the Consolidated Financial Statements – "Mortgage Banking Activities."

The following table summarizes gains and losses due to changes in fair value, including both realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities for the three and six months ended June 30, 2008:

		Three Months Ended June 30, 2008									Six Months Ended June 30, 2008

		Trading Assets			Available-for- sale Securities			Derivatives⁽¹⁾			Trading Assets			Available-for- sale Securities			Derivatives⁽¹⁾
		(in millions)
Interest income – available-for-sale securities		$	–		$	11		$	–		$	–		$	24		$	–
Interest income – trading assets			112			–			–			216			–			–
Revenue from sales and servicing of home mortgage loans			–			–			(2	)		–			–			60
Revenue from sales and servicing of consumer loans			12			–			–			121			–			–
Loss on other available-for-sale securities			–			(406	)		–			–			(472	)		–
Loss on trading assets			(282	)		–			–			(471	)		–			–
Other income			–			–			(56	)		–			–			(53	)

	Total	$	(158	)	$	(395	)	$	(58	)	$	(134	)	$	(448	)	$	7

Note: For gains and losses due to changes in fair value of MSR, see Note 3 to the Consolidated Financial Statement – "Mortgage Banking Activities."

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from the application of lower of cost or fair value accounting or recognition of impairment of assets.

Loans held for sale included loans which were adjusted to fair value using Level 2 and Level 3 inputs within the fair value hierarchy. These loans had an aggregate cost of $687 million and $41 million and a fair value of $685 million and $37 million at June 30, 2008 and March 31, 2008. The losses of $2 million and $6 million were included in earnings within the revenue from sales and servicing of home mortgage loans classification for the three and six months ended June 30, 2008.

The following table summarizes loans transferred from loans held for sale to loans held in portfolio, including losses for the three and six months ended June 30, 2008:

FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities ("Statement No. 159") became effective on January 1, 2008. Statement No. 159 permits an instrument by instrument irrevocable election to account for selected financial assets and financial liabilities at fair value. The Company did not elect to apply the fair value option to any eligible financial assets or financial liabilities on January 1, 2008 or during the first half of 2008. Subsequent to the initial adoption, the Company may elect to account for selected financial assets and financial liabilities at fair value. Such an election could be made at the time an eligible financial asset, financial liability or firm commitment is recognized or when certain specified reconsideration events occur.

The Company has four operating segments for the purpose of management reporting: the Retail Banking Group, the Card Services Group, the Commercial Group and the Home Loans Group. The Company's operating segments are defined by the products and services they offer. The Retail Banking Group, the Card Services Group and the Home Loans Group are consumer-oriented while the Commercial Group serves commercial customers. In addition, the category of Corporate Support/Treasury and Other includes the community lending and investment operations; the Treasury function, which manages the Company's interest rate risk, liquidity position and capital; the Corporate Support function, which provides facilities, legal, accounting and finance, human resources and technology services; and the Enterprise Risk Management function, which oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risk.

The principal activities of the Retail Banking Group include: (1) offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses; (2) holding the substantial majority of the Company's held for investment portfolios of home loans, home equity loans and home equity lines of credit (but not the Company's held for investment portfolios of home loans, home equity loans and home equity lines of credit made to higher risk borrowers through the

subprime mortgage channel); (3) originating home equity loans and lines of credit; and (4) providing investment advisory and brokerage services, sales of annuities and other financial services.

Deposit products offered to consumers and small businesses include the Company's signature free checking and interest-bearing Platinum checking accounts, as well as other personal checking, savings, money market deposit and time deposit accounts. Many products are offered in retail banking stores and online. Financial consultants provide investment advisory and securities brokerage services to the public.

The Card Services Group manages the Company's credit card operations. The segment's principal activities include: (1) issuing credit cards; (2) either holding outstanding balances on credit cards in portfolio or securitizing and selling them; (3) servicing credit card accounts; and (4) providing other cardholder services. Credit card balances that are held in the Company's loan portfolio generate interest income from finance charges on outstanding card balances, and noninterest income from the collection of fees associated with the credit card portfolio, such as interchange, performance fees (late, overlimit and returned check charges) and cash advance and balance transfer fees.

In response to tightening secondary markets, the Company has substantially ceased credit card securitizations, resulting in on-balance sheet funding of new originations.

The Card Services Group acquires new customers primarily by leveraging the Company's retail banking distribution network and through direct mail solicitations, augmented by online and telemarketing activities and other marketing programs including affinity programs. In addition to credit cards, this segment markets a variety of other products to its customer base.

The Company evaluates the performance of the Card Services Group on a managed basis. Managed financial information is derived by adjusting the GAAP financial information to add back securitized loan balances and the related interest, fee income and provision for credit losses.

The principal activities of the Commercial Group include: (1) providing financing to developers and investors, or acquiring loans for the purchase or refinancing of multi-family dwellings and other commercial properties; (2) either holding multi-family and other commercial real estate loans in portfolio or selling these loans while retaining the servicing rights; and (3) providing deposit services to commercial customers.

The principal activities of the Home Loans Group include: (1) the origination, fulfillment and servicing of home loans and home equity loans and lines of credit; (2) managing the Company's capital markets operations, which includes the selling of all types of real estate secured loans in the secondary market, which in light of continuing illiquid market conditions, are substantially limited to conforming loans sold to government-sponsored enterprises; and (3) holding the Company's held for investment portfolios of home loans, home equity loans and home equity lines of credit made to higher risk borrowers through the subprime mortgage channel, of which all lending activities were discontinued in the fourth quarter of 2007.

In conjunction with the resizing of the home loans business, the Company has decided to eliminate negatively amortizing products including the Option ARM from the product line, discontinue all lending conducted through its wholesale channel, close all of its freestanding home loan centers and sales offices and close or consolidate certain loan fulfillment centers.

The segment offers a wide variety of real estate secured residential loan products and services. Such loans are held in portfolio by the Home Loans Group, sold to secondary market participants or

transferred through inter-segment sales to the Retail Banking Group. Beginning in the second half of 2007, loans that historically had been transferred to the held for investment portfolio within the Retail Banking Group were retained within the held for investment portfolio within the Home Loans Group. The decision to retain or sell loans, and the related decision to retain or not retain servicing when loans are sold, involves the analysis and comparison of expected interest income and the interest rate and credit risks inherent with holding loans in portfolio, with the expected servicing fees, the size of the gain or loss that would be realized if the loans were sold and the expected expense of managing the risk related to any retained mortgage servicing rights.

The principal activities of, and charges reported in, the Corporate Support/Treasury and Other category include:

		Three Months Ended June 30, 2008

													Corporate Support/ Treasury and Other
																Reconciling Adjustments
		Retail Banking Group			Card Services Group⁽¹⁾			Commercial Group		Home Loans Group						Reconciling Adjustments
		Retail Banking Group			Card Services Group⁽¹⁾			Commercial Group		Home Loans Group						Securitization⁽²⁾			Other			Total
		(in millions)
Condensed income statement:
	Net interest income	$	1,210		$	769		$	203	$	240		$	254		$	(506	)	$	126	⁽³⁾	$	2,296
	Provision for loan losses		3,823			911			17		1,637			55			(530	)		–			5,913
	Noninterest income		842			187			5		(97	)		(327	)		(24	)		(25	)⁽⁴⁾		561
	Inter-segment revenue (expense)		7			(5	)		–		(2	)		–			–			–			–
	Noninterest expense		1,232			297			63		484			327			–			–			2,403
	Minority interest expense		–			–			–		–			75			–			–			75

	Income (loss) before income taxes		(2,996	)		(257	)		128		(1,980	)		(530	)		–			101			(5,534	)
	Income taxes		(959	)		(82	)		41		(635	)		(247	)		–			(324	)⁽⁵⁾		(2,206	)

	Net income (loss)	$	(2,037	)	$	(175	)	$	87	$	(1,345	)	$	(283	)	$	–		$	425		$	(3,328	)

Performance and other data:
	Average loans	$	138,671		$	26,314		$	41,891	$	54,880		$	1,648		$	(16,872	)	$	(1,123	)⁽⁶⁾	$	245,409
	Average assets		145,800			28,844			43,875		65,074			47,151			(14,739	)		(1,123	)⁽⁶⁾		314,882
	Average deposits		149,509			n/a			6,632		5,202			23,267			n/a			n/a			184,610

		Three Months Ended June 30, 2007

											Corporate Support/ Treasury and Other
														Reconciling Adjustments
		Retail Banking Group		Card Services Group⁽¹⁾		Commercial Group		Home Loans Group						Reconciling Adjustments
		Retail Banking Group		Card Services Group⁽¹⁾		Commercial Group		Home Loans Group						Securitization⁽²⁾			Other			Total
		(in millions)
Condensed income statement:
	Net interest income (expense)	$	1,291	$	649	$	208	$	211		$	(4	)	$	(459	)	$	138	⁽³⁾	$	2,034
	Provision for loan losses		91		523		2		101			(51	)		(294	)		–			372
	Noninterest income		820		393		63		389			60			165			(132	)⁽⁴⁾		1,758
	Inter-segment revenue (expense)		16		–		–		(16	)		–			–			–			–
	Noninterest expense		1,131		306		74		547			80			–			–			2,138
	Minority interest expense		–		–		–		–			42			–			–			42

	Income (loss) before income taxes		905		213		195		(64	)		(15	)		–			6			1,240
	Income taxes		340		80		73		(24	)		(37	)		–			(22	)⁽⁵⁾		410

	Net income (loss)	$	565	$	133	$	122	$	(40	)	$	22		$	–		$	28		$	830

Performance and other data:
	Average loans	$	149,716	$	24,234	$	38,789	$	43,312		$	1,367		$	(13,888	)	$	(1,301	)⁽⁶⁾	$	242,229
	Average assets		159,515		26,762		41,184		60,342			41,789			(12,287	)		(1,301	)⁽⁶⁾		316,004
	Average deposits		145,252		n/a		15,294		8,372			37,847			n/a			n/a			206,765

		Six Months Ended June 30, 2008

														Corporate Support/ Treasury and Other
																	Reconciling Adjustments
		Retail Banking Group			Card Services Group⁽¹⁾			Commercial Group			Home Loans Group						Reconciling Adjustments
		Retail Banking Group			Card Services Group⁽¹⁾			Commercial Group			Home Loans Group						Securitization⁽²⁾			Other			Total
		(in millions)
Condensed income statement:
	Net interest income	$	2,413		$	1,534		$	400		$	490		$	386		$	(1,010	)	$	258	⁽³⁾	$	4,471
	Provision for loan losses		6,122			1,537			47			2,544			173			(1,000	)		–			9,423
	Noninterest income		1,617			604			(3	)		221			(241	)		10			(79	)⁽⁴⁾		2,129
	Inter-segment revenue (expense)		15			(9	)		–			(6	)		–			–			–			–
	Noninterest expense		2,453			557			131			983			431			–			–			4,555
	Minority interest expense		–			–			–			–			151			–			–			151

	Income (loss) before income taxes		(4,530	)		35			219			(2,822	)		(610	)		–			179			(7,529	)
	Income taxes		(1,450	)		11			70			(904	)		(316	)		–			(474	)⁽⁵⁾		(3,063	)

	Net income (loss)	$	(3,080	)	$	24		$	149		$	(1,918	)	$	(294	)	$	–		$	653		$	(4,466	)

Performance and other data:
	Average loans	$	140,695		$	26,601		$	41,413		$	55,275		$	1,602		$	(17,131	)	$	(1,171	)⁽⁶⁾	$	247,284
	Average assets		148,704			29,044			43,439			65,958			46,338			(14,907	)		(1,171	)⁽⁶⁾		317,405
	Average deposits		148,122			n/a			7,053			5,335			23,947			n/a			n/a			184,457

		Six Months Ended June 30, 2007

												Corporate Support/ Treasury and Other			Reconciling Adjustments
		Retail Banking Group		Card Services Group⁽¹⁾		Commercial Group			Home Loans Group						Reconciling Adjustments
		Retail Banking Group		Card Services Group⁽¹⁾		Commercial Group			Home Loans Group						Securitization⁽²⁾			Other			Total
		(in millions)
Condensed income statement:
	Net interest income (expense)	$	2,575	$	1,290	$	420		$	455		$	(26	)	$	(874	)	$	275	⁽³⁾	$	4,115
	Provision for loan losses		153		912		(7	)		150			(25	)		(577	)		–			606
	Noninterest income		1,571		867		78			550			154			297			(218	)⁽⁴⁾		3,299
	Inter-segment revenue (expense)		34		–		–			(34	)		–			–			–			–
	Noninterest expense		2,201		635		148			1,069			191			–			–			4,244
	Minority interest expense		–		–		–			–			85			–			–			85

	Income (loss) before income taxes		1,826		610		357			(248	)		(123	)		–			57			2,479
	Income taxes		685		229		134			(93	)		(106	)		–			16	⁽⁵⁾		865

	Net income (loss)	$	1,141	$	381	$	223		$	(155	)	$	(17	)	$	–		$	41		$	1,614

Performance and other data:
	Average loans	$	152,445	$	23,921	$	38,715		$	48,255		$	1,356		$	(13,201	)	$	(1,389	)⁽⁶⁾	$	250,102
	Average assets		162,264		26,403		41,094			65,831			41,335			(11,627	)		(1,389	)⁽⁶⁾		323,911
	Average deposits		144,644		n/a		13,671			8,436			42,002			n/a			n/a			208,753

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company's Form 10-Q and other documents that it files with the Securities and Exchange Commission ("SEC") contain forward-looking statements. In addition, the Company's senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may."

Forward-looking statements provide management's current expectations or predictions of future conditions, events or results. They may include projections of the Company's revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items, descriptions of management's plans or objectives for future operations, products or services, or descriptions of assumptions underlying or relating to the foregoing. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events that occur after that date except as required by federal securities laws.

There are a number of significant factors which could cause actual conditions, events or results to differ materially from those described in the forward-looking statements, many of which are beyond management's control or its ability to accurately forecast or predict. Factors that might cause our future performance to vary from that described in our forward-looking statements include market, credit, operational, regulatory, strategic, liquidity, capital and economic factors as discussed in "Management's Discussion and Analysis" and in other periodic reports filed with the SEC. In addition, other factors besides those listed below or discussed in reports filed with the SEC could adversely affect our results and this list is not a complete set of all potential risks or uncertainties. Significant among the factors are the following which are described in greater detail in Part I Item 1A – "Risk Factors" in the Company's 2007 Annual Report on Form 10-K/A:

Each of the factors can significantly impact the Company's businesses, operations, activities, condition and results in significant ways that are not described in the foregoing discussion and which are beyond the Company's ability to anticipate or control, and could cause actual results to differ materially from the outcomes described in the forward-looking statements.

The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or furnishes under the Securities Exchange Act of 1934.

Management reviews and evaluates the design and effectiveness of the Company's disclosure controls and procedures on an ongoing basis, which may result in the discovery of deficiencies, and improves its controls and procedures over time, correcting any deficiencies, as needed, that may have been discovered.

Management reviews and evaluates the design and effectiveness of the Company's internal control over financial reporting on an ongoing basis, which may result in the discovery of deficiencies, some of which may be significant. Management changes its internal control over financial reporting as needed to maintain its effectiveness, correcting any deficiencies, as needed, in order to ensure the continued effectiveness of the Company's internal control over financial reporting. There have not been any changes in the Company's internal control over financial reporting during the second quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. For management's assessment of the Company's internal control over financial reporting, refer to the Company's 2007 Annual Report on Form 10-K/A, "Management's Report on Internal Control Over Financial Reporting."

The preparation of financial statements in accordance with the accounting principles generally accepted in the United States of America ("GAAP") requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the financial statements. Various elements of the Company's accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those the Company applied, which might have produced different results that could have had a material effect on the financial statements.

The Company has identified four accounting estimates that, due to the judgments and assumptions inherent in those estimates, and the potential sensitivity of its financial statements to those judgments and assumptions, are critical to an understanding of its financial statements. These estimates are: the fair value of certain financial instruments and other assets; the allowance for loan losses and contingent credit risk liabilities; other-than-temporary impairment losses on available-for-sale securities; and the determination of whether a derivative qualifies for hedge accounting.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Company's Board of Directors. The Company believes that the judgments, estimates and assumptions used in the preparation of its financial statements are appropriate given the facts and circumstances as of June 30, 2008. The nature of these judgments, estimates and assumptions are described in greater detail in the Company's 2007 Annual Report on Form 10-K/A in the "Critical Accounting Estimates" section of Management's Discussion and Analysis and in Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies."

A portion of the Company's financial instruments are carried at fair value, including: mortgage servicing rights, trading assets including certain retained interests from securitization activities, available-for-sale securities and derivatives. In addition, loans held for sale are recorded at the lower of cost or fair value. Changes in fair value of those instruments that qualify as hedged items under fair value hedge accounting are recognized in earnings and offset the changes in fair value of derivatives used as hedge accounting instruments.

On January 1, 2008, the Company adopted FASB Statement No. 157, Fair Value Measurement ("Statement No. 157"). Statement No. 157 defines fair value as 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. Statement No. 157 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value into three broad levels, based on the relative reliability of the inputs. The fair value hierarchy assigns the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

In accordance with Statement No. 157, it is the Company's policy to rely on the use of observable market information whenever possible when developing fair value measurements. Generally, for assets that are reported at fair value, the Company uses quoted market prices or internal valuation models to estimate their fair value. These models incorporate inputs such as forward yield curves, loan prepayment assumptions, expected loss assumptions, market volatilities and pricing spreads utilizing market-based inputs where readily available. The degree of management judgment involved in estimating the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market value inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument's fair value. Financial instruments that are valued using market-based information will usually be classified as either Level 1 or Level 2.

When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. These financial instruments are classified as Level 3 and include those assets and liabilities in which internal valuation models using significant unobservable inputs are used to estimate fair value. The models' inputs reflect assumptions, such as discount rates and prepayment speeds, which the Company believes market participants would use in valuing the financial instruments. The various assumptions used in the Company's valuation models are periodically adjusted to account for changes in current market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements, and changes made to assumptions could result in significant changes in valuation.

Substantially all of the Company's Level 1 assets at June 30, 2008 were U.S. Government securities. Assets and liabilities generally included as Level 2 include substantially all of the Company's available-for-sale securities, including mortgage-backed securities, debt and equity securities issued by U.S. states, political subdivisions or commercial enterprises; those conforming mortgage loans held for sale that are carried at fair value; and derivative contracts traded in over-the-counter markets, such as interest rate swaps, forwards and options, and foreign currency swaps.

Level 3 assets are comprised of the Company's mortgage servicing rights ("MSR"), substantially all trading assets, mortgage loan commitments that are accounted for as derivatives, and certain available-for-sale securities in which market-based information to estimate fair value was not available. The Company's Level 3 assets totaled $9.89 billion at June 30, 2008 and represented approximately 28% of total assets measured at fair value on a recurring basis and approximately 3% of the Company's total assets.

See Note 9 to the Consolidated Financial Statements – "Fair Value" for a further description of the valuation methodologies used for assets and liabilities measured at fair value.

Under FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill must be allocated to reporting units and tested for impairment. The Company tests goodwill for impairment at least annually or more frequently if events or circumstances, such as adverse changes in the business, indicate that there may be justification for conducting an interim test. Impairment testing is performed at the reporting unit level, which is the same level as the Company's four operating segments identified in Note 10 to the Consolidated Financial Statements – "Operating Segments." The Company's goodwill totaled $7.28 billion as of June 30, 2008, and is recorded in three of its operating segments: the Retail Banking Group, the Card Services Group and the Commercial Group. The first part of the test is a comparison, at the reporting unit level, of the fair value of each reporting unit to its carrying value, including goodwill. If the fair value is less than the carrying value, then the second part of the test is needed to measure the amount of potential goodwill impairment. The implied fair value of the reporting unit goodwill is calculated and compared with the actual carrying value of goodwill recorded

within the reporting unit. If the carrying value of reporting unit goodwill exceeds the implied fair value of that goodwill, then the Company would recognize an impairment loss for the amount of the difference, which would be recorded as a charge against net income.

The estimation of fair value for each reporting unit is determined primarily through a discounted cash flow approach that considers the market environment and the Company's expectations about future conditions. Estimated fair value computed under this approach contemplates cash flow projections based on the internal business forecasts for each reporting unit, and appropriate discount rates. Estimation of fair value involves significant management judgment about future conditions that are inherently uncertain, including the results of operations and the extent and timing of credit losses. In addition, analysis using market-based trading and transaction multiples, where available, is used to assess the reasonableness of the valuations derived from the discounted cash flow models.

In the second quarter, the Company considered the continuing adverse conditions within the market environment and the Company's best estimates regarding future conditions including credit losses, and concluded that there was no goodwill impairment within its reporting units with recorded goodwill as of June 30, 2008. A continuing period of market disruption, the Company's diminished trading value and market capitalization, or further market deterioration are factors the Company will continue to consider in future evaluations of recorded goodwill for impairment, including particularly its annual evaluation to be conducted in the third quarter of 2008 and subsequent evaluations.

For additional information regarding the carrying values of goodwill by operating segment, see Note 9 to the Consolidated Financial Statements – "Goodwill and Other Intangible Assets" in the Company's 2007 Annual Report on Form 10-K/A.

The Company recorded a net loss in the second quarter of 2008 of $3.33 billion, compared with net income of $830 million in the second quarter of 2007, primarily due to the Company's significant increase in loan reserves by $3.74 billion to $8.46 billion. Diluted loss per share was $6.58 for the quarter ended June 30, 2008. Diluted loss per share in the second quarter was negatively impacted by a one-time, non-cash adjustment of $(3.24) per share related to the conversion in June 2008 of Series S and Series T convertible preferred stock issued in April 2008 in connection with the Company's $7.2 billion capital raise. This non-cash adjustment had no effect on the Company's capital ratios or the net loss recorded in the second quarter, but had the effect of reducing retained earnings by $3.29 billion and increasing capital surplus-common stock by a corresponding amount. Excluding this one-time adjustment, diluted loss per share in the second quarter was $3.34 per share, compared with diluted earnings per share of $0.92 in the second quarter of 2007. The conversion option in the Series S and Series T Preferred Stock created a beneficial conversion feature as defined within generally accepted accounting principles and is described in further detail in Note 7 to the Consolidated Financial Statements — "Earnings Per Common Share."

The Company recorded a provision for loan losses of $5.91 billion in the second quarter of 2008, an increase of $5.54 billion from the second quarter of 2007 and significantly higher than second quarter 2008 net charge-offs, which totaled $2.17 billion. Net charge-offs in the second quarter of 2007 were $271 million. Adverse trends in key credit risk indicators, including high inventory levels of unsold homes, rising foreclosure rates, the significant contraction in the availability of credit for nonconforming mortgage products and negative job growth trends exerted severe pressure on the performance of the single-family residential ("SFR") loan portfolio, particularly loans in geographic areas in which the Company's lending activities have been concentrated in recent years. Nationwide sales volume of existing homes in June 2008 was 15% lower than June 2007, leading to a supply of unsold homes of approximately 11.1 months, a 22% increase from June 2007, while the national median sales price for existing homes fell by 6% between those periods. Since July 2006, average home

prices declined 19%, as measured by the S&P Case-Shiller 10-City Composite Home Price Index, or 22% when this index is weighted to reflect the geographic distribution of the Company's SFR portfolio. Foreclosure filings were also up significantly, increasing by 121% from the second quarter of 2007 to the second quarter of 2008.

The deteriorating housing market conditions resulted in sharply higher delinquency rates and restructurings of troubled loans, as the Company has intensified its efforts to work with borrowers to keep them in their homes whenever it can do so. The ratio of nonperforming assets to total assets rose to 3.62% at June 30, 2008, compared with 1.29% at June 30, 2007. Restructured nonaccrual loans accounted for 0.46% of the nonperforming assets to total assets ratio at June 30, 2008, compared with 0.05% of the ratio at June 30, 2007. Cure rates on early stage delinquencies, representing loans that are up to three payments past due, have also deteriorated, as declining home values and the reduced availability of credit throughout the mortgage market have created conditions in which many borrowers cannot refinance their mortgage or sell their home at a price that is sufficient to repay their mortgage.

Deteriorating trends in delinquency rates began migrating across the different types of loans in the Company's SFR portfolio starting in 2007. Rising levels of delinquencies initially occurred within the subprime mortgage channel during the first half of 2007, followed by the appearance of higher delinquencies in home equity loans and lines of credit during the second half of 2007. During the first half of 2008, Option ARMs have been the product type exhibiting the greatest increase in delinquency rates. The increases in Option ARM delinquencies are generally concentrated in geographic markets that have experienced the most significant levels of housing price depreciation, particularly in the inland regions of California and the Southeastern section of the country. While Option ARM loans that have experienced negative amortization are subject to payment recasting events, the presence of this feature has not been a significant contributor to the increase in delinquency rates, as the majority of recasts are not contractually scheduled to occur until 2010 and later years.

In addition to higher delinquency levels within its SFR loan portfolio, the Company also began experiencing deteriorating trends in loan loss severities starting in 2007, which continued to increase in the second quarter of 2008, reflecting the steep decline in home prices. Annualized net SFR charge-offs as a percentage of the average balance of the SFR portfolio increased from 0.39% in the second quarter of 2007 to 4.21% in the second quarter of 2008.

In response to these deteriorating trends in housing market conditions, delinquencies and loss severities, the Company has continued in 2008 to update its loan loss provisioning assumptions for its SFR portfolio, changing key assumptions used to evaluate default frequencies and loss severities, to reflect these trends. These updated assumptions accounted for approximately one-third of the provision recorded in the second quarter of 2008 and approximately $1.2 billion of the provision recorded in the first quarter of 2008. Refer to Credit Risk Management – "Allowance for Loan Losses" section for further discussion of these changes and a general discussion of the Allowance for Loan Losses.

The Company also experienced declines in the credit performance of its credit card portfolio during the first half of 2008, reflecting a softening U.S. economy and increased national unemployment, the macroeconomic factors that generally have the greatest impact on consumer spending and credit card performance. Annualized net credit card charge-offs as a percentage of the average balance of the credit card portfolio were 6.51% in the second quarter of 2008 and 3.63% in the second quarter of 2007. The national unemployment rate increased to 5.5% in June 2008 from 4.6% in June 2007, while the U.S. economy lost approximately 191,000 net jobs during the second quarter of 2008, compared with net job growth of 315,000 in the second quarter of 2007.

With the elevated levels of loan loss provisioning and charge-offs in its loan portfolios, the Company took steps to bolster its capital and liquidity positions during the second quarter. In April 2008, the Company issued approximately $7.2 billion of equity, comprised of common stock; perpetual, non-cumulative convertible preferred stock that was subsequently converted into common shares on

June 30, 2008 after receiving approval of the conversion from the Company's shareholders; and warrants. The Company took further steps to enhance its capital position by reducing both its quarterly common stock dividend to $0.01 per share, and the size of its balance sheet by $18 billion since the beginning of 2008. The Company expects that 2008 will be the peak year for loan loss provisioning.

At June 30, 2008, the Company's Tier 1 capital to average total assets ratio was 7.76%, and its total risk-based capital to total risk-weighted assets ratio was 13.93%, exceeding the regulatory guidelines for well-capitalized institutions, and the tangible equity to total tangible assets ratio was 7.79%, above the Company's established target of 5.50%.

Net interest income was $2.30 billion in the second quarter of 2008, compared with $2.03 billion in the second quarter of 2007. The increase was due to the expansion of the net interest margin, which increased, on a taxable-equivalent basis, from 2.91% in the second quarter of 2007 to 3.22% in the second quarter of 2008. As the Company's short-term wholesale borrowing costs reprice to current market rates faster than most of its interest-earning assets, the margin was aided by lower short-term interest rates, reflecting the actions taken by the Federal Reserve to stimulate the economy in light of the deteriorating housing market and higher unemployment rates. Since June 30, 2007, the target Federal Funds rate declined from 5.25% to 2.00%.

Noninterest income totaled $561 million in the second quarter of 2008, compared with $1.76 billion in the same quarter of 2007. Results from the sales and servicing of home mortgage loans declined from net revenue of $300 million in the second quarter of 2007 to net expense of $109 million in the second quarter of 2008. Continuing illiquidity in the secondary market for nonconforming loans, along with the Company's decisions to discontinue all lending through the subprime mortgage channel in the fourth quarter of 2007 and the wholesale mortgage channel in April 2008 led to significantly lower mortgage production activity. Additionally, the provision for loan repurchases rose significantly, primarily reflecting an increase in the volume of investor requests to repurchase loans the Company had previously sold. Revenue from the sales and servicing of consumer loans declined from $403 million in the second quarter of 2007 to $159 million in the second quarter of 2008 as the absence of securitization sales activity from the continued illiquid secondary market for unsecured loan products decreased the amount of gain on sale and higher net credit losses on securitized loans lowered excess servicing income. The Company also recorded a $407 million loss through earnings from the write-down of certain mortgage-backed securities within the available-for-sale securities portfolio, reflecting credit deterioration in which the declines in value were determined to represent an other-than-temporary impairment condition.

Noninterest expense totaled $2.40 billion in the second quarter of 2008, compared with $2.14 billion in the second quarter of 2007. With high volumes of delinquent loans migrating to foreclosure status and the steep declines in home prices, foreclosed asset expense increased from $56 million in the second quarter of 2007 to $217 million in the second quarter of 2008. Foreclosure expenses are expected to remain elevated until housing market conditions stabilize. In addition to the actions taken in the fourth quarter of 2007 to resize the home loans business and corporate and other functions, the Company initiated additional measures in the second quarter of 2008 to significantly reduce expenses, primarily within the home loans business and corporate support functions. The Company expects to incur approximately $450 million of restructuring and resizing costs related to these measures, of which $207 million were recorded in the second quarter, and anticipates that annualized expense savings of approximately $1 billion will be realized upon the completion of these initiatives.

Refer to Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies."

				Three Months Ended June 30,						Six Months Ended June 30,

				2008			2007			2008			2007
				(dollars in millions, except per share amounts)
Profitability
	Net interest income			$	2,296		$	2,034		$	4,471		$	4,115
	Net interest margin on a taxable-equivalent basis⁽¹⁾				3.22	%		2.91	%		3.14	%		2.85	%
	Noninterest income			$	561		$	1,758		$	2,129		$	3,299
	Noninterest expense				2,403			2,138			4,555			4,244
	Net income (loss)				(3,328	)		830			(4,466	)		1,614
	Basic earnings per common share			$	(6.58	)	$	0.95		$	(8.43	)	$	1.83
	Diluted earnings per common share:
		Diluted earnings per common share			(6.58	)		0.92			(8.43	)		1.78
		Less: Effect of conversion feature⁽²⁾			(3.24	)		–			(3.51	)		–

			Diluted earnings per common share excluding effect of conversion feature		(3.34	)		0.92			(4.92	)		1.78
	Basic weighted average number of common shares outstanding (in thousands)				1,016,081			868,968			936,502			871,876
	Diluted weighted average number of common shares outstanding (in thousands)				1,016,081			893,090			936,502			896,304
	Dividends declared per common share			$	0.01		$	0.55		$	0.16		$	1.09
	Return on average assets				(4.23	)%		1.05	%		(2.81	)%		1.00	%
	Return on average common equity				(69.25	)		13.74			(45.67	)		13.36
	Efficiency ratio⁽³⁾				84.11			56.38			69.01			57.24
Asset Quality (at period end)
	Nonaccrual loans⁽⁴⁾			$	9,691		$	3,275		$	9,691		$	3,275
	Foreclosed assets				1,512			750			1,512			750

		Total nonperforming assets⁽⁴⁾			11,203			4,025			11,203			4,025
	Nonperforming assets⁽⁴⁾ to total assets				3.62	%		1.29	%		3.62	%		1.29	%
	Allowance for loan losses			$	8,456		$	1,560		$	8,456		$	1,560
	Allowance as a percentage of loans held in portfolio				3.53	%		0.73	%		3.53	%		0.73	%
Credit Performance
	Provision for loan losses			$	5,913		$	372		$	9,423		$	606
	Net charge-offs				2,171			271			3,538			454
Capital Adequacy (at period end)
	Stockholders' equity to total assets				8.42	%		7.75	%		8.42	%		7.75	%
	Tangible equity to total tangible assets⁽⁵⁾				7.79			6.07			7.79			6.07
	Tier 1 capital to average total assets (leverage)⁽⁶⁾				7.76			6.09			7.76			6.09
	Total risk-based capital to total risk-weighted assets⁽⁶⁾				13.93			11.04			13.93			11.04
Per Common Share Data
	Book value per common share (at period end)⁽⁷⁾			$	13.35		$	27.27		$	13.35		$	27.27
	Tangible book value per common share (at period end)⁽⁸⁾				9.01			16.59			9.01			16.59
	Market prices:
		High			13.90			44.66			21.92			46.02
		Low			4.65			38.76			4.65			38.73
		Period end			4.93			42.64			4.93			42.64
Supplemental Data
	Total home loan volume				8,494			31,035			21,980			61,239
	Total loan volume				12,969			46,118			30,958			88,253

Average balances, on a taxable-equivalent basis, together with the total dollar amounts of interest income and expense related to such balances and the weighted average interest rates, were as follows:

					Three Months Ended June 30,

					2008							2007
					Average Balance		Rate			Interest Income		Average Balance		Rate			Interest Income
					(dollars in millions)
Assets (Taxable-Equivalent Basis⁽¹⁾)
Interest-earning assets⁽²⁾:
	Federal funds sold and securities purchased under agreements to resell				$	2,161		2.15	%	$	11	$	3,964		5.39	%	$	53
	Trading assets					2,404		19.50			117		4,995		8.67			108
	Available-for-sale securities⁽³⁾:
		Mortgage-backed securities				19,190		5.67			271		19,177		5.39			259
		Investment securities				5,287		5.06			67		7,382		5.15			95
	Loans held for sale					3,672		5.62			52		26,225		6.43			421
	Loans held in portfolio⁽⁴⁾:
		Loans secured by real estate:
			Home loans⁽⁵⁾⁽⁶⁾			107,299		5.83			1,563		90,818		6.44			1,462
			Home equity loans and lines of credit⁽⁶⁾			60,964		5.12			777		54,431		7.59			1,031
			Subprime mortgage channel⁽⁷⁾			16,933		6.05			256		20,152		6.80			343
			Home construction⁽⁸⁾			1,973		7.41			37		2,043		6.72			34
			Multi-family			32,786		6.13			502		29,419		6.65			488
			Other real estate			10,205		6.26			159		6,843		7.03			120

				Total loans secured by real estate		230,160		5.73			3,294		203,706		6.84			3,478
		Consumer:
			Credit card			9,443		11.56			271		10,101		10.44			263
			Other			180		16.85			8		254		12.44			8
		Commercial				1,954		6.76			33		1,943		7.73			38

				Total loans held in portfolio		241,737		5.98			3,606		216,004		7.02			3,787
	Other					11,052		3.01			83		2,089		5.47			29

				Total interest-earning assets		285,503		5.90			4,207		279,836		6.80			4,752
Noninterest-earning assets:
	Mortgage servicing rights					6,115							6,782
	Goodwill					7,283							9,054
	Other assets					15,981							20,332

				Total assets	$	314,882						$	316,004

(This table is continued on the next page.)

				Three Months Ended June 30,

				2008							2007
				Average Balance		Rate			Interest Income		Average Balance		Rate			Interest Income
				(dollars in millions)
Liabilities
Interest-bearing liabilities:
	Deposits:
		Interest-bearing checking deposits		$	22,619		1.39	%	$	78	$	30,373		2.51	%	$	190
		Savings and money market deposits			62,078		2.17			335		58,969		3.33			490
		Time deposits			69,161		4.08			702		84,330		4.96			1,043

			Total interest-bearing deposits		153,858		2.91			1,115		173,672		3.98			1,723
	Federal funds purchased and commercial paper				79		3.05			1		2,169		5.36			29
	Securities sold under agreements to repurchase				406		2.20			2		8,416		5.35			112
	Advances from Federal Home Loan Banks				60,402		3.36			505		22,063		5.36			295
	Other				30,839		3.69			283		39,886		5.57			555

			Total interest-bearing liabilities		245,584		3.12			1,906		246,206		4.42			2,714

Noninterest-bearing sources:
	Noninterest-bearing deposits				30,752							33,093
	Other liabilities				7,075							9,610
	Minority interests				3,913							2,659
	Stockholders' equity				27,558							24,436

			Total liabilities and stockholders' equity	$	314,882						$	316,004

Net interest spread and net interest income on a taxable-equivalent basis							2.78		$	2,301				2.38		$	2,038

Impact of noninterest-bearing sources							0.44							0.53
Net interest margin on a taxable-equivalent basis							3.22							2.91

					Six Months Ended June 30,

					2008							2007
					Average Balance		Rate			Interest Income		Average Balance		Rate			Interest Income
					(dollars in millions)
Assets (Taxable-Equivalent Basis⁽¹⁾)
Interest-earning assets⁽²⁾:
	Federal funds sold and securities purchased under agreements to resell				$	2,139		2.81	%	$	30	$	3,947		5.39	%	$	105
	Trading assets					2,565		18.22			233		5,293		8.37			221
	Available-for-sale securities⁽³⁾:
		Mortgage-backed securities				19,068		5.74			546		18,821		5.44			511
		Investment securities				5,802		5.24			152		6,785		5.18			176
	Loans held for sale					4,323		6.40			138		30,810		6.40			984
	Loans held in portfolio⁽⁴⁾:
		Loans secured by real estate:
			Home loans⁽⁵⁾⁽⁶⁾			108,536		6.05			3,283		94,074		6.45			3,033
			Home equity loans and lines of credit⁽⁶⁾			61,080		5.70			1,733		53,726		7.57			2,020
			Subprime mortgage channel⁽⁷⁾			17,519		6.19			543		20,381		6.74			686
			Home construction⁽⁸⁾			2,058		7.54			78		2,052		6.63			68
			Multi-family			32,374		6.23			1,009		29,621		6.61			979
			Other real estate			10,001		6.37			317		6,803		7.03			238

				Total loans secured by real estate		231,568		6.02			6,963		206,657		6.81			7,024
		Consumer:
			Credit card			9,233		11.16			513		10,500		11.03			574
			Other			188		17.17			16		261		12.70			17
		Commercial				1,972		7.06			69		1,874		7.84			73

				Total loans held in portfolio		242,961		6.23			7,561		219,292		7.03			7,688
	Other					8,526		3.34			141		2,776		5.65			78

				Total interest-earning assets		285,384		6.18			8,801		287,724		6.80			9,763
Noninterest-earning assets:
	Mortgage servicing rights					5,998							6,545
	Goodwill					7,285							9,054
	Other assets					18,738							20,588

				Total assets	$	317,405						$	323,911

(This table is continued on the next page.)

				Six Months Ended June 30,

				2008							2007
				Average Balance		Rate			Interest Income		Average Balance		Rate			Interest Income
				(dollars in millions)
Liabilities
Interest-bearing liabilities:
	Deposits:
		Interest-bearing checking deposits		$	23,502		1.58	%	$	184	$	31,093		2.57	%	$	397
		Savings and money market deposits			59,014		2.43			714		56,927		3.31			933
		Time deposits			71,693		4.33			1,545		87,960		4.96			2,165

			Total interest-bearing deposits		154,209		3.19			2,443		175,980		4.00			3,495
	Federal funds purchased and commercial paper				544		3.58			10		3,003		5.44			81
	Securities sold under agreements to repurchase				646		3.28			10		10,247		5.43			276
	Advances from Federal Home Loan Banks				61,600		3.83			1,175		29,019		5.37			773
	Other				32,443		4.23			683		36,366		5.62			1,016

			Total interest-bearing liabilities		249,442		3.48			4,321		254,615		4.46			5,641

Noninterest-bearing sources:
	Noninterest-bearing deposits				30,248							32,773
	Other liabilities				7,989							9,547
	Minority interests				3,914							2,554
	Stockholders' equity				25,812							24,422

			Total liabilities and stockholders' equity	$	317,405						$	323,911

Net interest spread and net interest income on a taxable-equivalent basis							2.70		$	4,480				2.34		$	4,122

Impact of noninterest-bearing sources							0.44							0.51
Net interest margin on a taxable-equivalent basis							3.14							2.85

Net interest income, expressed on a taxable-equivalent basis, increased $263 million and $358 million for the three and six months ended June 30, 2008 as compared to the same periods in 2007. The increase was largely due to the expansion of the net interest margin, which increased, on a taxable-equivalent basis, 31 basis points and 29 basis points during the three and six months ended June 30, 2008 as compared to 2007. The decrease in deposit and borrowing costs, aided by actions taken by the Federal Reserve which lowered the target Federal Funds rate from 5.25% at June 30, 2007 to 2.00% at June 30, 2008, more than offset the downward repricing of the loan portfolio, which generally responds to declining interest rates at a slower pace than the Company's wholesale borrowing sources. An increase in nonaccruing home loans also contributed to the decline in the yield on average interest-earning assets.

Average total noninterest-bearing liabilities used to fund average total interest-earnings assets increased from approximately 12% for the three months ended June 30, 2007 to approximately 14% for the same period in 2008, reflecting, in part, the effects from the April 2008 $7.2 billion capital issuance.

		Three Months Ended June 30,									Six Months Ended June 30,

		Three Months Ended June 30,						Percentage Change			Six Months Ended June 30,						Percentage Change
		2008			2007			Percentage Change			2008			2007			Percentage Change
		(dollars in millions)
Revenue from sales and servicing of home mortgage loans		$	(109	)	$	300			–	%	$	302		$	425			(29	)%
Revenue from sales and servicing of consumer loans			159			403			(61	)		407			846			(52	)
Depositor and other retail banking fees			767			720			6			1,470			1,385			6
Credit card fees			177			183			(3	)		358			355			1
Securities fees and commissions			64			70			(9	)		122			131			(6	)
Insurance income			32			29			13			63			58			8
Loss on trading assets			(305	)		(145	)		111			(521	)		(253	)		106
Gain (loss) on other available-for-sale securities			(402	)		7			–			(384	)		41			–
Gain (loss) on extinguishment of borrowings			100			(14	)		–			113			(7	)		–
Other income			78			205			(62	)		199			318			(37	)

	Total noninterest income	$	561		$	1,758			(68	)	$	2,129		$	3,299			(35	)

Revenue from sales and servicing of home mortgage loans, including the effects of derivative risk management instruments, consisted of the following:

					Three Months Ended June 30,									Six Months Ended June 30,

					Three Months Ended June 30,						Percentage Change			Six Months Ended June 30,						Percentage Change
					2008			2007			Percentage Change			2008			2007			Percentage Change
					(dollars in millions)
Revenue from sales and servicing of home mortgage loans:
	Sales activity:
		Gain (loss) from home mortgage loans and originated mortgage-backed securities⁽¹⁾			$	(162	)	$	66			–	%	$	(19	)	$	214			–	%
		Revaluation gain (loss) from derivatives economically hedging loans held for sale				11			126			(91	)		(9	)		72			–

			Gain (loss) from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments			(151	)		192			–			(28	)		286			–
	Servicing activity:
		Home mortgage loan servicing revenue⁽²⁾				438			526			(17	)		908			1,041			(13	)
		Change in MSR fair value due to payments on loans and other				(301	)		(401	)		(25	)		(531	)		(757	)		(30	)
		Change in MSR fair value due to valuation inputs or assumptions				542			530			2			42			434			(90	)
		Revaluation loss from derivatives economically hedging MSR				(637	)		(547	)		17			(89	)		(579	)		(85	)

			Home mortgage loan servicing revenue, net of MSR valuation changes and derivative risk management instruments			42			108			(62	)		330			139			139

				Total revenue from sales and servicing of home mortgage loans	$	(109	)	$	300			–		$	302		$	425			(29	)

The following table presents MSR valuation and the corresponding risk management derivative instruments and securities during the three and six months ended June 30, 2008 and 2007:


Washington		91-1653725
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1301 Second Avenue, Seattle, Washington		98101
(Address of principal executive offices)		(Zip Code)


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

			Three Months Ended June 30,						Six Months Ended June 30,

			2008			2007			2008			2007
			(in millions)
Balance, beginning of period			$	449,126		$	467,782		$	456,484		$	444,696
	Home loans:
		Additions		9,828			29,949			19,690			74,500
		Sale of servicing		–			–			(109	)		–
		Loan payments and other		(17,534	)		(24,213	)		(34,711	)		(46,682	)
	Net change in commercial real estate loans			181			1,349			247			2,353

Balance, end of period			$	441,601		$	474,867		$	441,601		$	474,867


		Common Stock — 1,705,359,302⁽¹⁾
		⁽¹⁾Includes 6,000,000 shares held in escrow.

		Three Months Ended June 30,

		2008							2007
		Pension Plan			Nonqualified Defined Benefit Plans		Other Postretirement Benefit Plans		Pension Plan			Nonqualified Defined Benefit Plans		Other Postretirement Benefit Plans
		(in millions)
Net periodic benefit cost:
Interest cost		$	25		$	2	$	–	$	17		$	2	$	–
Service cost			20			1		–		24			1		–
Expected return on plan assets			(43	)		–		–		(36	)		–		–
Amortization of prior service cost			4			–		–		(3	)		–		–
Recognized net actuarial loss			–			–		–		1			–		–

	Net periodic benefit cost	$	6		$	3	$	–	$	3		$	3	$	–

		Three Months Ended June 30, 2008							Six Months Ended June 30, 2008

		Aggregate Cost		Fair Value		Loss			Aggregate Cost		Fair Value		Loss
		(in millions)
Commercial loans transferred to loans held in portfolio⁽¹⁾		$	–	$	–	$	–		$	145	$	143	$	(2	)
Home loans transferred to loans held in portfolio⁽²⁾			21		17		(4	)		68		55		(13	)

	Total	$	21	$	17	$	(4	)	$	213	$	198	$	(15	)